Should the split capital trust debacle be a class action?

The split capital trust saga has been described as one of the biggest financial disasters of recent times, and unsurprisingly the doyens of class actions, Class Law and Leon Kaye, are at its centre. But following setbacks in the advancement of these firms' actions on behalf of some 2,000 individuals who invested in the splits, observers are asking themselves when the long-expected civil litigation will get off the ground.

The thrust of the litigation is that investors were provided with incorrect information about the possible returns from purchasing shares in the trusts' operating splits. The shares in question are zero dividend preference shares, with which investors receive a lump sum after a specified period. The litigation will also encompass other split investments, including income shares, where investors receive dividends on a rolling basis, and capital shares, where investors receive a percentage of any profit the trust makes.

Class Law, as ever ambitious for its clients to get immediate redress, rather ambitiously and to its subsequent embarrassment issued a statement last November to the effect that it would be initiating proceedings within 10 days to forward these claims. One month later and Class Law announced that the preparation had been significantly delayed and shifted the start date to the end of 2002. Meanwhile, Leon Kaye predicted kick-off as being February 2003. In February, Class Law expressed a further change of heart and announced before a House of Commons Treasury Select Committee investigating the splits that it was driving for a settlement.

One month later Class Law changed its mind again-instead of pushing for all its cases to be heard in one massive action pitting 2,000 claimants against some 100 defendants, it decided to pursue the matters on a case-by-case basis. Consequently, Class Law is sending filings to the majority of the defendants' lawyers as part of its pre-action disclosure necessary in such negligence claims. Stephen Alexander, Class Law's partner for the ever-increasing number of claimants, estimates the pre-action stage will last three months and will be followed by case management conferences to determine how to bring forward the multiplicity of complex and diverging claims.

Alexander chooses not to use the words 'massive turnaround' to describe his change of mind but instead regards it as a change of heart following consultation with defendant solicitors which include Barlow Lyde & Gilbert, Reynolds Porter Chamberlain, CMS Cameron McKenna, Browne Jacobson and Richards Butler. Surprisingly, the latter had not heard of Class Law's fresh plans. But Alexander says he has not ruled out returning to the original single action, so another change of heart could yet be on the cards. Meanwhile, he says several cases have settled in his clients' favour and several more settlements are round the corner. Details are confidential.

Alexander, who has instructed Alan Steinfeld QC of 24 Old Buildings and Tom Lowe of Wilberforce Chambers, is the first to admit that the cases are complex and require an enormous amount of legal legwork, particularly as Class Law has only eight lawyers. He mentions that any single independent financial advisers (IFA) may have advised on three or four products, all of which have to be examined, plus there is the issue of separating the good trusts from the bad.

Further difficulties stem from the fact that claimants are targeting a raft of different organisations related to the setting up of the splits, ranging from the marketers of the splits to the sponsoring banks. There are also the designers of the splits' structure, the investment scheme managers and the IFAs, from one-man bands through to the UK's largest.

This multiplicity of target groups contrasts with most other class actions, in which the claims are more similar and there is often just one type of defendant. This is the case with Class Law's other actions, such as for of Equitable Life's policyholders, the Railtrack Shareholders Action Group and the victims of Foot-and-Mouth.

There are further complexities. The litigation will go beyond the issue of whether the zero shares were wrongly promoted as being low risk. Split trusts made use of cross-investments in other splits, with the result that a chain of investments were adversely affected by one investment that went badly. The Commons Treasury Select Committee found in February that these cross-investments were more volatile and more difficult to understand and monitor than had been previously apparent. Class Law and Leon Kaye will no doubt be hoping to introduce this evidence to show that the trusts were partly to blame for the failure of the splits. This will be no easy task, as the Commons committee has pointed out.

Lawyers will also have to consider the extent to which investors were kept in the dark over the trusts' use of so-called 'gearing'. This involved trusts taking out bank loans on the presumption that they would pay them back with less interest than they were paying in proportions of profits or pre-agreed rates to splits policyholders. Banks were often repaid first, leaving policyholders without the monies owed to them.

Nevertheless, Class Law first pursued a single trial as the way to resolve the vast number of claims, and may return to that tactic. Richards Butler partner Charles Hewetson, acting for one of the defendants, says: "The big concern for me is how, where a trust has 1,000 investment customers who used different IFAs, were shown different literature and invested through different things, you can make a group litigation with identical claims in a class action. How can you avoid looking at this on an individual basis?"

Meanwhile, we wait to see how Class Law will develop its previous claim accusing the Financial Services Authority (FSA) of gross negligence for not acting on warnings from Guernsey's financial regulator about the risks of split caps. Alexander says this is on hold pending the outcome of the litigation. We also wait on whether Class Law will do what it has been promising for many months and actually file complaints before the European Commission against the FSA over its regulation of Independent Insurance.

brendan.malkin@thelawyer.com