Though some observers have reported a downturn in 2010 securities class action lawsuits compared to prior years, at least very recently there has been a flurry of filing activity, with six new securities suits in the past week, by my count. With these latest filings coming in, it seemed worthwhile to take a look at the most recent cases, to try to get a handle on where these latest suits are coming from. It does in fact appear that certain discernable factors are driving the recent filings.
1. The Headline Hit Parade: It is a truth universally acknowledged that a public company facing a public relations crisis must be in want of a securities class action lawsuit – or at least that seems to be the perspective of the plaintiffs’ bar. This pattern started earlier this year when Toyota’s sudden acceleration debacle led to a host of securities class action lawsuit filings (refer here). The pattern has been perpetuated in connection with the most recent public relations disasters.
Massey Energy sustains a coal mining disaster? Wham, in comes the securities class action lawsuit.
Goldman Sachs is target in a high profile SEC enforcement action: Pow, in comes the securities class action lawsuit.
Transocean is prominently involved in what may be the worst oil spill in U.S. history? Of course, a securities class action lawsuit filing followed closely behind. (The Transocean securities class action lawsuit filing follows closely on the heels of the shareholders’ derivative lawsuit filed against BP in connection with the Deepwater Horizon disaster, which I previously noted here.)
To find out which company will be next in line for one of these insult-to-injury lawsuits, just keep a close eye on the headlines – that seems to be what the plaintiffs’ lawyers are doing.
2. The Delayed Reaction Phenomenon: Another category of recent lawsuits look completely opposite from the headline driven lawsuits described above. Beginning around the middle of 2009, one phenomenon that developed was the emergence of belated lawsuits, where the filing date was as much as a year or more after the proposed class period cutoff date. Several of the most recent filings reflect this belated filing pattern.
For example, on May 11, 2010, plaintiffs’ lawyers initiated a securities class action lawsuit in the Southern District of New York against Pfizer and certain of its directors and officers. The proposed class period cutoff date is January 23, 2009, nearly 16 months prior to the initial filing date.
Similarly on May 12, 2010, plaintiffs’ lawyers initiated a securities class action lawsuit in the Western District of North Carolina against CommScope and certain of its directors and officers. The proposed class period cutoff date is October 30, 2008, more than 18 months before the initial filing date.
And on May 6, 2010, plaintiffs’ lawyers filed a complaint in the District of Delaware against Heckmann Corporation and certain of its directors and officers, in which the proposed class period cutoff date is May 8, 2009, just short of one year before the filing date.
Similarly belated filings have been an important aspect of the 2010 YTD securities class action lawsuit filings. Of the approximately 60 securities class action lawsuit filings this year, eleven (or about 18%) have been first filed at least one year after the proposed class period cutoff date. Perhaps more significantly, many of the most recent filing in May 2010 have been among these belated cases.
An interesting question related to these belated filings is whether the U.S. Supreme Court’s recent statute of limitations decision in the Merck case (about which refer here) will lead to the filing of even more superannuated suits. Reliable sources have suggested to me that it will.
3. Because That’s Where the Money Is: Since the beginning of the subprime-related litigation wave in 2007, lawsuits against financial services companies have predominated all filings. Though the proportion of filings against financial firms began to diminish around mid-2009, lawsuits against financial companies still represent the largest proportion of securities class action filings so far in 2010.
Thus, while the roughly 60 entities against which securities class action lawsuits have been filed so far this year represent 29 different Standard Industrial Classification (SIC) Code categories (and ten of the 60 lack any SIC Code classification), 17 of the 60 (or about 28%) involve companies in the 6000 SIC Code series (Finance, Insurance and Real Estate). Indeed, most of the entities lacking SIC Code designations are also financially related, and lawsuits filed against these two groups (that is, the 6000 SIC Code series entities and the entities without SIC Code designations) represent about 45% of all 2010 lawsuits.
The most noteworthy difference among the 2010 lawsuit filings involving financial companies compared to the most recent prior years’ filings is the number of commercial banks among the financial companies that have been sued. Indeed, several of the most recent filings have targeted failed or troubled banks, including, for example, the May 12, 2010 lawsuit filed against BancorpSouth (here), the May 7, 2010 lawsuit against First Regional Bancorp (here), and the April 15, 2010 lawsuit against Frontier Financial (here).
As I have recently noted, this lawsuit trend involving failed and troubled banks is likely to continue in the months ahead.
4. When All Else Fails: Though lawsuit filings against financial companies have continued to predominate among all securities suit filings, lawsuits against life sciences remain a familiar and important accompanying theme. With six lawsuits so far this year in the 283 SIC Code series (Drugs) and four more in the 384 SIC Code series (Surgical, Medical and Dental Instruments), lawsuits against life sciences companies remain an important part of 2010 lawsuit filings, as they have been in the past.
Several of the most recent lawsuit filings have involved life sciences companies, including the May 11, 2010 filing against Pfizer noted above, and the May 11, 2010 filing against NBTY. Indeed, 2010 filings that don’t involve either a financial services company or a life sciences company are in the distinct minority.
NERA Updates Options Backdating Securities Settlement Study: Earlier on in the evolution of the Options Backdating litigation, NERA Economic Consulting had reported (refer here), based on the handful of settlements at that time, that the options backdating cases were settling for lesser amounts than NERA’s analysis of all securities class action lawsuit settlements would predict. At the time, NERA proposed two possible alternative explanations – either the weaker backdating cases were settling first or suits alleging backdating were weaker than securities cases as a whole.
With many more of the options backdating securities class action lawsuits having settled (including the recent $173 million Maxim Integrated Product options backdating securities suit settlement), NERA has updated its analysis. In a May 12, 2010 report entitled "Do Options Backdating Class Actions Settle for Less – May 2010 Update" (here), NERA has taken a look at the 31 options backdating settlements and compared them to what their database model would predict.
Based on their analysis, NERA concluded that actual settlements were about 71% of predicted settlements. As a statistical matter they are unable based on the data to reject the hypothesis that "settlements in backdating class actions are, on average, no different than settlements in other shareholder class actions." This conclusion supports the corollary hypothesis that the "early settlements were relatively low because the weakest backdating class actions tended to settle most quickly."
The report includes a detailed list of each of the 31 options backdating related securities class action settlements to date.
Special thanks to Branko Jovanovic of NERA for permission to cite and link to the NERA backdating article.
SEC Settlements Update: And speaking of NERA updates, on May 14, 2010, NERA released its latest update on SEC settlement trends (here). In it last semiannual report, NERA reported that the SEC settled with 354 defendants in the first half of fiscal 2010, compared to 328 defendants in the second half of fiscal 2009 and 290 in the first half of 2009.
The first half of fiscal 2010 included two particularly noteworthy SEC settlements, the $314 million State Street settlement and the $150 million Bank of America settlement. The State Street settlement is the seventh largest SEC settlement since the passage of the Sarbanes Oxley Act.
Who’s On First/ In Whose Possession is First Base?: When I first conceived the title for this blog post, I recognized that I must construct the caption carefully or I would earn the scorn of vigilant grammarians. After careful review of the vast literature addressing the who’s/whose conundrum, I believe the caption is correct. It is always hard to tell who’s right and who’s wrong on these issues. But after all, whose blog is this? Who’s to tell? Whose views should prevail?