The D & O Diary
Fourth Quarter Slowdown Drives Decline in 2012 Securities Class Action Filings
Largely as a result of a slowdown in new filings during the fourth quarter, 2012 securities class action lawsuit filings were below the filing levels of recent years and below historical averages. Filing levels remained elevated in the natural resources, life sciences and computer services industries, and filings against non-U.S. companies, though off from 2011 record levels, remained above historical levels.
There were 156 new securities class action lawsuit filings during 2012. (Please see the comment below regarding my counting methodology.) The 2012 filing count is down from the 188 securities suits filed in 2011 and is well below the 1996-2011 annual average of 193.
The drop in 2012 filings is largely due to the decline in filings during the fourth quarter. There were 45, 45 and 41 filings during the first, second and third quarters, respectively. However, in the fourth quarter there were only 25 new securities class action lawsuit filings. The 66 new filings during the second half represented the lowest filing level for any half-yearly period since the first half of 2007, when 69 new securities suits were filed. (The lowest half-yearly filing period since 1996 was the second half of 2006, when there were only 55 new securities class action lawsuit filings. )
The 156 securities class action lawsuits filed during 2012 were filed in 45 different federal district courts, as well as two state courts. (The ’33 Act provides for concurrent state court jurisdiction for liability actions under the Act.) Though securities suits were filed in many different courts, there was a significant concentration of filings of new securities suits in the Southern District of New York. There were 43 new securities suits filed in the S.D.N.Y., representing 27.56% of all 2012 filings. Other courts with significant concentrations of new securities suits included the Northern District of California and the Southern District of California, each of which had 13 new filings during 2012; the District of Massachusetts (8); the Northern District of Illinois (7); and the District of New Jersey (6). Filings in the S.D.N.Y., N.D. Cal., and S.D. Cal. together accounted for over 44% of all of the 2012 securities suit filings.
The 2012 securities suits were filed against companies in a broad variety of industries. The 2012 securities suits involved companies in 81 different Standard Industrial Classification (SIC) Code categories. There were, however, concentrations in certain industries. There were 27 new securities suits against companies in the life sciences industries (represented by companies in the 283 SIC Code group [Drugs] and the 384 SIC Code group [Surgical, Medical and Dental Instruments and Supplies]).These 27 new suits against life sciences companies represented 17.3% of all filing during the year. Of particular note is that there were 15 new filings in the SIC Code category 2834 (Pharmaceutical Preparations) alone, representing nearly ten percent of all 2012 filings.
There were 16 new securities suits against companies in the natural resources extractive industries, including mining (SIC Code categories 1000, 1040, 1220, 1221) and oil and gas production (SIC Code category 1311). And there were ten new securities suits in SIC Code group 737 (computer programming, data processing and other computer services).
There were 26 new securities suits in 2012 against non-U.S. companies, representing about 16.6% of all 2012 filings. Both the absolute number and percentage of suits involving non-U.S. companies are down from 2011, when there were 68 lawsuits against non-U.S. companies represented 36.2% of all filings. Though the 2012 filings against non-U.S. companies were down from 2011, the 2012 filings against foreign firms were at levels comparable to 2010, when there were 27 suits against non-U.S. firms representing 13.4% of all filings.
The record levels of filings against non-U.S. companies during 2011 were largely due to the flood of suits last year against U.S.-listed Chinese companies. There were 41 suits against Chinese-based companies in 2011. Though the number of suits against Chinese companies declined in 2012, there were still 14 suits filed against companies based in China, plus another three suits against companies based in Hong Kong. (Note: I am including in my count of suits against Chinese companies the lawsuit filed on December 31, 2012 in the Southern District of New York against Silvercorp Metals, which is a company with its headquarters in Canada but all of its operations in China.) Overall, the new suits filed against non-U.S. firms in 2012 involved companies based in six different countries. Following China, the country with the highest number of companies sued in U.S. securities class action lawsuits during 2012 was Canada, which had six companies hit with U.S. securities suits.
My count of 156 securities suits during 2012 will be different from other published tallies of the securities suit filings. My count is slightly above that of the Cornerstone Research because my tally, unlike the Cornerstone Research tally, includes ’33 Act suits filed in state court pursuant to the Act’s concurrent jurisdiction provisions. At the same time, however, my count is below other tallies, such as, for example, the count of NERA Economic Consulting, because I only count related lawsuit filings once, regardless of the number of separate complaints filed. NERA and others count separate complaints filed in separate jurisdictions separately unless or until they are consolidated in the same judicial district. In addition, my count includes only lawsuits that seek to recover damages for alleged violations of the federal securities laws. As a result, my tally will be lower than other class action lawsuit counts that include suits against corporations and their directors and officers that do no allege securities laws violations (for example, merger objection suits).
The decline in the number of new securities lawsuit filings during the fourth quarter of 2012 is interesting, but at this point it is hard to know what it might mean, and it is far too early to jump to any conclusions about possible permanent shifts in the level of securities suit filings. There have been periods before (for example, at the end of 2006 and the beginning of 2007) when there were lulls in the level of securities suit filings, but at least in the past, the lulls in filing levels have proven to be temporary and relatively short-lived. Indeed, the lull at the end of 2006 and the beginning of 2007 was followed by a surge of new securities filings during following periods, as securities suits related to the subprime meltdown and credit crisis came flooding in.
There seem to be a few possibilities to explain the drop off in securities suit filings in the fourth quarter. The first is the absence of any cyclical phenomenon driving filings. During the period 2007 to 2010, the total number of filings was driven by lawsuits relating to the subprime meltdown and the credit crisis. During 2011, there was a surge of filings against U.S.-listed Chinese firms. By contrast, during 2012, the really wasn’t any particular cyclical development to drive filings.
Another factor in the decline in filings during the fourth quarter may be that there were a significant number of lawsuits filed during that time period as individual actions (particularly many of the lawsuits recently filed alleging misrepresentations in connection with mortgage securities offerings, as well as many of the suits filed in connection with the mortgage put-back litigation). It may be that the individual suit filings distracted from class action lawsuit efforts.
A third factor behind the decline in securities suit filings may be that the plaintiffs’ securities bar is seeking to diversify its product line. As I have previously noted, the increase in M&A litigation and the surge in say-on-say litigation, among other things, may be understood in part as the efforts by at least certain members of the plaintiffs bar to find new opportunities in lieu of traditional securities litigation, which has both become more costly (owing to electronic discovery) and more difficult (owing to case law developments) to pursue. Of course, if some cyclical phenomenon presenting securities litigation opportunities were to emerge, these diversifying plaintiffs’ attorneys could return to pursue securities litigation again.
A final possible explanation for the fourth quarter decline is that the apparent slowdown is purely coincidental and that filing levels will quickly return to normal levels. Just to reinforce this point, though there were only five new filings in October and nine in November, there were seven new securities lawsuit filings just in the final ten days of December alone. It could be that the apparent lull during the fourth quarter was nothing more than a reflection of the natural ebb and flow of securities law suit filings that has characterized filings patterns since 1996.
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