Securities class action lawsuit filings “remained at depressed levels” during the first half of 2013 according to the latest report from Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse. The report, entitled “Securities Class Action Filings: 2013 Mid-Year Assessment,” can be found here. The organizations’ July 24, 2013 press release about the report can be found here. My own analysis of the first half securities suit filings can be found here.
According to the report, there were 74 securities class action lawsuit filings in the year’s first half, which represents a 16 percent decline from the first half of 2012, but a 16 percent increase over the second half of 2012. The 74 filings in the first half of 2013 were well below the historical average of 95 per six-month period.
If filings were to continue at the same pace for the remainder of 2013, the year would finish with 148 filings, which would be the second-lowest total number of filings since 1997. The projected annualized rate is well below the 1997-2012 average of 191.
The increase in filings in the first half of 2013 compared to the second half of 2012 is primarily due to an increase in filings against companies in the technology and energy sectors. The increase in energy companies primarily relates to oil and gas companies, and is similar in magnitude to an uptick in energy filings observed in late 2011 and early 2012.
The number of M&A related filings in the year’s first half decreased markedly from high levels observed in 2010 and 2011. The report notes that “these actions are now being pursued primarily in state courts after the unusual jump in federal M&A filings in 2010 and 2011.”
In a particularly interesting observation, the report notes that federal filings against companies listed on the Over-the-Counter Bulletin Board (OTCBB) and Pink Sheets have increased over the last 18 months. These groups of companies typically are smaller firms with lower market capitalizations. Historically, less than four percent of filings involved these companies. However, during the last 18 months at least eight percent of filings have involved these companies. The increased presence of these smaller companies has meant, among other things, that the average disclosure losses theoretically involved in these cases are well off from historical levels.
Just as the number of filings against smaller companies has increased, filings against S&P 500 companies have declined in recent years. Of the 74 filings in the year’s first half, only seven involved S&P 500 companies, which represents the lowest level of filing activity against S&P 500 companies in 13 years.
During the first half of 2013, the number of filings against foreign issuers declined 50 percent from the same period in 2012. The percentage of all filings against non-U.S. companies fell to 14.9 percent – less than the percentage of filings against non-U.S. companies in 2011 and 2012 but similar to the proportions in the years prior to 2010. The decline compared to more recent years is largely attributable to the decline in the number of filings against U.S.-listed Chinese companies.
In its analysis of dismissal trends, the report notes that, compared to prior dismissal patterns, cases filed in the years 2003 through 2005 were being dismissed at greater rates. The report notes that “filing dismissal rates continued to increase in years 2008, 2009 and 2010.” For the 2008 year, 50 percent of filings have already been dismissed. For the 2009 and 2010 year, dismissal rates are 53 and 56 percent, respectively. Part of the increase in dismissal rates is due to the surge of M&A cases that began in 2009. M&A cases have much higher dismissal rates than non-M&A filings. On the other hand, a case involving an institutional investor lead plaintiff is much less likely to result in a dismissal.
The press release accompanying the report has a very interesting quotation from Stanford Law School Professor Joseph Grundfest, who predicts that there will be a “change in defense litigation strategy.” Grundfest noted that in the Amgen case four U.S. Supreme Court justices suggested they welcomed arguments over the continuing validity of the “fraud on the market” theory. Grundfest notes that
The defense bar is rising to the invitation. We are observing class certification challenges on the grounds that the fraud on the market doctrine should not apply. If this defense strategy is successful, and if the Supreme Court eventually backs away from the fraud on the market doctrine, then the class action securities fraud litigation market will likely shrink significantly. This potential evolution of legal doctrine represents the largest “risk factor” for anyone trying to predict the future course of the securities fraud litigation market.
One observation I have with respect to the report’s analysis is that all of the report’s observations and comparisons are based on the absolute number of filings. I think it is important to compare the number of filings to the number of publicly traded companies. As I noted in my analysis of the first half filings, the number of publicly traded companies declined about 24 percent between 2004 and 2012, and the absolute number of filings also declined about 24 percent during that period. Comparisons between the absolute number of filings now and the absolute average number of filings reflect this same analytical shortcoming, as the average reflects the number of filings in years when there were many more publicly traded companies. A relative analysis would be more meaningful than simply comparing absolute numbers.
Failing to take into account the decline in the number of publicly traded companies can result an incomplete understanding of filing rates (as opposed to filing numbers). As I have said elsewhere, even though the absolute number of filings is down, all else equal, the chance than any given publicly traded company will get hit with a securities class action lawsuit is about the same as it was ten years ago.
I also have a comment about the report’s observation that 2013 is on pace for the second lowest number of annual filings since 1996. The year with the lowest number of filings since 1996 was the year 2006, when there were a total of only 120 securities class action lawsuits. But immediately after that came the credit crisis and a huge wave of related litigation. My point is that securities class action filing activity ebbs and flows. There have been ebb periods before, often followed by periods of flow. Absent a change in the law of the order of magnitude that Professor Grundfest suggested might be coming, historical patterns suggest that some point there will be an influx of new securities suits.