Largely driven by a “dramatic” increase in the number of federal court merger objection lawsuits, securities class action litigation filings rose to the highest level ever in 2016, according to PwC’s most recent annual securities litigation report. The report also noted that for the first time securities litigation rose though the stock market performance during the year did not, contrary to prior patterns. The April 2017 report, entitled “A Rising Tide or a Rogue Wave? 2016 Securities Litigation Study,” can be found here.
According to the report, there were 276 securities class action lawsuits filed in 2016, compared to 195 during 2015. The 276 filings represent the highest annual number of securities suits during the 21 year period that PwC has been preparing its annual study. The number of securities lawsuit filings rose in 2016 for the fourth consecutive year. The more than 41 percent annual increase in filings between 2015 and 2016 is the largest annual increase in more than ten years. The 276 total number of cases filed in 2016 is more than 48% greater than the average annual number of securities suits of 186.
The most significant reason for the increase in securities suit filings during 2016 was the shift to federal court from state court of merger objection lawsuit filings. The shift was the result of key court decisions in state court in Delaware, making the filing of the merger cases there less attractive. The 89 merger objection cases filed in federal court in 2016 represented nearly a third of all federal court securities suit filings in 2016, compared to only 25 federal court merger objection lawsuits in 2015 (representing about 13% of filings). From 2012 to 2014, federal M&A-related class actions totaled between 15 and 16 cases per year.
Even if the merger objection filings during 2015 and 2016 are disregarded, there were still more securities class action lawsuit filings in 2016 than in 2015. The increase in traditional kinds of securities suit filings in 2016 is the result of an increase in the number of cases alleging corporate bribery schemes, FCPA violations, as well as other improper activities. Roughly one in four newly filed class actions alleged improper activities.
For the first time in 2016, there was no relationship between the number of securities suits filed and the performance of the S&P 500. In prior years, PwC had noted an inverse relationship between the number of securities suit filings and the stock market index. In 2016, however, the S&P 500 rose more than 9% while the number of securities suit filings rose about 41%.
A total of 71 of the 2016 securities suit filings (about one quarter of all filings) involved companies in the health industries, the highest number of suits against companies in any one industry group. In four of the last five years, companies in the health industries have had the highest number of filings.
Another factor contributing to the significant number of securities suit filings in 2016 was the number of class action lawsuits filed against foreign issuers. There were 44 lawsuit filed against foreign companies in 2016, representing about 16% of all filings, compared to 43 in 2015. The home countries of the foreign companies sued changed in 2016 compared to prior years; whereas in the recent years Chinese companies have predominated among the companies sued, in 2016 Chinese companies were not a significant factor. The countries with the highest number of securities suits in 2016 were Israel (9), Canada (7), and Ireland (6).
While more than half of the companies sued in 2016 were either micro-cap (under $300 million in market capitalization) or small cap companies (between $300 million and $2 billion), these kinds of smaller companies as a percentage of all securities suit defendants decreased in 2016 from the prior year. In 2016, 55% of companies sued were either micro-cap (16%) or small cap (39%) companies, compared to 70% in 2015.
56 of the 276 federal court securities class action lawsuits filed in 2016, representing about 20% of all filings, involved accounting-related allegations, compared to 50 cases involving accounting related allegations in 2015, representing about one quarter of all securities suit filings that year.
For several years, improper revenue recognition and inadequate internal controls have been the most common accounting-related allegations alleged. However, in 2016, there was an increase in the number of cases alleging improper activities, including accounting or disclosure of related party activities, earnings smoothing, money laundering, predatory overbilling, price-fixing and FCPA violations. Many of the cases alleging improper activities also alleged internal control deficiencies.
The majority of securities suit filings (nearly 80%) did not involve accounting-related allegations. Forty-two of the non-accounting cases involved allegations of kickback payments, price manipulation in violations of antitrust laws, environmental law violations, or various forms of fraud.
There were 15 federal court securities class action lawsuits involving IPO companies in 2016, compared to 23 in 2015. The decrease in the number of suits involving IPO companies appears to reflect the decline in the number of IPOs completed in 2015 and 2016, compared to the immediate prior years – there were 196 IPOs completed in 2015 and 123 in 2016, compared to 304 in 2014.
Among trends to watch, the report notes the possibility of future cases involving cybercrime. In the past, corporate litigation involving data breaches had largely involved derivative lawsuits. However, the report specifically noted that regard a securities class action lawsuit recently was filed involving data breach-related disclosure allegation against Yahoo (about which refer here). The report notes that “As the Federal Trade Commission (“FTC”), and now the SEC, pursue companies for inadequate or inaccurate public disclosures pre-breach, we expect to see more class actions following data breaches.”
The report notes that the average securities class action lawsuit settlement in 2016 was $46.2 million, compared to $48.9 million in 2015. The median securities class action lawsuit settlement was $9 million in 2016, compared to $8.7 million in 2015.
The report also contains a number of interesting comments on the potential impact of the arrival of the new administration on SEC enforcement activity and securities lawsuit filings.
My analysis of 2016 securities suit filings can be found here.