Led by Twitter’s successful offering earlier this year, IPO activity in the U.S. during 2013 has been at its highest levels since 2007. While the listing activity seems to bode well for the general economy as well as for the financial markets, the increased number of IPOs has also led to an uptick in IPO-related securities litigation. The recent rash of IPO-related securities suits is significant in and of itself but also arguably take on added significance in light of other significant securities litigation developments.
According to the website IPO Scoop, as of November 28, 2013, 188 IPOs have priced so far in 2013, compared to 146 during all of 2012. The 2013 total is already on track for this year to have the highest number of completed IPOs since 2007, when there were 279 IPOs. IPO activity fell off sharply in 2008 and 2009 during the worst of the credit crisis, but it has been recovering since then. Signs are that IPO activity will remain elevated going into 2014 – although of course any one of a number of things (including the budget mess in Washington) could change the marketplace for IPOs.
One of the things that has come along with the increased numbers of IPOs this year has been in an increase in the number of securities class action lawsuits alleging misrepresentations in IPO companies offering documents. This uptick in IPO-related securities litigation drew my attention last week, when two new securities actions involving IPOs completed earlier this year were filed.
First, on November 22, 2013, plaintiffs’ lawyers’ issued a press release (here) announcing that they had filed a securities suit in the Southern District of New York against Tremor Video, certain of its directors and officers, and its offering underwriters. Tremor completed its IPO on June 27, 2013. According to the press release, the plaintiff’s complaint (which can be found here) alleges that the company’s offering documents failed to disclose that the online advertising market had shifted to mobile browsing, as opposed to desktop browsing, where the company was at a significant disadvantage, and that the company was losing sales to competitors as a result.
Similarly, in a November 26, 2013 press release (here), plaintiffs’ lawyers announced that they had filed an action in the Northern District of California against Violin Memory, certain of its directors and officers. Violin Memory just completed its IPO on September 27, 2013. According to the press release, the plaintiffs’ complaint alleges that the company’s offering documents failed to disclose that the company’s sales and revenues were being negatively impacted by uncertainties surrounding the federal government budget mess and the government shutdown. A copy of the complaint can be found here.
These recent IPO-related lawsuits follow a host of others filed just since August 1, 2013, including several lawsuits involving companies that completed IPOs in 2012 and earlier. The IPO-related securities suits filed just since August 1 include the following.
On October 25, 2013, plaintiffs filed a securities lawsuit in the District Court of Massachusetts against NQ Mobile and certain of its directors and officers. Among other things, the plaintiffs allege that the company made certain material misrepresentations in its offering documents issued in connection with the company’s May 5, 2011 IPO. Further information about the NQ Mobile lawsuit can be found here.
On August 27, 2013, as detailed here, plaintiffs filed a securities lawsuit in the Southern District of New York, against Lightinthebox Holding Co. and certain of its directors and officers. The company completed its IPO on June 6, 2013. The plaintiffs allege that the company’s offering documents contained misrepresentations.
On August 8, 2013, plaintiffs filed a securities class action lawsuits in the Northern District of California against CafePress and certain of its directors and officers (as detailed here). Among other things the plaintiffs allege that the offering documents the company issued in connection with its March 29, 2012 IPO contained misrepresentations.
On August 1, 2013, plaintiffs filed a securities class action lawsuit in the Northern District of California against Vocera Communications, alleging material misrepresentations in connection with the company’s March 28, 2012 IPO, as discussed here.
These filings are a reminder that IPO-related lawsuits represent a significant part of securities class action lawsuit filings. Though these suits may collectively seem like only a small handful, they do represent about ten percent of all securities class action lawsuits that have been filed since August 1, 2013.
At a practical level this is hardly surprising, since claims under Section 11 of the Securities (the operative liability provision for IPO-related securities claims), unlike Section 10(b) of the Exchange Act, has no scienter requirement and operates as a strict liability statute. The relative prevalence of IPO-related securities suits is of course directly related to the level of IPO activity, as the above discussion shows. The 2012 Cornerstone Research year-end securities litigation repoirt (here) shows that in 2008 (that is, the year fater the last hgih water market for IPO activity) 24% of securities class action lawsuits filed included Section 11 allegatoins; but as IPO activity dropped off in subsequent years, filings with Section 11 allegatoins declined as well; in 2012 only 10% of securities class action filngs contained Section 11 allegatoins.
IPO-related claims may take on greater importance in the months ahead in light of pending developments at the U.S. Supreme Court. As discussed at greater length here, the U.S Supreme Court has recently granted cert in the Halliburton case and will be revisiting the fraud on the market presumption first enunciated in Basic v. Levinson. Although there are a range of possible outcomes in the Halliburton case, one possibility is that the Court could throw out the fraud on the market presumption, making it just about impossible for plaintiffs to obtain class certification in a Section 10(b) misrepresentation case, because reliance would not be presumed but would have to be shown for each class member.
However, reliance is not an element of a Section 11 claim. A Section 11 claimant is not dependent on the fraud on the market theory in order to obtain class certification. In other words, even if the Supreme Court throws out the fraud on the market theory in the Halliburton case, making class certification in Section 10(b) cases effectively impossible, claimants in Section 11 claims will still be able to pursue class action claims. In that circumstance, Section 11 claims would be even more attractive to plaintiffs’ attorneys, which would make IPO-related claims an even higher priority for the plaintiffs’ attorneys than they are now. At a minimum, IPO-related class action securities claims will remain even if the Supreme Court throws out the fraud on the market presumption.
The kind of IPO-related claims discussed above already represent an important category of securities class action litigation. Depending on what the Supreme Court does in the Halliburton case, these kinds of cases potentially could become even more significant.
China Lifts IPO Moratorium: According to news reports, Chinese securities regulators are about to lift a ban on initial public offerings in the country that has been in place since November 2012. The ban was put in place to crack down on fraud and misconduct. The ban will now be lifted as part of an overhaul of the rules governing initial offerings.
The new IPO rules from the China Securities Regulatory Commission represent a move to a U.S.-style registration system in which the regulator will focus on whether the company seeking a listing has meet information disclosure requirements. The prior system was approval-based and dependent on whether the issuer could sustain its operations. Under the new system, investors will judge the value and risks of offerings and help to set the share price in open-market trading. According to the Wall Street Journal (here) , as many as 50 companies are expected to have registrations completed in time for offerings in January 2014.
Briefly Noted -- South Africa: Creditor Claims Against Directors and Officers?: A November 29, 2013 memo from the Routledge Modise law firm (here) take a look at the question of whether or not creditors may pursue claims against the directors and officers of companies involving in “business rescue” proceedings (which seem to be similar to bankruptcy proceedings in the U.S.). The article concludes based on a review of relevant case law that under the applicable common law principles creditors may have certain rights to pursue claims against the directors and officers for “fraudulent and/or reckless trading.”