The D & O Diary : Directors and Officers Liability and Insurance : The D & O Diary : Kevin LaCroix : Securities Laws, Corporate Fraud, D & O Litigation

What are the factors that affect the timing of securities class action lawsuit dismissals and that affect the timing and size of securities suit settlements? These are the questions examined in an April 2012 PLUS Journal article entitled “When Are Securities Class Actions Dismissed, When Do They Settle and For How Much? An Update” (here) by Stanford Law School Professor Michael Klausner and his colleagues Jason Hogland and Matthew Goforth. In this article, the authors update their earlier research on these same questions.

In order to examine these issues, the authors examined the 652 securities class action lawsuits filed between 2006 and 2010. Of the 652 cases, 119 (18%) are ongoing, 257 (40%) have settled, 206 (32%) have been dismissed with prejudice, and 74 (11%) have been voluntarily dropped. Disregarding amounts paid in settlement by third parties (such as offering underwriters), of the cases from this period that settled, the mean settlement amount is $36 million and the median is $9 million.

The authors followed the progression of these cases through the motion to dismiss stage. They found that, among other things, as a result of a combination of dismissal motion rulings, voluntary withdrawls and settlements reached before a dismissal motion ruling, over half of all securities class action lawsuits “end well before discovery and before even a second complaint is filed.”

In 25% percent of cases, the motion to dismiss is granted with prejudice, on average within 19 months of the date on which the complaints were first filed. An additional 9% of cases were voluntarily dropped before the dismissal motion was heard, and another four percent were dropped after the motion to dismiss was granted without prejudice. Thus, a total of 38% of cases “ended relatively quickly and painlessly for defendants.”

In addition, another 13% of cases settled before the motion to dismiss was heard and another 2% of cases settled after the court granted a motion to dismiss without prejudice but before the plaintiffs filed an amended complaint. These cases “entailed costs to defendants and their insurers, but they did not involve extended litigation.”

In 34% of cases, the court granted the motion to dismiss without prejudice, of which 85% of plaintiffs filed a second complaint. The outcome of the second complaint cases roughly parallels the outcomes at the first complaint stage. On average about 30 months passed between the initial filing and the resolution of these second complaint stages. Only five percent of cases reached the third complaint stage, and even fewer involve subsequent complaints. The authors conclude that “relatively few cases entail the filing of a second, third or later consolidated complaint.”

Of all cases that are ultimately dismissed with prejudice, 66% are dismissed at the first complaint stage, 28% are dismissed at the second complaint stage, and 6% are dismissed at the third complaint stage. (Only one case was dismissed at the fourth complaint stage and one was dismissed at the fifth complaint stage.)

Certain factors clearly affect the likelihood of dismissal. For example, when a securities suit involves a parallel SEC enforcement action, the class action was dismissed in only 12% of cases. Cases that involved restatements “were dismissed less frequently than cases that involve non-restatement accounting issues, which in turn were dismissed less frequently than are non-accounting cases.”

In looking at the timing of settlement, the authors categorized the procedural stages of the cases as early pleading (that is, up through the first dismissal motion ruling), later pleading (involving the pleading stages following the first ruling but before the final determination), and discovery (involving the period after the dismissal motion has finally been denied). Forty three percent of settlements occur in the early or late pleading stage, that is while there is still a possibility of dismissal. Just under 60% of settlements occur in the discovery stage, some shortly after the motion to dismiss is denied.

For cases that settle after the motion to dismiss is denied, the time it takes the cases to settle ranges from one month to 46 months, but the mean length of time for a case to settle after the dismissal motion is denied is 16 months.

The authors found that settlement size is related to settlement timing. Settlement size increases as the cases move through the early pleading stage to the discovery stage. The mean settlement for cases that settle in the discovery stage is over $60 million, while the mean settlement of cases that settle in the early pleading stages is less than $20 million.

However, though the settlements tend to grow larger as the cases progress, the settlements as a percentage of shareholder losses decline as the cases advance through the various stages. The authors attribute this seeming contradiction to company size, as larger companies tend to settle later than smaller companies. Though cases involving larger companies settle for larger amounts in terms of absolute numbers of dollars, smaller companies tend to settle for a larger fraction of shareholder losses.

The authors concluded by noting that their findings in this latest updated study are consistent with the finding in their prior study, which had focused on cases filed between 2000 and 2004. The authors note that “it appears that the forces shaping the patterns of dismissal and settlement over the past decade have remained stable.”

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Securities class action lawsuits involving accounting allegations are less likely to be dismissed, take longer to resolve, and make up a much greater proportion of total securities suit settlement dollars than non-accounting cases, according to a new report from Cornerstone Research. The report, entitled “Accounting Class Action Filings and Settlements: 2012 Review and Analysis,” and which can be found here, shows that the number of securities cases involving accounting allegations declined in 2012, both in absolute numbers and as a percentage of all securities suit filings. However, a number of factors suggest that the number of accounting cases could increase in the months ahead. Cornerstone Research’s April 10, 2013 press release regarding the report can be found here.

The report defines a securities suit as an “accounting case” if the lawsuit involves allegations of Generally Accepted Accounting Principles or weaknesses in internal control over financial reporting. The alleged GAAP violations vary widely, but include allegations of accounting irregularities, restatement of financials, and asset write-downs.

During 2012, new accounting case filings decreased both in number and in proportion of new securities class action filings, to the lowest levels in six years. The number of accounting cases decreased from 78 in 2011 to 45 in 2012, and the proportion of total filings that accounting cases represented decreased from 42 percent to 30 percent. As a result of declines during 2012 in the number of cases involving Chinese reverse merger companies, as well as a general decline in the number of securities class action lawsuit filings in the second half of the year, the number of securities suit filings overall declined during 2012. The drop in Chinese reverse merger cases alone accounted for approximately two-0thirds of the drop in new accounting cases from 2011 to 2012

The total number of accounting restatements actually increased in 2012. However, the total number of accounting cases involving financial restatements decreased during 2012, returning to levels seen in 2009 and 2010, after a significant increase in 2011. Perhaps many of the 2012 restatements did not result in lawsuits because the “many of the restatements during 2012 did not have a significant effect on stock price.” It is also possible that a time lag between the time of the restatement and an eventual filing may result in more restatement related filings in 2013.  

For the third consecutive year, the majority of accounting cases included allegations of internal control weaknesses. Over the past three years, nearly two out of three accounting cases included allegations relating to internal controls, a much higher proportion than during the period 2007 through 2009.

Accounting cases typically are less likely to be dismissed than non-accounting cases. Of the securities class action lawsuits that were filed in 2007, only 35 percent of accounting cases were dismissed by the end of 2012, compared with 52 percent of non-accounting cases. In addition, 60 percent of accounting cases filed in 2007 settled by the end of 2012, compared to 41 percent of non-accounting cases. Of all cases filed during the period 2007 to 2010, only five percent of accounting cases were voluntarily dismissed, compared with 24 percent of non-accounting cases.

Accounting cases continue to represent a substantial portion of the total dollar value of all settlements. While accounting cases represented less than 70 percent of the number of 2012 securities lawsuit settlements, accounting cases represented over 90 percent of the total value of the settlements.

Both average and median settlement amounts are higher for accounting cases compared with non-accounting cases. During 2012, the average and median settlement amounts for accounting cases were approximately $73 million and $15 million respectively, compared with $16 million and $6 million for non-accounting cases. This difference is due in part to the fact that accounting cases often involve other factors associated with higher settlement amounts, such as an accompanying SEC action. The report also notes that cases in which the company has announced internal control weaknesses are associated with both higher median settlement amounts and a higher settlement share of “estimated damages.”

The report notes that factors such as the Dodd-Frank whistleblower program, a recent increase in the number of restatements by accelerated filers, and the JOBS Act’s extension of the exemption from auditor reports on internal controls for emerging growth companies are all factors that could contribute to an increase in the number of securities class action lawsuit filings involving accounting allegations.

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The number of securities class action lawsuits filed against life sciences companies rose in both absolute and relative terms in 2012, according to a March 20, 2013 memorandum by David Kotler of theDechert law form entitled “Survey of Securities Fraud Class Actions Brought Against U.S. Life Sciences Companies.”   According to the report, a copy of which can be found here, life sciences companies “remain an increasingly popular target of securities fraud class action lawsuits.”

According to the report, 27 pharmaceutical, biotechnology and medical companies were hit with securities suits in 2012, representing about 18% of all securities suits filed during the year.  By comparison, in 2011, 17 of those companies had securities suits filed against them, representing just 9% (It should be kept in mind when comparing the two years that securities class action lawsuit filings overall declined significantly between 2011 and 2012, as discussed in greater detail here.) The 18% of all securities suits that life sciences companies’ filings represented in 2012 is “well above the percentage of securities fraud complaints filed in recent years.”

During 2012, the fillings against life sciences companies continued to be concentrated on smaller companies. During 2012, 50% of all life sciences securities suit filings involved companies with market caps of less than $250 million, as compared to 58% in 2011 and 31% in 2010.

Abut 43% of the 2012 life sciences securities complaints involved alleged misrepresentations or omissions regarding product efficacy. However, “complaints claiming financial improprieties and insider trading were still prevalent in 2012.”

Though life sciences companies continue to be the target of securities class action litigation, many of these cases are also dismissed. The report notes that “in 2012, life sciences companies continued to enjoy relative success in obtaining dismissals of the securities fraud lawsuits filed in recent years.” For example, the report shows that of the 23 securities lawsuits filed against life sciences companies in 2008, three remain pending, eleven were settled, and nine have been dismissed, or about 45% of all resolved cases.

However, as the report also notes, “it is equally worth noting that securities fraud lawsuits still carry a substantial risk of exposure, and even when settled can result in very large payments.” The report notes that the 2008 securities suit filed against Medtronic settled during 2012 for $85 million.

The report also discusses the U.S. Supreme Court’s February 2013 decision in the Amgen case (background about which can be found here). The report states that “the Supreme Court’s decision in Amgen is expected to have a profound impact on the critical class certification stage in securities fraud class action lawsuits filed against life sciences companies, especially in the Second, Fifth and First Circuits, where the previously required higher threshold for plaintiffs to overcome the class certification barrier now will be lessened.”

The report concludes with a number of practical suggestions for life sciences companies to take to minimize the risk of, and impact from, securities fraud class actions.

Very special thanks to David Kotler for providing me with a copy of the report.

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Though the number of securities class action lawsuit settlement approvals reached a 14-year low in 2012, aggregate and average settlement amounts increased compared to 2011, according to the annual securities suit settlement report of Cornerstone Research. The report, which is entitled “Securities Class Action Settlements: 2012 Review and Analysis,” can be found here. Cornerstone Research’s March 20, 2013 press release regarding the report can be found here. A one-page infographic of the report’s findings can be found here.

According to the report, courts approved 53 securities class action lawsuit settlements in 2012, compared to 65 in 2011 (itself a very low year) and compared to a 2002-2011 average of 98 settlement approvals per year. The report suggests that the low number of settlement approvals in 2012 may be due to the relatively low number of securities class actions filed in 2009 and 2010.

Though the number of settlement approvals was down in 2012, the aggregate amount of settlement approvals was up substantially compared to 2011. The total amount of all settlements exceeded $2.9 billion dollars in 2012, compared to about $1.4 billion in 2011. Mega-settlements (those involving settlement amounts of over $100 million) accounted for more than 75% of the 2012 settlement amounts.

The average reported settlement amount dramatically increased from 2011 levels—in excess of 150 percent (from the inflation-adjusted amount of $21.6 million in 2011 to $54.7 million in 2012). The median settlement amount increased more than 70 percent in 2012, from $5.9 million last year to $10.2 million.

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Plaintiff law firms continued to file lawsuits in connection with virtually every mergers and acquisitions transaction in 2012, according to an updated report from Cornerstone Research. The February 2013 report, which is entitled “Shareholder Litigation Involving Mergers and Acquistions” and which was authored by Robert M. Daines of Stanford Law School and Olga Koumrian of Cornerstone Research, shows that plaintiff law firms filed lawsuits on behalf of shareholders in 96 percent of M&A deals valued over $500 million and 93 percent of transactions valued over $100 million. Cornerstone Research’s February 28, 2013 press release regarding the report can be found here. The report itself can be found here.

According to the report, the litigation rate involving M&A deals in 2012 was essentially unchanged from 2011. In both 2011 and 2012, about 93% of all deals valued over $100 million attracted litigation, and 96% of all deals valued over $500 million attracted litigation. Deals valued over $100 million attracted an average of 4.8 lawsuits per deal in 2012 (down slightly from 5.3 per deal in 2011) and deals valued over $500 million attracted an average of 5.4 lawsuits in 2012 (down from 6.1 in 2011).

The report notes that after a contrary trend in recent years, in 2012 a larger percentage of cases were filed in Delaware. In 2012 39% of all M&A lawsuits were filed in Delaware compared to only 25% as recently as 2012. For Delaware Corporations, 16% of deals were challenged only in Delaware, compared with 9% in 2011 and only 2% in 2009.

Of the 58% of cases filed in 2012 that had been resolved, the majority (64%) settled. 33% of the resolved cases were dismissed and 3% were voluntarily withdrawn. (These case outcomes are roughly equal to prior years, although with a certain number of the 2012 cases yet unresolved the settlement rate is slightly higher than prior years.)

Of the 2012 cases that were settled, 81% of the settlements involved only additional disclosures (compared to 88% in 2011 and 76% in 2010). According to the report, “the parties in only one settlement acknowledged that litigation contributed to an increase in the merger price.” The deal termination fee was reduced in four cases and the parties reached agreement about appraisal rights in six cases. There were two large settlements in 2012, both relating to transactions announced in 2011: the $110 million settlement in the El Paso/Kinder Morgan case and the $49 million settlement in the Delphi Financial/Tokio Marine case.

The report includes a detailed table of the ten largest M&A lawsuit settlements during the period 2003-2012. As the report notes, most of the larger settlements in the table “included allegations of significant conflicts of interest.”

The average agreed-upon attorneys’ fee for the 2012 settlements was $725,000, The average fee in a disclosure only settlement was $540,000, down from $570,000 in 2011 and $710,000 in 2010. The report includes an analysis of the factors that influence the size of the fee request. The report notes that “plaintiff attorney fees appear to be influenced by the following factors: size of the settlement fund; other monetary benefit to shareholders; number of suits filed; time to settlement; and overall deal value.”

The report concludes with a review of the emerging litigation involving shareholder challenges relating to annual proxy votes and disclosures about executive compensation, which mounted quickly as 2012 progressed. The report notes that “as the 2013 proxy season approaches, this litigation may expand.”

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The pace of bank closures has slowed to a trickle. There have only been three bank failures so far in 2013 (including one this past Friday evening, involving the Covenant Bank of Chicago, Illinois). But while bank failures have dwindled, the number of failed bank lawsuit filings has surged. On February 15, 2013, the FDIC updated its website to reflect a cluster of new failed bank lawsuit filings as well as an increased number of lawsuit authorizations. With the latest lawsuit authorizations, the FDIC is now approaching an authorized level of lawsuit filings comparable to the lawsuit filing level during the S&L Crisis.

With the three bank closures this year, there have now been a total of 471 bank failures since January 1, 2007. The FDIC’s latest litigation update shows that  during the current wave of bank failures the agency has now filed 51 lawsuits against the former directors and officers of 50 failed banks, meaning that the FDIC has already filed lawsuits in connection with just under 11% of all bank failures. But, as reflected in the updated information on the FDIC’s website, the agency has also authorized more lawsuits. The number of authorized lawsuits has continued to increase each month, as well.

As of February 15, 2013, the FDIC has authorized suits in connection with 102 failed institutions against 836 individuals for D&O liability. This includes the 51 filed lawsuits naming 396 former directors and officers at 50 institutions. In other words, there could be as many as 52 as-yet-to-be-filed lawsuits based just on the authorizations to date. Some of these authorized lawsuits may not ultimately be filed, as pre-litigation negotiations sometimes results in settlements that avert the need for a lawsuit to be filed. But were the FDIC to file lawsuit in connection with as many as 102 failed institutions, that would mean that the FDIC would have initiated lawsuits in connection with nearly 22% of all bank failures, a percentage that would approach the 24% rate during the S&L crisis. To the extent the agency authorizes even more lawsuits in coming months, the litigation rate could meet or even exceed the S&L crisis litigation rate.

The updated information on the FDIC’s website includes information relating to four additional filed bank lawsuits that I had not previously tracked. With the addition of these four latest suits, the FDIC has now filed a total of seven failed bank lawsuits so far in 2013, after having filed 26 during 2012. I briefly discuss each of the four latest lawsuits below. One interesting note about these four new suits is that none of them involve failed Georgia banks. As I have previously noted on this blog (most recently here, see second item), the failed bank lawsuits had been disproportionately concentrated in Georgia. These latest filings, none of which involve Georgia banks, might suggest that this imbalance may start to level out.

Here is brief description of the four latest failed bank lawsuit filings.

First, on January 18, 2013, the FDIC in its capacity as receiver for the failed Columbia River Bank of The Dalles, Oregon filed an action in the District of Oregon against seven former officer and three former directors of the bank. The bank failed on January 22, 2010, so the FDIC filed the suit just ahead of the third year anniversary of the bank’s closure. The FDIC’s complaint (a copy of which can be found here) asserts claims against the former directors and officers for gross negligence, negligence and breach of fiduciary duties. The complaint alleges that the defendants “took unreasonable risks with the Bank’s loan portfolio, allowed irresponsible and unsustainable rapid asset growth concentrated in high-risk and speculative” loans, “disregarded regulator warnings,” and violated the Bank’s loan policies and procedures. The defendants allegedly caused damages to the bank of no less than $39 million.

Interestingly, though the Columbia River Bank was not closed until January 2010, all but one of the specific loans cited in the complaint were originated in 2006 and 2007 (the one exception was originated in early 2008). As time goes by, the loan originations cited in the FDIC’s complaint start to seem more and more like ancient history.

Second, on January 29, 2013, the FDIC filed an action in the Middle District of Florida in its capacity as receiver for the failed Orion Bank of Naples, Florida. The FDIC’s complaint can be found here. The FDIC’s complaint seeks to recover damages of in excess of $58 million. The lineup of defendants is interesting, as the four individuals named as defendants are all former directors; none of the bank’s former officers are named as defendants.

The complaint, which asserts claims for gross negligence and breach of fiduciary duties, alleges that the bank “collapsed under the weight of the unsustainable growth strategy that the Defendants permitted Chief Executive Officer Jerry Williams to pursue.” Williams, the former CEO, is not named as a defendant in the case. The complaint alleges that as Williams pursued his “reckless growth strategy” he was “unrestrained” by the defendants who engaged in a “pattern of unconsidered acquiescence.” The Defendants are alleged to have approved loans “without meaningful deliberation or discussion.” The complaint alleges that the director defendants even continued to “ignore” their duties even after the bank had entered an August 25, 2008 written agreement with the federal banking authorities that was specifically concerned with the directors’ oversight responsibilities. 

The Orion Bank failed on November 13, 2009, which suggests that the parties may have entered some sort of a tolling agreement. The naming of only four former directors as defendants, and the absence of any officer defendants, is not explained in the complaint. One possibility is that as a result of negotiations while the tolling agreement was in place resulted in settlements on behalf of the former officers (this, I should add is sheer speculation on my part).

Third, on January 31, 2013, the FDIC in its capacity as receiver of the failed Security Savings Bank of Henderson, Nevada, filed an action in the District of Nevada against three former director and officers of the bank. The FDIC’s complaint (a copy of which can be found here) seeks to recover damages in excess of $13.1 million from the three defendants who allegedly “underwrote, recommended and/or voted to approve at least seven high-risk commercial real estate and acquisition and development and construction loans in violation of the Bank’s lending policies and clear principles of safety and soundness.”

The bank was closed and the FDIC appointed as receiver on February 27, 2009, which suggests that the parties had entered some sort of tolling agreement. The three defendants had resigned before the bank failed; two of them, the former CEO and the former Chief Credit Officer, had resigned in September 2008, and the third had resigned all the way back in December 2006. The three individual defendants have long since scattered, with two now living in Texas and a third living in Virginia. All of the specific loans mentioned in the FDIC’s complaint were originated in 2005 and 2006, which really does seem like ancient history.

Fourth, on February 13, 2013, the FDIC, in its capacity as receiver of the failed LaJolla Bank of LaJolla, California filed an action in the Southern District of California against two former officers of the bank and against the bank’s former board Chairman. The complaint (here) asserts claims for negligence, gross negligence and breach of fiduciary duty and seeks to recover damages in excess of $57 million. The complaint alleges that the defendants violated the bank’s loan policy and “safe and sound lending practices” by “recommending or approving speculative commercial real estate loans despite known adverse economic conditions,” as well as recommending or approving loans to borrowers who were not creditworthy, or without requiring sufficient underwriting and without sufficient information.

Regulators closed the LaJolla Bank on February 19, 2010, so the FDIC filed its complaint just prior to the third anniversary of the bank’s closure. The specific loans referenced in the complaint were originated between March 2007 and March 2009.

Reading these four complaints in quick succession was an interesting experience. Though there are noteworthy variations between the complaints (for example, with the Orion Bank complaint, which names only director defendants), there is also a certain sameness to the complaints, as well – so much so that some of the allegations and even phraseology seem to be lifted verbatim from other complaints. It is, after all, a familiar story. The banks grew quickly during a period of rapid economic expansion and then were slow to recognize the seriousness of the downturn. In the aftermath, it appears that many of the loans extended during the go-go days had not always been made with full procedural compliance. It does beg the question whether the losses were the result of the failure to follow procedures or of the suddenness and severity of the downturn.

Another unmistakable impression from reading these complaints in quick succession is that as time goes by, the events on which the FDIC is going to be trying to base its current and any future lawsuits are receding further and further into the past. As noted above with respect to the Security Saving Bank complaint, the defendants are scattering. As time goes by, the FDIC’s burden is going to become increasingly archeological.

This Just In From Our Istanbul Bureau -- D&O Liability and Insurance in Turkey: As is the case in many countries, the use of D&O insurance is still relatively new in Turkey. However, as discussed in an interesting January 29, 2013 article by Naşe Taşdemir Önder and Pelin Baysal of the Mehmet Gün & Partners law firm entitled “Turkey: Directors’ and Officers’ Liability Insurance in View of the New Turkey Commercial Code” (here), new standards on corporate governance incorporated into the new Turkish Commercial Code are “expected” to “lead to increase in demand for D&O policies.”

According to the authors, the new Code introduces new requirements for “universal accounting and auditing standards and rules for increased transparency” which the authors expect will support the “operability” of “liability provisions.” According to the authors, the Code introduces a “heavier level of duty of care” for directors and officers. Among other things, the new Code provisions introduce certain specific types of liability provisions, including in particular liability for misrepresentations in documents and declaration and misrepresentations on capital subscription. The Code introduces many other new provisions, including new provisions allowing for claims by shareholders for losses incurred by the company.

With respect to insurance, the new Code specifies that third party liability insurance will be consider “occurrence based” unless otherwise indicated in the policy. The new Code also prohibits coverage for losses arising as a result of willful acts. The author’s very thorough examination of the new Code’s insurance-related provisions detail the many other specific insurance issues that the new Code addresses.

For anyone interested in the D&O liability and D&O insurance issues in Turkey, the authors’ memo is a valuable resource.

And Now, From Our Singapore Bureau: Regular readers of this blog may recall my post about my April 2012 visit to Singapore, which I found to be an interesting and impressive place. But Singapore’s transformation into a gleaming metropolis is relatively recent. As shown in this photo montage from Business Insider, Singapore had to become what it is today and relatively recently it was a very different place. I found these photographs, and the history they embody, to be fascinating.

And Finally: Kalefa Sanneh’s excellent and interesting article in the February 11 & 18 issue of The New Yorker entitled “Sprit Guide” (here), about whisky distiller Bruichladdich, contains the following sentence, written with reference to the whisky sampling  techniques of the whisky maker’s master distiller, Jim McEwan: “It’s a simple process, but consumers hoping to reproduce McEwan’s results at home will find, no doubt, that some variant of the uncertainty principle applies: the more research you conduct, the less reliable your data become.” I tip my hat to the article’s author; the sentence has its own humor, in that conducting whisky research undoubtedly involves certain limits owing to the properties of the subject matter.  But it is the sly side reference to Heisenberg’s uncertainty principle that I admire.

Though I could never hope to write with such sophisticated humor, I can certainly admire the writing, including also the following sentence from the same article:  “The first part of the distillate, known as the foreshot, contains methanol, which can be toxic in large quantities – although the same could be said of whisky.” (Side note: In Scotland, there’s no “e” in whisky.)

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Litigation related to M&A activity continued at an “extremely high rate” in 2012, according to the latest research update from Ohio State law professor Steven Davidoff and Notre Dame business professor Matthew Cain. According to the professors’ analysis, presented in their February 1, 2013 paper entitled “Takeover Litigation in 2012” (here), 91.7% of all merger transactions that met the professors’ criteria attracted at least one lawsuit, compared to 91.4% in 2011.

The professors’ paper is the latest update on their research originally presented in their January 2012 article entitled “A Great Game: The Dynamics of State Competition and Litigation” (here), which I reviewed here. Following the original article’s publication, the professors updated their research with additional litigation data regarding M&A transactions that took place in 2011. Their latest paper updates their research with regard to 2012 transactions.

The professors have limited their analysis to merger transactions over $100 million involving publicly traded target companies with an offering price of at least $5 per share. The 2012 update includes only transactions there were completed as of January 2013. The professors intend to update their 2012 data in six months to incorporate information relating to the in process transactions.

It is probably worth noting that there were fewer deals that met the professors’ sorting criteria in 2012. There were only 84 deals with the defined characteristics in 2012, compared to 128 in 2011 (representing a year over year drop of 34%). But the percentage of deals attracting at least one lawsuit remained virtually unchanged, with 91.7% of deals attracting at least one suit, compared to 91.4%. The professors believe based on anecdotal evidence, that when they update their 2012 “the ultimate litigation rate will match or exceed the 91.7% figure.” Though the litigation rate is virtually unchanged from 2011, the 2012 rate is “almost 2.5% that of 2005,” when the litigation rate was only 39.3%.

The number of complaints brought per transaction remained at about 5.0 lawsuits per transaction, the same rate as in 2011 but more than double the mean number of lawsuits in 2005, when the figure was 2.2/ Multi-jurisdiction litigation “remained similar in 2012 with 50.6% of transactions with litigation experiencing litigation in multiple states,” compared to 53% in 2011.

87.5% of all 2012 cases that had settled involved “disclosure only” settlements, compared to 79.5% in 2011. The average attorneys’ fees were down substantially in 2012, but that may be driven by a few larger settlements in 2011. The median attorneys’ fee award was about the same both years -- $580,000 in 2011, $595,000 in 2012.

Delaware attracted a slightly reduced share of M&A litigation in 2012. The state attracted 46.7% of all litigation that could have been filed in there in 2012, compared with 52.8% in 2011. Delaware “also appears to be dismissing fewer cases, thus allowing more cases to be settled” – 76.9% of Delaware cases settled in 2012, compared with 61.5% in 2008. The authors note, referencing their original paper, that “when Delaware loses cases to other jurisdictions it historically has dismissed fewer cases and allowed more to settle, consistent with conduct designed to reattract litigation.”

Discussion

Because of the authors’ sorting criteria, their analysis and conclusion are most relevant to the larger transactions. However, based on my own observations, the authors’ conclusions are consistent even with respect to the smaller deals that do not meet their sorting criteria. The explosion of M&A-related litigation in recent years has not been limited just to the larger companies and transactions.

The surge in M&A related litigation in recent years has been one of the principal justifications the D&O insurance carriers have given as an explanation for their efforts to try to increase the insurance rates, particularly with respect to the rates for primary D&O insurance. In addition, the upsurge in M&A-related litigation has also affected the terms and conditions that the carriers are willing to offer. In particular, some carriers have been insisting on adding a separate, larger retention for M&A-related claims. The professors’ updated M&A-related litigation date seems to suggest that the carriers will try to continue to push rate and to try to include separate M&A-related claim retentions.

As I detailed in a prior post (here), the defense expenses and settlement amounts associated with M&A-related litigation represent a serious problem, for the companies involved and for their insurers. The prevalence of the multi-jurisdiction litigation is a particularly vexing problem, as the proliferating lawsuits are expensive to defend and difficult to resolve.  Unfortunately, based on the professor’s updated research, all signs are that these phenomena will remain a significant part of the corporate and securities litigation landscape for the foreseeable future.

Special thanks to Professor Davidoff for providing me with a copy of his latest paper.

Chinese Reverse Merger Cases: Is There a “China Discount”?: During 2010 and 2011, and to a lesser extent during 2012, the plaintiffs’ securities lawyers rushed to file securities class action lawsuits against Chinese companies that had obtained a U.S. listing through a reverse merger. But while these cases flooded the courts, they have not proven to be a huge bonanza for the plaintiffs’ lawyers or their clients. As I noted in a prior post, the settlement so far have been rather modest.

Michael Goldhaber’s February 12, 2012 Am Law Litigation Daily article entitle “Whither Chinese Reverse Merger Litigation?” (here) suggests that there may be a “China discount” in the Chinese reverse merger cases. The article quotes a defense attorney with the Sherman & Sterling law firm as saying that there is now a “critical mass of settlements between $2 million and $3 million” and that these lower settlements “may exert a gravitational pull on other settlements down the road.” The article notes that “the remarkable uniformity of the settlements suggests that $5 million D&O insurance policies are standard for this niche,” adding that a policy of that amount allows enough for defense fees and a settlement compromise with in the policy limit.

The two arguable exceptions to these generalizations both involve proceedings outside the U.S. The first is the $77.5 million Hong Kong arbitration award that C.V. Starr obtained against the founding shareholders of China MediaExpress Holdings (about which refer here) and E&Y’s $118 million December 2012 settlement of a Canadian class action arising out of its audit of Sino-Forest Corporation (refer here). Though these two exceptions each have their own distinct characteristics, these developments may hearten the claimants in the other cases and give them the incentive to continue to try to press on. The evidence so far, however, suggests the greater likelihood of the more modest settlements that have tended to become the norm.

A particularly interesting feature of the Am Law Litigation Daily article is a link to Sherman & Sterling document provided a comprehensive status summary of more than 75 disputes in U.S. forums relating to allegations of securities violations by Chinese parties, including more than 50 reverse merger companies. The summary document can be found here.

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As numerous observers (including this blog) have noted, securities class action lawsuit filings were down in 2012 compared to the previous year and historical averages. It turns out that the downturn was not limited just to securities class action litigation. New lawsuit filings for corporate and securities litigation generally declined in 2012, according to a January 29, 2013 report from Advisen entitled “D&O Claims Trends: 2012 Wrap Up” (here). The new report details an annual decline across all of the categories of corporate and securities litigation that it tracks, while at the same time noting that litigation filings in the aggregate in 2012 were still elevated compared to prior years.

According to the survey, the total number of corporate and securities lawsuits declined 21 percent from 2,043 suits in 2011 to 1,616 in 2012. But though the numbers declined year over year, the 2012 filings still exceeded all other years except 2011. The elevated levels between 2012 and the years preceding 2011 was largely due to what the Advisen report calls “securities fraud” suits (which it should be emphasized is a category that does not include securities class action lawsuits and largely consists of regulatory and enforcement actions) and shareholders derivative suits.

The report emphasizes that the apparent decline in overall corporate and securities litigation levels between 2011 and 2012 may be a reflection of the fact that 2011 was an “unusually active year” for litigation. But, the report adds, to the extent that the 2012 figures do represent a longer term trend, it may be that the plaintiffs’ firms’ resources “are being allocated outside the realm of D&O related litigation.”

The decline in the number of securities class action lawsuits, which has been mush noted, “likely reflects a change in the emphasis by plaintiffs’ firms due in part to a string of Supreme Court decisions favoring defendants,” as well as a “shift in focus towards other types of suits that can be resolved quickly in more favorable state jurisdictions at a far lower cost to the law firm.”

Along those lines, the report notes that as recently as 2007, securities class action lawsuits represented 22 percent of all corporate and securities lawsuit filings, but only about 11 percent in both 2011 and 2012. The declining significance of securities class action lawsuit as a percentage of all corporate and securities lawsuit filings is a reflection of the changing mix of corporate and securities litigation.

The largest drop in corporate and securities litigation activity between 20011 and 2012 occurred with respect to breach of fiduciary duty suits, which fell 31 percent year-over-year. A large factor in this drop was the decline in 2012 of new merger objection lawsuit filings, after those types of suits had increased sharply between 2006 and 2011. According to the report, the number of new merger objection suits declined 24 percent in 2012 compared to the all-time high levels in 2011. This decline in merger objection suit filings may be in part a function of the decreasing M&A activity. However, the ten percent decline in M&A activity “does not fully explain the large decrease in suits.”

Though suits against financial firms continued to predominate among all corporate and securities lawsuits, the percentages of suits involving financial firms was also down in 2012. Suits against financial firms involved 28 percent of all new filings in 2012 compared to 31 percent in 2011, largely “an outcome of the continuing wind down of subprime and credit crisis activity.”

The report notes that during 2012, though the number of settlements was down, the average securities class action lawsuit settlement (including proposed and tentative settlements) was $51.8 million, compared to $34.9 million in 2011.

The report includes an interesting report on Foreign Corrupt Practices Act enforcement activity and related follow-on litigation, as we as related D&O insurance issues. The report notes that though FCPA enforcement activity was down in 2012, most commentators expect that the decline will prove to be temporary. The report also notes that between 20% and 30% of FCPA enforcement actions trigger shareholder derivative suits.

Advisen Report Webinar: On Tuesday January 29, 2013 at 11 am EST, I will be participating in a webinar sponsored by Adivsen in which the report’s findings will be discussed.  The webinar will provide a quarterly review of securities and other litigation impacting D&O coverage and will identify and analyze the trends of greatest significance to Risk Managers and Management Liability professionals. The participants in this free webinar will include AIG’s Tom McCormack, John McCarrick of the White and Williams law firm, and Advisen’s David Bradford and Jim Blinn. Further information about the seminar, including registration instructions, can be found here.

Time for a Music Video Interlude: All the Single Babies. If you like it, then you'd better put a diaper on it.

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Securities class action lawsuit filings were down “sharply” in 2012 compared to the prior year and to historical average, according to Cornerstone Research’s annual report. The study, published in conjunction with the Stanford Law School Securities Class Action Clearinghouse and entitled “Securities Class Action Filings: 2012 Year in Review,” can be found here.  A short, single-page graphic summary of the report’s conclusions can be found here. The two organization’s January 23, 2013 press release discussing the report can be found here. My own analysis of the 2012 securities suit filings can be found here.

According to the report, there were 152 securities class action lawsuits filed in 2012, which is below both the number of filings in 2011 (when there were 188) and the 1997-2011 annual average number of filings (193). The 152 filings in 2012 represents a 19 percent decrease from 2011 and a 21 decrease from the 1997-2011 annual average.

A significant factor in the reduced number of filings in 2012 was the decline in filing activity during the year’s second half, particularly during the fourth quarter. There were only 64 filings in the second half, compared with 88 in the first half. The filing level in the second half of 2012 was “lower than all semiannual periods other than the historic low observed in the second half of 2006.” The 25 filings in the year’s fourth quarter was “the lowest number of filings in any quarter in the last 16 years.” The report notes that these observations are consistent with “a declining trend since the first half of 2010.”

The report states that the decrease in 2012 filings was “largely due” to declines in federal mergers and acquisitions objection litigation and in the number of lawsuits involving Chinese companies (particularly Chinese companies that obtained a U.S. listing through a reverse merger transaction). According to the report, on a year-over-year basis, M&A filings decreased 70 percent (as plaintiffs appeared to prefer state court forums for this type of litigation) and filings related to Chinese reverse merger companies decreased by 68 percent. The report also noted that for the first time since 2007 there were no new securities class action lawsuit filings related to the credit crisis.

The number of filings against foreign issuers dropped from 61 in 2011 to 32 in 2012 (a 48 percent drop). Though filings against foreign issuers represented only 24 percent of all 2012 filings, compared to 32 percent in 2011, the 2012 percentage “reflects a level that is greater than al prior years other than 2011.” The continued elevated level of filings against foreign issuers in 2012 is largely due to filngs related to Chinese firms. There were a total of 18 filings against Chinese companies in 2012 (including Hong Kong companies) compared to 40 in 2011.

Larger companies were less likely to be the target of a securities suit in 2012 compared to recent years. 3.4% of S&P 500 companies were named in securities suits in 2012, compared to an annual average of 6.1% for S&P 500 companies during the period 2000 to 2011. The 2012 level is comparable to the 13-year low observed in 2011 (3.2%).

The most targeted industrial sector in 2012 was Consumer Non-Cyclical, representing 32% of all filings. Health care and life sciences companies comprised 67 percent of all Consumer Non-Cyclical filings (33 filings), compared to 62 percent (28 filings) in 2011. Filings against companies in the financial sector continued a declining trend with 15 filings in 2012, compared with 43 in 2010 and 25 in 2011.

As I noted in my own analysis of the 2012 securities suit filings, it is too early to tell whether the late-year decline in filings represents a trend or just a temporary dip in the general ebb and flow of securities suit filings. The report noted that the previous low semiannual filing level was in the second half of 2006, which was quickly followed by the onslaught of the subprime meltdown and credit crisis-related litigation wave.

One obvious factor in the overall 2012 decline was the absence of any episodic even driving filing levels. Indeed, Dr. John Gould, one of the report’s authors, is quoted in the press release as having said that “the absence of a filings trend…influenced the total number of new cases,” by comparison to recent years when filing levels have been dominated by “observable filings types,” such as, more recently, the M&A related litigation and litigation involving U.S.-listed Chinese companies.

While it is hard to know whether the trend will continue, the press release identifies at least one development that could result in a possible increase in future securities lawsuit filings. The press release quotes Stanford Law School Professor Joseph Grundfest, who notes that the upsurge in SEC whistleblower reports raises the questions whether the SEC will translate these reports into enforcement actions, and, if so, whether “private-party plaintiffs will be successful in prosecuting ‘piggyback’ claims that copy the Commission’s complaints.”

One factor that could also explain the declining number of 2012 filings is the plaintiffs’ securities bar’s continuing shift to diversity their inventory. Going back to the options backdating cases in 2006, the plaintiffs lawyers have been pursuing types of litigation other than securities class action litigation (in part due to unfavorable U.S. Supreme Court decisions). While the Cornerstone Report notes the absence of any new credit crisis-related securities class action lawsuit filings in 2012, there were a host of credit crisis-related lawsuits filing as individual actions in 2012. It is hard to tell, but it seems likely that this diversifying trend will continue.

Finally, it is worth noting that, as one reader observed in a comment to my blog post analyzing the 2012 securities suit filings, Superstorm Sandy could have had an impact on fourth quarter filings, since the storm basically closed New York’s downtown business district for several weeks during the fourth quarter.

Jan Wolfe's January 22, 2013 Am Law Litigation Daily article about the Cornerstone Research report can be found here.

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Picking up where it left off at the end of the year, the FDIC has filed its first failed bank D&O lawsuit of 2013. The lawsuit, which the agency filed on January 17, 2013 in the District of New Mexico, names as defendants ten former directors and officers of the failed Charter Bank, New Mexico. The complaint, which the FDIC filed in its capacity as receiver for the failed bank, alleges claims for negligence, gross negligence and breach of fiduciary duty, can be found here.

Charter Bank failed on January 22, 2010, so the FDIC filed the complaint just before the third anniversary of the bank’s closure (and just before a long holiday weekend as well.) The complaint alleges that prior to its failure the bank committed 72% of the bank’s core capital to a “highly speculative and risky” subprime lending operation in Denver, Colorado in late 2006, when the defendants “knew or should have known” there was no secondary market for subprime mortgage loans. The operation made loans that “no reasonable institution” would have made at the time, and relaxed underwriting standards to do so. Unable to sell the mortgages into the secondary market, the bank had to take the loans onto its own balance sheet, which cause the bank to suffer financial losses.

The lawsuit, the first that the FDIC has filed in 2013, is also the first that the agency has filed in New Mexico as part of the current failed bank litigation wave. This latest lawsuit is the 45^th that the agency has filed as during the current banking crisis, 26 of which were filed in 2012. (These figures, both overall and for 2012, include the lawsuit filed just before the holidays in the Central District of California in connection with the failed Alliance Bank of Culver City, California. The FDIC’s complaint, filed on December 21, 2012, in its capacity as receiver for the failed bank against X former directors and officer of the bank can be found here.)

There undoubtedly are more lawsuits to come. On January 22, 2013, the FDIC updated the page on its website on which the agency indicates the current number of lawsuits that the agency has authorized. According to the latest update, as of January 15, 2013, the FDIC has authorized suits in connection with 95 failed institutions against 788 individuals for D&O liability. This includes 45 filed D&O lawsuits naming 355 former directors and officers. The 45 lawsuits filed involve 44 failed institutions, so the implication is that there are lawsuits involving some 51 failed institutions yet to come – based on the number of lawsuits that have been authorized so far. Since the FDIC has increased the number of authorized lawsuits each month for several months in a row now, the likelihood seems to be that there are at least 51 more lawsuits – and possibly many more – to come in the months ahead.

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The U.S. Supreme Court’s 2011 decision in Wal-Mart Stores v. Dukes continues to agitate the employment practices litigation arena while at the same time both EEOC enforcement activity and wage and hour litigation continue to surge, according to the annual review of workplace litigation by the Seyfarth Shaw law firm. The law firm’s January 14, 2013 press release about this year’s ninth edition of the annual Workplace Class Action Litigation Report can be found here. The report’s introductory “trends” chapter and the “top ten” settlements chapter can be found here.

Among the many changes that the Wal-Mart case has brought about during the past year is that it resulted in a decline in the levels and numbers of employment discrimination class action settlements in 2012. According to the report, the 2012 total for all employment discrimination class action settlements was about $49 million, which is well below the $348 million level in 2010, the year before the Wal-Mart decision, and the lowest annual level since 2006. (As discussed n greater detail here, in its June 2011 decision in the Wal-Mart case, the Supreme Court established a heighted standard to satisfy the “commonality” required in order to certify a class.)

This decline in aggregate settlements is due to the fact that employers settled many fewer employment discrimination cases during 2012, fewer than “at any time over the past decade and at a fraction of levels as in the period from 2006 to 2011.” The decline reflects the difficulty in the wake of Wal-Mart in certifying a nationwide class, as well as the ability of the defendants “to dismantle large class cases or to devalue them for settlement purposes.” Indeed, according to the study, the Wal-Mart case has “caused both federal and state courts to conduct a wholesale review of the propriety of previous class certification orders in pending cases.”

At the same time, though, governmental enforcement activity remained at “white hot” levels in 2012. According to the report, more discrimination charges were filed with the EEOC in 2012 than in all but one previous year since the Commission was founded. The Commission is particularly focused on its “systemic investigation program” in which the agency is emphasizing the “identification, investigation and litigation of discrimination claims affecting large groups of ‘alleged victims.’” According to the study, the agency is focused on “high-impact, high-stakes litigation.”

In particular, the EEOC’s prosecution of “pattern or practice lawsuits” is “an agency-wide priority.” The Commission completed work on 240 systemic investigations in fiscal year 2012, resulting in 94 ‘probable cause’ determinations and 46 settlement agreements or conciliation agreements that yielded a total recovery of $36.2 million for systemic claims.

And while workplace litigation overall has remained level with prior years, wage and hour related litigation “continued to out-pace all other types of work place class actions.”   Thus, while ERISA litigation was down slightly for the year (from 8,414 cases in 2011 to 7,908 in 2012, a decline of about 6%) and employment discrimination filings were also down (from 14,411 in 2011 to 14,260 in 2012, a decline of 1%), there were 7,908 FLSA lawsuit filings in 2012, representing about a 16% increase from the 6,779 filings in 2011. In addition, state court wage and hour class action lawsuit filings also surged in 2012. The report projects that “the vigorous pursuit of nationwide FLSA collective actions by the plaintiffs’ bar will continue in 2013.”

While the U.S. Supreme Court’s Wal-Mart decision, as well as its 2011 ruling in AT&T Mobility v. Concepcion (recognizing the enforceability of contractual arbitration agreements), have unquestionably had an impact on the workplace litigation arena, the plaintiffs class action bar has moved quickly to respond. According to the report, 2012 saw “rapid strategic changes based on evolving decisions and developments.” The plaintiffs’ bar “began the process of ‘re-booting’ class–wide theories of certification, as well as establishing liability and damages on a class-wide basis.”

As a result, “workplace class action litigation case law is in flux, and more change is inevitable in 2013.” Among other things, the report suggests that as a result of these changes, “future employment discrimination class action filings are likely to increase due to a strategy whereby state or regional-type classes are asserted rather than nationwide, mega-cases.”

A January 14, 2013 Corporate Counsel article about the Seyfarth Shaw report can be found here. Special thanks to Gerald Maatman, the report’s co-author and chair of the Seyfarth Shaw class action litigation group, for providing me with a copy of the report and press release. Maatman’s January 14, 2013 post on the Workplace Class Action Blog about the report can be found here.

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The FDIC’s filing of lawsuits against former directors and officers of failed banks increased “markedly” during the fourth quarter of 2012 after a “lull” during the second and third quarters of the year, according to a new study from Cornerstone Research. The study, released December 18, 2012 and entitled “Characteristics of FDIC Lawsuits Against Directors and Officers of Failed Financial Institutions” can be found here. Cornerstone Research’s December 18 press release about the study can be found here.

As of December 7, 2012, the FDIC has filed a total of 23 lawsuits this year, compared to 18 total filed during 2010 and 2011. The FDIC filed nine lawsuits (so far) during the fourth quarter, the same as during the fist quarter, compared to two during the second quarter and three during the third quarter. The 41 lawsuits overall relate to 40 different financial institutions, meaning that so far the FDIC has filed lawsuits in connection with nine percent of the 467 financial institutions that have failed since January 1, 2007.  

(Since the December 7 closing date for the Cornerstone Research report, the FDIC has filed one additional lawsuit {refer here, second item} , bringing the quarter to date total to ten, the total this year to 24, and the total overall to 42. For clarity’s sake, throughout this post I have referenced the data used and analyzed in the Cornerstone Research study, rather than attempting to update it to reflect the additional lawsuit.)

The FDIC’s D&O lawsuits generally have targeted larger failed institutions and those with a higher estimated cost of failure, though the lawsuits the FDIC filed during he second half of 2012 have involved smaller and less costly failures. Overall the failed banks that have been targeted had median total assets of $647 million, compared to $225 million total assets for all failed banks. However, the failed banks targeted during the third and fourth quarters had median total assets of $136 million and $154 million respectively. The median estimated cost to the FDIC for the failed banks that the FDIC has targeted in D&O litigation has been $134 million, compared to a median estimated cost for all failed banks of $55 million. However, during the third and fourth quarters of 2012, the median total costs of failed banks that the FDIC has targeted in D&O litigation was $27.3 million and $58 million, respectively.

Most of the FDIC’s D&O lawsuits have included both officer and directors defendants. Only 11 of the 41 lawsuit the FDIC has filed have involved only officer defendants. 30 of the lawsuits have also involved director defendants, including seven of the nine lawsuits filed so far during the fourth quarter.

One particularly interesting observation in the report relates the failed institutions’ CAMELS ratings in the period preceding the banks’ closures. The CAMELS rating ranks the institutions on a scale of 1 to 5, with 1 being the best score and 5 the lowest. (The CAMELS ratings are not public, but in the agency’s loss review of failed institutions includes a short history of the failed bank’s examination ratings.) The study reports that 86 percent of the institutions subject to FDIC lawsuits had composition ratings of 1 or 2 two years prior to their closure. Not until one to two years prior to failure did any of the institutions have a composite rating of 4 or 5, and 36 percent of the institutions still had a rating of 2 one year prior to closure. The report concludes that “Weak ratings were not a persistent historical problem for this group of institutions. The decline in ratings occurred near the end of their independent existence.”

The study also includes a helpful summary of all of the FDIC lawsuits that have settled so far, although readers should note that the recent settlement of IndyMac CEO Michael Perry (about which refer here) is not reflected on the settlement table on page 11 of the study. The Perry settlement is referenced in the text of the study.

The report notes that the number of lawsuits that the FDIC has filed lags the number of lawsuits that the FDIC has authorized. (The updated number of authorized lawsuits can be found on the FDIC’s website, here.) The report notes that the difference between the number of lawsuits authorized and the number filed increased during 2012. The report comments that “this backlog of authorized lawsuits, the FDIC”s recent success in the IndyMac trial, and the approaching end of the statute of limitations for making a claim against the numerous institutions that filed in 2009 and 2010 suggest that substantially more FDIC cases may be filed in upcoming months.”

Discussion

The Cornerstone Research report’s statement that the FDIC has initiated lawsuits in connection with nine percent of the banks that have failed since 2007 is interesting. Just to put that into perspective, during the S&L crisis, the FDIC (and other federal banking regulators) filed D&O lawsuits in connection with 24% of all failed institutions. If the FDIC were to file D&O lawsuit in connection with 24% of all failed institutions this time around, that would imply that the FDIC would ultimately file about 112 lawsuits (based on the number of banks that have failed so far since 2007).

 As it turns out, the final number of FDIC lawsuits might well get into that range, as the FDIC’s most recent update indicates that the agency has authorized lawsuit in connection with 89 institutions (or about 19% of the banks that have failed so far). The FDIC has increased the number of authorized lawsuits each month this year, so the authorized number of suits could quickly get reach as high as the implied 112 number of suits.

The study’s report that the more recently filed lawsuits involve smaller institutions than the earlier lawsuits had targeted is really not a surprise. The very largest banks that failed during the current banking crisis failed early on. For example, the two largest failures this time around, WaMu and IndyMac, both failed in 2008, and were among the first failed banks that the FDIC targeted in failed bank litigation. It may not be so much that the FDIC is targeting smaller institutions as such now, it may simply be that there are larger failures were the first to work their way through the system.

The analysis of the failed banks’ CAMELS ratings is also interesting. The implication of the analysis is that the banks that failed deteriorated rapidly. The failed institutions’ relatively high ratings until just prior to their closure seems consistent with the argument that many of the individual defendants are raising in their defense – that is, that the failure of their bank wasn’t the result of anybody’s fault; rather it was the outcome of problems that no one, including the FDIC itself, saw coming.

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New securities class action lawsuit filing levels were comparable to historical norms during 2012, but the number of settlements and of dismissals were both down for the year, according to the analysis and projections of NERA Economic Consulting in their December 11, 2012 publication “Flash Update: 2012 Trends in Securities Class Actions” (here).

According to the report, there were 195 new securities class action lawsuits filed this year through November 30, 2012. NERA projects that there will be around 213 total lawsuit filings by year end. The projected number is slightly below the 2007-2011 average of 221. (It should be noted that NERA counts multiple actions in multiple jurisdictions against the same defendants as different filings, unless and until consolidated, so NERA’s initial lawsuit filing counts will be higher than those published by some other sources. NERA also notes in the report’s footnotes that it “counts” a case if it involves securities, even where the complaint alleges violations of the common law or breach of fiduciary duty. This criterion may also result in counts differing from other published sources, some of which “count” cases only if they allege violations of the federal securities laws.)

The report notes that the 2012 filing levels are more or less consistent with recent years, even though the credit crisis-related lawsuit filings have faded away. The report notes that in 2005-2006, just prior to the credit crisis, annual filing levels had been as low only about 160. The report notes that the number of filings has not declined to these prior lower levels, as “the plaintiffs’ bar has found new causes of action, with merger objection cases picking up much of the slack.”

Though filings levels have remained more or less level, the number of cases resolved during 2012 through dismissal or settlement has plummeted. (It is important to understand that the report measures the time of settlement as the date on which it is approved, so some high profile settlements that were announced in 2012 – such as the massive $2.43 billion settlement of the BofA/Merrill Lynch merger case – are not reflected in NERA’s analysis. The NERA report count of dismissals includes dismissals that are not yet final, such as dismissals without prejudice.)

According to the report, the 92 settlements that are projected to be approved in 2012 is the lowest number since 1996 and 25% lower than 2011. The 60 dismissals projected for the year represent the lowest level since 1998 and the 2012 total is 50% lower than 2011. The total of 152 cases that have been resolved (settled or dismissed) is also the lowest level since 1996. The report notes that part of the reason for these declines may simply be that there were fewer cases pending and therefore available to be resolved as 2012 began, the lowest level of pending cases since 2000. The report also speculates that the slowdown in the number of settlements and dismissals may also be due to “other changes in the legal environment.”

While the number of settlements may have declined, average and median settlements are up. The average securities class action settlement in 2012 was $36 million, compared to a 2005-2011 average of $42.1 million. But if the calculation excludes settlements over $1 billion, the IPO laddering cases and the merger objection cases, the 2012 average is $36 million, up from a revised average for the 2005-2011 period of $32 million. The median settlement in 2012 was $11.1 million, which is the largest ever annual median since 1996, and only the second year since 1996 that the median has exceeded $10 million.

FDIC D&O Lawsuits and D&O Insurance Coverage: Former directors and officers of failed banks who are sued by the FDIC may look to the bank’s D&O insurance to defend and protect themselves. However, the bank’s D&O insurer may assert defenses to coverage that could limit the availability of the insurance, according to a December 10, 2012 memorandum entitled “Not So Fast: Directors and officers Sued by the FDIC over Bank Failures Should Not Assume D&O Insurance Will Cover the Claims” (here) by Britt K. Latham and M. Jason Hale of the Bass Berry and Sims law firm.

As reflected in the memorandum, among other issues, the carriers are raising the “Insured vs. Insured” exclusion found in most policies as a defense to coverage for claims brought by the FDIC in its capacity as the failed bank’s receiver. The authors review the existing case law and observe that “this issue is expected to be hotly contested in the wake of continuing D&O lawsuits by the FDIC related to bank failures.”

My own overview of the impact of the Insured vs. Insured exclusion on the FDIC’s failed bank litigation can be found here. As I discussed in a recent post (here), in October 2012, a federal court in Puerto Rico held that the Insured vs. Insured exclusion does not preclude coverage for an FDIC’s claims as receiver of a failed bank against the bank’s former directors and officers.

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The volume of securities litigation against non-U.S. companies has ‘reached record levels” despite the U.S. Supreme Court’s 2010 decision in Morrison v. National Australia Bank, according to a recent report from NERA Economic Consulting. The report, written by Robert Patton of NERA, and entitled “Recent Trends in U.S. Securities Class Actions Against Non-U.S. Companies” can be found here. The report was written as a chapter to the 5th edition of The International Comparative Legal Guide to Class & Group Actions 2013, a collection of articles on class and group actions worldwide published by Global Legal Group in association with Commercial Dispute Resolution (CDR).

According to the report, the number of U.S. securities class action lawsuits filed against non-U.S. companies reached a peak in 2011, when there were 60 filings. In the first half of 2012, there were 20 filings against non-U.S. companies. While the 2012 filing pace is off from 2011, it is still higher than prior to 2011 and well above the annual average of 18 filings during the period 2000 to 2007. The filings against non-U.S. companies in 2011 represented 28.1 percent of all securities class action lawsuit filings, and while that percentage for the first half of 2012 has declined to 19.8 of all filings, that filing level is well above levels in 2008, 2009 and 2010.

The report notes that both in 2011 and 2012, the proportion of U.S. class actions filed against non-U.S. companies exceeded the proportion of non-U.S. companies listed on the U.S. stock exchanges. The report notes that during 2011 and 2012, non-U.S. companies listed on the U.S. exchanges were likelier to be sued than were U.S. companies, reversing a trend from the preceding three years, when foreign companies listed on the U.S. markets were less likely to be sued than U.S. companies.

The report notes the irony that the increase in the number of suits filed against non-U.S. companies has occurred after the U.S. Supreme Court’s 2010 opinion in the Morrison case. It has been widely believed that the transaction-based test enunciated in Morrison would reduce the number of securities suits involving non-U.S. companies

According to the report, the reason for the proliferation of suits involving non-U.S. companies has been the wave of litigation involving U.S.-listed Chinese companies. While there were only few of these cases filed in 2008 and 2009, in 2010, there were 15, and in 2011, there were 34, representing 17 percent of all 2011 securities class action lawsuits filings and nearly two-thirds of all securities suits involving non-U.S. companies. In the first half of 2012, the rate of filing against non-U.S. Chinese companies has declined, with ten cases filed. The report notes with respect to the suits against Chinese companies  that “this wave of litigation appears unlikely to re-emerge,” not only because rules regarding reverse mergers (the principal mechanism by which Chinese companies have obtained U.S listing) have become stricter, but also because Chinese companies “have become less likely to seek a U.S. listing, due to an increased perceived cost of litigation.”

Even though Morrison has not yet had a perceptible impact on the number of filings involving non-U.S. companies, Morrison has had an impact. As claimant classes are defined to omit claims on behalf of shareholders who purchased shares on non-U.S. exchanges, the shareholder classes on whose behalf the securities claims are asserted have become narrower. As the report states, “Morrison’s effect is more likely to narrow the scope of a claim against a non-U.S. company than to eliminate the claim entirely.”

The report also reflects an analysis of securities suit settlements in cases involving non-U.S. companies. The analysis shows that in each year during the period 2008 through the first half of 2012, the average settlement was lower in each year for cases involving non-U.S. companies than for cases against U.S. companies, often by a substantial margin. Although the median settlements for these two groups during the same time period are closer, in each year since 2009, the median settlement in cases involving non-U.S. companies is lower than cases against U.S. companies.

A significant factor driving the lower settlement trend for cases involving non-U.S. companies is the relatively low settlement of cases involving U.S.-listed Chinese companies (a phenomenon I previously discussed on this blog, here). The median settlement in cases involving Chinese companies during the period January 2010 through June 2012 was $3.0 million, compared to $9.0 million in cases involving settlements for other non-U.S. companies. In addition, the smaller class sizes in cases involving non-U.S. companies owing to Morrison (as noted above) could also be having an effect.

The report concludes by noting that the data in the report “underscore that the Morrison decision has not eliminated the risk of U.S. securities class action litigation to non-U.S. companies with securities traded in the U.S.”

Special thanks to the several readers who sent me a link to the NERA Report.

The Week Ahead: This week, I will be traveling to Chicago for the annual PLUS International Conference. On Thursday, November 8, 2012, I will be participating in a panel discussing D&O insurance in Asia that will be chaired by industry maven Joe Monteleone and that will also include my good friend Aruno Rajaratnam, as well as Dan Harris, the author of the China Law Blog, and Arthur Dong of Lantai Partners.

I also plan to attend many of the other sessions and conference events. I hope that if you see me around the conference you will please stop to say helllo and introduce yourself, particularly if we have not previously met. I look forward to seeing everyone at the conference.

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On July 25, 2012, Cornerstone Research in conjunction with the Stanford Law School Securities Class Action Clearinghouse release it report entitled “Securities Class Action Filings: 2012 Mid-Year Assessment” (here). By contrast to other mid-year securities litigation reports, the Cornerstone Research study reports that securities class action litigation filings decreased by 6 percent in the first half of 2012,  compared to both the first half and second half of 2011. I discuss below possible explanations for the differences in the conclusion between the Cornerstone Report and other published studies of first half filings. Cornerstone Research’s July 25, 2012 press release about the report can be found here. My own analysis of the first half 2012 filings can be found here.

 

According to the Cornerstone Research report, there were 88 filings in the first half of 2012, which annualizes to 176 filings. This annualized figure is below the 1997 to 2011 average number of filings of 193, but in line with the 2009 to 2011 average of 177.

The slight decrease in the number of filings is due to the “substantial decline” in Chinese reverse merger filings and also to a decline on mergers and acquisitions related filings. Chinese reverse merger filings were down 79 percent in the year’s first half, compared to the first six months of 2011, and M&A related filings were down 67 percent. The press release quotes Stanford Law Professor Joseph Grundfest as saying with respect to the M&A related filings that in the second quarter of 2012, “the aggregate deal flow count reached the lowest level since the third quarter of 2009,” which obviously was a factor in the decline the federally-filed M&A litigation in the first half of 2012.

While litigation related to Chinese reverse merger companies and M&A activity declined in the first half, “traditional filings” increased 23 percent, offsetting the decline in the number of nontraditional filings. Filings against non-U.S. companies decreased in the first half of 2012 after a sharp increase in 2011 (when there were significant numbers of Chinese reverse merger filings) but remained above historical levels. In the first six months of 2012, 26 percent of all filings involved non-U.S. companies, compared to 36 percent in 2011, but also compared to 9 percent for the period 1997 to 2010.

Of the 88 securities class action lawsuits filings in the first half of 2012, 10 involved S&P 500 companies, compared to eight in the first half of 2011.

In terms of looking ahead, the press release quotes Professor Grundfest as saying that “the Libor-litigation industry is clearly a sector to watch for years to come.” Both the size of the potential exposures and the complexity of the claims mean that the Libor-scandal will “likely generate large amounts of litigation activity in may geographies.” Interestingly, Grundfest suggests that “much of the litigation activity will occur away from the U.S. class action securities sector, but more lawsuits are virtually assured.”

Discussion

The Cornerstone Research reports on securities litigation activity are unique, in that it is possible to go to the Stanford Law School Class Action Securities Class Action Clearinghouse website and identify exactly what their reports are “counting.” By comparing the filings listed on their website, it is possible to determine what they are – and more importantly, what they are not – counting in their tally. By comparing the list of cases on the website with my own list of cases, it is a simple matter to determine why the Cornerstone Research tally is lower than other published tallies, and why Cornerstone Research is report that filings are declining, which other observers are reporting that filings are holding steady or increasing.

Simply put, the difference has to do with the M&A related filings.  Further review reveals that Cornerstone Research is not including federal court merger objection cases that do not include a claim based on an alleged violation of the federal securities laws. For example, if a federal court merger objection suit contains only a claim for breach of fiduciary duty, but no claim for breach of the federal securities laws, it is not included in the Cornertone list.The exclusion of these cases accounts for a significant part of the differences between the Cornerstone Research tally and other published figures.

Another difference between the Cornerstone Research tally and other published figures is that, as the Cornerstone Research report states on the inner page following the title page of the report, in counting filings, the Cornerstone Research report takes the following approach: “Multiple filings related to the same allegations against the same defendant(s) are consolidated in the database through a unique account indexed to the first identified complaint.” Other published reports take a different approach, counting separate complaints in separate judicial districts separately, at least until formally consolidated in a single action or proceeding. These differences in counting methodology also account for apparent differences between the Cornerstone Research report and other published reports.

One final observation I have is that the discussion about filing activity and whether filings are up or down often relates exclusively to the absolute number of filings. In my view, the absolute numbers of filings alone, considered without respect to the changing numbers of public companies, can lead to some misleading conclusions. The fact is that the absolute numbers of annual filings over the last 17 or so years has remained within the same very narrow band, while the numbers of publicly trade companies has declined dramatically. The key fact that should not be lost sight of here is that for any given company with shares trading on the U.S. exchanges, the chances of getting hit with a securities class action lawsuit are much higher now than they were, for example, in the late 90s. Focusing solely on the absolute numbers of lawsuit filings is not sufficient to fully understand what is going on.

Professor Grundfest’s comments about the likely Libor-scandal litigation are very interesting. Because so many of the events and so many of the prospective defendants are located outside the United States, it does seem more likely that lawsuits would be brought outside the United States -- except for the fact that there are so many procedural advantages to pursuing claims in the U.S. It will be very interesting to see if, as Professor Grundfest has suggested, Libor-related litigation outside the U.S. will be a significant factor.

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According to NERA Economic Consulting’s mid-year 2012 report, securities class action lawsuit filings were at or above historical levels in 2012, and though average securities class action lawsuit settlements during the year’s first half approached all times highs, the pace of securities suit settlements is “slowing down markedly.” NERA’s Report, which is entitled “Recent Trends in Securities Class Action Litigation: 2012 Mid-Year Review,” can be found here. NERA’s July 24, 2012 press release regarding the report can be found here. My own analysis of the first half filings can be found here.

According to the NERA report, and largely driven by merger objection cases, there were 116 class action lawsuit filings in the year’s first half, which suggests an annualized rate of 232 filings. (Please see the note below regarding NERA’s counting methodology.) This rate is slightly above the 217 average annual number of filings that NERA calculates for the period 1996 to 2011.

However, the report makes a point that I have also made on this site, which is that while the annual number of filings has fluctuated around the same annual figure since the mid-90s, the number of public companies has declined significantly. According to the NERA report, the number of publicly traded companies has decreased by about 45% since 1996, and so “the average company listed in the US is significantly more likely to be the target of a securities class action now than it was in 1996.” This is an important observation that is often overlooked; all too often commentators, referring only to fluctuations in the absolute number of lawsuits, conclude that filings are up and down, without considering the relation of the number of filings to the potential number of lawsuit targets.

Merger objection cases remained an important component of securities class action filings in the year’s first half, although at a slightly diminished level from 2010 and 2011. (NERA counts only the merger objection cases filed in federal court; many more merger objection cases are filed in state court.) The NERA report notes that over recent years there have been a number of temporary phenomena that have briefly inflated the number of securities suit filings. However, and nlike these other short term developments, the merger objection cases “may continue indefinitely, in the absence of substantial changes in the legal environment, their number fluctuating with market cycles in M&A activity.” The decline in the number of publicly traded companies may be contributing to the growth in the number of non-traditional securities class action lawsuits, as plaintiffs’ lawyers seek business alternatives in a shrinking market.

The NERA report also shows that the number of filings against non-U.S. companies is well off the record pace for such filings in 2011, although the filings against foreign issuers still remains above historical levels and remains disproportionately high relative to the number of foreign issuers listed in the U.S. Thus, foreign issuers represent only 16.4% of all U.S. listed companies, but lawsuits against non-U.S. companies represented 19.8% of all first half 2012 filings (which is down from 2011, when filings against non-U.S. companies represented 28.1% of all filings.).

The report also contains a detailed analysis of the status of cases with respect to motions to dismiss, motions for class certification and motions for summary judgment at the time of settlement. Among the  interesting facts that come out of this analysis is that in cases in which a motion to dismiss has been filed, 22% settle before the motion is heard. Another interesting observation is that there are settlements in 10% of the cases in which the dismissal motions have been granted.  

For cases filed in 2001, about 35% of all cases were dismissed. However, as more recent filing years have matured, it looks as if the dismissal rate may be increasing. The report notes that “for each annual cohort from 2003 to 2006, the dismissal rate has been 43% or more.”  These figures will ultimately change somewhat, because some cases are not yet resolved and other cases that have been dismissed may see reversals on appeal. The most recent years are still too undeveloped to draw any conclusions. Analysis of the year of dismissal motion resolution (as opposed to year of filing) suggests a similar uptick in dismissal grants. Importantly this analysis of dismissal motion resolution omits merger objection cases, because they are resolved quickly and often are dismissed voluntarily.

The majority of cases (58%) settle before a motion for class certification has been filed, and of 46% of the cases in which a motion for class certification has been filed settle before the class certification motion is resolved. For those cases in which the class certification motion is heard, over three-quarter of the class certification motions are heard within there years of the lawsuit filing date. Interestingly, for cases in which the class certification motion has been granted at the time of settlement, the median settlement value is $16.5 million, compared with $9.1 million for all cases.

Motions for summary judgment are filed in only a small minority of cases (11%), and of those, nearly half (48.8%) settle before the motion is heard. Less than ten percent (9.8%) of summary judgment motions are granted.

Continuing a trend that began to emerge in 2011 (at least of the merger objection cases are removed from the analysis), the pace of settlements so far this year is on pace for the lowest level of settlements since 1998. However, the average value of a settlement in the first half of 2012 was $71 million, a sharp rise from the average value of $46 million over the period 2005-2011. This average is pulled upward by a few very large settlements. If the settlements over $1 billion and the IPO laddering cases are removed from the calculation, this year’s average settlement amount is $41 million. (The 2005-1022 equivalent average is $32 million.) 52% of settlements this year settled for below $10 million. The median settlement amount so far this year is $7.9 million, compared to $7.5 million for all of 2011.

So far in 2012, the median settlement amount represents about 1.3% of median investor losses (this figure has declined as claimed investor losses have increased over time, because, as the NERA report shows, the settlement as a percentage of investor losses declines as the amount of investor losses increases). Median attorneys’ fees as a percentage of settlement amounts also declines as the size of the settlement increases. The median plaintiffs’ attorneys’ fees as a percentage of the settlement amount so far in 2012 is 20% (down from 30% in 1996).

A final note about counting. There are at least two factors identifiable from the face of the NERA Report to suggest reasons why its published lawsuit filing count may differ (specifically, may be larger than) other published counts. The first is that, as NERA says in the footnotes to its report “If multiple … actions are filed against the same defendant, are related to the same allegations, and are in the same circuit, we treat them as a single filing. However, multiple actions filed in different circuits are treated as separate filings. If cases filed in different circuits are consolidated, we revise our count to reflect that consolidation.” At least as an initial reporting matter, this counting methodology may result in the NERA account appearing higher than other published counts.

In addition, it seems that NERA is counting all merger objection suits filed in federal court in its tally. This also may result in the NERA tally appearing higher than lawsuit filing counts published elsewhere, at least where the other tallies include only merger objection suits that affirmatively allege a breach of the federal securities laws (as opposed to alleging only a breach of fiduciary duties or similar allegation). Given how numerous the merger objection filings have been in recent years, this method of counting could significantly affect the reported filing numbers as well as the analysis of the number of filings relative to prior filing periods.

This last commentary about filing counts is just another way of saying that when all the reports about the first half filings are in, they are going to reflect seemingly disparate reports. This is a direct reflection of the counting methodology used in preparing the separate reports. It is critically important when you are looking at any analysis of securities class action filing trends that you consider and understanding the counting methodology used, and how the methodology might affect the reported results (particularly by contrast to other reported results).

Eleventh Circuit Reverses Trial Court Ruling, Affirms the Ultimate Result in BankAtlantic Securities Case: Many readers will recall the long-running Bank Atlantic subprime-related securities suit saga. Unusually, the case went all the way to trial, resulting in a verdict for the plaintiff (about which refer here), although following the verdict the trial judge entered judgment as a matter of law in the defendants’ favor (about which refer here). A detailed description of the case, the jury verdict, and the post-trial proceedings can be found here. The plaintiff appealed.

In a July 23, 2012 opinion (here), the Eleventh Circuit held it was error for the trial court to consider anything the determination the defendants’ motion other than the sufficiency of the evidence. However, because the Eleventh Circuit held that the plaintiffs’ had not established loss causation as a matter of law, the trial court’s ultimate ruling was affirmed.

Jan Wolfe has a good summary of the tortured procedural history in the case and of the Eleventh Circuit’s holding in a July 23, 2012 post on the Am Law Litigation Daily (here).

Libor Scandal Criminal Charges Coming This Week?: As I reported in my post yesterday about the Libor scandal, authorities in several countries are conducting criminal investigations into the scandal. A July 23, 2012 Reuters article (here) reports that prosecutors are close to arresting individual traders that participating in manipulating the rates. Charges may come as early as this week. Although this will not directly affect the regulatory actions against the banks themselves, it could shed significant light on which banks are involved and how they are involved in the scandal. Stay tuned.

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On July 13, 2012, after a lull of nearly two months during which the FDIC did not file any new failed bank lawsuits, the FDIC filed two new lawsuits against former directors and officers of failed banks. The FDIC also updated the number of authorized failed bank lawsuits as well.

The first of the two lawsuits was filed in the Northern District of Georgia against six former directors, one of whom was also an officer, of the First Piedmont Bank of Winder, Georgia, which failed on July 17, 2009. The FDIC’s complaint, which can be found here, asserts claims for negligence and for negligence in connection with “nine speculative and high risk acquisition, development and construction (ADC) transactions” that the defendants approved between October 18, 2005 and July 24, 2007. The complaint alleges that the defendants approved the loans “on an uninformed basis,” and “allowed irresponsible and unsustainable rapid asset growth concentrations in high-risk ADC transactions, without implementing and adhering to adequate underwriting and credit administration policies and practices.”

The second of the two July 13 lawsuits was filed in the District of Arizona against seven former directors and officers of the Community Bank of Arizona, of Phoenix, Arizona, which failed on August 14, 2009. Three of the seven defendants were both officers and directors of the failed bank; the remaining four were directors only. The complaint, which can be found here, asserts claims against all defendants for gross negligence and for breach of fiduciary duty and asserts claims of ordinary negligence against the officer and director defendants as well. The FDIC alleges that the defendants improperly “rubber stamping” the purchase of interests in numerous loans that had been originated at the bank’ “sister bank” – the Community Bank of Nevada, which also failed on August 14, 2009 – without the Arizona bank conducting its own underwriting of the loans and in reliance on the sister bank’s “outdated or inadequate” underwriting. The FDIC seeks to recover damages of at least $11 million.

In addition to the fact that both of these complaints were filed on July 13, 2012, these complaints also have in common the fact that they were both filed as the end of the three year statute of limitations period approached. In the case of the First Piedmont Bank lawsuit, the FDIC filed its complaint almost at the very end of the three year period. Given how many banks failed in the second half of 2009, there could be a host of other bank failures that in the coming months will be approaching the end of the three year period following their closure.

Indeed the high number of 2009 bank failures had been one of the reasons that some commentators (including me) had predicted that this would be a very active year for FDIC lawsuit filings. Indeed, through about the middle of April of this year, the FDIC had been very active. But since mid-April, the FDIC had only filed one additional lawsuit before it filed these two complaints on July 13. It is hard to tell from here whether or not the filing of these two lawsuits means the short lull is over.

There are further lawsuits to come at some point, that much is clear. The FDIC has updated its website to indicate that the number of authorized lawsuits has increased. As of July 17, 2012, the FDIC has authorized suits in connection with 68 failed institutions against 576 individuals for D&O liability. This figure is inclusive of the 32 D&O lawsuits that the agency has already filed naming 266 former directors and officers. In other words, there are as many as 36 further lawsuits in the pipeline, involving an additional 310 individuals. There are going to be a lot more lawsuits before all is said and done.

One interesting difference between the two July 13 lawsuits is that the Arizona lawsuit seems to have been crafted so as to avoid asserting ordinary negligence claims against the director defendants, while the Georgia lawsuit actively asserts ordinary negligence claims against the director defendants. This is interesting because of the recent decision in the Northern District of Georgia in the Integrity Bank case, applying Georgia law and holding that because of their protection under the business judgment rule, directors cannot be held liable of ordinary negligence. In light of that earlier decision, it would seem that the director defendants in the new Georgia case have a basis on which to seek to have the negligence claims against them dismissed.

Despite the recent lull, there have still been a total of 14 FDIC failed bank lawsuits filed this year, and 32 overall as part of the current bank failure wave. Eight of the 32 total lawsuits, or a quarter of all lawsuits, have involved failed Georgia banks, the highest number for any state, which is hardly surprising since Georgia has had the highest number of bank failures of any state. However, the 80 Georgia banks that have failed since August 2008 represent substantially less than a quarter of the approximately 440 bank failures during that same period, so the Georgia bank failures seem to be attracting litigation at an unexpectedly elevated rate, at least so far.

Scott Trubey's July 18, 2012 Atlanta Journal Constitution article about the new Georgia lawsuit can be found here.

Advisen Webinar on Securities Litigation Developments: On Thursday, July 19, 2012 at 11:00 am EDT, I will be participating in free, one-hour webinar sponsored by Advisen and entitled “Second Quarter Securities Litigation Review.” The webinar will be chaired by Advisen’s Jim Blinn and will also include Terence Healy of the Reed Smith law firm. Further information and registration instructions for the webinar can be found here. I hope all blog readers will listen in, this should be a lively webinar. There is a lot to talk about.

Advisen’s quarterly report on 2Q12 corporate and securities litigation can be found here.

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The number of securities class action lawsuit filings came in slightly above historical averages during the first half of 2012, with filings against natural resources companies, life sciences companies, and foreign issuers leading the way. Filings related to mergers and acquisitions transactions continued to be an important factor in the number of filings, although not as significant of a factor as was the case in 2011.

During the first half of 2012, there were 103 new securities class action lawsuit filings. This figure annualizes to 206, which would be above the 1997-2010 annual laverage number of filings of 194. Though securities suit filings were active during the year’s first half, the filings were not evenly distributed during the period. There were 58 filings in the first quarter -- 44 in January and February alone -- but only 45 filings in the second quarter. Given the relative filing slowdown after the first two months of the year, it may be that by year’s end the overall filing level may not remain at the relatively elevated levels that we saw in the first half. .

A surprising number of the first half filings involved companies domiciled or with their principle place of business outside the U.S. There were 18 filings in the year’s first six months against these non-U.S. companies, representing about 17.5% of all filings. This level of filings against non-U.S. companies is down from 2011, when 36.2% of all filings involved non-U.S. companies, but the filings against non-U.S. companies are still up from 2008-2010, when the filings against non-U.S. companies averaged about 13.4% of all filings.

The largest numbers of these filings involving non-U.S. companies related to companies domiciled in or with their principal place of business in China. There were seven of these suits against Chinese companies during the first half. In addition, there were three more companies that are headquartered or domiciled in Hong Kong but that have their operations in China .Taking all of these into account, there were ten China-related filings. This level of filing against China-related companies is down from 2011, when filings against Chinese reverse merger companies largely drove the filings during the year. The numbers of filings against Chinese-related companies in 2012 still is a little unexpected, as the wave of filings involving Chinese companies in 2011 was largely assumed to be a temporary phenomenon. To be sure, the filings against Chinese-related companies is down significantly from 2011. Nevertheless, the continued level of filings against Chinese-related companies is noteworthy.

It should be noted that there were also six filings against Canadian companies, many of them natural resources companies (about which see more below).

There were a number of “ripped from the headline” lawsuits in the first six months, including in particular the fillings during the first half against J.P. Morgan, Wal-Mart, Facebook and Netflix. Given the anemic rate of IPO activity during the first six months of 2012, the numbers of IPO related lawsuits are a little bit of a surprise. There were six suits involving IPO companies, including the high profile IPO fizzles Facebook and Groupon.

About 15% of the first half filings involved M&A related allegations, which while significant is down from 2011, when M&A related filings accounted for about 22.9% of all filings.

The first half securities suits were filed in 38 different district courts. The court with the largest number of filings in the year’s first six months was the Southern District of New York, which had 33 filings (or roughly a third of all filings in the first half). No other court had nearly as many filings. The courts with the highest filing levels after the Southern District of New York were the Central District of California (6); and the Northern District of California, Northern District of Illinois and District of Massachusetts, each of which had five filings. These top five courts together had more than half of all first half filings (52.42%).

Many kinds of companies were sued in securities suits in the first half. The companies involved were drawn from 62 different Standard Industrial Classification (SIC) code categories.  However, there were concentrations of filings in certain specific areas

The largest concentration of filings was in the 283 SIC code grouping (Drugs), where there were a total of 13 filings, included eight  in the 2834 SIC code category (Pharmaceutical Preparations). Another area of concentration was in the 384 SIC code group (Surgical, Medical and Dental Instruments), which had six filings. The single category within this group that had the highest number of filings was SIC code category 3845 (Electrochemical and Electromagnetic Apparatus). Taking all of these groups and categories together, there were a total of 19 filings against life sciences companies, or about 18.4% of all filings.

Outside of life sciences companies, the next highest concentration of filings was in the SIC code series from 1000 to 1400 (which includes mining and natural resources companies), in which there were 15 first half filings (about 14.5% of all filings). The largest single category with this group was SIC code category 1311 (Crude Petroleum and Natural Gas), which had eight filings.

Another group with a significant number of first half filings was the SIC code group 737 (Computer Programming and Data Processing), which had a total of eight filings. Finally, there were four filings in SIC code group 8200 (Educational Services),.

It is worth noting that there were only a modest number of filings in the 6000-level SIC code series (Finance Insurance and Real Estate). In recent years, subprime and credit crisis-related filings has driven filings among companies in these categories, which as recently as 2010 predominated all filings. However, during the first half of 2012, there were only ten filings against companies in these SIC Code categories, representing about 9.7% of all filings.

Discussion

The above comparison to historical filing levels is based on absolute numbers of filings. It could be argued that on a relative basis, the filing rate is actually increasing. According to data on the World Federation of Exchanges website, in the ten year period between January 1, 2002 and December 31, 2011, the number of companies trading on either NYSE or NASDAQ has declined by about 25% (from 6,586 to 4,900), yet in absolute terms the number of filings remains within about the same range (that is, around 200 per year). Relative to the declining numbers of public companies, the rate of securities class action lawsuit filings arguably is increasing.

The level of securities litigation activity involving mining and natural resources companies is interesting. Historically, companies in these categories have seen relatively little securities class action filing activity. The single largest factor in the increase of filing activity is litigation arising from M&A transactions. But litigation has also arisen due to the fluctuating pricing of minerals or petroleum; questions about mineral or petroleum reserves; or as a result of extraction mishaps, such as crude oil spills. It does seem as if the increased global competition for natural resources has made companies in these categories more vulnerable to securities class action litigation activity than they have been in the past.

There are some important aspects in which my analysis will likely vary from other published versions. There is a significant amount of judgment about what to include in the tally of filings and then about how to categorize the various filings. To use one example of this problem, it is unlikely that other published versions will show the same figures as I have for the number of China-related companies. There are a variety of ways these companies might be tracked, whether limited purely to Chinese domiciled companies, or broadened to also include companies that have their principal place of business in China or companies that have their principal business activities in China. I have used the most inclusive grouping, including within the group companies that have the business activities in China, even if they are not Chinese domiciled and even if they don’t have their principle place of business in China. This categorization may result in a larger tally of China-related companies than you may see published elsewhere. This same precaution about categorization applies equally to the more basic task of tallying up the lawsuit filings; due to differences in counting methodology, my tally is likely to vary from other published counts.

Failed Bank Litigation Fizzle?: A number of commentators, including even me, had been projecting that as 2012 progressed then numbers of FDIC failed bank lawsuits would escalate sharply. In the event, quite the opposite has happened, at least so far. In particular, during 2Q12, new FDIC filed bank lawsuit filings have slowed to a crawl.

As reflected on the FDIC’s website (here), during the first quarter of 2012, there were nine new FDIC lawsuits against the former directors and officers of failed banks, including four in March along. However, during the second quarter of 2012, the FDIC filed only three new failed bank lawsuits total. The agency filed no lawsuits at all during June.

It may well be that new failed bank lawsuit activity will pick back up in the year’s second half. Indeed. on its website, the FDIC indicates that a lawsuits involving a total 65 failed institutions have been authorized (inclusive of the 30 lawsuits involving 29 institutions that have already been filed), which suggests that there may be as many as 36 lawsuits that have been approved but not yet filed.

With all of these authorized lawsuits, it seems probable that new lawsuit filings will soon resume and that the period during the second quarter will turn out to have been a short-term lull only. Nevertheless, the relative dearth of new failed bank lawsuit filings during the second quarter is noteworthy and even a little puzzling.

The FDIC has in any event continued to take control of failed financial institutions during the first half of the year. There were a total of 31 bank failures during the period, which though well below the  pace of closures during the last few years, is still above even the annual total for 2008, where there were 25 bank failures during the entire year. In other words, even if the pace of failed bank litigation filing seems to have dipped during the second quarter, the problems associated with the current wave of bank failures continue to accumulate and the likelihood is that the fallout from the bank failures will have to be sorted out for years to come.

Collegiate Hunter Gatherers: An article in the July 2, 2012 issue of the New Yorker entitled “The Hunter Games” (here)  takes a look at the annual Scavenger Hunt at the University of Chicago known to the undergraduate students there simply as “Scav.” What began a few years ago as a modest diversion has grown into an enormous nerd ritual that exceeds traditional limits of normal human behavior. To cite but one example of the kinds of things the annual event leads to, the article mentions that “in 1999, for five hundred points, a pair of physics students built a working breeder reactor in a Burton-Judson dorm room in one day, converting thorium powder collected from inside of vacuum tubes into weapon-grade uranium, using a device made from scrap aluminum and carbon sheets. A concerned nuclear physicist attested to the machine’s efficacy.”

The list of objects to be found or constructed is devised by a group of judges, whose bylaws provide that the planning meeting “could not be adjourned while beer remained on the table.”  Here is a representative sample of a typical challenge: “Build a laptop charger using only materials available in the sixteenth century.” Another requirement is to create “a Scrabble game consisting of nonexistent words, for which the player has to supply definitions (‘mervifeet’ is a medical condition in which only the outer edges of the afflicted person’s feet touch the ground).”

The article catalogues the event’s sheer lunacy. However, the article also notes that, despite its “pervasive commotion,” only about ten percent of the undergraduate student body takes place in the event. Others consider it a distraction. The student newspaper parodied the kinds of items on the Scav search list with its own spoof list, including items such as: “Bite your own teeth. Birth a child that is larger than yourself.” One undergraduate is quoted in the article as saying that the Scav is “just really white and socially awkward,” adding that “there’s nothing wrong with being white and socially awkward, but as someone who is not white or socially awkward, it’s not exactly appealing to me.”

The Scav may not be universally popular, and it is undeniably a veritable nerd Olympics, but it still stands as an ironic contrast to the University of Chicago’s well-known tag (quoted in the article) that the school is the place “Where Fun Goes to Die.” The contestants come off in the article as brainy and humorous. And seriously odd.

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A great deal of the analysis of securities class action lawsuit settlements revolves around measures of aggregate, average and median settlement amounts. These data, while useful, are relatively unhelpful in trying to anticipate the outcome of any particular case, particularly at the outset. To try to develop a way to predict likely case outcome at the outset of a securities class action lawsuit, four academics conducted a detailed statistical analysis of securities class action settlements in order to identify factors that affect outcomes.

In their April 30, 2012 paper entitled “Predicting Securities Fraud Settlements and Amounts: A Hierarchical Bayesian Model of Federal Securities Class Action Lawsuits” (here), Northwestern University Business Professor Blakeley McShane, Juridigm Principal and Vice President Oliver Watson, U. Penn Law Professor Tom Baker and Fordham University Law Professor Sean Griffith set out to create a “predictive model to forecast case outcomes based exclusively on information available at the time the lawsuit is filed.”

Their model, described in their paper, “estimates (i) the probability of the settlement versus dismissal of a securities class action lawsuit and (ii) the amount for which the class action will settle conditional on the settlement.”

A great deal of the authors’ paper is devoted to a description of the methodology used to derive the data on which their analysis is based. Another significant part of the paper is devoted to a description of their analytic methodology, which, as their title suggests, employs high level statistical approaches and techniques. A detailed description of the authors’ data derivation and statistical methodologies is beyond the scope of this blog (which is another way of saying that I know my limits).

For purposes of understanding the authors’ conclusions, it is useful to note that the authors derived a data set of nearly 1200 securities class action lawsuits and associated case resolutions. Among other critical steps taken to derive their data set, the authors focused exclusively on cases filed post-PSLRA that were filed five years or more before the starting date of their analysis. (The five year cut-off was used to ensure the likelihood that the cases in the data set had been finally resolved). Essentially, the authors looked at cases filed between 1996 and 2005 that otherwise survived the authors’ filters and sorting criteria.

The authors also derived several of their own measures using variety of data sources. For example, in order to determine the “notoriety” or “newsworthiness” of a particular company or case, the authors considered the number of Google News Archive hits associated with the company in the year prior to the lawsuit filing.

Using these and other data points and applying selected statistical methods to develop their model, the authors identified a number of variables predictive of whether a case is settled or dismissed, and variables predictive of the settlement amount if a case is settled.

The variables the authors identified that indicate that a case will most likely settle include “a number of classes or types of securities associated with the case, a higher return on the S&P 500 during the class period, whether or not GAAP violations were alleged and having an individual plaintiff listed.” Factors that indicate that a case is less likely to settle (that is, more likely to be dismissed) include “longer filing times, higher market capitalization, a higher company return during the class period, having an institutional plaintiff listed, and greater public notoriety (as measured by the number of Google hits in the year prior to filing).”

The variables the authors found that positively impact the settlement amount include “the total number of securities, the length of the class period, market capitalization, the company return during the class period, whether or not earnings were restated, whether or not the case was a Securities Act Section 11 case, whether or not insider trading was alleged, the existence of an institutional plaintiff, and the number of Google hits.” Factors associated with lower settlement amounts include “longer filing times and not having an institutional investor listed (i.e., having only an individual plaintiff listed or having no plaintiff listed).”

The authors also found that though GAAP cases are more likely to settle, the GAAP cases that do settle do not have higher settlement amounts. The authors speculate that this is likely due to the fact that an allegation of a GAAP violation significantly bolsters the merits of the case, which increases the chances the case will survive a dismissal motion. The authors suggest that this makes it more appealing for plaintiffs to take on a GAAP violation case even if the potential damage award is relatively low.

At the same time, Rule 10b-5 cases are less likely to settle (that is, more likely to be dismissed) but those that do settle have higher settlement amounts. The authors attribute this to the greater damages available to Rule 10b-5 plaintiffs. The authors suggest that plaintiffs rationally might be willing to pursue cases with a lower survivability probability when the cases are likelier to have larger settlements, assuming the cases survive dismissal. Cases without institutional plaintiffs are more likely to survive motions to dismiss, which the authors interpret to suggest both that institutional investors select the high potential value cases and that plaintiffs’ lawyers exercise more care regarding the merits of cases with only an individual plaintiff.

The authors also noted a number of differences among the various circuits and industries. For example, the authors note that the eleventh circuit appears to have modestly lower settlement amounts whereas the ninth and tenth circuits have modestly higher settlement amounts. Similarly, utilities have somewhat higher settlement amounts.

Discussion

I have necessarily summarized here the authors’ much more detailed analysis. The only way to fully understand and appreciate the authors’ predictive analysis, as well as the ways in which the authors’ conclude that the various factors are predictive, is to read their paper in full, which I recommend.

I do note that the ability to predict case outcomes at the outset is important for a number of process participants, including in particular the affected D&O insurers. Among other things, D&O insurers must have reliable means to assess and predict case outcomes at the outset in order to try and set case reserves appropriately. In addition, D&O insurers whose coverage attaches only in the excess layers will want to be able to assess cases at the outset in order to try to determine the likelihood that losses associated with any particular claim will penetrate their attachment point. For the involved D&O insurers, the authors’ predictive model could provide a useful tool.

The authors’ model could prove a useful tool for the defendant companies themselves as well as for their defense counsel. It is critically important for companies and their counsel in setting their litigation strategy to have an accurate understanding of the seriousness of the claim.  The authors’ model may provide a useful way for companies and their counsel to make a realistic assessment of the seriousness of the case in order to try to set defense strategy appropriately.

If I were to make one suggestion to the authors in order to make their analysis more accessible, it would be to expand their summary description of the relevant factors so that the factors are not only identified but also so that the nature of their relevance is more apparent. For example, it is of course important for the authors to state in the summary of their conclusions that, for example, “the length of the class period” is a relevant factor positively impacting settlement. It would be even more helpful for the non-mathematician reader for the authors to explain in the conclusion section how the variation of the length of the class period affects the settlement (that is, is it a shorter or a longer class period that positively affects the settlement?). A more detailed explanation in the paper’s discussion section of the authors’ specific conclusions with respect to each of the identified factors would make the authors’ otherwise somewhat intimidating paper more approachable to a wider variety of readers and would make the authors’ conclusions both clearer and more useful for those trying to understand the implications of the authors’ analysis.

I would like to thank Professor Tom Baker for providing me with a copy of this interesting paper.

UPDATE: Following my publication of this post, and in particular in response to my comments about the paper, one of the paper's authors, Blakeley McShane, contacted me with a supplement to the article, to provide further explanation of the paper and its conclusions. Because I think the supplement significantly aids an understanding of the paper, I have reproduced the supplement in full below. My thanks to McShane for taking the time to prepare a detailed supplement and for his willingness to allow me to publish it here. Here is the supplement: 

Thank you for your interest in our paper “Predicting Securities Fraud Settlements and Amounts: A Hierarchical Bayesian Model of Federal Securities Class Action Lawsuits” which is forthcoming in the Journal of Empirical Legal Studies. We really enjoyed reading your write-up of our results and wanted to follow up on your last paragraph where you requested a more friendly description of the effect of each variable. We will attempt to be as clear as possible and focus on our “best guess” of the effect of each variable (i.e., the dots in Figures 8a and 9a respectively). Of course our estimates are subject to uncertainty (indicated by the thick and thin lines of Figures 8a and 9a) but we will ignore that for the purpose of this discussion.

First, let’s begin by discussing the data. Our principal data source comes from the Riskmetrics Group’s Securities Class Action Services Division which tracks securities fraud class action lawsuits on a commercial basis. Nonetheless, as you mentioned, a substantial amount of processing as well as augmentation with data from other sources was required. This is detailed in Section II of our paper so we will just give a brief description of each of the variables that are “statistically significant” in either of the two stages of our model (i.e., the settlement versus dismissal stage and settlement amount conditional on settlement stage).

• Total Securities: The number of different securities (e.g. stocks, bonds, etc.) associated with the case.
• Filing Time: The length of time from the end of the class period until the filing date.
• Class Length: The length of the class period.
• Market Capitalization: The market capitalization of the plaintiff firm.
• Company Return: Roughly speaking, the percentage return on the plaintiff firm’s stock during the class period (see Section II.C for full details on how we constructed this variable).
• S&P 500 Return: The percentage return on the S&P 500 during the class period.
• GAAP: Whether or not GAAP violations were alleged in the case.
• Restated: Whether or not the allegation mentions that the company’s financial statements were restated.
• 10b5: Whether or not the case was a Rule 10b-5 case.
• Section 11: Whether or not the case was a Securities Act Section 11 case.
• Plaintiff: The plaintiff variable has three values. If one or more institutions are listed as the plaintiff, we set out Plaintiff variable equal to “Institutional”. If no institutions are listed but one or more individuals are, we set it equal to “Individual”. Finally, if nothing is listed in the database, we set it equal to “Unknown”. Of course, this does not mean there is no plaintiff in the case; rather, it means Riskmetrics has not obtained the information for this variable. This is potentially informative for whether or not a case settles and for how much it settles for if it does settle, but probably says more about Riskmetrics’ priorities in gathering data than anything else. In particular, given the nature of Riskmetrics’ business, they are most highly incented to collect complete data for cases which settle and especially those which settle for large amounts. Consequently, we would, for example, a priori expect Empty plaintiff cases (i) to be less likely to settle and (ii) to settle for less when they do settle.
• Insider Trading: Whether or not insider trading was alleged in the case.
• Google Hits: A measure of the newsworthiness or notoriety of the case. In particular, the number of Google News Archive associated with the company name in the year prior to the filing date (see Section II.E for full details on how we constructed this variable).

With the variables defined, let’s begin with the factors that predict settlement amount conditional on a case settling. We identified eleven “statistically significant” predictors of the settlement amount:
• Total Securities: A 1% increase in total securities is associated with a 0.25% increase in the settlement amount.
• Filing Time: A 1% increase in the filing time is associated with a 0.1% decrease in the settlement amount.
• Class Length: A 1% increase in the length of the class period is associated with a 0.1% increase in the settlement amount.
• Market Capitalization: A 1% increase in market capitalization of the plaintiff firm is associated with a 0.4% increase in the settlement amount.
• Company Return: A 1% increase in plaintiff firm’s return over the class period is associated with a 0.2% increase in the settlement amount.
• Restated: Restated financial statements are associated with a 20% increase in the settlement amount.
• Section 11: Securities Act Section 11 cases are associated with a 45% increase in the settlement amount.
• Individual Plaintiff: Individual plaintiff cases are associated with a 35% decrease in the settlement amount relative to cases with an institutional plaintiff.
• Unknown Plaintiff: Unknown plaintiff cases are associated with a 40% decrease in the settlement amount relative to cases with an institutional plaintiff.
• Insider Trading: Insider trading cases are associated with a 30% increase in the settlement amount.
• Google Hits: A 1% increase in the number of Google News hits is associated with a 0.05% increase in the settlement amount.

Many of these variables make intuitive sense. For instance, the total number of securities, market capitalization, and number of Google hits are associated with the size of the firm and hence how much damage can be done and how large a settlement can be extracted. Similarly, the longer the class length, the greater the number of securities traded during the period and, hence, the larger the damages. The higher damages for Section 11 cases (all other things being equal) may reflect the fact that plaintiffs do not need to prove scienter to succeed. The filing time result has a plausible basis as there is often a rush to file the “best” cases. Interestingly, some “merits” variables such as Restated and Insider Trading, which in theory should only affect whether or not a case settles or is dismissed, also impact the settlement amounts thus suggesting that decisions over whether or not there were damages versus how great those damages were may not be entirely independent. The Company Return finding is somewhat surprising, since a lower return during the class return would indicate larger damages from the alleged fraud. Our hypothesis is that that this finding is picking up on the capacity of the defendant to pay. Other things being equal, a company that recently made money is going to be better able to pay a settlement. Finally, the result for the identity of plaintiff is consistent with Riskmetrics’ business model as outlined above.

The interpretation of the significant coefficients for the model which predicts whether a case settles or is dismissed is somewhat more complicated than that for the settlement amount model. This is because each case is associated with a “latent score” giving the probability of dismissal: cases with high scores are very likely to settle and cases with low scores are very likely to be dismissed. The tricky part is that the relationship between the latent score and the probability is non-linear. Instead, it follows an S-shaped curve called a logistic curve:

With a logistic curve, the increase in the probability of settlement associated with a small change in the latent score depends on the original latent score: at the extremes, the change in probability is quite small whereas in the middle it is quite large. For example, an increase of 0.1 from -4.0 to -3.9 hardly changes the probability as can be seen in the above figure (the probability only goes from 1.8% to 1.9%). Similarly, an increase of 0.1 from 4.0 to 4.1 hardly changes the probability as can be seen in the above figure (the probability only goes from 98.2% to 98.4%). On the other hand, in the middle of the curve, small changes can have a substantial impact. For example, an increase of 0.1 from 0.0 to 0.1 changes the probability substantially from 50% to 52.5%. In the descriptions which follow, the increase in probability will be for the middle of the curve where the “action” is.

We identified ten “statistically significant” predictors of the probability of settlement:
• Total Securities: A 1% increase in total securities is associated with a 0.4% increase in the probability of settlement.
• Filing Time: A 1% increase in the filing time is associated with a 0.02% decrease in the probability of settlement.
• Market Capitalization: A 1% increase in market capitalization of the plaintiff firm is associated with a 0.02% decrease in the probability of settlement.
• Company Return: A 1% increase in plaintiff firm’s return over the class period is associated with a 0.15% decrease in the probability of settlement.
• S&P 500 Return: A 1% increase in plaintiff firm’s return over the class period is associated with a 0.3% increase in the probability of settlement.
• GAAP: Allegations of GAAP violations are associated with a 13% increase in the probability of settlement.
• 10b5: Rule 10b-5 cases are associated with a 25% decrease in the probability of settlement.
• Individual Plaintiff: Individual plaintiff cases are associated with an 8% increase in the probability of settlement relative to cases with an institutional plaintiff.
• Unknown Plaintiff: Unknown plaintiff cases are associated with a 60% decrease in the probability of settlement relative to cases with an institutional plaintiff.
• Google Hits: A 1% increase in the number of Google News hits is associated with a 0.02% decrease in the probability of settlement.

Again, many of these results have an intuitive basis. The result for filing has the same intuition as for settlement amounts: many of the “best” cases are filed early. While we had no a priori expectation for the market capitalization result, perhaps bigger firms are better able to defend themselves; regardless, the effect is weak. Nonetheless, this as well as the result for Google Hits may be a result of the “plaintiff selection effect” whereby plaintiffs select cases which are more likely to be dismissed but will settle for a large amount conditional on surviving the motion to dismiss. This is consistent with the results presented above. Not surprisingly, as the company’s return during the class period goes down (potential evidence of fraud), the likelihood of settlement goes up; this is exacerbated when the market as a whole (as measured by the S&P 500) goes up during the same period. GAAP violations are a classic merits variable and therefore associated with increased likelihood of settlement. A combination of Riskmetrics’ incentive in gathering data as well as the plaintiff selection effect are likely at play in explaining the plaintiff results (i.e., Riskmetrics’ is more likely to gather plaintiff information for cases which settle and, further, institutional plaintiffs are more likely to become involved in cases with larger damages potential). Riskmetrics’ incentives are also likely to explain the number of securities result, as Riskmetrics will be more likely to gather all of the securities information for cases that actually do settle. Finally, the lower probability of settlement of 10b5 cases likely reflects the greater difficulty of proving the knowledge required (scienter) as compared to, for example, Section11 cases.

We hope this is more interpretable and clarifies matters some. Thank you again for your interest in and coverage of our work

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On April 25, 2012, Cornerstone Research released a report written by Stanford Business School Professor Robert Daines and Cornerstone Research Principal Olga Koumrian entitled “Recent Developments in Shareholder Litigation Involving Mergers and Acquisitions – March 2012 Update” (here). This memorandum is the latest in a series of recent papers documenting the growth in merger related litigation in the United States. The research described in this paper is consistent with the prior reports but it also contains some new additional insights.

The report opens with a number of observations about the incidence of litigation in connection with mergers valued at $500 or greater during the period 2007 to 2001. The report shows that while in 2007 only about 53% of such deals attracted litigation, by 2011 almost all deals (96%) of those deals attracted litigation.

In addition, with respect to the deals of that size that attracted litigation during that period, the number of lawsuit per deal also increased between 2007 and 2011. Thus, while in 2007, the average number of lawsuits per litigated deal was 2.8, in 2011, the average number of lawsuits per litigated deal was 6.2 million. The report also shows that these trends were not limited just to the largest deals; during 2010 and 2011, for deals valued between $100 million and $500 million, 85% of the deals attracted litigation, and the average number of lawsuits per litigated deal was 4.1.

The absolute count of lawsuits involving deals with values of $500 million or greater also nearly doubled during that period, with 289 lawsuits filed in 2007 and 502 lawsuits filed in 2011.

The authors also note that as of March 2012, 67 lawsuits have already been reported for thirteen out of seventeen deals announced during January and February 2012. 

Certain deals attracted far more than the average number of lawsuits. A table in the report shows that fifteen deals with a valuation of $100 million or greater during the period 2007-2011 attracted fifteen or more lawsuits. Interestingly, of these fifteen, twelve of these deals were announced in 2010 or 2012. The report notes that size alone does not explain which deals attracted these large numbers of suits, and that in fact several relatively small acquisitions attracted fifteen or more lawsuits.

The report also shows that deals in certain industries seem to attract the most numbers of lawsuits. Thus, deals in the energy industry attracted an average of 8.6 lawsuits per deal, and deals in the consumer goods industries attracted an average of 6.0 lawsuits per deal.

There is a common perception that there is a “race to file” these lawsuits after deals are announced. However, the report shows that while filings arrive quickly after deal announcements, the time to filing has not accelerated in any material way since 2007. Indeed, the proportion of lawsuits filed in the first week after the deal announcement declined from 55 percent in 2007 to 39 percent in 2011. In all years studied, “a significant percentage of lawsuits were filed more than four weeks after a deal’s announcement.”

One phenomenon that has been the subject of discussion with respect to this type of litigation is whether or not there has been a “flight from Delaware” as claimants seek to pursue claims in the courts of other states. This study shows that with respect to merger litigation involving Delaware corporations, the share of M&A lawsuits filed in Delaware was higher in 2011 (45%) than in 2007 (34%) and that the percentage has increased steadily since 2008. However, according to the report, the “most striking trend in venue choice” is that challenges to the same deal in both Delaware and some other venue (as opposed to just Delaware alone or to some other venue alone) are now more common than in 2007. Most lawsuits brought in non-Delaware courts were filed in California, Texas and New York, “likely reflecting where many deal targets are headquartered.”

The report shows that M&A shareholder lawsuits “typically settle and often settle quickly.” Of the 2010 and 2011 lawsuits where the authors were able to track the resolution, 28 percent were voluntarily dismissed, four percent were dismissed by the court, and 67 percent settled. This represents a “significant change in outcomes observed a decade ago.” A prior study cited in the report shows that in 1999 and 200, 59 percent of cases were dismissed and only 28 percent settled. Of the 202 unique settlements involving 2010 and 2011 deals, 194 were reached before the merger closed. The median time between lawsuit filing and settlement was forty-four days.

Settlement terms have also changed over time. Whereas during 1999 and 2000, the majority of settlements (52%) involved cash awards and only 10% involved additional disclosures only, only 5% of 2010 and 2011 lawsuits related to M&A deals involved cash payments, and a large majority (83%) involved additional disclosure only settlements.

The average fee awards in connection with the M&A suits in 2010 and 2011 in connection with deals valued at $500 million or greater was $1.2 million. However, this average was pulled upward by some larger awards. Only 23% of plaintiff fee awards were $1 million or higher, while 44 percent were at or under $500,000 or under. Of the largest plaintiffs few awards, several were associated with settlements that did not involve any payment to shareholders. Average fees per deal fluctuated between 2007 and 2011, and while the average fees as a percentage of deal value in 2010 and 2011 remained higher that in 2007, the average fees as a percentage of deal value declined in 2010 and 2011 compared to 2009.

Discussion

The analysis in the Cornerstone Research report corroborates many of the observations noted in prior analyses of these same topics. That is, M&A related litigation is becoming increasingly more prevalent, and each deal is attracting an increasing number of lawsuits. At a minimum, the Cornerstone Report helps explain why M&A related litigation has become increasingly more expensive to defend. The impact of M&A litigation settlements and of plaintiffs’ fee awards on the cost of this litigation is less clear, but overall the implication is that the growing frequency of this type of litigation remains a very significant corporate and securities litigation trend, with important implications for D&O insurers.

One very important consideration to be kept in mind when comparing the various reports regarding M&A litigation is that each of the reports has used its own deal size definition to define the merger transactions that are the basis of each report’s analysis. The definitions used in the various reports are not necessarily consistent. At a minimum, the differences in the definitions used can make comparisons between the reports challenging. In any event, it is important in considering the analysis in any one of the reports to keep clearly in mind what definitions the report has used in determining what merger transactions to include the study.

The FDIC’s Latest Failed Bank Lawsuit: On April 20, 2012, the FDIC filed its latest failed bank lawsuits against ten former directors and officers of the failed First Bank of Beverly Hills. In its complaint (here), which the FDIC filed in its capacity as receiver for the failed bank, the FDIC seeks to recover losses of at least $100.6 million the bank allegedly suffered on nine poorly underwritten acquisition, development and construction loans and commercial real estate loans from March 2006 through July 2007.

The bank failed on April 24, 2009, or just short of three years prior to the date the FDIC filed its lawsuit. The complaint asserts claims against the ten defendants for negligence, gross negligence and breach of fiduciary duties. The complaint alleges that the defendants approved or allowed the loans in question in willful disregard of the bank’s own loan policies and with “willful blindness” to the risks and imprudence of the loan decisions. The complaint alleges that at the same time the defendants were approving these risky strategies, they were “weakening the Bank’s capital position by approving large quarterly dividend payments to the Bank’s parent company,” of which several defendants were shareholders. The complaint alleges that the individual defendants “lined their own pockets” with these dividends.

The FDIC’s lawsuit against the former directors and officers of the First Bank of Beverly Hills is the 29^th the FDIC has filed as part of the current wave of failed bank litigation, and the fifth so far involving a failed California bank. In its latest website update, the FDIC announced that as of April 25, 2012, the agency has authorized lawsuits in connection with 58 failed institutions against 493 individuals for D&O liability, inclusive of the 29 filed D&O lawsuits naming 239 former directors and officers. Given the large number of failed banks like the First Bank of Beverly Hills approaching the third anniversary of their closure, it seems likely that we will be seeing a flurry of new FDIC failed bank lawsuits in the months ahead.

In the meanwhile, the FDIC continues to take control of additional failed banks. This past Friday evening, the FDIC closed five additional banks, the most the FDIC has closed in a single day this year. These additional closures bring the 2012 year to date number of bank closures to 22. This flurry of bank closures is a little bit surprising as up to this point, the pace of closures had begun to suggest that the FDIC was winding down its new bank closures. The five closures on Friday night suggest that there may still be a number of bank failures yet to come.

For Almost As Long As Our Country Has Existed, Man Has Dreamed of Traveling to Cleveland: NASA announces its plan to put a man on a bus to Cleveland. Get the details here.

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On April 11, 2012, PricewaterhouseCoopers released its 2011 Securities Litigation Study, entitled “The Ever-Changing Landscape of Litigation Comes Full Circle” (here). According to the study, “we’ll remember 2011 as the year that plaintiffs’ attorneys’ renewed their focus on mergers and acquisitions (M&A) and foreign issues (FIs), specifically those based in China.” PwC’s April 11 press release about the study can be found here.

The PwC study is directionally consistent with other studies of 2011 securities litigation, although it differs in some of the details, primarily due to methodological differences. I discuss the methodological differences and their impact below. My own 2011 securities class action litigation can be found here.

According to the PwC study, the overall number of federal securities class action lawsuits increased for the third consecutive year, with 191 cases representing a 10% increase over 2010 and a 22% increase over 2009.For the first time since 2009, total filings in 2011 exceed PwC’s calculated annual average (180) of cases filed since the enactment of the Private Securities Litigation Reform Act.

Among factors in driving the 2011 filings increase was the growth in M&A litigation, which increased 17% over 2010, and cases involving foreign issuers, which increased a “whopping” 126%, with 61 cases in 2011 involving foreign issuers, compared to 27 in 2010. The 2011 foreign issuer filings represented 32% of all 2011 filing, while the 2010 foreign issuer filings represented 16% of all 2010 filings.

According to the study, 48 of the 191 filings in 2011 involved M&A related allegations, compared with 41 in 2010, and only six in 2009. The increase is the number of M&A cases is higher not only in terms of the number of cases, but also significantly higher as a percentage of the total number of deals that trigger lawsuits . The study emphasizes that these cases are often filed quickly after the transactions are announced; of the 48 M&A-related filings in 2011, 34 were filed prior to closing, 25 of which occurred within a quarter of the proposed closing date. The cases also often settle quickly, as the parties to the transaction seek to move forward with the deal and move on. Multiple filings in connection with the same deal can result in “a complex web of cases that defendant companies need to administer and litigate” and require “considerable legal resources” not just to address the litigation but “to settle the matter so the deal can close.”

As other studies have noted, a big factor driving the 2011 cases involving foreign issuers was the upsurge in cases involving U.S.-listed Chinese companies. The combined 37 cases involving Chinese companies represented 61% of the cases involving foreign issuers and 19% of all 2011 filings. 28 of the 37 Chinese companies obtained their U.S.-listings by way of reverse merger. Using SEC data, the PwC calculates of the 159 Chinese companies that obtained U.S. listings through a reverse merger during the period January 1, 2007 through March 31, 2010, 23% were sued in securities class action lawsuits filed in 2010 or 2011.

The report notes that private litigants are not the only ones that have responded to the accounting allegations involving Chinese companies; the SEC and the PCAOB have also been quick to respond. But based on the challenges the regulators have faced in trying to pursue regulatory actions, the private litigants “may face considerable challenges to pursue litigation for breaches of U.S. securities laws.” The litigants will not only face “challenges of securing access to individuals and paper and electronic documentation” but there may also be questions whether there are “sufficient funds to make the effort worthwhile.”

The PwC report notes that U.S.-listed Chinese companies were not the only foreign issuers to see an increase in filings in 2011. European companies also saw an uptick. The eleven cases brought against Europe-based companies in 2011 are  slightly higher than the eight cases per year between 2006 and 2010. Cases against non-U.S. North American companies also increased, from six cases in2010 to ten cases in 2011, exceeding the average of seven cases between 2006 and 2010.

The report notes that for the first time since 2007, companies in the high-tech industry were named in more filings that those in the financial services industry, returning to pre-crisis levels. High tech companies were named in 23% of all 2011 filings, while companies in the financial services industries were named in 12% of all cases (representing a 10% drop from 2010 and the lowest level since 2006). The study did cite one category of cases notable for its near absence, which is “efficacy cases against pharmaceutical companies,” which decreased from 11 filings in 2010 to just one case in 2011.

The majority of filings name the two most senior corporate officers as defendants. 86% of cases named the CEO and 69% named the CFO. The audit committee and compensation committee members were named in 15 cases (9%) and 11 cases (6%), respectively. However the involvement of these committee members, which is up from recent years, is largely a factor of the cases involving Chinese companies. Ten of the cases naming audit committee members involved foreign issuers, including nine in China.

With respect to settlements, the number of securities class action lawsuits that settled in 2011 declined by 30% to the lowest level since 1999. However, according to the PwC study, the total value of settlements increased 17% from $2.9 billion in 2010 to $3.4 billion in 2011, reversing a six-year trend of falling total settlements between 2005 and 2010. (The PwC study’s conclusion in this respect differs from other published reports, as discussed below).  $2.6 billion of the $3.4 billion 2011 total settlements related to credit crisis related lawsuits. With fewer settlements and a larger total, the average settlement in 2011 increased 71%, from $30 million in 2010 to $51.2 million in 2011.

As for what may lie ahead, the study suggests that “M&A related cases will be a feature of securities litigation for the foreseeable future,” and in particular that we will see “another year of M&A litigation in 2012.” With respect to regulatory and legal developments both inside and outside the United States, the report notes that “the increase in international regulations and enforcement, the emerging signs that other parts of the world are moving toward class action securities litigation, and the continued focus of U.S. regulators and plaintiff attorneys make it increasingly likely that an international company will at some point become the subject of litigation, or fall under regulatory scrutiny.” While the exact issue may be unknown, “the probability is forever increasing.”

Discussion

PwC is the latest in a series of studies of 2011 securities class action litigation. Some of the differences in the statistics reported in the various studies are attributable to differences in methodology. For example, in counting securities class action lawsuit filings, “multiple filings against the same defendant with similar allegations are counted as one case.” Other observers count separate actions against the same defendant in different judicial districts as separate filings, at least until the cases are consolidated. This methodological difference may account for at least some of the differences between the PwC study and the other reports.

The PwC’s analysis regarding settlements is a particularly good illustration of differences that may result from  differing  methodology. As discussed here, just last month, Cornerstone Research caused quite a stir when it released its annual study of securities class action settlements and announced that both the number and total value of 2011 settlements represented ten-year lows. While the PwC analysis also found a decline in the number of settlements, the PwC report concluded that the total value of settlements increased 17% from 2010 and reversed a six-year trend of falling total settlements. The PwC study reported a sharp increase in the average settlement size (to $51.2 million), while the Cornerstone Research study reported a decline in the average settlement to $21 million.

The differences in the two reports analysis of the 2011 settlements has to do with the way in which the two groups assigned a settlement year to individual case settlements. In the PwC study, “the year of settlement is determined based on the [date of the] primary settlement announcement.” The Cornerstone Research report, by contrast, assigns an individual settlement to the year in which it receives final court approval. As the two studies conclusions show, this simple difference in methodology can result in sharply different conclusions. Depending on which way you look at it, overall settlements and average settlements are either up or down dramatically.

There are now several different groups presenting annual studies of securities class action filings and settlements. Even though they groups purport to be studying the same phenomena, their conclusions can sometimes vary materially, as was shown in the preceding paragraph. For that reason, it remains important to review all of the various reports. And it is even more important to understand the way that methodology may affect the analysis and the conclusions.

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On an annualized basis, the pace of securities class action lawsuit filings fir the first quarter of 2012 ran above historical averages, although the pace of filings declined compared to  the prior month in the quarter’s second and third months. Merger-related cases, which were such a significant part of 2011 filings, remained an important factor in filings in the first quarter of this year, but other pronounced 2011 filing trends diminished in the year’s first three months.

Overall, there were 57 new securities class action lawsuit filings in the first quarter of 2012, which represents an annual filing rate of about 228 lawsuits. This filing rate is above the 2011 filing levels, when there were 188 securities class action lawsuit filings, and the 1996-2010 annual average filing rate of 194. However, the pace of filings  was not level  throughout the first quarter. The number of lawsuit filings declined from the prior month in the second and third months of the quarter. Thus, while there were 24 new securities class action lawsuit filings in January, there were 19 in February and only 14 in March.

One pronounced 2011 filing trend was the number of lawsuits filed against U.S.-listed Chinese companies. Last year, 41 of the 188 filings (or about 22%) involved these Chinese companies. There were fewer of these lawsuit filings in the second half of 2011 than there were in the first half of the year, and this downward trend continued in the fist quarter of 2012, when there were only two filings involving U.S.-listed Chinese companies.

Overall in 2011, 68 of the 188 filings (or about 38%) involved non-U.S. companies. The number of filings against non-U.S, companies declined significantly during the first three months of 2012, when there were only six filings against foreign companies, or about 10.5% of all first quarter filings. This rate is much closer to the historical proportion of all filings involving non-U.S. companies; during the period 1996 to 2010, only about 8.5% of all filings involved companies domiciled outside the U.S.  Of the six first quarter filings involving non-U.S. companies, four involved companies from Canada, and two involved Chinese companies. Of the four Canadian companies, three were in SIC Cod 1040 (Gold and Silver Mining)

One 2011 filing trend that continued in the first quarter of the year was the significant percentages of all filings that were merger related. In 2011, 43 of 188 filings were merger related (22.87%). In the first quarter of 2012, 13 of 57 filings (22.81%) were merger related. The percentage of cases relat4ed to mergers was virtually unchanged in the first three months of 2012 compared to the full year of 2011. The significant numbers of merger-related cases is an important reason why the filing rate in the year’s first quarter is above longer term norms.

The filings during the year’s first quarter involved companies drawn from a wide variety of industries. The 57 first quarter lawsuits involved companies in 39 different Standard Industrialization Code (SIC) code categories. Companies in Life Sciences-related grouping had the greatest number of first quarter filings. There was a total of six filings in  Industry Group 283 (Drugs), and there was a total of four filings in Industry Group  384 (Surgical, Medical and Dental Instruments), The ten total filings from these two groupings represent about 17.5% of all first quarter 2012 filings. The 17.5% percentage of all filings during the first quarter involving Life Sciences companies is above the historical annual percentage of all filings involving Life Sciences companies; as discussed at greater length here, during both 2008 and 2009, about 10% of all filings involved Life Sciences companies.

Industry Group 737 (Computer Programming, Data Processing and Other Computer-Related Services) also had a total of four filings. No other industry group had more than three filings.

With one exception, the first quarter 2012 filings were widely distributed among the U.S. district courts.` During the first quarter, the 57 securities class action lawsuits were filed in 29 different district courts. The one court where there was a concentration of filings was the federal court in Manhattan. During the first quarter there were 18 filings (or just less than a third of all filings) in the Southern District of New York.

It is important to note that the filing figures for the first quarter of 2012 do not include two categories of cases that have been an important part of all corporate and securities litigation activity during recent periods. Thus, the 57 first quarter securities class action lawsuit filings does not include merger objection lawsuits that were filed in state courts. The first quarter figures also do not take into account securities cases that were filed during the quarter that were not filed on a class action basis. There have been a host of individual actions relating to mortgage-backed securities and alleging violations of the securities laws; because these actions were not filed on behalf of a class, they are not reflected in the tally of securities class action lawsuits. But when these other types of cases are taken into consideration, it is very clear that the level of all corporate and securities litigation is at elevated levels.

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Though down from the previous year on both an absolute and a relative basis, securities class action lawsuit filings against life sciences companies remained a significant component of all securities class action lawsuit filings during 2011, according to a March 20, 2012 memorandum entitled “Survey of Securities Fraud Class Actions Brought Against Life Sciences Companies” by David Kotler of the Dechert law firm (here).

According to the report, there were 17 securities class action lawsuits filed against life sciences companies during 2011, representing approximately 9% of all 2011 securities class action suits. The number of 2011 life sciences suits represents a decline both in absolute and relative terms from the prior year, when there were 29 securities suits involving life sciences companies, representing 16% of all securities class action lawsuits. However, the 2011 figures are consistent with albeit slightly below prior years (for example, during both 2008 and 2009, suits against life sciences companies represented 10% of all securities lawsuits).

It should be noted that these filings statistics do not reflect lawsuits filed against life sciences companies involving merger objection allegations. If the M&A suits were included, the statistics would reflect an even greater frequency of corporate and securities lawsuits involving life sciences companies.

The lawsuits filed against life science companies in 2010 had been weighted toward the larger companies. However, the lawsuits filed in 2011 were more focused on smaller companies. During 2011, 58% of all life sciences companies hit with securities suits had market capitalizations under $250 million, compared with only 31% in 2010. By contrast, during 2010, 29% of the securities lawsuits involving life sciences firm related to companies with market caps over $10 billion, whereas during 2011, there were no suits filed involving those larger life sciences companies.

Allegations relating to financial proprieties and financial misrepresentations remain an important part of suits involving life sciences companies, but to a lesser extent than in the previous year. During 2010, over half of all complaints against life sciences companies involved these financially-related allegations, but during 2011, only 35% of the suits involved these types of allegations. The report notes with respect to the 2011 suits that “half of the claims alleging financial improprieties were brought against China-based companies.”

By contrast, the report notes, “industry specific allegations were comparatively on the rise in 2011.” Eleven of the 17 lawsuits of the complaints filed against life sciences companies involved allegations of misrepresentations involving product safety or efficacy. Allegations of allegedly fraudulent life sciences product marketing were raised in seven of the suits. Allegations involving misrepresentations in connection with prospects for FDA approval were involved in four cases, and allegations relating to manufacturing were involved in three cases. (Some complaints involved more than one of these categories of allegations).

Though life sciences companies are a frequent target of securities suits, these cases are also often dismissed. During 2011, according to the report, “courts continued to gran with relative frequency life sciences companies’ motions to dismiss due to plaintiffs’ inability to sufficiently plead scienter.” On the other hand, “it is also worth noting that, even in cases that are settled, securities fraud class action lawsuits can result in very large payments.”

One development during 2011 potentially of significance with respect to securities litigation involving life sciences companies was that in March 2011, the U.S. Supreme Court issued its opinion in Matrixx Initiatives v. Siracusano (about which refer here). In its opinion, the Court rejected the argument of Matrixx Initiatives that adverse product reports must be "statistically significant" in order for a manufacturer to have an obligation to disclose the reports to investors.

As the law firm memo notes, of particular importance to life sciences companies is the question whether, as a result of the Matrixx Initiatives case, “a publicly traded life sciences company can be held liable for securities fraud for failing to disclose adverse reports” regarding its products. Life sciences companies are faced with the task of “where to draw the disclosure line in the absence of a bright line standard.”

Fortunately, the report notes, thus far, the Matrixx Initiatives decision “has not resulted in any noticeable increase in securities fraud lawsuits brought against life sciences companies,” and the case’s holding has “not yet shown any significant impact on existing case law beyond rejection of the bright line rule based on lack of statistical significance.”

The author concludes with a number of practical suggestions for life sciences companies to take to minimize the risk of, and impact from, securities fraud class actions.

Directors and Officers’ Liabilities in Failed Bank Lawsuits: In a recent post (here), I examined the February 27, 2012 decision in the FDIC lawsuit involving the failed Integrity Bank of Alpharetta, Georgia, in which Northern District of Georgia Judge Steve Jones determined that allegations of mere ordinary negligence against the bank’s former directors and officers were barred by the business judgment rule under Georgia law.

A March 2012 memorandum from the Jones Day law firm entitled “FDIC Failed Bank Director and Officer Claims – Recent Court Decisions Better Define the Landscape” (here) takes a look at the Integrity Bank decision as well as recent developments in the FDIC’s failed bank lawsuit in the Northern District of Illinois involving Heritage Community Bank (for background involving the Heritage Community Bank case, refer here).

Among other things, the memo’s authors conclude that the decision in these cases “have helped inform the strategy of former directors and officers facing potential FDIC claims or actual litigation.” Even more importantly, according to the authors, “the Integrity decision appropriately set the bar higher for FDIC claims based on ordinary negligence, at least in jurisdictions with law similar to Georgia.” Obviously the decision is particularly important in Georgia itself, which has had more bank failures than any other state during the current bank failure wave.

Wage & Hour Litigation: Big and Getting Bigger: According to the title of a March 19, 2012 Corporate Counsel article, wage and hour litigation is “Big – and Getting Bigger” (here). Among other things, the article notes that “there has been more than a 325 percent increase in wage and hour lawsuits filed over the last ten years.” In the reporting year ended March 31, 2011, there were over 7,000 wage and hour claims filed in federal courts, which is “higher than the total filings of all other types of employment cases combined.”

Among other reasons cited in the article for this upsurge in wage and hour litigation is that these cases, according to one commentator quoted in the article “are very lucrative for plaintiffs lawyers,” as well as easier and less expensive for plaintiffs’ lawyers than discrimination class actions. Another reason for the increase in cases is that “employers continue to struggle with the law,” which in many ways is maladapted to today’s work place (where, for example, workers often find they must check blackberries, even outside of normal work hours). Employers struggling with how to apply the law are “confounded by the scarcity of case law” – although, as the article notes, the U.S. Supreme Court is scheduled to hear argument in a wage and hour case on April 16, 2012, in the Christopher v. SmithKline Beacham Corp. case. (Background on the Christopher case can be found here.)

A Break in the Action: Over the next several days, I will likely not be posting as frequently due to extended travel oblligations. The D&O Diary will resume its normal publication schedule in April.

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A decline in the number and size of settlements in 2011 led to a drop in aggregate and average securities class action settlement figures during the year, according to the annual study of securities suit settlements from Cornerstone Research. According to the study, entitled “Securities Class Action Settlements: 2011 Review and Analysis” (here), the number and total value of all securities suit settlements reached a ten-year low during 2011. Median and average settlements were also well below historical levels. Cornerstone Research’s March 14, 2011 press release regarding the study can be found here.

According to the study, there were 65 court-approved securities class action lawsuits settlement during 2011, representing a total of $1.4 billion in settlement funds. (The study uses the year in which a settlement receives court approval as the year of the settlement, rather than the year in which the settlement was first announced.) The number of 2011 settlements is 25 percent below the prior year’s number and 35 percent below the average of the preceding 10 years. The aggregate settlement amount represents a 58 percent decline from 2010’s total of $3.2 billion.

The median settlement amount declined nearly 50 percent in 2011, from $11.3 in 2010 to $5.8 million in 2011. The 2011 median represents the lowest annual median settlement figure during the post-Reform Act era. The average settlement also declined from $36.3 million in 2010 to $21 million in 2011. The 2011 average is well below the 1996-2010 average of $55.2 million. The 2011 average of $21 million is even below the 1996-2010 average if the three largest settlements during that period are removed from the equation (the adjusted 1996-2010 average is $39.9 million). The 2011 average is the lowest average settlement in the last decade.

The relatively low 2011 average is largely attributable to the absence of very large settlements during the year. In addition, the average for settlements of $100 million or greater declined more than 27 percent from 2010 to 2011.

The report reviews several possible explanations for the decline in the number of settlements and in aggregate settlement funds during 2011. First, the report attributes the decline “largely to the drop in traditional securities class actions that began in 2006.” This decline in filings was partially offset by credit crisis cases, but the credit crisis cases tend to take longer to settle than traditional cases.

Another factor in the ten-year low in average and median settlements is that the 2011 settlements involved cases with lower “estimated damages” than prior years. The “estimated damages” for 2011 settlements declined 40 percent compared to 2010.

The 2011 settlements also lacked the involvement of factors that often are associated with larger settlements. There was a substantial decline during 2011 of settlements involving accounting-related allegations, overlapping SEC actions and companion derivative actions. There was also a reduction in the number of settlements involving third-party defendants (such as auditors). As these factors “tend to be associated with higher settlement amounts,” the drop in the number of cases with these characteristics “may explain the lower 2011 settlement values.”

The factors that contributed to the lower settlement figures during 2011 may only be temporary. Indeed, the report notes that in light of the $725 million AIG settlement that was approved in February 2012, “it appears likely that the total dollar amount of settlements will return to more typical levels in 2012.”

The report contains a number of interesting observations, including one that will be of particular interest to readers of this blog. The report states that nearly 80% of settlements with identifiable D&O insurance contributions “were funded 100 percent by such policies,” compared with about 60% in 2010. The report suggests that this increase in the proportion of the settlement amounts covered by D&O insurance “may be a function of the lower overall settlement amounts in 2011 and an increase in the level of D&O coverage carried by firms.”

The report also contains some interesting analysis about the cumulative distribution of all post-Reform Act settlements. According to the report, more than half of the post-Reform Act settled cases have settled for less than $10 million, about 80 percent have settled for less than $25 million, and only 7 percent have settled for $100 million or higher.

Discussion

One factor that may have a considerable impact on the analysis is the report’s use of the year of settlement approval as the settlement year, rather than the year of announcement. While this factor is at one level simply a timing issue, it does have an impact. Just to pick one settlement by way of illustration, the $725 million AIG settlement noted above may not have been approved by the court until 2012, but it was first announced in 2010 (refer here). By the same token, there are a number of credit crisis related settlements that were announced in 2011 (for example, the $417 million Lehman Brothers underwriters’ settlement), but that will not receive final court approval until 2012 or later.

To be sure, it makes sense to only include settlements that have actually been approved and as they are approved.  My point is just that the use of this methodology distributes the settlements in a way that could affect the overall settlement figures, include overall aggregates, medians and averages. A different methodology might produce different conclusions about settlement trends. This is not just an idle observation; practitioners, for instance, pay keen attention to settlement announcements, and their perceptions of settlement trends are based on the most recent settlement announcements, not the most recent settlement approvals.

That said, the time of settlement approval does have important practical significance, because it dictates when investors receive their money. It also dictates when the plaintiffs’ lawyers get paid as well. Given the relative decline in the number of aggregate value of settlements in 2011, it seems that 2011 was an off year for the plaintiffs’ bar.

The report’s observation about the percentage increase in D&O insurance contribution toward settlement is also very interesting. This observation might suggest that even if the aggregate, averages and medians may be dropping, the equivalent figures for the insurers themselves might actually be increasing.

There are a couple of important considerations to keep in mind with respect to Cornerstone Research’s analysis. The first is that the report considers only class settlements. The figures in the report do not include any amounts related to settlements with other claimants that opt out of the class action settlement, which can be a significant factor in connection with at least some settlements. The settlement amounts in the report also do not include amounts incurred in defending against these lawsuits. The defense costs often are enormous, and typically are borne in whole or in part by the D&O insurers, which adds the overall costs this litigation imposes on the D&O insurers.

Finally, the settlements analyzed in the Cornerstone Research report related solely to securities class action lawsuits. Settlements in association with other types of corporate and securities litigation are not included. In most past years, the absence of consideration of other types of litigation would not have been worth noting, as the securities class action suits represented by far the most significant corporate and securities litigation threat. However, as I have noted on this blog (refer here), litigation relating to mergers and acquisitions activity is becoming an increasingly serious problem – and it is a problem that involves both increased frequency and severity, as large settlements in the M&A cases, previously unknown, have become increasingly common. In other words, the consideration of the trends noted in the Cornerstone Research report represent only a part of the serious corporate and securities litigation exposure that companies face.

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Even as the number of bank failures now appears to be winding down, the FDIC’s failed bank litigation filings seem to just be ramping up. With now 21 lawsuits filed as part of the current wave of bank failures, it may be possible to try to make some generalizations about the lawsuits so far. In a February 1, 2012 post on BankDirector.com entitled “Characteristics of FDIC Lawsuits against Directors & Officers of Failed Financial Institutions” (here), Cornerstone Research takes a look at the FDIC’s failed bank lawsuits to date and finds, among other things,  that the suits so far have involved larger institutions within the same geographic concentrations as the bank failures themselves.  As discussed below, Cornerstone Research’s various findings may have important implications for the lawsuit filings that are yet to come.

The Cornerstone Research study reports that the FDIC has filed lawsuits so far in connection with only about 4.7% of financial institutions failures since January 1, 2007. Two suits were filed in 2010, 16 in 2011, and three so far in 2012. The study also reports that on average the FDIC has waited about 2.2 years after the date of an institution’s failure to file a lawsuit.

The lawsuits so far have “tended to target larger failed institutions,” with the 20 institutions so far involved in the 21 lawsuits to date having had median total assets of $882 million, compared with median total assets of $241 million for all failed financial institutions. The 20 institutions have had a median estimated cost to the FDIC of $179 million, compared with the medial estimated costs of $60 million for all failed banks.

The geographic mix of lawsuits has paralleled the location of failed institutions, with the largest concentrations of both bank failures and lawsuits in Georgia, Illinois and California. The one exception, the report notes, is Florida, which has been the location of 14 percent of all failures since 2007, but where no FDIC failed bank lawsuits have been filed yet.

The 21 lawsuits so far have involved 178 former directors and officers. In six of the cases, only inside directors and officers have been named as defendants, but in the remaining 15 cases, outside directors were also named as defendants. Three of the suits have also named D&O insurers as defendants (about which refer, for example, here); and at least one suit has included the failed bank’s outside law firm as a defendant (refer here). Three cases have involved the spouses of former directors and officers (refer, for example, here).

The aggregate damages sought in the 21 complaints are $1.98 billion. The average and median damages sought is $104 million and $40 million, respectively. Losses on commercial real estate loans and on acquisition, development and construction loans are the most common bases of alleged damages. As the report notes about the sources of alleged damages, “despite the widespread problems in residential lending and residential real estate markets, fewer lawsuits focused on those types of lending.”

The report notes that three of the FDIC’s cases have settled so far: the WaMu case (about which refer here); the First National Bank of Nevada case (about which refer here); and the Corn Belt Bank & Trust Company case (the settlement details of which have not yet been publicly disclosed).

Discussion

Obviously there is a long way to go in the current bank failure litigation wave. The 4.7% percent of bank failures that have involved litigation so far compares to the rate during the S&L crisis, when the FDIC filed lawsuits against directors and officers of the failed institutions in about 24% of all bank failures. Indeed, though the FDIC has filed only 21 lawsuits so far, involving 20 institutions and 178 former directors and officers and aggregate claimed damages of $1.98 billion, , the FDIC’s website states that as of January 18, 2012, the FDIC has authorized lawsuits in connection with 44 failed institutions against 391 institutions, claiming damages of at least $7.7 billion.

Perhaps even more significantly, the FDIC has increased these authorization numbers each month for the past several months – and the number of failed institutions has also continued to increase, as well. In other words, just the suits authorized so far implies quite a number of lawsuits yet to come, and likelihood of increased numbers of future authorization suggests an even greater number of suits ahead. The FDIC may or may not wind up filings suits in connection with 24% of the failed institutions this time around as it did during the S&L crisis, but we still could be in for a substantial amount of future litigation.

The substantial gap between the $7.7 billion of claimed damages in the cases the FDIC has authorized to date, and the aggregate of $1.98 billion of claimed damages in the cases the FDIC has filed so far, suggests that the suits that have been authorized but not yet filed involve larger failed  institutions.

The Cornerstone Research report’s analysis supports this suggestion that there may be a backlog of as yet unfiled cases involving larger institutions, and not just because the report’s findings in general suggest that the FDIC has at least so far largely concentrated its litigation activities on larger institutions. As the report notes, though the FDIC has targeted two of the largest failed institutions (WaMu and IndyMac), “many of the other large or costly failures …have not yet been the target of FDIC lawsuits.” In light of the fact that many of the most costly failures occurred in 2008 and 2009 and given statute of limitations restrictions, “these would seem to be the most likely candidates for FDIC lawsuits in the near future. “

Taking this analysis and looking back at the costliest 2009 bank failures to assess the possible targets, some possible litigation examples might include Colonial Bank (August 2009 failure, $25 billion asset bank, $2.8 billion to the insurance fund); Guaranty Bank (August 2009 failure, $13 billion asset bank, $3 billion loss to the insurance fund); and Bank United (May 2009 failure, $12.8 billion asset bank, $4.9 billion loss to the insurance fund). Of course, whether or not there may be litigation involving these institutions remains to be seen, as would the merits of any litigation that might arise.

The report’s note that there has as yet been no litigation involving a failed bank located in Florida is an interesting insight. Given that over 60 institutions have failed in Florida since 2007, it seems likely that there future lawsuit filings might involve failed Florida banks.

One concluding note in the Cornerstone Research report that is worth emphasizing is that a number of potential lawsuits have been resolved without litigation through mediation or negotiation, often involving the failed bank’s D&O carriers. There are no publicly available statistics on these out of court resolutions and their overall impact is hard to assess. Though the impact is not quantifiable, these types of resolutions may be an important part of the FDIC’s post-failure salvage operations.

In any event, it does seem probable that the current wave of bank failure litigation not only has a long way to run but will also continue to grow in the near term. We can only hope that Cornerstone Research will continue to update and publish their analysis as the process unfolds.

Many thanks to a loyal reader for sending me a link to the Cornerstone Research report.

Carlyle Group Drops Bid to Require Investors to Arbitrate Claims: In a prior post (here), I commented on the unusual effort of the Carlyle Group in connection with its upcoming IPO to require investors to arbitrate rather than to litigate claims. As Victor Li discusses in a February 3, 2012 Am Law Litigation Daily article (here), Carlyle Group has announced that in response to pressure from the SEC and others, the company has dropped its efforts in required arbitration. As Li notes, Carlyle Group’s efforts had been sharply criticized by several U.S. senators and numerous others, and also ran contrary to long-standing SEC prohibitions against approval of arbitration provisions.

Notwithstanding Carlyle Group’s withdrawal of its arbitration proposal, the issue may yet come to a head in the weeks ahead, in light of the efforts of investors at Gannett and Pfizer to have included in their companies’ 2012 proxy ballots shareholder proposals to required investor claims to be litigated. The question of the propriety of a corporate provision requiring the arbitration of shareholder claims may yet be aired at the SEC.

The Week Ahead: This week I will be attending the PLUS D&O Symposium at the Marriott Marquis Hotel in New York City. On Wednesday, February 8, 2012, I will be moderating a panel entitled “Financial Institutions Underwriting: Is it Safe to Come Out Yet?” Joining me on the panel are my good friends Jennifer Fahey of AON; Tim Braun of AXIS; Steven Goldman of ACE: and Dan Gamble of Alterra.

I know many of the readers of this blog will also be attending the Symposium. I hope readers will feel free to greet me, particularly those whom I have not previously met.

I know that many attending this larger conference, particularly first time attendees, can find the crowded sessions and events a little intimidating. Some may even find that despite – or ironically because of – the crowds, it is hard to meet people. I can’t provide any sure fire way to overcome these challenges and to succeed in making many new professional contacts. But one loyal reader did send me a link to an article that may be useful to at least some conference attendees trying to work their way into the mix.

The January 25, 2012 article is from the Harvard Business Review blog, and it is entitled “The Introvert’s Guide to Networking,” which can be found here. There are a number of useful items in this short article, but the best piece is the author’s observation that she “stopped being afraid to be the one to reach out.” This observation is particularly useful in connection with the PLUS D&O Symposium.

My observations after many years in this industry are, first, that there are many people around who have trouble dealing the large crowds at industry events, so you are not alone, and, second, most people are as interested in meeting you as you are in meeting them, and so the best approach is just to go up to someone you don’t know and introduce yourself. Also, don’t be afraid to ask others to introduce you to people you would like to meet. The great thing is that we have a very friendly, sociable industry and most people are happy to be introduced.

I look forward to seeing everyone in New York.

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Securities class action filings rise slightly in 2011 compared to the prior year but remained below historical averages according to the annual study of Cornerstone Research, prepared in conjunction with the Stanford Law School Securities Class Action Clearinghouse, which was released today. A copy of the report can be found here, and Cornerstone Research’s January 19, 2012 press release can be found here. My own analysis of the 2011 securities class action lawsuit filings can be found here.

According to the report, there were 188 securities class action lawsuit filings in 2011, compared to 176 in 2010, and compared to the 1997 to 2010 average annual average number of filings of 194. The two largest factors in the number of 2011 filings were the heightened number of M&A-related filings (43) and the elevated number of filings involving U.S.-listed Chinese companies. (33).

The Cornerstone Research report contains a number of insights about the 2011 filings beyond those that have appeared in previously published analysis of the filings. Among other things, the report notes that three percent of companies listed on the three major U.S. exchanges (NYSE, NASDAQ and Amex) were sued in securities suits in 2011. This represents the highest annual percentage since 2004 and is above the 1997 to 2010 annual average percentage of 2.4 percent.

On the other hand, in 2011 only 3.2 percent of S&P 500 companies were sued, “making it the least litigious year for S&P 500 companies since 2000.” Historically, larger companies have been more likely to be sued in a securities class action lawsuit, and that trend continued in 2001. Thus, while only 3.2 percent of the S&P 500 companies were sued in 2011, those companies represented 5.1% of the S&P 500 market capitalization.

This year’s Cornerstone Research report also contains a number of new analyses, including an analysis of the number of private securities class action lawsuits filed between 1996 and 2011 involving Foreign Corrupt Practices Act allegations. The report shows that there were four such filings in 2011, the highest annual number of filings since 2006 (when there were also four filings).

The report also contains a new analysis of the experience of the judges handling securities class action lawsuits during the period 1996 to 2011. The analysis shows that while there are a relatively small number of judges that handled more than ten cases during that period (65), a much larger number of judges (329) handled only one case, and the vast majority of judges (582) handled only three or fewer cases. The inference is that many securities cases are being handled by judges who are relatively inexperienced with securities cases – although there is also a smaller number of judges that are very experienced with these types of cases.

The report also reflects some interesting insight about the plaintiffs’ law firms’ involvement in these cases. The report sets out which law firms are selected most often as lead counsel in securities class action cases that do not involve M&A related allegations and then separately lists the firms most often selected as lead counsel in the M&A cases. The interesting thins is that the lineup of law firms leading the M&A cases looks very different than the lineup for the other cases. These differences shed some light on the changing mix of corporate and securities lawsuits and the growth in the number of M&A cases, suggesting that among other things the rising M&A related litigation activity may reflect dynamics within the securities’ plaintiffs’ bar.

Speaking of M&A related cases, Cornerstone Research has also recently released a separate companion report specifically focused on M&A related litigation, which can be found here.

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There seems to be a general consensus that the amount of M&A-related litigation is increasing. The question of how to quantify the increase has attracted quite a bit of attention lately. In a recent post, I previewed a forthcoming report from Cornerstone Research that will provide detailed statistic analysis of the M&A litigation phenomenon.

My post attracted considerable commentary, and also drew a communication from NERA Economic Consulting, which has released its own statistical analysis of M&A-related litigation, and which they shared with me.

In addition, this week I separately received from Ohio State University Law Professor Steven Davidoff a copy of the January 1, 2012 paper that he and Notre Dame Finance Professor Matthew Cain have written entitled “A Great Game: The Dynamics of State Competition and Litigation” (here), in which they analyze M&A related Litigation from 2005-2010., with particular attention to the question of whether or not there is now competition between the states for this type of corporate litigation. Davidoff should be familiar to many readers as The Deal Professor from the New York Times Dealbook blog.

These two reports add substantial additional quantitative and analytic support for the general observations surrounding the growth in M&A-related litigation. Both of these reports corroborate the explosive growth in M&A-related litigation in recent years. I examine both of these reports below, starting first with Professors Davidoff and Cain’s analysis.

Professors Davidoff and Cain’s Paper

The Professors’ primary interests relate to the question of whether or not the states are competing for corporate litigation. Their interest in this question is driven in part by recent analyses suggesting that Delaware may be losing “market share” for this type of litigation. In order to determine how “both attorneys and courts interact in this game,” the authors examine state court merger litigation. The authors analyzed 955 merger transactions that took place between 2005 and 2010 and having a transaction value great than $100 million.

The authors found that 49.7 percent of transactions during that period attracted at least one shareholder lawsuit, and that the litigation rate increased “sharply” during the period, with only 38.7 percent of the transactions incurring litigation in 2005, compared to 84.2 percent in 2010. In addition, merger transactions increasingly are attracting multiple lawsuits. In 2005, only 8.6 percent of the deals attracted litigation in more than one jurisdiction, compared to 46.5 percent in 2010.

The authors found that during the sample period, 69.8 percent of cases settled, while 30.2 percent were dismissed. Only 4.9 percent of the settlements involved in increased in the amount of the transaction consideration, while 52.1 percent of the settlements involved only the disclosure of additional information. The average plaintiffs’ attorneys’ fee for settled suits is $1.4 million. Cases that settled for additional disclosure only pay the lowest level of attorneys’ fees (average attorneys' fees of $793,000) while settlements involving an increase in the deal consideration  pay the most (average attorneys fees $8.5 million)

The authors used this information to calculate an expected dismissal and attorneys’ fee baseline, as a way to measure “unexplained” dismissal rates and attorneys fees. The authors used these unexplained amounts as an “indicator for state competition.” The authors found significant variation across states, with certain states awarding higher fees than others. Delaware awarded fees $400,000 to $500,000 higher while dismissing a greater portion of cases than other states.

The authors found some statistical support for the claims that Delaware is losing the state court litigation competition, but they also found that “the game” is complex and that the dynamic varies depending on which states are compared. The authors also found evidence that Delaware’s courts are responsive to this competition, concluding that Delaware’s courts award” higher attorneys’ fees to compensate for a higher dismissal rate,” and adjust “dismissal rates down when it loses prior cases to other jurisdictions.” The authors cite the recent $300 million award in the Southern Peru Copper case as an indication that Delaware is” competing more overtly in this game.”

The NERA Economic Consulting Presentation

In a December 6, 2011 presentation done in conjunction with the Wilson Sonsini law firm and entitled “Merger Objection Litigation” (here), NERA provided a detailed statistical review of M&A-related litigation. The NERA study is based on the firm’s examination of the 731 merger transactions it identified as having been announced between 2006 and 2010 and that were completed by February 28, 2011, and that had a value equal to or greater than $100 million. NERA found that 285 of those transactions were challenged in a state or federal lawsuit, through June 20, 2011. NERA also found that litigation settlements had been reached in connection with 162 of the deals.

The NERA study found that while there were fewer deals overall in the last three years of the 2006-2010 study period, the incidence of M&A related litigation escalated significantly in those three later years. Thus, while only 26.1% of the 2006 deals and only 21.9% of the 2007 deals attracted litigation, 45.4% of the 2008 deals, 78.6% of the 2009 deals, and 60.7% of the 2010 deals attracted litigation. Though the 2010 figure represent a slight decline from the prior year, the 2010 level of litigation still represents a significant increase compared to the earlier years in the study period.

The NERA study also found that throughout the 2006-2010 period, the litigation rate increased as the size of the deal increased. Thus, only about 25% of the deals under $500 million attracted litigation, but 38.7% of the deals between $500-$999 million, 40.8% of the deals between $1 billion and $1.9 billion, 53.0% of the deals between $2 billion and $4.9 billion and 70.1% of the deals equal to or greater than $5 billion attracted litigation.

Merger objection litigation can be expected to arise fairly quickly after the deal is announced. The NERA study shows that a third of the litigation arrives in the first two days after the deal is announced and about 60% arrived in the first week. 81% of the merger litigation arrives within the first thirty days after the deal is announced. Although the takeover target is consistently named as a defendant in this litigation, 70% of the time the named defendants also include the acquirer.

The vast majority of the litigation is filed in state court only. 83% of the deals that were litigated attracted only state court litigation. Another 14% attracted both state and federal litigation. Only three percent of the deals attracted only federal court litigation.

The NERA study suggests that many of the deals that attract litigation are attracting litigation outside Delaware. Of the deals that were litigated, 20% were litigated only in Delaware and another 13% were litigated in both Delaware and another state. So about one third of the deals that attracted litigation were litigated at least in part in Delaware. The remaining two thirds of the deals were litigated only outside Delaware. However, the presentation does not show how many of the deals that were litigated only outside Delaware involved target companies that were incorporated in Delaware. The presentation also does not show whether or not the prevalence of litigation outside Delaware changed during the 2006-2010 study period.

With respect to the M&A-related lawsuits in the study period that had settled, the NERA report found that the vast majority of the settlements involved cash payments of less than $1 million. 106 of the 154 settlements in the settlement analysis (nearly 69%) settled for less than $1 million. Another 33 out of the 154 in the settlement analysis settled for less than $10 million. Only 15 of the 154 settlements in the analysis settled for amounts of $10 million or greater, including only 4 with settlements between $100 million and only one with a settlement greater than $1 billion. (The NERA presentation includes a detailed list of the largest settlements at slide 19.)

Thus, while the settlement period included a few very large settlements, the vast majority of the settlements were for less than $10 million, and more than two-thirds were below $1 million.

In fully 87% of the litigated deals that had settled, the only beneficiary from the monetary settlement was the plaintiffs’ attorneys. In only 9% of the settlements did the beneficiaries include both the plaintiffs’ attorneys and class members. Thus the vast majority of monetary settlements pay only for the plaintiffs’ attorneys’ fees and expense, and the “benefits” to the class, although occasionally monetary, more often take another form, such as reduced target company termination fee; fuller disclosure; or improved corporate governance.

Discussion

The information in these two studies provides valuable additional perspective on the increasingly important M&A-related litigation phenomenon. The two studies corroborate that in creasing numbers of M&A transactions are attracting litigation. The NERA data also provides some interesting additional information that has not been a part of other statistical perspectives on this litigation phenomenon, including in particular the data showing how quickly the lawsuits arrive and the information showing the range of settlement outcomes.

The Professors’ report provides additional information about the increasing prevalence of multi-jurisdiction litigation, as well as average attorneys’ fees and dismissal rates. Perhaps most significantly, the Professors’ study provides important insight into the question of state competition for corporate litigation.

The data in these studies are directionally consistent with the previously released studies, including the information I previewed in a recent post about the forthcoming Cornerstone Research report. They are also directionally consistent with each other, while differing somewhat in their details. The two reports also differ somewhat from the Cornerstone Research data I previously reviewed.  (The Cornerstone Research analysis suggests a higher litigation rate both in 2007 and in 2010 than the analysis in either of the two studies discussed above, although all three of the analyses agree that that the litigation rate increased between 2007 and 2010.)

The difference between the analyses may be attributable to the differing data sources used in the studies. There may have been methodological differences as well. For those of use who are studying and trying to understand the growing M&A-related litigation phenomenon, it will be important to understand these differences. We can certainly hope as the various research sources release their analyses that they will help the rest of us understand not only where their data came from and how it was analyzed, but how the approach they used may differ from other analyses that have been published.

In any event, no matter how you slice it, the level of M&A related litigation is growing. The defense expenses and settlement amounts associated with this litigation represent a growing problem as well. All signs are that this phenomenon will remain a significant part of the corporate and securities litigation landscape for the foreseeable future. For that reason it will remain important to understand what this litigation means. The willingness of NERA and of the Professors to share their analysis is extraordinarily helpful in that regard. Along those lines, I would like to express my deep thanks here to NERA and to Professor Davidoff for their willingness to share their presentations with me.

Seven Nation Army: Even though I was not even really focusing on it, I had noticed recently that marching bands and sporting fans everywhere have picked up the same tune, as a rallying cry, as a communal chant, as basic crowd background noise. But if you had asked me to focus on it, I still might not have been able to name the tune. A January 13, 2011 article on Deadspin identified the tune, and also explained how it managed to take over the sportworld.

The song is “Seven Nation Army,” a 2003 tune from the alternative rock band, The White Stripes. Just in case you don’t think you know the tune, I have included a video below of the band performing the song. (I guarantee you if you listen to it, you will say – “Oh yeah, that song. I always wondered what that was.”) I was on the alert for it this past weekend, and I noticed that both the San Francisco crowd at the 49ers/Saints game and the west London crowd at the English Premier League game between Chelsea and Sunderland were chanting the tune during their respective games on Saturday. All very odd for an alternative rock song. But I guess it isn’t any weirder than that fact that a lot of marching banks have also picked up “Carmina Burana” from classical composer Carl Orff.

In any event, for today’s musical interlude, here’s The White Stripes performing “Seven Nation Army.” Now you will know what the heck all of those fans are trying to chant. (My apologies to all of those rock music aficionados – most half my age -- who think I am an idiot for not knowing the song before; please consider my age, location and occupation, and I think you will see how unlikely it is that I would be fully versed in the contemporary alternative rock scene.)

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In several recent posts (most recently here), I have written about the problems associated with the growing wave of M&A related litigation. In writing about this topic, I have tried to marshal the evidence supporting my position, but for many reasons my analysis has been more descriptive than statistical. However, I have been provided with advance access to some of the data from a forthcoming Cornerstone Research publication to be entitled “Recent Developments in Shareholder Litigation Involving Mergers and Acquisitions.” The data provide interesting additional statistical perspective on the recent M&A-related litigation trends.

UPDATE (as of Jan. 17, 2012): Cornerstone has now released its report, entitled "Recent Develpments in Shareholder Litigation Involving Merger and Acquisitions" (here) online. The full report iincludes additional information beyond what is discussed in this blog post.

In their preparation of the report, Cornerstone Research reviewed SEC filings related to acquisitions of U.S. public companies valued at $100 million or greater and announced during 2010 and 2011. For purposes of historical comparison, Cornerstone Research also collected information on litigation related to deals announced in 2007 valued at $500 million or greater.

Based on their review, Cornerstone Research identified 789 lawsuits filed in connection with U.S. public company acquisition transactions valued at $100 million or greater and announced in 2010 and 696 lawsuits for deals of that size announced in 2011.

Cornerstone Research found that litigation arose in connection with 91% of all deals announced during the 2010-2011 period with values greater than $100 million. The average number of lawsuits per deal announced during that period was 5.1. Both of these figures grow relatively larger as the size of the deals grows larger. Thus for deals announced in 2010-2011 with valuations between $100 million to $500 million percentage of deals involving litigation is 85%, and the average number of lawsuits per deal is 4.1, while 96% of all deals valued over $1 billion during that period attracted litigation, and averaged 6.1 lawsuits per deal.

Certain deals announced during the 2010-2011 proved to be particularly litigation attractive. For example, Blackstone’s $600 million acquisition of Dynegy attracted 29 lawsuits. Express Scripts’ $29.3 billion acquisition of Medco Health Solutions attracted 22 lawsuits. Attachmate’s $2.2 billion acquisition of Novell attracted 19 lawsuits. Overall, there were nine deals during that period valued at $100 million or greater that attracted 15 or more lawsuits.

To provide historical perspective, Cornerstone Research compared M&A litigation in 2007 and in the 2010-2011 periods, by comparing deals valued greater than $500 million announced in each of those two periods. There were 289 lawsuits in connection involving deals of that size in 2007 and 557 involving deals of that size in 2010, representing a 92% growth in the absolute number of lawsuits between the two periods. There were 473 lawsuits involving deals of that size that were announced in 2011, which is 63% higher than in connection with deals of that size announced in 2007.

Obviously, this growth in the absolute number of lawsuits might be attributable to an increase in the level of M&A activity involving deals greater than $500 million. In fact, there were 195 deals valued over $500 million that were announced in 2007, but only 108 and 80 deals valued over $500 million that were announced in 2010 and 2011, respectively.

The Cornerstone Research analysis shows that only 50% of the deals valued at $500 million or greater announced in 2007 attracted litigation, whereas 95% of the comparably sized deals announced in 2010 attracted litigation, and 96% of such deals announced in 2011 attracted litigation. In other words, the litigation activity was both absolutely and relatively greater for deals valued at $500 million or greater in the 2010-2011 period compared with comparably sized deals announced in 2007.

In addition, the number of lawsuits filed per deal has also increased. Deals valued at greater than $500 million announced in 2007 attracted an average of 2.8 lawsuits, whereas deals of that size announced in 2010 attracted an average of 5.4 lawsuits, and deals of that size announced during 2011 attracted an average of 6.1 lawsuits.

One of the recurring questions associated with the increase in M&A-related litigation has been whether or not courts in Delaware, traditionally the forum of choice for this type of litigation, has been losing “market share” to other jurisdictions that may be perceived as more plaintiff-friendly. The Cornerstone Research analysis suggests that Delaware’s courts are not in fact losing market share, at least with respect to deals meeting Cornerstone’s criteria.

Cornerstone Research’s analysis of this issue compares deals involving Delaware incorporated companies that were valued at greater than $500 million announced in 2007, on the one hand,  to deals involving Delaware incorporated companies where the deal was valued at greater than $500 million and announced in 2010-2011, on the other hand.

The Cornerstone Research analysis shows that in terms of where the lawsuits were filed in the two respective periods, in 2007, 34% of the lawsuits were filed in Delaware, while in the 2010-2011 period, 41% of the lawsuits were filed in Delaware.

This analysis is reinforced when the lawsuits are looked at on a per deal basis. Looking at the venue of lawsuits in which acquisitions involving Delaware incorporated companies were being challenged, the Cornerstone data show that 29 of the 2007 deals involved at least one lawsuit filed in Delaware, and 32 of the deals involving only litigation outside Delaware. By comparison, in 2011, 41 of the deals had at least one lawsuit filed in Delaware, and just nine of the deals involved litigation only outside Delaware. In other words, in the later period, a much greater portion of the deals involved litigation in Delaware, either exclusively or in combination with litigation in other jurisdictions, and a much smaller proportion of the deals involved only litigation outside Delaware.

Discussion

The Cornerstone Research data tend to corroborate many of the points I have made in recent posts on this blog – that is, M&A litigation is increasing, on both an absolute and relative basis; that a much higher percentage of deals is attracting merger objection litigation; and the average number of lawsuits per deal is also increasing.  The Cornerstone Research analysis is particularly interesting with respect to the number of deals that are attracting unusually higher numbers of lawsuits.

The data in the Cornerstone Research report are directionally consistent with many other data sources I have cited in prior blog posts on this topic, but the Cornerstone figures appear to differ in certain specific details. For example, the Cornerstone Research analysis suggests that a much higher percentage of deals attract merger objection lawsuits than the figures in other reports have suggested (refer here, for example).

There likely are many explanations for the differences in the details between the Cornerstone Research data and other reports, but one particular aspect of the Cornerstone analysis should be kept in mind. That is, the Cornerstone Research analysis for the 2010 and 2011 period involves only M&A transactions with announced values greater than $100 million. Deals involving smaller valuations and the related litigation are not a part of the Cornerstone Research analysis. By the same token, Cornerstone Research’s historical analysis refers only to deals announced in the 2007 period with valuations greater than $500 million, which omits an even broader range of deals (and related litigation) based on the size of the deal valuations. These data set definitions could result, at a minimum, in differences between the Cornerstone Research data and other analyses of comparable time periods.

But in any event, the Cornerstone Research analysis makes a very important contribution to the consideration of these issues. The Cornerstone Research report clearly shows that M&A related litigation is becoming a more significant issue. With the increasing average numbers of lawsuits per deal, M&A-related litigation is becoming an increasingly more costly problem, as the increased numbers of lawsuits in multiple jurisdictions means both procedural complications and increased defense expense.

The Cornerstone Research analysis of the Delaware court “market share” issue could prove to be particularly interesting. The question whether or not litigants are self-selecting away from Delaware is and will be a very hot topic. The stakes are high, as the continued involvement of Delaware courts in corporate and securities litigation could determine whether or not Delaware’s courts continue to play a leading role on legal issues in these areas. And on a more practical level, if Delaware’s courts are not losing market share after all, there is no reason for its judges to be as concerned with attempting to curry favor with the plaintiffs’ bar in order to preserve market share.

The Cornerstone Research data certainly offers a variety of interesting statistical perspectives on the issues surrounding the growth of M&A litigation. We can all look forward to the forthcoming publication of Cornerstone Research’s complete report on these issues.

Very special thanks to Cornerstone Research for their willingness to share this data with me and with readers of this blog.

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As a result of developments during 2011, there is a “growing sense of urgency amongst FCPA practitioners as to the direction the statute will take in the coming years,” according to a law firm’s year-end FCPA report. The January 3, 2011 memo from the Gibson Dunn law firm, entitled “2011 Year-End Update,” can be found here. Whatever else might be said, according to the report, “these are interesting times for the FCPA.”

According to the report, FCPA enforcement activity remains near all time highs. In terms of FCPA enforcement actions initiated by the Department of Justice and the SEC, 2011 “was the second most prolific ear in the history of FCPA enforcement.” The 23 DoJ actions and the 25 SEC actions are “outmatched only by the juggernaut that was 2010.” However, the report notes, the 2010 statistics were “elevated substantially” by the 22-defendant SHOT  show arrests.

The report notes a number of interesting FCPA enforcement trends during 2011, including the increasing practice of U.S. regulators to pursue enforcement actions against individual defendants after negotiated settlements with the individuals’ employer. As an example, the report cites the recent enforcement actions brought against seven former Siemens executive and two former Siemens third-party agents. Among other things the report notes, the nine targeted individuals are all foreign nationals. In other words, the parent company, the alleged wrongful activity and the targeted individuals all took place or are domiciled outside the United States, which illustrates the U.S. regulators’’ willingness to “polic conduct beyond [U.S.] borders that it perceives as affecting U.S. markets.

The report also referenced the SEC’s willingness to bring unsettled FCPA enforcement actions as evidence of the agency’s “more aggressive enforcement stance.” In the past the agency “has not been known to file many FCPA cases absent an advance agreement to settle the matter.” But during 2011, the SEC brought 10 unsettled FCPA enforcement actions, more than in the previous 33 years of FCPA enforcement combined.”

FCPA enforcement actions during 2011 also reinforced the “imperative that acquisitive companies conduct thorough pre-acquisition due diligence and equally robust post-acquisition compliance integration.”

The report also notes the DoJ’s recent initiative to pursue foreign government officials who received the bribes paid by FCPA defendants. The FCPA itself does not criminalize the receipt of bribes by foreign officials, but the Department of Justice has tried to use two tools to reach the recipients: money laundering statutes and civil forfeiture actions. These aggressive efforts are still in their early stages.

The report notes that though the FCPA itself does not provide for a private right of action, “enterprising plaintiffs have circumvented the FCPA’s lack of a private redress mechanism by filing derivative lawsuits, securities fraud actions, tort and contract law claims, employment lawsuits, and private actions under the Racketeer Influenced and Corrupt Organizations (RICO) Act.” Among other cases the report cites is the FCPA-related derivative lawsuit involving Avon Products (refer here, footnote 5 to the financial statements), and the FCPA-related derivative lawsuits involving Bio-Rad Laboratories (refer here) and Tidewater, Inc. (refer here). Avon is also the subject of an FCPA-related securities class action lawsuit as well (refer here).

The report also canvasses the various pending legislative and policy developments that could lead to changes to the FCPA itself or its enforcement during 2012. The report also catalogues global anti-corruption enforcement developments. Overall, the report is interesting and well-written, and well worth reading in its entirety.

Readers of this blog will be most interesting in the report’s commentary about FCPA-related civil litigation. The follow-on litigation provides what I have called in the past the link to the D&O insurance policy. There would not be coverage under the typical D&O policy for the fines and penalties imposed in connection with an FCPA enforcement action, although defense fees incurred in connection with the action potentially could be covered under many policies, depending on the policy wording. But the filing of a civil lawsuit against members of the board of directors, as a follow on to the FCPA action, is an event much more directly linked to the D&O policy and much more likely to give rise to covered loss under the policy.

As the escalating levels of FCPA enforcement actions continues to increase, this type of potential Board liability exposure will continue to be a growing concern for Boards, their advisers, and their D&O insurers.

Those readers who want a more comprehensive overview of both the historical and current state of FCPA enforcement will want to refer to the Shearman and Sterling law firm’s mammoth 692-page January 3, 2011 “FCPA Digest” (here). The Shearman and Sterling report has a more detailed statistical overview and an exhaustively detailed case summarization. The Shearman & Sterling report also sets out in specific case detail a catalog of follow-on civil actions arising out of FCPA enforcement activities (refer to pages 538 through 620 of the report). The value of the Shearman & Sterling approach is that it is not limited just to actions filed or pending in 2011, but is historically all-encompassing – although some readers may find the report’s sheer size intimidating.

The Morrison  Foerster law firm has a January 5, 2012 client alert (here) detailed the fines and penalties assessed under the FCPA in 2011. A January 6, 2011 Corporate Counsel article reviewing the Gibson Dunn and Shearman & Sterling memos can be found here.

Readers interested in the phenomenon of FCPA follow-on civil litigation will want to read the very interesting post on the FCPA Professor Blog (here) about the $45 million settlement that Innospec in an antitrust lawsuit brought by a competitor following Innospec’s $25.3 million settlement of an FCPA enforcement action. Professor Mike Kohler has some very provocative observations about the case and the settlement.

Finally, for reference purposes, The FCPA Blog has a comprehensive list (dated January 4, 2012) of all severity-eight companies that have disclosed in their respective SEC filings currently pending FCPA investigations.

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The year just ended was eventful in many ways. Earthquakes, hurricanes, tornadoes, floods, blizzards and droughts were scattered across the globe, and political unrest shook many countries. In a year filled with such significant developments, events in the world of D&O liability pale by comparison. But even if there were no earth-shaking events, 2011 was nevertheless an eventful year in the directors and officers’ liability arena. Here is my selection of the top ten stories from the world of D&O.

1. M&A Litigation Becomes the Lawsuit of Choice for Plaintiffs’ Securities Attorneys: The traditional focus for any discussion of D&O litigation exposure has been federal securities class action litigation. But in recent years, there has been a shift in the mix of corporate and securities litigation filings. Taking into account both federal and state lawsuit filings, M&A-related lawsuits now outnumber federal securities lawsuit filings and M&A-related litigation is now the lawsuit of choice for many plaintiffs’ securities attorneys.

As a result of legislative changes and U.S. Supreme Court case law developments, “dispossessed plaintiffs’ lawyers” (as one academic recently put it) have been forced to seek an alterative business model. And M&A litigation appears to be an attractive business model for many plaintiffs’ lawyers. Corporate defendants, eager to complete the underlying business transaction, often are keen to settle these cases quickly. Settlements often include a not insignificant provision for plaintiffs’ fees.

The attractions of this business model is drawing competition, as increasingly each merger transaction is attracting  multiple separate lawsuits, often filed in differing jurisdictions. The jockeying between the plaintiffs’ lawyers in the competing cases in multiple jurisdictions has led to procedural complications and rapidly increasing costs of defense. Delaware, the traditional forum for this type of litigation, arguably now faced with “market share” competition, is according to some under pressure to show that it is not inhospitable to these kinds of lawsuits, and even to support plaintiffs’ fee awards (about which see more below).

Not only are both defense expenses and plaintiffs’ fee awards in merger objection suits mounting, but it is increasingly common for M&A-related cases to result in cash settlements on an order of magnitude often seen only in traditional securities class action lawsuits. Thus, the Kinder Morgan case, settled in August 2010 for $200 million (refer here); the Del Monte case settled in September 2011 for $89 million (refer here); the May 2010 ACS settlement was $69 million (refer here); and the 2011 Intermix Media settlement was $45 million (refer here).

The new M&A litigation model represents both a high frequency and a high severity risk. The severity risk is particularly acute given the exacerbating effects of escalating defense expenses and rising plaintiffs’ attorneys’ fees. The bottom line is that it is no longer sufficient to focus just on federal securities class action litigation. M&A related litigation is an increasingly important part of the overall mix of corporate and securities litigation. For anyone whose tasks include understanding the risks and exposures associated with corporate and securities litigation, this is an important development with significant implications. 

2. Chinese Take-Out: U.S.-Listed Chinese Companies Hit With Class Action Securities Litigation: Every year there seems to be one group or sector of companies that draws the unwanted attention of plaintiffs’ securities attorneys. During 2011, the hot sector was U.S.-listed Chinese companies. There were 39 different U.S.-listed Chinese companies hit with securities class action lawsuits during 2011, representing nearly one-fifth of all securities class action lawsuit filings during the year. Since January 1, 2010, there have been securities class action lawsuits filed against 49 different Chinese companies.

This surge of litigation involving Chinese companies has arisen out of accounting scandals, many of which were first revealed by online analysis, many of whom have short positions in the companies they are attacking. The Chinese companies have attempted to deflect the assertions by charging that the attacks are merely rumors started by interested parties with a financial incentive to drive down the companies’ shares prices. Fair or not, the online reports seem to be leading directly to shareholder litigation, as in many cases the shareholder plaintiffs’ are simply quoting the online analysts’ reports in their complaints.

Obviously not all of these cases are meritorious and indeed some of them have been dismissed (refer for example here). On the other hand, other cases have survived the initial dismissal motions (refer for example here). Even in those cases in which the plaintiffs’ claims survive the initial pleading threshold, their claims stiff face substantial challenges, not the least of which are problems involved with effecting service of process and in conducting discovery in China, as well as deriving from the geographic distances and language issues involved. (Refer here).

Eventually the plaintiffs’ lawyers will simply run out of Chinese companies to sue, but for now the phenomenon shows no sign of letting up. During the second half of 2011, there were a total of 13 Chinese companies sued in securities class action lawsuits in the U.S., including two in December alone.

The recent litigation against the U.S.-listed Chinese companies is a reminder of circumstance-specific events that can drive securities class action lawsuit filings. Countless things determine litigation activity levels, many of which cannot be captured or predicted in historical filing data. Simply put, the numbers vary over time, because, for example, contagion events and industry epidemics happen.

3. Massive Settlements Emerge as the Subprime and Credit-Crisis Litigation Wave Slowly Plays Out: The subprime and credit crisis-related litigation wave is about to enter its sixth year. Though there were additional credit crisis-related lawsuit filings during 2011, the arrival of new cases seems to have largely come to an end. However, there is still a massive backlog of cases filed over the last five years that is yet to be resolved. During 2011, a number of these cases were settled, and in some cases the settlements were massive.

The 2011 settlements include the largest so far in subprime and credit crisis-related cases, the $627 million Wachovia bondholders settlement, about which refer here. Other settlements include the following: Merrill Lynch Mortgage Backed Securities, $315 million (refer here); Lehman Brothers offering underwriters settlement, $417 million (refer here); Washington Mutual, $208.5 million (refer here); Wells Fargo Mortgage Backed Securities, $125 million (refer here); National City, $168 Million (refer here); Colonial Bank, $10.5 million (refer here); and Lehman Brothers executives, $90 million (refer here) and E*Trade, $79 million (refer here).

If you include the Lehman Brothers’ offering underwriters’ settlement, the various subprime and credit crisis lawsuit settlements total about $4.432 billion. The average settlement so far is about $110 million, although that figure is clearly driven upward by the largest settlements. If the Countrywide, Wachovia bondholders and Lehman offering underwriters’ settlements are removed from the equation, the average settlement drops to about $74.7 million.

As impressive as these settlement numbers are, there are still many more cases pending. Of course, a certain number of the pending cases will ultimately be dismissed. But many will not, and eventually those remaining cases will be settled. Although it is impossible to conjecture how large the total tab for all these cases ultimately will be, the implication from the cases that have settled is that the total amount will be massive. 

The possibilities here may have significant implications for D&O insurers. Of course, not all of these amounts will be covered by D&O insurance. But a significant chunk will be. Indeed, a number of the recent settlements will be funded entirely or almost entirely by D&O insurance, including the D&O portion of the WaMu settlement, the Colonial Bank settlement, the E*Trade settlement and the Lehman Brothers executives’ settlement. Interestingly, the Lehman executives’ settlement will come close to exhausting what is left of Lehman’s $250 million insurance tower.

In other words, the D&O insurers have had some very large bills to pay. Signs are that there will be further amounts due in the months ahead.

4. Costs Incurred in Connection with Informal SEC Investigation Held Not Covered: One of the perennial D&O insurance coverage questions is whether or not a D&O insurance policy provide coverage for defense expenses and other costs incurred in connection with an informal SEC investigation. In October 2011, in a case that was closely watched in the D&O insurance industry, the Eleventh Circuit  issued a per curiam opinion affirming a lower court holding that costs Office Depot had incurred in connection with an informal SEC investigation and investigating an internal whistleblower complaint were not covered under its D&O insurance policies.

The sheer dollar value of the costs for which Office Depot had sought coverage underscores the extent of the problems involved. Office Depot had incurred tens of millions of dollars in expense before the SEC investigation became formal. Under the circumstances presented and based on the policy language at issue, the district court held and the Eleventh Circuit affirmed that Office Depot did not have insurance coverage for these costs. The holding was a reflection of the specific policy language at issue, but D&O insurers undoubtedly will try to rely on the holding in other circumstances in which coverage is sought for costs incurred in connection with informal SEC investigations.

Meanwhile, the insurance marketplace has evolved in recognition of policyholders’ interest in having insurance coverage for the costs of informal SEC investigations. Recently, some carriers have been willing to provide coverage for costs individuals incur in connection with informal SEC investigations. In addition, at least one carrier now offers a separate insurance product that provides coverage for costs that the entity itself incurs in connection with an informal SEC investigation. Although this entity protection for informal SEC investigative costs is subject to a large self-insured retention and to coinsurance, the fact remains that if such a policy had been available to Office Depot and if Office Depot had had such a policy in place, at least a significant part of Office Depot’s costs of responding to the informal SEC investigation might have been covered.

Policyholder advocates undoubtedly will take the position that the Eleventh Circuit’s opinion in the Office Depot case does not represent the final word on the question of D&O insurance coverage for costs incurred in connection with informal SEC investigation. In making these arguments, the policyholder advocates undoubtedly will seek to rely on the Second Circuit's July 2011 opinion in the MBIA case, in which the court held that costs incurred in voluntarily responding to a governmental investigation are covered. (The MBIA case is itself also a reflection of the policy language involved and circumstances presented, including in particular the fact that most of the costs at issue were incurred after the SEC had issued a formal investigative order, by contrast to the Office Depot case, where most of the costs were incurred before the investigation was formalized.)

These questions undoubtedly will continue to be disputed and even litigated. But it will be interesting to see how the marketplace continues to evolve as the industry continues to try to craft solutions to this recurring problem.

5. FDIC Litigation Against Failed Bank Directors and Officers Slowly Emerges: Since January 1, 2008, there have been 414 bank failures, including 92 in 2011 alone. Though the number of bank closures this past year represents a decline from the prior year’s total of 157, the likelihood is that there are further bank failures ahead in 2012, albeit at a reduced pace from recent years. (The January 3, 2012 Wall Street Journal comments that “failures will be a part of the landscape for many months, maybe years, as weak banks take a long time to recover or fail.”) But even if the number of new bank failures may finally be starting to decline, the FDIC’s pursuit of litigation against the directors and officers of failed banks may just be getting started.

During 2011, the FDIC stepped up its failed bank litigation activity. The FDIC filed 15 lawsuits against directors and officers of failed banks in 2011, bringing the total number of FDIC failed bank lawsuits to 17. Signs are that the number of FDIC lawsuits will continue to grow in the months ahead. According to the FDIC’s website, as of December 8, 2011, the FDIC has authorized suits in connection with 41 failed institutions against 373 individuals for D&O liability for damage claims of at least $7.6 billion. These figures representing the authorized lawsuits contrast starkly with number of lawsuits that the agency has actually filed: So far, the agency has filed only 17 lawsuits against 135 former directors and officers of 16 failed financial institutions. Given the discrepancy between the number of suits authorized and the number of suits filed, there clearly are many more suits in the pipeline, with even more lawsuits likely to be authorized in the months ahead.

As the FDIC’s failed bank lawsuits have begun to emerge, settlements of these cases are also slowly developing. The most noteworthy of the settlements so far is the well-publicized resolution of the FDIC’s lawsuit against three former WaMu officers. Although widely reported as having a value of $64.7 million, the cash value of the settlement was actually about $40 million, as discussed here. All but a very small portion of the cash component was paid for out of WaMu’s directors and officers’ insurance coverage. Although it is interesting that the individual defendants were called upon to contribute out of their own assets toward the settlement, the fact is that D&O insurance represented almost all of the cash component of the settlement.

The point here is that as the FDIC failed bank lawsuits accumulate in the coming months and as the filed cases move toward resolution, D&O insurers could be called upon to contribute amounts toward defense and resolution of these cases that in the aggregate could be massive.

6. Eurozone Crisis Includes Corporate Liability Exposures: The financial crisis gripping the European economic community has many dimensions. As governments wrestle with concerns about sovereign debt of Eurozone countries, as well as unemployment and unrest, companies exposed to European sovereign debt face perils of their own. As the fallout from the collapse of MF Global demonstrates, the hazards these companies face include, among many other concerns, liability exposures stemming from the companies’ investments in European sovereign debt.

Among the many disturbing features of MF Global’s demise is the speed of its collapse. And inevitably its collapse was immediately followed by an onslaught of securities class action lawsuit filings against the firm’s directors and officers. MF Global collapsed because of its exposure to European sovereign debt. The company is of course far from the only enterprise exposed to European debt. A host of other financial institutions and banks are also exposed and many more enterprises are exposed to the companies with European debt exposure. The possibility of sovereign debt rating downgrades or even debt write-offs looms over the firms carrying these assets on their balance sheets. 

Though the larger problems for the global financial marketplace clearly are of a much higher order, these issues also pose a challenge for D&O insurance underwriters. As noted above, there is not just the question of whether or not a company is exposed to European sovereign debt. There is also the far more difficult to discern question of whether or not a company is exposed to a company that is exposed to European sovereign debt. If the European difficulties were to evolve from a crisis to a disaster  – for example, though the withdrawal of one or more countries from the Euro – the aftereffects could be even more widespread. As MF Global’s rapid demise illustrates, these kinds of concerns are sufficient to quickly send a company into bankruptcy.

There is no way to know for sure, but I suspect strongly that as the New Year progresses, there will be a lot more to be said about European sovereign debt risk, at both the global and individual company levels.

7. Whistleblower Rules Go Into Effect, Whistleblower Lawsuits Emerge: The SEC issued its implementing regulations with respect to the Dodd-Frank whistleblower provisions in August 2011. In November 2011, the agency released its first report to Congress, as required by the Dodd-Frank Act, on whistleblower activities, as of the end of the 2011 fiscal year end on September 30, 2011.

Though the SEC’s report reflected only a seven week time period, it revealed a heightened level of whistleblower reporting. In just the first seven weeks, the program recorded 334 whistleblower reports, which implies an annualized level of nearly 2,500 reports. Interestingly, about 10 percent of all whistleblower reports during the period reflected in the study originated outside the United States. The SEC made no whistleblower bounty payments during the period reflected in the study, as permitted under the Dodd-Frank Act. It seems likely that as the agency makes bounty payments additional whistleblowers will be motivated to come forward.

With the implementation of provisions for potentially rich whistleblower bounties under the Dodd-Frank Act, there have been concerns that the incentives will not only lead to increased numbers of reports and increased enforcement activity, but that the regulatory action will in turn generate follow-on civil litigation.  As discussed here, a December 2011 securities class action lawsuit filed against Bank of New York Mellon give a glimpse of how heightened whistleblower activity could lead to increased follow-on civil litigation.

The lawsuit followed whistleblower reports that the company engaged in a scheme to fraudulently overcharge its customers for foreign currency exchange transactions. Although the whistleblower allegations first emerged in separate whistleblower lawsuits, the foreign currency exchange allegations are also the subject of whistleblower reports to the SEC. In addition to the securities class action lawsuit, the whistleblower allegations have also triggered multiple regulatory actions. The train of events that the BNY Mellon whistleblower allegations set in motion shows how the revelation of whistleblower allegations can lead not only to significant regulatory action but also to significant follow on civil litigation.

Given the substantial bounties for which the Dodd-Frank Act provides, it seems likely there will be increased numbers of reports to the SEC, which in turn could mean increased levels of enforcement activity. Along with all other concerns these possibilities present, there is also the concern that the increased number of reports and increased enforcement activity could, following the same sequence illustrated in connection with the BNY Mellon whistleblowers, lead to a surge in follow-on civil litigation. As we head into 2012, we will have to watch whether increased whistleblowing will lead to increased follow-on civil litigation, similar to the suit against BNY Mellon.

8. Aggrieved Overseas Investors Seek Litigation Alternatives Outside the United States: For many years, the United States was the forum of choice for aggrieved investors to seek redress, regardless of whether or not the investors purchased their shares in the United States. However, the U.S. Supreme Court’s June 2010 decision in Morrison v. National Australia Bank abruptly and unexpectedly eliminated access to U.S. courts for investors who purchased their shares outside the U.S. As a result, these investors increasingly are seeking alternative means to pursue their claims. Though we are still in the earliest days following the Morrison decision, there seem to be significant indications that aggrieved investors are developing a new playbook that includes resort to non-U.S. courts.

Investors’ pursuit of claims outside the United States was not long in coming after the Morrison decision and as its implications began to emerge in the lower U.S. courts. For example, in January 2011, after investors’ claims in U.S. court against Fortis were dismissed based on the Morrison decision, investors filed an action in Dutch court seeking remedies under Dutch law, but raising the same allegations that previously had been asserted in U.S. courts. Similarly, in December 2011, hedge funds and other investors whose action against Porsche had been dismissed from U.S. courts based on Morrison filed an action raising the same allegations against the company and its management in a German court.

Developments in other jurisdictions also reflect investors’ efforts to develop alternative remedies in the absence of access to U.S. courts. Among other things, at least two class actions pending in Canadian courts have not only survived dismissal motions but have had global classes certified. As discussed here, investors have also shown a willingness to pursue claims in a variety of other countries, including, for example, Germany and Australia. Recent statutory amendments in other countries (including, in particular, Mexico) may lead to investors in those countries to seek to pursue claims there.

Increased litigation and regulatory exposure outside the United States has a variety of implications, not the least of which concerns D&O insurance. As companies and their directors and officers face increased exposures on a global basis, D&O insurance policies will be called upon to respond in new and unusual situations. These developments in turn will require policies that are well adapted to the changing circumstances.

9. Judge Rakoff Rejects Settlement of SEC Enforcement Action Against Citigroup: Southern District of New York Judge Jed Rakoff’s November 2011 rejection of the $285 million settlement of the SEC’s enforcement action against Citigroup was not the first occasion on which Rakoff rejected a proposed SEC settlement. But this latest rejection has caused quite a stir, and not only because of the sharp rhetoric he used in rejecting the settlement (among other things, he derided the settlement because it “shortchanged” investors.) The most significant aspect of Rakoff’s rebuff is his refusal to accept a settlement in which Citigroup neither admitted nor denied the SEC’s allegations.

The SEC, perhaps stung by the Rakoff’s sharp words, and even more concerned about the possibility that it might be constrained from the entry into future no admit/no deny settlements, has appealed Rakoff’s ruling to the Second Circuit.  The SEC is right to be concerned about the implications of Judge Rakoff’s ruling. Following Judge Rakoff’s ruling, at least one other court has questioned a proposed SEC settlement that contained the “neither admit nor deny formulation.”

The problem for the SEC is that if proposed settlements cannot be approved unless the target defendants admit to wrongdoing, it may become significantly more difficult to settle cases and the SEC will be forced to take more enforcement actions to trial. This would not only put an enormous strain on the agency’s resources, but it could result in an overall reduction in the agency’s enforcement reach as it is forced to concentrate both more time and means on fewer enforcement actions.

The inability to enter into a no admit/no deny settlement presents a highly unattractive picture for target defendants as well. If fewer enforcement actions settle and more enforcement actions are forced to trial, the costs of defending an SEC enforcement action could escalate substantially. Target defendants unable to avoid the risks and uncertainty of trial without admitting wrongdoing will have to consider the possible effects of any admission on separate private civil actions. Any admissions in the enforcement actions could undermine their defenses in the separate civil actions. Moreover, depending on what is admitted, the admissions could have the further also undermine the target defendant’s insurance coverage by triggering a conduct exclusion on the defendant’s insurance policy.  

For these and a host of other reasons, the SEC’s appeal of Judge Rakoff’s ruling to the Second Circuit will be very closely watched. Crucially, however, the Second Circuit has not yet agreed whether or not it will actually hear the appeal of Judge Rakoff’s ruling. In additiona, there is always the possibility that Citigroup and the SEC will reach an agreement that Judge Rakoff finds acceptable (a footnote in his opinion rejecting the initial settlement does lay out a schematic for a settlement that would be acceptable to him, as I discuss here). Depending on how it all finally goes down, this case has the potential to be one of the top stories of 2012, as well.

10. A Big Fee Award in Delaware Gets Everybody’s Attention: Sometimes in litigation, a case that results in a big number is interesting in and of itself. And on that score, Delaware Chancellor Leo Strine’s October 2011 post-trial damages award of $1.263 billion in a lawsuit arising out of Grupo Mexico’s 2005 sale of Minerva Mexico to Southern Peru Copper Corporation certainly qualifies as interesting. (The later addition of pre-judgment and post-judgment interest increased the amount of the award to $2 billion). But what really has drawn attention to the case is Strine’s award to the plaintiffs’ of fees amounting to 15% of the damages and interest – that is, $300 million. A December 28, 2011 Wall Street Journal article entitled “Christmas Comes Early for These Lawyers” (here) describes the award.

As noted in a December 28, 2011 WSJ.com Law Blog post (here), the $300 million fee award may be the largest fee award ever in a shareholders’ derivative suit. Indeed it appears to be one of the largest fee awards in any corporate or securities case, approaching in order of magnitude the awards in the massive Enron and World Com cases (where the fees awarded were $688 million and $336 million, respectively).

Grupo Mexico undoubtedly will appeal both the damages award and the fee award. Whether or not the $300 million award ultimately withstands scrutiny, there are reasons to be concerned about the award. As noted above with respect to M&A litigation, Delaware’s courts are facing competition and appear to have been losing “market share” for corporate litigation. At least some interpreters have concluded, as reported in the Journal article linked above, that the plaintiffs’ fee award is a not-so-subtle signal to plaintiffs’ lawyers that Delaware’s courts are “open for business.” Other interpreters suggested that the fee award represents a “message to the plaintiffs’ bar.”

It is an obvious concern if Delaware’s judges feel obliged -- in order remain competitive in the jurisdictional competition and to try to preserve declining corporate litigation market share -- to prove that plaintiffs’ lawyers will be rewarded for resorting to the state’s courts.

Bloggers of the World, Unite!: Everyone here is pretty much reconciled to the fact that writing a blog is not exactly accorded equal dignity with, say, writing for The New Yorker. So we were all very gratified by the article in December 31, 2011 issue of The Economist entitled "Marginal Revolutionaries" (here), in whch the magazine reports that "the financial crisis and the blogosphere have opened up mainstream economics to new attack." Among other things, the article cites "the power of blogging as a way of getting fringe ideas noticed." The article recounts the experiences of the "invisible college of bloggers" whose revolutionary economic analyses have moved from the fringe to become part of the central economic dialog of our times.

In the immortal words of  the theme song of revolutionaries everywhere , "Allons enfants de la patrie, Le Jour de gloire est arrivé!" 

Perspective: Those worried about the troublesome events of the day may want to spend a few minutes contemplating "The Hisory of the Earth as a Clock" (here). In the grand scheme of things, the current crises are a mere passing cloud. (Source: UW-Geoscience).

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Surging levels of M&A-related litigation and a wave of lawsuits involving U.S.-listed Chinese companies drove federal securities class action lawsuit filings during 2011 to the highest levels since 2008. However, due to the growing wave of M&A-related litigation, much of which is filed in the state courts, the federal securities lawsuit filing statistics, while interesting, represent only a part of the overall corporate and securities litigation story. State court litigation, particularly state court M&A-related litigation, represents an increasingly important part of the picture.

According to my count (about which see more below), there were 218 securities class action lawsuit filings in 2011, well above the 176 filed in 2010, and also above the 1997-2009 average number of filings of 195, but below the 2008 credit crisis fueled total of 223. The 2011 filings were fairly evenly balanced throughout the year, with 113 in the year’s first half and 105 in the year’s second half.

The single largest factor driving the increase in 2011 filings were merger-related lawsuits. Sixty-one of the 218 filings during 2011 (or about 28%) were merger-related. By way of comparison, the M&A-related lawsuits represented slightly less than 20% of all 2010 filings, While these federal court filings represented an important part of the year’s overall federal securities class action lawsuit filings, these federal court filings represented only a fraction of all M&A-related litigation, most of which was filed in state court. Taking all of the cases, state and federal, into account, the number of M&A related lawsuits now greatly exceeds the number of federal securities class action lawsuits that are not merger-related. As discussed further below, the counts and relative comparisons can get tricky.

A second significant factor driving the 2011 securities class action lawsuit filings is the number of filings against non-U.S. companies, particularly U.S.-listed Chinese companies. 55 (or about 25%) of the 2011 federal securities filings involved non-U.S. companies.  The targeted non-U.S. companies are domiciled in 12 different countries. 39 of these 55 foreign companies are U.S.-listed Chinese companies (or U.S. listed companies that have their executive offices or principal places of operation in China). These 39 alone represent about 18% of all 2011 filings. Though the 39 lawsuit filings involving Chinese companies were heavily weighted to the first part of the year, there were still 13 in the year’s second half (which is more the 10 total filed against U.S.-listed Chinese companies during all of 2010) -- including two in December.

At one level, the fact that a quarter of all 2011 securities class action lawsuit filings involved non-U.S. companies is surprising, given that it seemed probable that the U.S. Supreme Court’s decision in the Morrison v. National Australia Bank case would result in a reduction in litigation involving non-U.S. But the 2011 actions involving non-U.S. companies either (like the cases involving the Chinese companies) involved firms with shares or ADRs listed on U.S. exchanges – and that therefore come within the requirements of Morrison – or were filed only on behalf of shareholders who purchased their shares in the U.S. The November 2011 action on behalf of the very few Olympus Corporation shareholders who purchased their Olympus ADRs over the counter in the U.S. is a good example of this latter kind of case. The Olympus case, which involves only a very small fraction of the company’s shareholders, show that Morrison is still having a very significant impact on filings, notwithstanding the number of filings involving non-U.S. companies.

The merger cases and the cases involving U.S.-listed Chinese companies together represented 100 of the 218 securities class action lawsuit filings during 2011, or nearly 46% of all filings. Clearly these two lawsuit phenomena were significant factors in driving 2011 filings, and more than account for all of the increase in 2011 filings compared to filing levels in 2010 and 2009.

The companies targeted in the 2011 securities class action lawsuit filings were very diverse, representing 114 Standard Industrial Classification (SIC) code categories. Unlike recent years in which filings against companies in the financial services industries predominated, filings against companies in the 6000 SIC code category (Finance, Insurance and Real Estate) represented only about 12% of all filings, compared to 2010, when filings against companies in that group represented about 20% of all filings, and 2009, when suits against financial companies accounted for over half of all filings.

This decline in the percentage of cases involving financial companies is largely due to the winding down of the subprime and credit crisis-related litigation wave. But while the wave is fading, it is not yet completely gone. There were still four new subprime relates securities class action lawsuit filings in 2011. However, none of these were filed during the year’s second half, which suggests that we could be very close to the end of the litigation wave, at least in terms of new filings.

There really was no SIC code classification that predominated in the 2011 filings. However, as always seems to be the case, there were a large number of cases involving companies in the life sciences sector. The SIC code classification with the single largest number of filings was SIC Code classification 2834 (Pharmaceutical Preparations), in which there were 11 lawsuits in 2011. Overall there were 13 lawsuits in SIC Code Group 283 (Drugs). There were another 5 companies sued in SIC Code classifications 3841 (Surgical and Medical Instruments) and 3845 (Electromedical and Electrotheropeutical Apparatus), meaning that overall there were 18 new lawsuits filed against life sciences companies, or about 8% of all 2011 filings. These 2011 figures were down from filings against companies in the SIC Code categories in 2010, when there were 27 lawsuits against companies in these sectors, representing about 15% of all filings.

Another sector that had a significant number of filings was SIC Code Group 737 (Computer Programming, Data Processing and Other Computer-Related Services). There were a total of 21 lawsuits involving companies in this group. There were also another 11 lawsuits filed against companies in SIC Code Group 367 (Electrical Components and Processors), including nine in SIC Code classification 3674 (Semiconductors) alone. Together, these various technology categories accounted for 32 of all 2011 filings, or about 15%. 

The 2011 securities class action lawsuits were filed in 47 different federal district courts, although a few courts accounted for most of the filings. 48 of the filings, or about 22%, were in the Southern District of New York (both the merger filings and the lawsuits against Chinese companies helped to swell the number of filings in this judicial district). The Central District of California accounted for 33 of the filings (again swollen by filings involving Chinese companies), and the Northern District of California accounted for 16, largely as a result of the number of lawsuits involving technology companies. These three districts together accounted for 97 of the 2011 filings, or nearly 45% of the total.

Discussion

My tally of the 2011 securities class action lawsuit filings will differ from other published counts of the 2011 lawsuits. My count is larger than the tally of the Stanford Law School Securities Class Action Lawsuit Clearinghouse, because I included all federal court merger objection lawsuits while the Stanford web site chose to omit some. My count is smaller than that of NERA Economic Consulting (about which refer here) for a number of reasons, primarily because I count multiple lawsuits involving a corporate defendant only once, whereas NERA will count multiple lawsuits in multiple jurisdictions involving the same company multiple times, unless the separate lawsuits are consolidated in a single case in a single jurisdiction.

The differences in counting the M&A lawsuits underscores a recurring general difficulty with trying to count federal securities class action lawsuits. There is an inevitable definitional issue, as deciding whether or not to “count” individual cases presents recurring questions abut exactly what it is that you are trying to count. The M&A related cases present a particularly challenging category of cases, because increasingly a single merger transaction will give rise to multiple lawsuits in multiple different jurisdictions, sometimes based on a differing legal theories. Because there cases are sometimes filed in different states’ courts, or in both federal and state courts, there are recurring and vexing issues involved with trying to count these cases, all of which is compounded by the fact that it can be very difficult to accurately track the state court filings.

Though I have elected to include all federal court M&A-related lawsuit filings in my tally, these filings represent only a fraction of all M&A-related lawsuit filings in 2011. The vast majority of 2011 corporate and securities lawsuits – particularly the merger objection cases – were filed in state court. The fact that my 2011 count, like most of the published securities class action lawsuit filing counts, is based on federal filings necessarily means that it omits numerical recognition and analysis of the state court filings. At least from a frequency standpoint, the exclusively federal court focus could lead to a distorted impression of corporate and securities litigation activity levels.

At the same time, my inclusion of the federal merger objection lawsuits could result in a distortion the other way as well. There is a very legitimate argument that these cases should not be included, or at least many of them should not be included, in a tally of federal securities class action lawsuit filings. Some of them may not allege a breach of the U.S. securities laws. For that reason, the Stanford website omits some of these cases. I decided to go ahead and include all of them and not just some of them, first, because it can become extraordinarily difficult to make selections at the individual case level. The categorical distinctions are not always apparent. But the larger reason I decided to include these is that I felt that without including these cases, the overall levels of federal court litigation might appear understated.

There is another significant way in which the federal court litigation may be understated, at least as a matter of analysis. That is, most analysis of federal securities lawsuit filings levels focus exclusively on the absolute numbers of filings. Though the absolute number of annual filings has fluctuated over the years, they have generally held pretty steady, even allowing for the occasional annual blip up or down. But a simple focus on the absolute numbers of filings levels does not consider the relative filing levels – that is, the number of filings relative to the number of public companies.

The fact is that there are significantly fewer public companies than there were only a few years ago, due to bankruptcies and mergers, along with declining numbers of IPOs. As I discussed here, by one estimate, there are 40% fewer public companies than there were in 1997, yet the annual number of new securities class action lawsuits is more or less consistent with that earlier time. All of which supports the argument that because absolute filing numbers have held steady while the number of publicly traded companies has declined, overall filing levels have actually increased over time. In any event, regardless of what you make of this argument, I think that consideration of relative filing levels is a part of the analysis that is routinely omitted from the consideration of the changes in annual litigation activity.

Looking ahead to 2012, it seems probable that the wave of new lawsuits involving Chinese companies will wind down, since sooner or later the plaintiffs’ lawyers will simply run out of companies to sue. However, there seems to be no reason to expect that the surge of M&A-related litigation will not continue to grow. The procedural and substantive barriers to traditional securities litigation and the prospects for quick settlements and attorneys’ fee recoveries in the M&A suits have encouraged many of the smaller plaintiffs’ securities firms to adapt M&A litigation as their new business approach. The vexing problems this type of litigation presents will increasingly challenging in the New Year. My own view is that the growth in M&A litigation represents a secular rather than a merely cyclical change.

The bottom line is that with growing levels of M&A-related litigation and relatively greater frequencies of federal securities class action lawsuit filings, the likelihood that any particular public company will get hit with a serious corporate or securities lawsuit has never been greater (as I analyze in greater detail here).

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One of the most noteworthy recent trends in corporate and securities litigation has been the dramatic growth in the frequency of lawsuits relating to mergers and acquisitions activity. These lawsuits are not only becoming increasingly more common, but also increasingly more costly. The growth in this litigation activity has been so rapid that the significance of these trends may remain underappreciated.

In this post, I first set the stage to examine these trends by reviewing the current landscape for traditional securities class action litigation, which differs in many ways from current conventional wisdom, and which provides a context for assessing the merger-related litigation trends. I then review important recent developments in M&A related litigation activity, both in terms of increasing frequency and escalating severity. I conclude with a review of the implications of these developments.

The Current Securities Class Action Litigation Environment

Traditionally, any discussion of corporate and securities litigation focused primarily (and sometimes exclusively) on securities class action litigation. In many ways, this makes perfect sense, as these kinds of lawsuits were for many years the most frequent and the most severe type of corporate and securities lawsuit.

More recently, the relative significance of securities class action litigation as a percentage of all corporate and securities litigation risks has shifted. As the insurance information firm Advisen has well-documented (refer here), securities class action litigation activity as a percentage of all corporate and securities litigation has declined dramatically over the past several years. Whereas securities class action lawsuits once represented among the most likely sources of litigation, in 2010 securities class action lawsuits represented less than 16% of all corporate and securities lawsuit filings.

As Advisen has also documented and as is discussed below, one reason for this relative decline is the growth in M&A-related litigation filings. Moreover, as is also discussed below, securities class action litigation is not the only source of corporate and securities litigation severity exposure; M&A-related lawsuits also represent a growing severity risk.

But, to set the stage for the discussion of M&A-related litigation trends and their significance, there are some important misperceptions about traditional securities class action litigation activity that I want to address.

A frequently recurring question is whether overall securities class action litigation filings are declining. Usually this discussion focuses exclusively on the absolute number of annual new securities class action lawsuit filings. In 2010, depending on the source to which you are referring, the absolute number of new lawsuit filings either declined compared to historical averages ( e.g., refer here regarding  the 2010 Cornerstone Research study) or held steady or perhaps grew (refer here regarding  the 2010 NERA Economic Consulting  study). The reasons these studies reach different conclusions are worthy topics for a separate blog post. But regardless of the conclusions about the absolute numbers of annual lawsuit filings, the key fact often  missing from the analysis is a consideration of how the absolute number of filings relates to the changing number of public companies.

The fact is, since, 1999, the number of companies listed on U.S. exchanges has declined every year. If you refer to the annual data from the World Federation of Exchanges (here), you will see that the number of companies listed on U.S. exchanges has declined from over 8,500 in 1999 to about 5,100 in 2010 – a decline of about 40%.

When the absolute number of annual lawsuits is compared to the declining number of companies trading on U.S. exchanges, it is clear that the frequency of securities class action lawsuit filings has not declined, but arguably is increasing, and at a minimum is at least holding steady.

But while frequency has not declined, median severity has increased. In 2010, the median securities class action settlement was $11.1 million, which is well over double the 1999 median settlement of $5.0 million and triple the 1996 median settlement of $3.7 million. These figures are not adjusted to account for the effect of economic inflation, but these figures nevertheless reflect a  substantial increase.

In short, even amidst the changing litigation landscape in which securities class action lawsuit filings have declined as a percentage of all corporate and securities litigation, the threat of securities class action litigation remains a very serious litigation exposure for publicly traded companies.

It is against this backdrop that the growth in M&A litigation must be considered.

The Exploding Growth in M&A-Related Litigation

Whatever else you want to say about M&A-related litigation, it is clear that there is a lot more of it now than there used to be, both in terms of absolute numbers of lawsuits filings and also relative to the number of merger transactions. Indeed, Advisen has commented that the number of M&A-related lawsuits has “skyrocketed “in recent years.

Reported data (refer for example here and here) show that as recently as ten years ago, there were only a handful of M&A related lawsuits filed each year. For example, in 2001, there were only four M&A related lawsuits filed, compared to the 341 filed in 2010 (up from “only” 191 the year prior). Just in the four- year period ending in 2010, the annual number of merger-related lawsuit filings has increased over 600%.

These numbers are even more startling when it is considered that these lawsuit filings are increasing even as the number of merger transactions is declining. The number of merger targeted companies declined in each of the three years from 2008 to 2010, yet the absolute number of merger-related lawsuits increased in each of those three years relative to the prior year. In 2010, there were 214 fewer companies targeted for mergers than there were in 2007, representing a decline of over 37%. Yet the number of merger-related lawsuits filed in 2010 was more than triple the number filed in 2007. Today, one out of every two companies announcing an acquisition is sued, and that is true whether or not the acquisition is friendly or hostile, and even whether or not the board of the target company has accepted or rejected the proposed acquisition.

There are a host of possible explanations for these filing trends. The first is that a changing case law environment has made securities class action litigation a more challenging game for plaintiffs (for example, as a result of the U.S. Supreme Court’s holdings in the Tellabs case and the Morrison case). In addition, the declining number of public companies over the past several years means that there are fewer prospective securities class action litigation targets. These developments may have encouraged plaintiffs’ lawyers to seek out an alternative business model.

And in the M&A related litigation, the plaintiffs’ attorneys seem to have found relatively easy money, as these cases often involve a quick resolution (due to the fact that the parties are often highly motivated to complete the underlying transaction) and the payment of plaintiffs’ attorneys’ fees, which average around $400,000 per case. These attributes of M&A related litigation were discussed in an August 27, 2011 Wall Street Journal article, written from the shareholders’ perspective, entitled “Why Merger Lawsuits Don’t Pay” (here) and in a July 12, 2011 Fox Business article entitled “M&A Lawsuits Skyrocket as Fee-Hungry Law Firms Smell Easy Money” (here).

The surest sign that M&A-related litigation represents an attractive proposition for the plaintiffs’ lawyers is the level of lawsuit competition that merger transactions increasingly are engendering. Increasingly, the announcement of a merger can trigger multiple separate lawsuits filed by separate plaintiffs’ firms in multiple separate jurisdictions, producing complicated procedural and jurisdictional issues (refer for example here and here) and also adding dramatically to the cost of litigation.

This latter point, about the costs involved, brings us to the heart of the matter. Not only are M&A cases increasingly more frequent, they are increasingly more costly, in a number of ways. I emphasize the costs involved because there is a perception in certain quarters that while M&A lawsuits may be numerous, they represent only a minor nuisance. To put this in insurance terms, M&A lawsuits are described as a high frequency, low severity risk. In fact, this is something I myself have said in the past. However, the truth now is, when all of the costs are considered on an all-in basis, that the cases actually are quite expensive, and increasingly are becoming more so.

Start with defense expenses. Because these cases often involve high stakes and short fuses, their defense often can trigger an explosion of legal fees. When you add in the additional expense involved when there are multiple cases in multiple jurisdictions, the expenses multiply. And when you add in the fact that these cases increasingly are continuing on even after the underlying merger transaction has closed, the defense costs can increase exponentially. Much of the time, these defense expenses are borne by the target company’s D&O insurer.

The D&O Insurers not only absorb the sometimes massive defense expenses, but they also often have to absorb the plaintiffs’ fees as well, as the payment of the plaintiffs’ attorneys’ fees often is a covered component of the case settlement. (Refer here for a recent discussion of the issues surrounding D&O coverage for a plaintiffs’ fee request in a derivative lawsuit settlement.)

The plaintiffs’ fees alone can sometimes be staggering. In the August 2010 Morgan Kinder lawsuit, the plaintiffs’ fee requests amounted to as much as $50 million (that is, 25% of the $200 million settlement, refer here). The plaintiffs’ fee request in the September 2011 Del Monte settlement was $22.3 million (refer here). And in the May 2010 settlement of the Atlas Energy case, the plaintiffs’ fee request was as much as $17.25 million ($25% of the $69 million settlement, refer here).

It should be emphasized that the plaintiffs’ fee request can be substantial even where there is otherwise no cash component to the settlement. For example, in the April 2010 XTO Energy settlement, in which there otherwise was no cash component, the plaintiffs’ fee request was $8.8 million (refer here) . In the September 2009 Pepsi Bottling settlement, which otherwise did not involve a cash payment the plaintiffs’ fee request was $7.7 million (refer here). Similarly in the February 2011 Atlas Energy case, the fee request was $4.0 million (refer here).

And beyond that – and the most important point here – it is increasingly common for the settlement of these cases to also involve significant cash payments. Indeed, the settlements in many of these cases suddenly are starting to resemble in order of magnitude the settlements of securities class action lawsuits. Thus, the Kinder Morgan case, as referenced above,  settled in August 2010 for $200 million (refer here); the Del Monte case, as noted above,  settled in September 2011 for $89 million (refer here); the May 2010 ACS settlement was $69 million (refer here); and the 2011 Intermix Media settlement was $45 million (refer here). In many instances, where these settlement amounts are not designated as an increase in the acquisition price, these settlement amounts may be insurable.

And not only have these cases become more expensive in every way, there are signs that the competition between jurisdictions could even further exacerbate this situation. At November 11, 2011 Columbia Law School conference about the Delaware Chancery Court, various observers commented on the question of whether the Delaware courts, the traditional forum for this type of litigation, were losing “market share” to other jurisdictions’ courts, possibly because plaintiffs’ lawyers believe they (and their clients too, don’t forget) think they can do better elsewhere.  Francis Pileggi has a good summary of the discussion at the conference in a November 11, 2011 post on his Delaware Corporate & Commercial Litigation blog (here).

As Alison Frankel discussed in a November 14, 2011 post on her Thomson Reuters News and Insight blog, here, this debate compelled one Delaware jurist to conduct a visual demonstration to try to prove that plaintiffs’ lawyers can expect to recover substantial fees in Delaware courts. It is an obvious concern if Delaware’s judges feel obliged -- in order remain competitive in the jurisdictional competition and to try to preserve declining market share -- to prove that plaintiffs’ lawyers will be rewarded for resorting to the state’s courts.

Discussion

Contrary to popular perception, the new M&A litigation model represents both a high frequency and a high severity risk. The severity risk is particularly acute given the exacerbating effects of escalating defense expenses and rising plaintiffs’ attorneys’ fees. Increasingly, M&A litigation is a recurring and very expensive feast for which D&O insurers are picking up increasingly larger tabs.

Another important point that should not be lost here is what the increasing risk of M&A related litigation means in combination with the ongoing risk of securities class action litigation. When all of the factors are considered – including the declining number of public companies and the increasing absolute number of lawsuits – it is apparent that publicly traded companies today  face a significantly increased risk of serious corporate and securities litigation than they did in the recent past.

Indeed, the probability of a U.S.-exchange listed company facing a merger lawsuit or a securities class action lawsuit in 2010 was more than double what the equivalent probability was as recently as 2006, as the number of public companies has declined and the number of lawsuits has increased. To be specific, the probability in 2006 that any given public company would get hit with a merger lawsuit or securities class action lawsuit was 2.8%; the equivalent probability in 2010 was 5.7%.  The probability of any given company being involved in serious corporate and securities litigation has never been greater.

All of these developments mean that publicly traded companies’ litigation risks represent an increasingly  serious and expensive problem, and that M&A-related litigation is increasingly a big part of that problem – in general, of course, but also for the companies’ D&O liability insurers as well.

Now, I am not the first to make some of these points about M&A-related litigation. But I think there still is a perception that if M&A-related litigation represents a problem for the D&O insurance industry, it is principally a problem for the insurers that are active in providing primary D&O insurance (refer for example here), and that this is not a problem for the carriers that confine their public company D&O exposures to the excess layers. The point I hope the above analysis gets across is that when you take into account the defense expenses, the plaintiffs’ fees and the M&A related indemnity exposure, the M&A-related litigation increasingly represents a risk for all of the carriers in companies’ D&O insurance programs. M&A litigation increasingly involves a threat of a flame-through loss, increasingly approaching the order of magnitude of securities class action litigation.

With both increasing frequency and severity, the casual observer might well assume that pricing for D&O insurance would also be increasing. The casual observer’s assumption would, however, fail to take into account the iron laws of supply and demand. There are more D&O insurers now than there were ten years ago, representing in the aggregate much greater levels of insurance capacity, while at the same time, there are many fewer public companies. What you have are increasing numbers of D&O insurers chasing decreasing numbers of public company D&O insurance buyers.  As a result, overall industry pricing has declined steadily since 2003.

It might well be asked how long this combination of circumstances in the D&O insurance marketplace can continue. Some commentators are already proclaiming that they thing they see a market turn on the horizon. I am making no predictions. I have been in this business one way or the other for nearly three decades and I think that every single day during that period someone has been predicting a hard market. We are still waiting. All I know is that if someone were looking around for reasons to explain increasing D&O insurance pricing (if it were in fact increasing), they wouldn’t have to struggle to find explanations. However, I also know that the insurance industry rarely changes as an act of will – it usually changes only as a matter of necessity. Until necessity requires, then, the D&O insurance industry likely will continue on in the same direction – even as the dashboard indicator lights flash caution.

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Overall levels of corporate and securities litigation declined during the third quarter of 2011 relative to recent quarters but 2011 annualized filings remain above historical levels, according to a recent report from the insurance information firm Advisen entitled “Securities Litigation Activity Dips, An Advisen Report: Q3 2011,” which can be found here. My own survey of the third quarter 2011 securities litigation filing activity can be found here.

Preliminary Notes

It is critically important to recognize that the Advisen report uses its own unique vocabulary to describe certain of the corporate and securities litigation categories.

The “securities litigation” and “securities suits” analyzed in the Advisen report include not only securities class action lawsuits, but a broad collection of other types of suits as well, including regulatory and enforcement actions, individual actions, derivative actions, collective actions filed outside the U.S. and allegations of breach of fiduciary duty. All of these various kinds of lawsuits -- whether or not involving alleged violations of the securities laws -- are referred to in the aggregate in the Advisen report as "securities suits."

One subset of the overall collection of "securities suits" is a category denominated as "securities fraud" lawsuits, which includes a combination of both regulatory and enforcement actions, on the one hand, and private securities lawsuits brought as individual actions, on the other hand. However, the category of "securities fraud" lawsuits does NOT include private securities class action lawsuits, which are in their own separate category ("SCAS").

Due to these unfamiliar usages and the confusing similarity of category names, considerable care is required in reading the Advisen report.

The Report’s Findings

There were 316 “securities suits” (as that phrase is used in the Advisen report) during the third quarter of 2011, which is down from the 367 “securities suits” filed in 2Q11 and 421 filed in 1Q11. This quarterly decline is attributable in part to the decline of breach of fiduciary duty suits (primarily merger objection suits) in 3Q11, when there were 76 breach of fiduciary duty suits filed, compared to 130 filed in the year’s second quarter.

In addition, the quarterly decline in overall corporate and securities lawsuit filing activity is also due in part to the decline in 3Q11 compared to 1Q11 in what the Advisen report calls “securities fraud suits” (which as noted above encompasses both regulatory actions as well as private securities lawsuits brought as individual rather than class actions). According to the study, the number of these so-called “securities fraud suits” declined to 109 in the third quarter, compared to 156 in the first quarter and 101 in the second quarter.

According to the Advisen study, the number of securities class action lawsuits filed during the third quarter was also down relative to the second quarter. The Advisen study reports that there were 56 securities class action lawsuits filed during 3Q11, compared to 61 during the second quarter. Though the third quarter filings were down relative to the prior quarter, the third quarter filing activity level was higher than the 2010 quarterly filing average of 47. Over 70 percent of Q311 class action lawsuit filings named companies in four sectors as defendants: information technology, healthcare, financial and industrial.

Litigation involving non-U.S. companies, filed both in the U.S. and elsewhere, was an important part of “securities suit” filings during the third quarter and overall during 2011. In the first three quarters of 2011, 16 percent of all “securities suits” were filed against non-U.S. companies, compared to 11 percent for both 2009 and 2010. During the third quarter, fifteen percent of all “securities suits” were filed against non-U.S. companies, down from 19 percent during the second quarter.

With respect to this activity involving non-U.S. companies, an increasing percentage of this “securities suit” activity is outside the U.S. The study reports that in the first three quarters of 2011, there were 55 “securities suits” filed in courts outside the U.S., 17 of which were filed during the third quarter. These 55 cases represent five percent of all YTD “securities suits,” which is “higher than the 3-percent level recorded in most recent years.”

Many of the cases involving non-U.S. companies in U.S. court involve Chinese companies. The number of “securities suits” filed in U.S. court involving Chinese companies has rise from five in 2009 to 24 in 2010, and up to 55 during the first three quarters of 2011.

Even though we are now well past the peak of the credit crisis (at least as a temporal matter if not as an economic matter), overall corporate and securities litigation activity remains highly concentrated in the financial sector. According to the Advisen report, 35 percent of all “securities suits” filed during the third quarter targeted companies in the financial sector. A large portion of the “securities suits” filed against financial companies in the third quarter involve regulatory actions, as 48 percent of all “securities suits” filed against financial companies involved regulatory actions.

But while the filing activity concentration in the financial sector remains elevated, the 3Q11 “securities suits” were “more broadly dispersed” during the quarter “than in previous years, especially compared to 2008 and 2009.” Suits against information technology firms and healthcare companies each represented 13 percent of all “securities suits,” while suits against industrials represented 11 percent of all such suits.

The average value of settlements of “securities suits” during the third quarter was $17.4 million, down from $22.8 million in the second quarter and from $18.2 million for all of 2010. The average securities class action lawsuit settlement during the quarter was $45.7 million.

Advisen 3Q11 Securities Litigation Webinar: On Thursday November 17, 2011 at 11:00 am EST, I will be participating in one-hour long Advisen webinar to discuss third quarter 2011 corporate and securities litigation filing activity. The panelists for this free webinar will also include Steve Gilford of the Proskauer law firm, Alliant Insurance’s Susanne Murray, and Advisen’s Dave Bradford. The panel will be moderated by Advisen's Jim Blinn. More information about this free webinar, including registration information, can be found here.

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Securities class action lawsuit filings continued to accumulate during the third quarter of 2011, and the filing levels remain on pace for an above average year of securities class action litigation. As was the case in earlier quarters this year, the third quarter filing level was significantly buoyed by merger-related litigation and by lawsuits involving U.S.-listed Chinese companies, although to a lesser extent than prior quarters. There are some other interesting trends emerging as well.

By my count, there were 49 new securities class action lawsuits filed in the third quarter of 2011, bringing the year to date total through September 30 to 154. (Please see below for some note about “counting “and the reasons my count may differ from other published tallies.) The third quarter filing levels held steady with the number in the second quarter of 2011, when 49 lawsuits were also filed. The 154 filings year to date implies an annual filing total of about 205, which would be above the 1997-2009 average of 195.

The two most significant factors in the securities lawsuit filings during the first nine months of the year are merger-related lawsuits and lawsuits involving U.S.-listed Chinese companies. Of the 154 federal securities lawsuits filed through September 30, 47 (30.51%) were merger-related. Non-U.S. companies were named as defendants in 43 of the securities lawsuits (27.9%) filed during the first three quarters, of which 32 involved U.S. listed Chinese companies (20.79%).

Though the merger-related filings and lawsuits against U.S.-listed Chinese companies both continued to accumulate in the third quarter, both trends were diminished in the third quarter compared to the year’s first half. During the third quarter, 11 of the 49 lawsuit filings (22.54%) were merger-related, and 6 of the 49 filings (12.24%) involved U.S.-listed Chinese companies, both figures down compared to the year to date as a whole.  

The 154 YTD lawsuit filings involve a surprising diversity of companies. The companies named as defendants in the securities lawsuit filings during the year’s first nine months represented 91 different Standard Industrial Classification codes (SIC). Unlike recent years, in which filings against financially-related companies predominated, the SIC code categories with the largest number of filings during the first three quarters of 2011 reflect industries that historically have been the focus of securities litigation.

Thus, the SIC code categories with the largest number of securities lawsuit filings so far this year are SIC code categoies 3674 (Semiconductor and Related Devices) and 7372 (Prepackaged Software). The next largest SIC code category includes one industrial group that has also been a frequent target in the past, SIC Code category 2834 (Pharmaceutical Preparations), in which six companies have been sued year to date. Another category that has also had six new filings so far this year is a group that in the past has not seen the same level of litigation activity, SIC Code category 1311 (Crude Petroleum and Natural Gas).

The federal securities class action lawsuits during 2011’s first nine months have been filed in 45 different federal district courts, but just two courts have accounted for more than half of the filings. During the first three quarters of the year, there were 33 new securities class action lawsuit filing in the Southern District of New York, and 29 in the Central District of California. Both of these figures were significantly increased by filings involving U.S.-listed Chinese companies. In the Southern District of New York, 21 of the 33 filings through September 30 involved non-U.S. companies, of which 13 were U.S.-listed Chinese companies. In the Central District of California, 13 of the 29 lawsuits filed during the first nine months of the year involved U.S.-listed Chinese companies.

In the overall category of corporate and securities litigation, including litigation filed in state courts, the merger-related litigation has been and remains the predominant story. By my count, during the first three quarters, there was merger objection litigation filed involving at least 129 transactions, and accounting for at least 185 different lawsuits (counting lawsuits filed in both federal and state court). These figures only take account of the lawsuits of which I am aware and are almost certainly understated. In other words, if you are attempting to track corporate and securities litigation and you are only monitoring federal securities class action litigation, you are missing a great deal of the action. In fact, you could be missing the majority of the action.

As I noted at the outset, my lawsuit count may differ from other published accounts for a number of reasons. First, I include in my count class action lawsuits asserting violation of the federal securities laws but that are filed in state court. There were at least two of these during the third quarter of 2011. In addition, I may not always decide to include the same merger-objection lawsuits in my tally as do other sources that track securities lawsuit filings. I include the merger-related lawsuit if it is in federal court and if it alleges a violation of the federal securities laws.

The decision to include the above described categories of cases and other factors will likely cause my count to be slightly higher than other published tallies. I think the tallies will remain directionally consistent but the differences might be enough to lead to differences of opinion about, for example, whether or not the number of annual filings is increasing or declining, or how the annual filing levels compare with annual averages.

The Towers Watson 2011 D&O Insurance Survey Form Released: Towers Watson has released the 2011 survey form for its annual survey of D&O insurance buying patterns. Everyone in the industry benefits from Towers Watson’s annual survey, the summary report for which Tower Watson makes freely available. Because everyone benefits from it, we all have a stake in making sure that there are sufficient responses to ensure that the survey results are meaningful. I hope everyone will take the time to ensure that as many D&O insurance buyers as possible will complete the survey. The survey can be found here.

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In the most recent of the securities litigation analyses, on July 26, 2011, NERA Economic Consulting issued its report on the securities class action lawsuit filing during the first six months of 2011. In a report entitled “Recent Trends in Securities Class Action Litigation: 2011 Mid-Review” (here), NERA  suggests, perhaps contrary to other recently published reports, that securities suit  filings during the first half of the year were  “on the rise” and “indeed unusually high.” As I discuss below, the seeming variance among the various published reports is a reflection of different counting methodology. I have comments about that below.

According to NERA (and by rather stark contrast to the conclusions of the analyses of the recently released Cornerstone Research report), during the first half of 2011 “securities class action lawsuits were filed at the second highest semi-annual rate in the last eight years.” According to NERA, there were 130 filings in the first half of the year. If the filing rate were to continue at the same pace for the rest of the year, “there would be 260 filings in 2011, the highest level since 2002, and the fourth highest in the 16 years since the passage of the Private Securities Litigation Reform Act.”

According to NERA, a decline in the year’s first six months was offset by a “surge in suits targeting Chinese companies.” Over a third of the lawsuits during 2011’s first half were filed against foreign domiciled issuers, a rate which is “extraordinary by historical standards,” and “more than double the prior peak of 2004.”

The filings themselves has “continued to migrate from the Second Circuit to the Ninth Circuit,” as the mix of companies targeted has shifted away from financial companies and toward technology companies. Filings against companies in the financial sector has declined from a 2008 peak of 49 percent to just under 20 percent in the first half of 2011. Filings in against companies in the electric technology and technology services sector represented 22 percent of filings in the year’s first six months.

The NERA report notes that filings activity continues to be positively correlated with market volatility. Controlling for market returns, volatility is positively and statistically significantly correlated with quarterly filings from the second quarter of 1996 through the second quarter of 2011. However, the correlation is “not one-for-one.” Indeed, market volatility and market returns together explain only about 20 percent of the variance in quarterly filings. In other words, volatility is important but it does not come close to telling you everything you need to know.

In looking at the status of cases from the 2000 filing year, the NERA report shows that about 63% of all cases from that year have settled and about 37% percent have settled.

With respect to the 245 credit crisis cases filed as of June 30, 2011, 79 have produced “current dismissals” and “only 23 settlements. “

With respect to first half 2011 settlements, the average settlement was $23 million, which is sharply down from the 2010 average settlement of $108 million. The median settlement during the year’s first six months was only $6.3 million, down sharply from the all time high median settlement of $11 million in 2011. The proportion of cases settling for less than $10 million reached a post-2006 high during the first half of 2011, when 58 percent of cases settled below $10 million , up from 41 percent in 2010.

The report speculates that one reason for the lower settlement levels may be that during the first half of 2011 “cases may have been more apt to settle within insurance limits, possibly due to defendants’ reduced ability to pay.” Of the 15 out of the 48 first half settlements for which NERA was able to determine the insurance contribution, insurance paid all of the settlement in eight cases, between 71 and 81 percent in three and an unspecified rate in the remaining four.

The full report, which has a wide variety of other interesting and useful information, warrant reading at length and in full.

Discussion

It is  purely coincidental that the NERA report’s publication came in such close conjunction with the publication of the Cornerstone Research report. But because they appeared so close in time, it is impossible not to compare the two reports’ findings. The contrast between the reports’ conclusions is striking. The Cornerstone Report suggested that securities class action laws filings are in decline and trending toward historically lower levels. The NERA Report, by contrast, suggests that filings “are on the rise” and “unusually high.”

What in the world is going on? Aren’t these two reports supposed to be analyzing the same thing?

The casual reader will be forgiven for assuming that the two reports are analyzing the same thing. But careful reading of the small print and footnotes will disclose that the two reports are not analyzing the same thing. Or to put it more accurately, they are not counting the same things in the same ways. I suspect there are even more differences in what is counted and how it is counted than can be discerned from the reports themselves. But even just based on what can be gleaned from the reports,, the NERA Report (as described in its footnote 1), counts separate filings against a company in separate circuits as separate lawsuits, at least until they are consolidated. Cornerstone, by contrast, counts each target defendant company only once. Cornerstone also counts separate lawsuits brought by separate classes of securityholders separately, at least until consolidated.

I know from my own experience that another very difficult category has to do with the lawsuits arising from M&A-related transactions. Whether or not to include these cases can only be decided on a case by case basis, and reasonable people almost certainly might reach different conclusions , which could produce significantly different lawsuit counts.

My point here is that how you count affects what you count. And what you count affects the ultimate outcome of your count. The net effect is that we have two very reputable analytic firms reaching quite different conclusions about the level of securities class action lawsuit filing activity during the first six months of 2011. Truthfully, that is the reason I keep my own count, because I find it too confusing trying to make sense out of the conflicting conclusions of the reporting firms.

The problem for everyone is that these conflicting conclusions get picked up in the mass media and reported as if they representing absolute conclusions rather than alternative analyses based on mixed data. These conflicting reports create a great deal of confusion among the general public.

I think part of the problem here as the respective commentators act as if they are publishing their data in a vacuum. Nothing could be further from the truth. I suspect to a very high degree of moral certainty that every single reader that reads any one of these report reads them all. Not only that, but the authors of these reports read each others reports and they know that everyone that reads their reports reads all the reports.

 It would be extraordinarily helpful if the authors would acknowledge this reality up front (not in footnotes, not in reduced text, not in text buried deep within the document) in a simple cover page statement that declares the counting methodology used and that explains how that contrasts with counting methodologies used in other published reports. It would be even more helpful if this initial disclosure explained how the methodology selected affects the ultimate count.

By making these remarks here, I hope that no one concludes that I am being critical of anyone. To the contrary, I am one of many people who are very grateful that these high-powered analytic firms are willing to publish their reports and make their analyses available for free. These reports are extraordinarily valuable and helpful. My point is simply that these reports would be even more useful if the reports were to recognize the context within which they are read.

Finally, I want to be sure to acknowledge the incredibly fine work that the folks at these firms produce. On behalf of myself and everyone else that devours these reports as soon as they are published. I would like thank everyone associated with the production of these reports. And since this particular post is about the NERA report, I would like to salute all my friends at NERA and to thank them for another fine report. I hope no one interprets my curmudgeonly remarks as anything other than a friendly suggestion.

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Decreased credit crisis-related filings partially offset by an influx of new filings related to M&A transactions or involving Chinese companies resulted in slightly decreased overall levels of securities class action litigation filings during the first half of 2011, according to a recent report entitled “Securities Class Action Filings: 2011 Mid-Year Assessment,” jointly published by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse. The report can be foundhere and the accompanying July 26, 2011 press release can be found here. My own analysis of the first half filings can be found here.

According to the report, there were 94 securities class action lawsuit filings during the first half of 2011, compared to 104 in the second half of 2010. The 94 first half filings annualizes (using calendar days rather than months) to 190 filings, which is slightly below the 1997-2010 annual filing average of 194. (Cornerstone’s lawsuit count may differ slightly from other published tallies because, among other things, it counts multiple complaints against the same defendants only once and because it does not count state court filings.)

The report notes that the quarterly number of filings has generally declined during the past twelve months. Quarterly filings decreased from 56 in the third quarter of 2010 to 48 in the fourth quarter of 2011, 46 in the first quarter of 2010 and 48 in the second quarter of 2011.

One factor driving the first half 2011 filings was the upsurge in lawsuits against Chinese companies. There were 24 securities class action lawsuits against Chinese companies in the first half of 2011, with 23 of those actions involving reverse merger companies, up from 12 filings against Chinese companies, nine involving reverse merger companies, in all of 2010. By the same token there were 21 M&A-related filings in the first six months of 2011, “continuing a new pattern” that emerged in the second half of 2010, when there were 27 M&A-related lawsuits.

The lawsuits involving Chinese companies and M&A-related activity collectively represent a very substantial part of all securities class action lawsuit filings in the first six months of 2011. These two groups of lawsuits together represented 46.8 percent of all filings in 2011’s first half, up from 32.7 percent in the second half of 2010. Excluding these two categories, there were otherwise only 50 securities class action lawsuits in the first half of 2011, 70 in the second half of 2010 and 57 in the first half of 2010. These figures, the report notes, are “similar to the low number of filings seen in 2006 and 2007.”

The report notes that the its own annualized projection for the 2011 year-end number of securities class action lawsuit filings assumes that the pace of new filings against Chinese companies seen in the year’s first half will continue in the second half. However, the report notes, the number of U.S.-listed Chinese reverse merger companies is finite, and the current level of new filings involving Chinese companies is unlikely to continue indefinitely. The report reckons, “at one extreme,” that if there were no new lawsuits involving Chinese companies in 2011’s second half and other filings continue at the same pace as in the year’s first half, there would be only a total of 166 filings this year, “making 2011 the second lowest year in filings activity during 2006.”

The report contains some interesting analysis of the frequency of new lawsuit filings involving S&P 500 companies. The report notes that only 8.5 percent of the first half of 2011 filings named companies in the S&P 500 index, down from 15.4 percent in the second half of 2010. Overall, eight companies, or about one out of every 63 companies in the S&P 500 Index, were defendants in a class action filed in the first half of 2011, compared with about one out of every 19 S&P 500 companies during the full year of 2010. Only one out of 81 companies in the S&P 500 Financials sector was named as a defendant in the first half of 2011, compared to an average of 11.7 percent of Financials sector firms named in class actions between 2000 and 2010.

The losses in market capitalization associated with adverse disclosures at the end of the class periods remains low compared to historical levels. The total disclosure loss during the first half of 2011 of $48 billion is well below the historical average of $64 billion occurring between 1997 and 2010. The market cap declines during the class periods also remained low during 2011.

Discussion

The report clearly substantiates that the number of lawsuits against Chinese companies and involving M&A transactions were a significant factor driving securities class action litigation activity during the first half of 2011. The report’s exploration of the counterfactual question of what the litigation levels might have looked like without these two categories of litigation activity is interesting. But the report’s implicit suggestion that – but for the anomalous Chinese company and M&A transaction lawsuits –  securities litigation filings are actually trending toward the lower levels that prevailed during the “lull” years of 2006 and early 2007 warrants scrutiny.

The lawsuits involving Chinese companies and M&A-related transactions may reflect short term filing patterns. But it has long been the case with securities class action lawsuit filings that they are substantially driven by short term filing patterns. For years, class action lawsuit filings have been reflected sector slides, contagion patterns, or industry events. The Internet bubble was followed by the telecom industry crash and that was filed by the era of the corporate scandals, which was followed by the mutual fund industry market timing scandal, and then came options backdating scandal and after that the subprime meltdown and then the credit crisis. Each one of these events involved an associated influx of securities class action lawsuits.

So while it is true that the current litigation activity is largely being driven by short-term trends, there is nothing unusual about that. There always seems to be something driving securities class action litigation activity and it seems likely that even after the current round of securities lawsuits involving Chinese companies winds down, the plaintiffs lawyers will find something else to agitate about. (And as for whether the pattern of lawsuits against Chinese companies is going to wind down soon, I note that there have already been four new securities class action lawsuits filed against U.S.-listed Chinese companies already this month, so there is no current suggestion that the filing phenomenon has started to slow down.)

The other thing about the “lull” period, from about mid-2005 to mid-2007, is that while securities class action lawsuit filings may have declined compared to historical norms during that period, overall litigation levels did not decline. The options backdating scandal unfolded during that period, and many more of the options backdating lawsuits that were filed during that period were filed as shareholder derivative suits (over 160) than were filed as securities class action lawsuits (only about 40). So while there may have been a decline in new securities lawsuits during that period, overall litigation levels remained at or near historical norms. It is important to keep this fact in mind when attempting to discern filing patterns over time, especially when considering the possibility that filing levels are or are not actually trending toward a putative lower level.

My own view, which is substantially dependent upon the assumption that the plaintiffs’ lawyers will always find the next new category of lawsuits to pursue, is that securities class action lawsuit filings are not trending toward some lower level. More specifically, I do not think that the mid-2005 to mid-2007 filing levels represent some sort of “new normal” to which filings levels are generally trending but for short-term anomalies that obscure the overall pattern. To the contrary, I think the lower securities class action filing levels during the 2005 to 2007 period represent the anomaly, and it is an anomaly that is entirely explainable by the plaintiffs’ bar’s temporary diversion into shareholders derivative lawsuit filings during the options backdating scandal.

As I have said before, fish gotta swim, birds gotta fly, and plaintiffs’ lawyers have to file lawsuits. The fish and the birds can be counted upon to continue their traditional activities, and so can the plaintiffs’ lawyers.

An important consideration to keep in mind along those lines is that going forward the lawsuit filings driving corporate and securities litigation may or may not involve securities class action lawsuits. As the insurance advisory firm Advisen has well documented in its periodic reports on corporate and securities litigation (refer for example here), securities class action lawsuits increasingly represent a declining percentage of all corporate and securities litigation. So it may happen, as was the case during the so-called “lull” period, that securities class action lawsuit filings may decline while overall litigation levels remain unchanged or even continue to increase.

Responding to Negative Say on Pay Vote: Although only a very small companies experienced a negative say on pay vote during this past proxy season (as detailed here), a number of the companies that did sustain negative votes wound up in litigation. For companies that find themselves in this position, the question arises of how the company and its board should respond.

In an interesting July 24, 2011 post on the Harvard Law School Forum on Corporate Governance and Financial Regulation blog (here), Paul Rowe of the Wachtell Lipton law firm examines the question of the how companies that have experienced a negative say on pay vote should respond.

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Overall levels of corporate and securities litigation during the second quarter and first half of 2011 remained at elevated levels despite a decline in regulatory and enforcement activity during the quarter, according to the latest Advisen quarterly litigation report. A copy of the report can be found here. My own survey of the second quarter and first half securities class action litigation activity can be found here.

Preliminary Notes

It is critically important to recognize that the Advisen report uses its own unique vocabulary to describe certain of the corporate and securities litigation categories.

The “securities litigation” and “securities suits” analyzed in the Advisen report include not only securities class action lawsuits, but a broad collection of other types of suits as well, including regulatory and enforcement actions, individual actions, derivative actions, collective actions filed outside the U.S. and allegations of breach of fiduciary duty. All of these various kinds of lawsuits, whether or not involving alleged violations of the securities laws, are referred to in the aggregate in the Advisen report as "securities suits."

One subset of the overall collection of "securities suits" is a category denominated as "securities fraud" lawsuits, which includes a combination of both regulatory and enforcement actions, on the one hand, and private securities lawsuits brought as individual actions, on the other hand. However, the category of "securities fraud" lawsuits does NOT include private securities class action lawsuits, which are in their own separate category ("SCAS").

Due to these unfamiliar usages and the confusing similarity of category names, considerable care is required in reading the Advisen report.

The Report’s Findings

According to the report, the annualized level of all corporate and securities litigation activity during the first half of 2011 remained “on par with the record-setting year of 2010,” notwithstanding a decline in the number of new regulatory actions against financial services firms, as enforcement activity in the wake of the global financial crisis waned.

Advisen tracked a total of 332 new actions across all categories of corporate and securities lawsuits during the second quarter, compared to 398 during 1Q11. Despite the falloff, the second quarter activity remained as a “high level” and the first half activity annualizes to a record level of corporate and securities litigation activity.

One category of litigation activity driving these numbers is the group of lawsuits alleging breach of fiduciary duties. Many of these breach of fiduciary duty lawsuits are merger objection lawsuits, the filing of which has been “mushrooming” in recent years. The number of merger objection suits has grown from only 21 in 2001 to 353 in 2010, and with 176 merger objection suits in the first half of 2011, the pace of merger objection litigation remains in line with 2010 levels. The report includes a chart on page 6 illustrating the dramatic growth in merger objection litigation activity.

According to the Advisen report, there were 63 new securities class action lawsuit filings during the second quarter, which is flat with the previous quarter, but above the 2010 quarterly average of 48 per quarter and in line with the 60 suits per quarter during 2009. Securities class action lawsuit filings as a percentage of all corporate and securities lawsuit filings remains down from historical levels although up slightly from 2010 levels. Class action securities lawsuits represented as much as a third of all corporate and securities litigation activity as recently as 2006, but during the second quarter, securities class action lawsuits represented only 19 percent of all corporate and securities lawsuits, which while below historical levels is up slightly from the 14 percent such suits represented in 2010. Three industrial sectors accounted for over 60 percent of all securities class action lawsuit during the first half: information technology, consumer discretionary, and industrial.

Actions involving companies in the financial services industry accounted for a smaller percentage of all corporate and securities litigation activity during the second quarter compared to recent periods. Financial firms counted for 45 percent of all corporate and securities litigation in 2008 and 45 percent in 2009. The number fell to 34 percent in 2010 and during the second quarter of 2011, the number fell to 25 percent. Despite the decline, the financial services industry still remains the “leading sector” for attracting corporate and securities litigation activity.

One prominent trend has been the growth in corporate and securities litigation activity involving non-U.S. companies. A certain amount of this litigation involving non-U.S. companies involves proceedings outside the U.S. The Advisen study reports that during the first half of 2011, there were 38 corporate and securities lawsuits filed outside the U.S., 18 of which were filed during the second quarter. Corporate and securities lawsuits involving non-U.S. companies, whether filed in the U.S. or elsewhere, have accounted for about ten percent of all corporate and securities litigation activity since 2005. But in the first half of 2011, corporate and securities lawsuit activity against non-U.S. companies accounted for 17 percent of all corporate and securities litigation activity, and during the second quarter of 2011, the figure for non-U.S. companies was up to 20 percent.

A substantial part of this rise in activity involving non-U.S. companies has been the rise in the number of corporate and securities lawsuits involving Chinese companies, of which there were 44 during the first half of 2011.

Discussion

Advisen’s report takes a broader view of corporate and securities litigation, because its scope reaches beyond just securities class action lawsuits to include all corporate and securities litigation, and not just in the U.S, but outside the U.S. as well. But even with this broader scope, it is apparent that a couple of identifiable factors are currently driving corporate and securities litigation activity, as is also the case with securities class action litigation – that is, the high levels of litigation largely  is a factor of the suits connected to merger and acquisition activity  and by lawsuits involving Chinese companies.

The table in the report depicting merger objection litigation filings dramatically illustrates the growth in this type of litigation activity in recent years. This development has a number of implications, including for the D&O insurance carriers that often wind up picking a significant part of the defense expenses and settlement amounts associated with these kinds of lawsuits. Even though these cases taken individually do not present a significant severity risk, taken collectively that represent a significant claims loss burden for the carriers, particularly those that are the most active in the primary layers.

As the mix of litigation has shifted away from higher severity claims such as securities class action lawsuits and toward higher frequency claims such as merger objection suits, the D&O carriers’ claims experience has shifted as well. As I noted in my own report on second quarter litigation activity, this is an under-discussed issue.

The burden these costs represent may be all the more painful for the carriers because the exposures involved with these kinds of suits likely are not priced into the risk premium. In addition, it is tough to underwrite the likelihood that any one company will be acquired. But because the discussion of carriers’ loss exposures tends to focus on the higher severity risk of securities class action litigation, there is relatively little consideration given to the higher frequency exposure that these merger objection lawsuits represent. This is one of those issues that just doesn’t get the airtime it deserves – at least not so far.

One interesting development involving these kinds of merger objection lawsuits is that the judges in the Delaware Chancery Court have started to show some resistence to the fee awards to plantiffs' counsel in cases that do not produce a material benefit for shareholders. The Wall Street Journal has a July 19, 2011 article (here) discussing these developments. The flip side of this judicial resistence is that in some instances the Delaware courts have proven more willing to approve larger fee awards where the court concludes the plaintiffs have produced substantial benefit for shareholders.

The surge in litigation involving U.S.-listed Chinese companies also has important D&O insurance implications, as noted in a recent Client Advisory I co-authored with Pillsbury Winthrop’s Peter Gillon, about which refer here. Alison Frankel has a July 18, 2011 post on the same topic on her Thomson Reuters News & Insight blog, here.

Second Quarter Litigation Update Webinar: And speaking of first half 2011 litigation filing trends, on Tuesday July 19, 2011 at 11 a.m. EDT, I will be participating in the Advisen's "Q2 Securities Litigation Webinar."  My fellow panelists will include Anderson Kill's Bill Passanante, Navigators' Scott Misson, and Willis’ John Connolly. The panel will be moderated by Advisen's Jim Blinn. Information about this event, which is free, can be found here.

Outside Directors and SEC Enforcement Actions: A July 16, 2011 post on the Harvard Law School Forum on Corporate Governance and Financial Regulation entitled “SEC Enforcement Actions Against Outside Directors Offer Reminder for Boards” (here) takes a look at recent SEC Enforcement actions targeting outside directors. The article concludes with respect to the recent SEC enforcement actions that “when taken together, the cases signal the commission’s continued interest in bringing enforcement actions against directors of publicly traded companies who personally violate securities laws or egregiously disregard their duties.”

Among other implications, the article notes the importance for board members of considering the coverage available through their company’s D&O insurance program for regulatory investigations and enforcement actions.

Cordray for Consumers? : Many readers may have seen the news that President Obama has nominated former Ohio Attorney General Richard Cordray to head the new Consumer Financial Protection Bureau. Cordray will be a familiar figure to readers of this blog, as I have commented in the past on Corday’s actions while Ohio Attorney General in pursuing securities class action lawsuits on behalf of Ohio’s pension funds.

Reactions to Cordray’s nomination to head the new consumer agency include concerns regarding Cordray’s connections to the securities class action bar. In a July 18, 2011 post on his Full Disclosure blog on the Forbes website, Daniel Fisher takes a look at the campaign contributions Cordray received in the past from prominent members of the securities class action litigation bar and comments that Cordray’s “record of taking money from lawyers who profit from private litigation that often follows closely on the heels of government investigations could provide fodder for his enemies.”

Ross Todd has a July 18, 2011 post on the Am Law Litigation Daily on the same questions about Cordray.

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Largely driven by M&A-related litigation and securities suits against U.S.-listed Chinese companies, federal securities class action lawsuit filings continued to mount during the second quarter of 2011. With 48 new securities suits during the second quarter, the year-to-date total mid-way through the year stands at 105. The 2011 filings are on pace to finish the year with about 210 new lawsuits, which is well above the 1997-2009 average of 195.

The M&A lawsuits included in my tally are those that were filed in federal court and that allege a violation of federal securities laws. There were ten M&A-related federal securities lawsuits during the second quarter, or about 20% of all second quarter filings.  

Many of the M&A-related lawsuits are being filed in state court and so don’t enter into the count of federal securities suits. In addition, there are a number of federal court M&A-related lawsuits that don’t allege violations of the federal securities laws; these suits typically allege breaches of fiduciary duties.

M&A-related litigation overall, including all state and federal court suits, continues to surge. Because many of these suits are filed in state court, it is difficult to get complete information. But based on the filings I have been able to track, and counting all state and federal suits of which I am aware, there have been a total of at least 125 merger-related lawsuits YTD involving as many as 90 transactions (some transactions have drawn multiple lawsuits). While this information may be incomplete, it is clear that there are many more merger-related lawsuits now being filed than traditional securities class action lawsuits. This mix of litigation has some important implications, discussed below.

But the most interesting story line relating to 2011 securities class action lawsuit filings is the number of new filings involving U.S.-listed Chinese companies. As I have previously noted (most recently here), lawsuits filings against these Chinese companies have been surging, particularly during the second quarter. There have been a total of 26 securities suits against Chinese companies so far in 2011, 19 of them filed during the second quarter. The 26 lawsuits represent almost one-quarter of all 2011 securities class action lawsuit filings. The 19 securities suits filed against Chinese companies during the second quarter represent almost 40% of all new securities lawsuit filings during that period.

Signs are that the lawsuit filings against U.S.-listed companies will continue as we head into the year’s second half. Plaintiffs’ lawyers have published news releases that they are “investigating” additional U.S.-listed Chinese companies (refer for example, here). These types of releases usually precede lawsuit filings.

Lawsuit filings against foreign companies in general have been a significant part of the 2011 securities lawsuit filings. Although the vast majority of the suits against foreign companies have involved Chinese companies, lawsuits have been filed against a number of companies from other non-U.S. jurisdictions. There have been a total of 34 lawsuits against foreign companies so far this year (about 32% of all YTD 2011 filings), involving companies from eight different countries.

These filings against non-U.S. companies are all the more notable given the U.S. Supreme Court’s June 2010 decision in the Morrison v. National Australia Bank case, which seemingly would have produced a decline in the number of new securities suits involving non-U.S. companies. But because the shares of most of these foreign company defendants trade on U.S. securities exchanges, the Morrison decision poses no barrier to the shareholder plaintiffs suing these foreign companies in U.S. courts.

Although the year-to-date filings are largely characterized by the features noted above, the suits are in other ways remarkably diverse. For example, the 105 companies named as defendants represent 70 different Standard Industrial Classification (SIC) Code categories. The SIC Codes with the highest number of filings are SIC Code Category 7372 (prepackaged software), and SIC Code Category 6022 (state commercial banks), each of which has had six securities suits during the first six months of 2011.

Though there were a number of filings in the year’s first half against banking institutions, overall far fewer of the first half filings involved financial institutions than was the case in recent years in the wake of the credit crisis. However, as I noted in a recent post, there are still lawsuits coming in that are based on credit crisis-related events. By my count, there were at least four credit crisis-related lawsuits in the year’s first half.

The first half lawsuit filings were also quite dispersed geographically. The securities suits in the year’s first six months were filed in 32 different U.S. districts. The districts with the highest number of filings in the first half were the Central District of California, with 24 filings, and the Southern District of New York, which had 19.

Discussion

As is always the case and as I have frequently noted, definitional issues significantly affect the lawsuit count. For example, if I were to include the federal court M&A lawsuits that do not involve securities law allegations, I would be reporting 113 first half lawsuits, rather than 105. On the other hand, by including the federal court merger objection suits that have securities allegations, the count arguably is inflated in the other direction. (I have struggled for some time to decide whether or not the merger objection suits properly belong in this tally.) In other words, my count may vary from other published figures, largely due to these kinds of definitional issues.

The growing wave of M&A litigation is an under-discussed issue. Even though the M&A cases cases tend to be resolved quickly and usually don’t involve significant financial settlements, taken collectively they still impose an enormous cost on the system. Even if the settlement in any one case is modest (usually just the payment of the plaintiffs’ attorneys fees), there are still the defense expenses to consider. In the aggregate this litigation imposes a huge expense on the financial system. In the aggregate they are also imposing significant costs on D&O insurers, or at least those that are most active as primary insurers. Sooner or later these kinds of costs have to start taking a toll on the carriers.

The burden these costs represent may be all the more painful for the carriers because the exposures involved with these kinds of suits likely are not priced into the risk premium. In addition, it is tough to underwrite the likelihood that any one company will be acquired. But because the discussion of carriers’ loss exposures tends to focus on the higher severity risk of securities class action litigation, there is relatively little consideration given to the higher frequency exposure that these merger objection lawsuit represent. This is one of those issues that just doesn’t get the airtime it deserves – at least not so far.

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Corporate and securities litigation filing activity reached a “crescendo” in the first quarter of 2011, according to the most recent quarterly report from Advisen, the insurance information firm. The filing rate in the year’s first three months if annualized would represent a record –settling annual level of corporate and securities litigation activity. A copy of the Advisen report can be found here. My own survey of the first quarter 2011 securities class action lawsuits filings can be found here.

Preliminary Notes

In considering the Advisen report, it is critically important to recognize that the report uses its own unique vocabulary to describe certain of the litigation categories.

The “securities” litigation analyzed in the Advisen report includes not only securities class action litigation, but a broad collection of other types of suits as well, including regulatory and enforcement actions, individual actions, derivative actions, collective actions filed outside the U.S. and allegations of breach of fiduciary duty. All of these various kinds of lawsuits, whether or not involving alleged violations of the securities laws, are referred to in the aggregate in the Advisen report as "securities suits."

One subset of the overall collection of "securities suits" is a category denominated as "securities fraud" lawsuits, which includes a combination of both regulatory and enforcement actions, on the one hand, and private securities lawsuits brought as individual actions, on the other hand. However, the category of "securities fraud" lawsuits does NOT include private securities class action lawsuits, which are in their own separate category ("SCAS").

Due to these unfamiliar usages and the confusing similarity of category names, considerable care is required in reading the report.

The Report’s Findings

According to the report there were a total of 363 corporate and securities lawsuits filed in the first quarter of 2011, which is up from the 342 filed in the fourth quarter of 2010 but below the quarterly record level of 386 set in the third quarter 2010. If the first quarter filing levels were to continue for the rest of the year, that would imply a 2011 year-end total of 1,448 corporate and securities lawsuits, which, according to Advisen would represent a “record-setting year.” Just to put this level of filing activity into perspective, prior to the credit crisis “new filings averaged less than two-thirds of this annualized level.”

According to Advisen’s tally, there were 61 securities class action lawsuits in the first quarter of 2011. However, securities class action lawsuits as a percentage of all corporate and securities lawsuit filings continue to decline. As recently as 2006, corporate and securities lawsuits represented as much as one third of all corporate and securities litigation, but in the first quarter of 2011, the securities class action suits represented only 17 percent of all corporate and securities lawsuit filings.

With respect to the securities class action lawsuit filings, 85 percent of the suits were filed against companies in just five sectors: financial, information technology, consumer discretionary, energy and industrial. With respect to all corporate and securities litigation generally, financial firms continue to be the most frequently sued albeit at a lower level in recent years. Financial firms were named as defendant in 34 percent of all corporate and securities lawsuits in the first quarter, compared to 45 percent in 2008 and 40 percent in 2009.

Breach of fiduciary duty suits, many of which are filed in state court and many of which are filed shortly after the announcement of a proposed merger or acquisition, represent a growing area of corporate and securities litigation. These breach of fiduciary duty suits represent about a third of all corporate and securities lawsuit filings in the first quarter of 2011, up from only eight percent of all corporate and securities filings as recently as 2004. Over 60 percent of the first quarter breach of fiduciary duty suits were filed in the state court.

Corporate and securities litigation activity outside the U.S. has also been on the increase. During the first quarter of 2011, Advisen recorded 17 of the corporate and securities lawsuits filed outside of the United States.

By the same token, 16 percent of all corporate and securities lawsuits filed during the first quarter involved non-US companies, compared to only 11 percent in 2009 and 2010. These figures were largely driven by cases involving Chinese companies whose shares trade on the U.S. exchanges. Cases against Chinese companies in U.S. courts “mushroomed” in 2010, and continued in the first quarter, when there were 11 new securities lawsuits in the U.S. against Chinese companies. (This trend of filings against Chinese companies has continued into the second quarter as well, as I noted in my recent posts, here and here.)

Finally, with respect to settlements, the Advisen report notes that the average securities class action lawsuit settlement announced during the first quarter of 2011 was $54.6.

Quarterly Advisen Conference Call: On Thursday, April 21, 2011, I will be participating in an Advisen conference call to discuss the first quarter 2011 filing statistics and trends. The free one-hour conference call will take place at 11 am EDT. The conference call panel will include a number of distinguished speakers, including Dan Bailey from the Bailey Cavalieri law firm, Carol Zacharias from ACE, Carolyn Polikoff from the Woodruff Sawyer firm and David Bradford from Advisen. Information about the session including registration information can be found here.

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A number of trends that had predominated in recent years diminished during 2010 while new trends emerged, according to PwC’s 2010 Securities Litigation Study, which can be found here. 2010 may also mark “the start of a new era” as a consequences of a new regulatory and enforcement environment take effect, which “could lead to a reinvigorated volume of reported securities violations and associated class actions.” PwC’s April 7, 2011 press release about its report can be found here.

In many ways the 2010 securities litigation filing activity was characterized by the  reversal of a number of trends. Thus, for example, the declining numbers of credit crisis related cases meant that fewer cases were filed against financially related companies than in the immediately preceding three years (although financial companies remained the most frequent litigation target in 2010). In addition, accounting-related cases continued to decline in 2010, as did the number of new cases against Fortune 500 companies.

On the other hand, the reversal of these trends was “offset” by other trends that emerged during the year, leading to an overall jump in the number of cases. The focus of activity shifted from an “overwhelming focus on the financial services industry” to a “medley of issues across a variety of industries.”  Increasing numbers of cases against companies in the health industry, a surge in M&A related cases, a jump in cases against Chinese companies and a rash of cases against for-profit education companies all contributed to the increased litigation activity.

Overall, the total number of federal securities class action filings rose 12 percent during 2010 compared to 2009, from 155 to 174. (PwC’s count may vary from other published reports as a result of its counting methodology, pursuant to which “multiple filings against the same defendant with similar allegations are counted as one case.”). There were more filings in the third and fourth quarters of 2010 than in either of the first two quarters. Among other things, the increase in filings in the year’s second half reflected the “increasing domination o f non-financial crisis-related cases and the decline in financial-crisis related cases.”

Among the principle drivers of the increased number of filing in the second half of 2010 was the increase in the number of M&A related cases. Overall, M&A cases represented 24 percent of all securities filings in 2010, compared to only 4 percent in 2009.

Health industry cases increased from 17 percent in 2009 to 21 percent in 2010, representing the second highest percentage of for any industry in 2010. The filings included cases against pharmaceutical, medical device and health services companies. (My recent post discussing 2010 securities filings against life sciences companies can be found here.)

The percentage of cases raising accounting-related allegations (including overstatement of revenues, understatement of expenses and liabilities and overstatement of assets) fell from 37 percent in 2009 to 35 percent in 2010, which represents the lowest level of accounting-related cases in 15 years. The report speculates that one possible reason for this decline in accounting-related cases could be “the effectiveness of SOX in combating accounting fraud.” On the other hand, the decline in the number of cases involving accounting allegations could also just be a reflection of the changing mix of cases; the options backdating cases that predominated a few years ago were replete with accounting-related issues, but the increasing numbers of M&A cases in 2010 rarely involved accounting allegations.

Surprisingly, in light of the U.S. Supreme Court’s June 2010 decision in Morrison v. National Australia Bank, the number of filings involving foreign issuers increased during 2010 by 35 percent, and of the 27 cases filed in 2010 involving foreign issuers, 16 (or 59 percent) were filed after the Morrison decision was announced. The percentage of cases involving foreign issuers as a percentage of all filings increased during 2010 from 13 percent in 2009 to 16 percent in 2010.

Of these 27 cases involving foreign issuers, 12 cases (44 percent) involved Chinese companies. Eleven of the 12 cases against Chinese companies involved accounting allegations.

The average settlement of securities related cases during 2010 decreased by 11 percent compared to 2009, from $34 million to $30.1 million.(PwC ‘s figures may differ from other published reports as PwC assigns the settlement to the year of the “primary settlement announcement,” and any subsequent announcements are attributed to the primary announcement year.” PwC also excludes zero dollar settlements.)

 However, the average settlement value of cases settled for more than $1 million and less than $50 million increased by 21 percent, from $10.7 million in 2009 to $12.9 million. In addition, median settlements increased by nearly 35 percent, from $7.5 million to $10.1 million.

The PwC report concludes with a survey of the changing liability  environment arising from  the new regulatory mandates introduced by the Dodd-Frank Act. Because enforcement activities “are likely to increase” and the new Dodd-Frank whistleblower provisions “could produce a surge in allegations of securities violations,” the financial regulatory environment is “vastly different in 2011 from what it was just one year ago, and companies will have to devote significant resources to understanding and adapting to its new topography.”  The decade ahead has “the potential to yield yet more transformations.”

My analysis of the 2010 securities class action litigation filing can be found here. My more recent study of first quarter 2011 filings (here) shows that many of the trends that emerged in 2010 continued in the first quarter, including in particular the heightened level of M&A related litigation. In addition, as I recently noted (here), the wave of accounting-related litigation involving Chinese and China-linked companies has also continued in 2011.

WaMu Subprime-Related Securities Lawsuit Settlement in the Works: In case you missed the news last week, the WaMu subprime-related securities lawsuit apparently has settled. According to the Court’s  April 6, 2011 minute order (here), the parties have advised the court that the lead case has settled, and the Court has suspended all of the schedules dates and motions. The settlement papers have not yet been filed so the details of the settlement are not yet known, but an April 6, 2011 Seattle Times article by Sanjay Bhatt (here) reports that the amount of the settlement “is in excess of $200 million.”

The WaMu case, of course, relates to the facts and circumstances surrounding the largest bank failure in U.S. history. The case itself did not necessarily unfold smoothly from the plaintiffs’ perspective. In a May 2009 opinion that was sharply critical of the plaintiffs’ pleadings (about which refer here) , Western District of Washington Judge Marsha Pechman has initially granted the defendants’ motion to dismiss. However, the plaintiffs’ amended pleadings survived the renewed motion, and now the parties apparently have settled the case.

The details of the settlement, once they are finally released, will be interesting in and of themselves, but they may be even more interesting in light of the recent action that the FDIC filed against three former WaMu executives and the wives of two of the officials (about which refer here). The possibility that the WaMu securities suit settlement could involve the payment of  hundreds of millions of dollars raises the possibility that the settlement would consume the remaining limits of WaMu’s D&O insurance policy, possibly leaving the defendants in the FDIC without insurance remaining for them to defend themselves against and to try and settle the FDIC claims.

So The D&O Diary is interested in a number of details about the settlement, beyond just the settlement’s dollar value. We are interested to see how much of the settlement will be funded by D&O insurance, and whether any of the settlement is to be funded out of the individual defendants’ assets. We are also interested to see if the settlement documents show whether the settlement exhausts the remaining D&O insurance limits. Along the same lines, it will be interesting to see (if possible) what kind of a release the insurers are getting in exchange for the insurance payment, if any, and whether it is a policy release or just a claim release.

In any event, the WaMu settlement is just the first of what I think will be a wave of subprime-related securities lawsuit settlements during the course of 2011. The WaMu settlement also vividly illustrates the competition for insurance policy proceeds that the FDIC will face as it seeks to pursue lawsuits against directors and officers of failed banks, particularly as in many cases the shareholders have been actively pursuing their claims while the FDIC has proceeded much more deliberately.

Speakers’ Corner: On Thursday April 14, 2011, I will be a panelist at the Professional Liability Underwriting Society Southwest Chapter’s Educational Event in Englewood, Colorado. The title of the even t is “Winds of Change in Executive and Professional Liability,” and I will be speaking on panels on the topics of Governmental Investigations and D&O Liability Developments. Information about the event can be found here.

If you are a part of the Southwest Chapter, I hope you are planning on attending. And if you are attending I hope you will take a moment to say hello, particularly if we have never met before.

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Largely as a result of a flood of M&A related lawsuits, there were a significant number of new securities class action lawsuits filed in the first quarter of 2011, and even factoring out the M&A lawsuits, the first three months of the year still represented an active period for securities lawsuit filings.

Taking the merger objection suits into account, there were a total of 55 new securities class action lawsuits filed in the first quarter. That would imply an annualized rate of 220 securities suits for the year, which would be well above both the 176 filed in 2010 and the 1996-2009 annual average of 195 filings. However, the rash of merger suits filed during the first quarter does complicate the numeric analysis, as the changing mix of cases may make the year to year measures somewhat of an apples- to-oranges comparison.

There were 20 federal court merger objection lawsuits in the first quarter. (There were even more state court merger objection lawsuits, as discussed further below.)  Subtracting the federal court merger objection lawsuits from the first quarter securities class action lawsuit filing tally would reduce the number of first quarter filings from 55 to 35, which would be idenitcal to the 35 new securities suits filed in the first quarter of 2010. Obviously, the process of determining what to include in the lawsuit count has a huge impact on the ultimate tally.  I have further observations about “counting” the securities suit filings below.

The 55 securities suits in the first quarter represent a surprisingly diverse range of kinds of companies. The companies targeted in the 55 suits represent 42 different Standard Industrial Classification (SIC  Code categories. Only two SIC Code categories had as many as three companies sued – SIC Code Category 2834 (Pharmaceutical Preparations) and SIC Code Category 3674 (Semiconductors and Related Devices.).

By interesting contrast to recent years' filing patterns, the first quarter filings included relatively few companies in the 6000 SIC Code group (Finance, Insurance and Real Estate). While the credit crisis litigation wave was unfolding and lawsuits against financial companies flooded in, suits against companies in the 6000 SIC Code group predominated. The relative decline of litigation activity in this category provides even further proof that the credit crisis related litigation wave has largely played out. I count a total of only three cases in the first quarter that might even arguably be categorized as credit crisis related. Among these three were  two new securities suits in the first quarter involving failed or troubled banks, which is a filing phenomenon that seems likely to continue in the weeks and months ahead.

Among the 55 first quarter cases were nine suits filed against companies domiciled outside the United States. In addition to these nine, there were two additional companies sued that were incorporated in the United States but that have their principle place of business outside the U.S. These eleven total cases represent about 16.3% of all first quarter filings, a percentage that is above the approximately 12% of 2010 filings that involved non-U.S. companies. This relative increase in the incidence of filings against non-U.S. companies is frankly unexpected in light of the U.S. Supreme Court’s June 2010 decision in Morrison v. National Australia Bank (about which refer here).

The persistent elevated level of filings against non-U.S. companies is largely attributable to the surge in lawsuits involving Chinese companies. Four of the nine lawsuits filed in the first quarter against non-U.S. companies were filed against Chinese companies. Three additional lawsuits involved companies incorporated elsewhere but with their principle places of business in China. These seven suits together represent about 12.7% of all first quarter filings. Indications are that this phenomenon of suits involving Chinese companies is likely to continue, as in recent days, plaintiffs’ lawyers have issued numerous press releases (for example, here and here)  indicating that they  are “investigating” certain other Chinese companies (a development that usually presages a subsequent lawsuit filing.)

As the new filings have shifted away from financially related companies, the jurisdictions in which lawsuit filings have been concentrated have also shifted. During the credit crisis litigation wave, lawsuit filings were concentrated in the Southern District of New York. Indeed, there were nine new securities suit filings in the Southern District of New York during the first quarter 2011, but for the first time since 2007 there were more quarterly filings in a federal district other than the Southern District of New York. Specifically, there were ten new securities lawsuit filings in the Central District of California, and another five in the Northern District of California, a changing jurisdictional mix that reflects the shifting mix of companies that are getting sued.

More About the Merger Objection Lawsuits: As I noted above, there were twenty new federal court merger objection lawsuits filed during the first quarter of 2011. A total of at least 63 different M&A transactions produced merger objection litigation in the first quarter, but many of the lawsuits relating to these transactions were filed in state court rather than in federal court. In addition, some of the transactions provoked lawsuits in both state and federal court, and some provoked multiple different lawsuits in different states.

Breaking all of this M&A related litigation down, and counting both the state and federal merger objection lawsuits,  there were a total of at least 81 different lawsuits relating to at least 63 different transactions. OF these 81 lawsuits, 20 were filed in federal court and 61 were filed in state court. As indicated above, some transactions produced multiple lawsuits in different jurisdictions.

A Note About Counting: Some readers may note that my count of 55 first quarter securities lawsuits differs substantially that the 39 lawsuits reported as of today on the Stanford Law School Securities Class Action Clearinghouse website. There are two reasons for this difference. One is timing, as I have counted suits that have not yet made it onto the Stanford site’s list. The other is counting protocol, as I have included 11 federal merger objection suits on my list that are not included on the Stanford website list.

As I have noted numerous times in the past on this site, one of the most challenging parts about keeping a running tally of securities class action lawsuit filings is deciding what you are going to count. As part of my counting protocol used during the first quarter, I have chosen to “count” all federal court securities suits, including all merger objection suits. This has produced a count that differs in certain particulars from the Stanford website count. However, I should hasten to add that my count includes all of the cases noted on the Stanford site. It just includes a few more.

These differences underscored the importance of definitional consistency when making comparisons across time. The comparisons are only meaningful if the counting protocols are consistent over time.

Finally, and whatever else might be said about the increasing numbers of merger related lawsuits, it seems apparent that the mix of cases is decidedly shifting. While there may be fewer traditional securities class action lawsuits being filed than in some prior years, the amount of total litigation activity is at or above historical averages when the merger objection litigation is taken in to account. And it also seems to be the case that at least as a matter of percentages of all filings, the merger objection lawsuits now outweigh the tradtional securities class action lawsuits.

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Though the average dollar value of securities class action settlements approved in 2010 declined slightly compared to 2009, the median settlement amount reached record levels, according to Cornerstone Research’s annual 2010 Securities Class Action Settlement Study. Cornerstone’s March 10, 2010 press release about the study can be found here, and the study itself can be found here.

Largely as a result of the decline in the number of mega-settlements, the average securities class action lawsuit settlement approved in 2010 declined to $36.3 million, compared to S37.2 million in 2009. Both of these figures are well the 1996-2009 average settlement of $54.8 million. Even if the post-Reform Act settlement average is "normalized" by excluding the top-three settlements during that era, the 2010 average is still below the adjusted 1996-2009 average of $38.8. (All historical averages are adjusted for inflation.)

The median average class action lawsuit settlement approved in 2010 increased to $11.3 million from a 2009 median of $8.0 million. This 40% increase represents the largest single year increase in the median settlement in the last ten years.

The sizeable gap between the averages and medians is a reflection of the presence of a few significant larger settlements During the post-Reform Act era, more than half of the securities class actions have settled for less than $10 million, about 80% have settled for under $25 million.. Only 7 percent of cases have settled for more than $100 million. Thus, "while large settlements tend to receive substantial attention, they tend to occur infrequently."

The Cornerstone study reports the number of securities class action lawsuit settlements approved during 2010 is the lowest in ten years. The "more likely cause" for this decline is combination of the substantial drop in the number of new securities class action lawsuit settlements and the fact that the credit-crisis suits have taken longer to settle. The average time to settlement for cases settled in 2010 was 4.1 years, compared to 3.9 years for the cases settled in 2009.

Obviously, the most significant factor with respect to the overall size of securities suit settlements is the overall amount of investor losses (although the proportionate relationship between the size of the settlement and the size of investor losses decreases as the size of "plaintiff-style" damages increases.)

There are a number of other lawsuit features that present statistically significant differences in the size of the settlements. First, cases involving accounting allegations are resolved with larger settlements than cases without accounting allegations. For example, cases involving a restatement settled during the 1996-2010 period settled for 3.9% of "plaintiff-style" damages, but cases without a restatement settled for 3.1% of those amounts. In addition, filings that do not involve accounting allegations are more likely to be dismissed than filings with accounting allegations.

The report goes on to observe that the increased complexity of cases involving accounting allegations means these cases may take longer to resolve, which may be a factor contributing to the increased interval between the filing date and the settlement date observed over time.

Second, the presence of public pension plans as lead plaintiffs is associated with higher settlements as well. Though this observation could be explained by these investors choosing to participate in stronger cases, the study reports that even controlling for observable factors that affect settlement amounts, "the presence of a public pension plan as a lead plaintiff is still associated with a statistically significant increase in settlement size."

Other lawsuit features that are associated with statistically significant settlement amounts are the presence of Section 11 and/or Section 12(a)(2) claims; the presence of a remedy of a corresponding SEC action; and the presence of companion derivative claims. On the latter point, the report notes that class actions accompanied by derivative actions tend to be associated with other factors important to settlement amounts, such as accounting allegations, the presence of related SEC action and the involvement of public pension fund plaintiffs.

The credit crisis cases have settled more slowly than "traditional cases." There have also been relatively few settlements of these cases to date, as well. Of the credit crisis cases that have settled so far, they have tended to settle for larger amounts (median settlements of $31.3 million and average settlements of $103.1 million) but for lower percentage of estimated "plaintiff-style" damages (3.2% on average compared to 4.9% for all cases). My compilation of all credit-crisis settlements can be accessed here.

Some readers may note slight variations between the averages and median settlement figures reported in the Cornerstone report compared to those reported elsewhere. Thought there are differences, the figures are directionally consistent. The differences may be due to a combination of timing and methodology. The Cornerstone report designates the settlement year as the year in which the hearing to approve the settlement was held. Cases involving multiple settlements are reflected in the year of the most recent partial settlement (subject to certain additional considerations).

Though all of the report’s findings are interesting and important and the report is well worth reading at length and in full, for me the most significant finding is the report’s conclusion about the dramatic increase in the size of the median settlement. Averages can be driven by outliers, but medians are more reflective of the overall direction of settlements in general.

The rapid increase in the median settlement amount has important implications for corporate insurance buyers as well as for their insurers, particularly at a time when costs of defense are also escalating rapidly. For buyers, the rising median settlement amount clearly has important implications for purposes of limits selection and limits adequacy. I think the unmistakable conclusion is that the questions of limits adequacy may now involve larger levels of insurance than may have been the case in the past.

For insurers, and particularly those insurers who more typically are involved in the excess layers, the rising median may have important implications for likely loss experiences. The clear implication is that higher attaching excess layers are increasingly likely to be called upon to participate in case resolution, particularly in light of rising costs of defense. Losses are likelier to push up into higher layers.

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The number of outstanding securities class action lawsuits in Canada reached an all-time high during 2010 according to a January 31, 2011 report by NERA Economic Consulting entitled "Trends in Canadian Securities Class Actions: 2010 Update." The report can be found here. The report includes an appendix in which securities lawsuit trends in several other countries are summarized, including Australia, Japan, and Italy, as well as the United States.

According to the report, there were eight new securities class action lawsuits filed in Canada during 2010. The number of 2010 filings is one fewer than the nine new cases filed in 2009, and two fewer than the record ten filings in 2008. Allowing for the settlements in six cases during the year in which defendants agreed to pay a total of CAN$80 mm, there are now 28 active Canadian securities class action lawsuits.

A total of 25 lawsuits have now been filed under Bill 198, the relatively new secondary liability provisions of the Ontario securities laws. Of the nine Bill 198 cases that have settled, the average settlement is CAN$10.7 mm, with four cases settling for more than $10 million and three settling for less than CAN$3 million.

Interestingly, one of the 2010 filings involved a company – Canadian Solar – whose shares do not trade on a Canadian exchange (its shared trade on NASDAQ. This is the second Canadian securities suit involving a company whose share do not trade on a Canadian exchange (the first being the 2008 lawsuit involving AIG).

The report notes that it has become relatively common in recent years for Canadian companies to be subject to securities lawsuit in the United States. Between 1996 and 2010, Canadian-domiciled companies have been named as defendants in securities class action lawsuits in the U.S. Of these, 17 cases also had parallel class action lawsuits in Canada.

The report notes that the number of future filings in the US against Canadian companies may decline in future years owing to the U.S. Supreme Court’s holding in Morrison v. National Australia Bank. Indeed, Morrison could have an impact on at least some of the cases pending in the U.S. against Canadian companies. The report notes that the Morrison case comes at a time when Canada and even other countries may be expanding the reach of their collective action mechanisms. It is entirely possible that there may be an increase of lawsuits in Canada involving companies whose shares do not trade in Canada, particularly in light of the fact that at least one Canadian court has been willing to certify a global class of claimants.

The average settlement amount of the 37 U.S. cases involving Canadian companies that have settled is US$71.5 mm, but this average is skewed by two large settlements involving Nortel. The median of these settlements is US$6 mm. For the 14 US cases against Canadian companies that have settled since 2007 (i.e., after the Nortel settlements), the average settlement is U.S $20.5 mm and the median settlement is uS$6.2 mm.

This Week at the PLUS D&O Symposium: Weather permitting, this week I will be attending the 2011 PLUS D&O Symposium in New York City. I know that many readers of this blog will also be there. I hope that if you see me at the Symposium that you will take a minute to say hello, particularly if we have not previously met. I look forward to seeing everyone there, or at least everyone who can make it through the storm. Safe travels to all, good luck to all of us with the weather.

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Every year, the Stanford Law School Securities Class Action Clearinghouse, in conjunction with Cornerstone Research, releases its annual overview of securities class action lawsuit flings. As I noted in a post last week, this year’s version introduced a number of innovations and reflected a host in interesting observations. (The full 2010 Stanford/Cornerstone report can be found here.)

Because the securities class action litigation environment clearly is going through a significant transition, I thought it would be worthwhile to check in with the Stanford Law Professor Joseph Grundfest, who oversees the Stanford website. Professor Grundfest was gracious enough to agree to participate in an interview for this site. The interview, in the form of a Q&A, is reproduced below. My questions appear in italics, followed by Professor Grundfest’s responses.

Q. What do you think were the most important securities class action litigation trends during 2010?

            A: The dramatic increase in merger related federal class securities fraud litigation. These cases were traditionally filed only in state court, but the decline in traditional securities fraud litigation appears to have generated a demand in the securities fraud plaintiff bar to find new cases to fill the litigation pipeline. Also, plaintiffs may discover that it is easier to control this litigation if they can bring cognizable federal claims, even if those claims are quite weak.

Q. What do you think were the most important judicial trends concerning securities litigation in 2010?

            A: The implications of the Supreme Court’s Morrison decision continues to reverberate in the lower courts, and many observers are surprised by the vigor with which the lower courts are dismissing actions related to foreign market activity. Morrison is not being interpreted narrowly.

Q. What impact do you think that the Dodd Frank Act will have on securities litigation? Do you think the Dodd Frank whistleblower provisions will lead to significantly increased SEC enforcement activity? Are there other provisions of the Act that you think are particularly important from a litigation or enforcement activity standpoint?

            A: Dodd-Frank’s bounty provisions are the joker in the deck here. If the presence of the bounty causes a material increase in SEC enforcement actions, it is reasonable to expect an increase in parallel private actions. After all, that’s the way the market works now: if the SEC files a claim that plaintiffs haven’t yet pursued, it’s only a short matter of time before a very similar private complaint is on file in federal court. There’s no reason that the market won’t work that way in response to SEC actions instituted in response to whistleblower information.

Q. You are in regular contact with directors at some the leading companies in the country. What are directors most concerned about these days? Are there particular liability exposures that you think directors are worried about?

            A: Thoughtful, honest directors are most concerned with the implications of Dodd-Frank’s bounty provisions. In an ideal world, these directors would want all employees with information about potential violations to report those concerns to the appropriate authorities within the company, including the audit committee, so that prompt remedial activity (including potential self-reporting to the SEC) could take place as quickly as possible. Now, however, these directors find themselves in competition with the SEC which stands ready to offer significant financial rewards for the provision of information that might otherwise go to compliance authorities within the corporation. Honest directors, standing ready to remedy all violations brought to their attention, will now be frozen out of the information market because they simply can’t compete with the significant bounties available under Dodd Frank.

 

Q. You have been systematically observing securities class action litigation now for many years. What do you think are the most important securities class action trends and developments in recent years, and why?

            A: It’s a business. The business responds to the forces of supply and demand, and reacts to exogenous shocks in the form of financial crises and revelations of backdating. If you analyze the securities litigation process from a purely economic perspective, otherwise mysterious behavior becomes far more transparent.

Q. Several years ago you suggested that there had been a “permanent shift” to lower securities class action litigation activity levels. I wonder what you think of that suggestion now with the benefit of the passage of time and of the opportunity to review intervening events.

            A: To formally test this hypothesis, we still need several more years’ worth of data. With that caveat firmly in mind, I would like to suggest that this years’ data are consistent with that observation. The “core rate” of litigation, i.e., the number of companies named as defendants in traditional securities fraud actions, is well below the pre-Sarbanes Oxley level, once we net out the merger disclosure cases that inflate this year’s census. This observation suggests that fewer issuers are engaged in the sorts of conduct that would have stimulated litigation prior to Sarbanes Oxley. To be sure, plaintiff counsel can point to a variety of legal developments that arguably raise the bar for plaintiff recovery, but the cases likely precluded either reflect attempts to expand the scope of liability beyond the contours set by the Supreme Court, or involve weaker, more remote claims. The strong cases alleging clear frauds are, in my view, being prosecuted as strongly as ever.

Q. Are there pending cases or ongoing issues that you are watching that you think will be particularly important in the months ahead?

            A: There are three securities cases pending before the Supreme Court this term and any or all of them could lead to decisions that would have significant implications for the securities fraud litigation market. Also, the Supreme Court has a busy class action procedure docket, and decisions in those non-securities cases could have profound implications for the prosecution of class action securities fraud litigation.

Q. Do you have any predictions about 2011 securities litigation activity, as far as anticipated levels or trends?

            A: I would expect the core rate to remain constant, and from there I would expect a bump up as even more merger disclosure litigation finds its way to federal court and a bump down as Morrison reduces the incidence of claims targeting foreign trading activity. Farther down the road, I would not preclude an increase in litigation activity attributable to whistleblower “tag along” cases that will be filed shortly after the Commission announces litigation or settlements arising from Dodd Frank bounty hunter disclosures.

Q. If you were to be called upon to serve as a D&O insurance underwriter, what are the most important things you would want to consider when reviewing a particular company, and why?

            A: I would only insure issuers who promise not to file any claims :)

I would like to thank Professor Grundfest for his willingness to participate in this dialog. I know there are many D&O insurance underwriters who earnestly wish they could implement his proposed D&O insurance underwriting philosophy.

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As a result of a spike in second half filings, the number of new securities class action lawsuits increased slightly in 2010 compared to the year before, although the 2010 filing levels remained below historical averages, according to the annual study released jointly by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse. This year’s version of the study, entitled "Securities Class Action Filings: 2010 Year in Review," introduces some innovations that provide some interesting perspectives on securities class action lawsuit filings.

The study can be found here, and the joint January 20, 2011 press release about the study can be found here.

According to the study, there were 176 securities class action lawsuit filings in 2010, up 4.8% from 2009, but 9.7% below the 1997-2009 average number of filings (195). The increased number of filings in 2010 was largely due to the increased filing activity in the second half of the year, when 104 new securities suits were filed (compared to only 72 in the first half).

A significant factor in the increased number of 2010 filings was the number of lawsuits related to merger and acquisition transactions. According to the report, there were 40 filings with allegations related to M&A transactions, which represents a 471 percen increase from the seven M&A-related filings in 2009.

This increase in M&A-related litigation cannot be explained simply as reflection of increased M&A activity, since M&A activity increased only 20 percent in 2010. The increase, the report suggests "may be largely a result of changes in plaintiff law firm behavior rather than changes in underlying market forces." The press release quotes Stanford Law Professor Joseph Grundfest as saying that "plaintiffs lawyers are scrambling for new business as traditional fraud cases seem to be on the decline," adding that "there is little reason to believe that this trend will reverse or slow down."

The report also notes a number of trends that have previously been noted elsewhere, including the decreasing number of credit crisis-related lawsuits during the year, and the spate of lawsuits involving for-profit education companies and also involving Chinese companies.

With regard to the surge in lawsuits involving Chinese companies, the press release quotes Professor Grundfest as saying that this litigation is arising as "some Chinese issuers struggle to conform to Western market norms, adding that at the same time others might engage in outright fraud." The report itself adds the observation that most of the Chinese companies sued in 2010 were only recently listed on major U.S. exchanges; eight out of the 12 Chinese companies sued were listed during 2009 or 2010, while the remaining three issuers were listed toward the end of 2006, 2007 and 2008. On average these companies were sued within 1.4 years of their listing dates.

The report includes a status update for the credit crisis related filings. The report confirms an observation I had previously noted, which is that the credit crisis cases seem to be reaching the settlement stage more slowly than compared to securities cases generally. The report states that credit crisis filings "have significantly lower settlement rates compared to non-credit-crisis filings," largely as a result of the cases pending in the Second Circuit. The report shows a 9.8 percent settlement rate for credit-crisis filings compared to 24.1 percent for non-credit crisis filings. However, the dismissal rates for credit crisis-related filings "do not appear to be different from non-credit-crisis-filings."

A new feature added to this year’s report is an analysis of the litigation exposure following initial public offerings. The report analyzed the likelihood that a company would be sued in the eleven year period after its IPO, and compared that likelihood to the possibility that a company in the S&P 500 would be sued during that same eleven year period.

The report found that the exposure to securities class actions is the highest during the first few years after an IPO, although the exposure diminishes over time as the companies mature. The analysis showed that there is more than a 10 percent chance that firms would be hit with a securities suit within three years of an IPO, with the highest risk in the second year after an IPO, when they faced a 4.1 percent chance of being sued.

Interestingly enough, at least with respect to IPO companies that survived for eleven years, the possibility of those companies being sued during that eleven year period is actually lower than for the S&P 500 companies during that period. The S&P companies had a 49.9 percent chance of a suit during that period, compared to only 28.7 percent for the IPO companies. The report speculates that this lower risk over the longer period may be explained by the fact that the IPO companies tend to be much smaller than S&P 500 companies, and therefore represent less attractive targets for the plaintiffs’ lawyers.

One particularly interesting aspect of the report’s IPO review is its analysis of the survivability of IPO companies. The report shows that only 39.4% of IPO companies survived for the full eleven year study period (compared to 65.1% of S&O 500 companies).Indeed, more than 35 percent of companies failed to survive four years after their IPO (compared to less than 15% of the S&P 500 that failed to survive the first four years of the study period).

The report’s industry analysis shows that as filings against financial companies declined due to the diminution of the credit crisis litigation wave, filings against companies in the health care sector spiked.

The report also notes that as the number of M&A related cases has increased, the phenomenon noted in recent years of belated filings (in which the filing date came well after the stock price decline that precipitated the suit) has largely abated.

Overall, the report contains a number of interesting observations and findings, and the report warrants reading at length and in full.

Two final notes: First, the lawsuit count reflected in the Cornerstone report may differ from other published figures, as the Cornerstone report counts multiple filings against the same defendants as a single filing (compared to other commentators that may count separate complaints separately until they have formally been consolidated).

Second, while securities class action lawsuit filings may have been down in 2010 compared to historical averages, the overall level of corporate and securities litigation during the year was actually up – indeed, at "record" levels" – at least according to Advisen’s recently issue report about 2010 litigation activity, about which refer here.

My own analysis of the 2010 securities class action lawsuit filings can be found here.

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Though securities class action lawsuit filings were below historical averages, overall corporate and securities litigation reached "record" levels during 2010, according to a report from the insurance information firm, Advisen. The report, which was released on January 19, 2011 and is entitled "2010 a Record Year for Securities Litigation," can be found here.　

 Preliminary Notes

In considering the Advisen report, it is critically important to recognize that the report uses its own unique vocabulary to describe certain of the litigation categories.

The litigation analyzed in the Advisen report includes not only securities class action litigation, but a broad collection of other types of suits as well, including regulatory and enforcement actions, individual actions, derivative actions, collective actions filed outside the U.S. and allegations of breach of fiduciary duty. All of these various kinds of lawsuits, whether or not involving alleged violations of the securities, are referred to in the aggregate in the Advisen report as "securities suits."

One subset of the overall collection of "securities suits" is a category denominated as "securities fraud" lawsuits, which includes a combination of both regulatory and enforcement actions, on the one hand, and private securities lawsuits brought as individual actions, on the other hand. However, the category of "securities fraud" lawsuits does NOT include private securities class action lawsuits, which are in their own separate category ("SCAS").

Due to these unfamiliar usages and the confusing similarity of category names, considerable care is required in reading the report.

The Report’s Analysis

According to the latest Advisen report, there were a total of 1196 corporate and securities lawsuits field in 2010, which is slightly above the 1171 corporate and securities lawsuits filed in 2009, and represents a "record."

According to the report, there were 193 securities class action lawsuits filed in 2010, down from 233 in 2009 (Advisen’s securities class action lawsuit counts may differ from those of other published sources because the Advisen count, unlike those of other sources, include state court securities class action lawsuits as well as federal court lawsuits). The 193 securities class action lawsuits is 2010 is well below the 2004-2009 average of 227. The Advisen report attributes the relative decline to "a sharp drop in credit crisis suits."

The proportion of all securities class action lawsuits as a percentage of all corporate and securities lawsuits has been, according to the report, "steadily trending downward." Thus, prior to 2006, securities class action lawsuits represented as much as one third of all corporate and securities lawsuits. However, in 2010, securities class action lawsuits represented only 16 percent of all corporate securities lawsuits, and only 14 percent during the fourth quarter of the year.

Two growing categories of corporate and securities litigation are breach of fiduciary duty lawsuits and shareholders derivative lawsuits.

Breach of fiduciary duty lawsuits have grown rapidly as a category of all corporate and securities litigation. As recently as 2004, fiduciary duty suits represent only 8 percent of all corporate and securities lawsuits, whereas they represented about a third of all corporate and securities suits in 2010, and 40 percent in the fourth quarter of 2010. Many of the breach of fiduciary duty cases filed in 2010 are related to merger and acquisition transactions.

Similarly, derivative lawsuits filings increased to 129 in 2010, up from 93 in 2009. In 2011, the derivative lawsuits represented 11 percent of all corporate and securities lawsuit filings.

Financial firms remained the most frequently sued companies in 2010, although filings against financial firms were down relative to prior years. Overall, 30 percent of the corporate and securities lawsuits in 2010 were filed against financial firms, compared to 40 percent in 2008 and 2009. The remaining 2010 lawsuits were more widely dispersed than in recent years.

The report notes that the average settlement value of all corporate and securities lawsuits in 2010 was $37 million, compared to $29 million. In considering this information it is critically important to consider that this figure aggregates regulatory and enforcement settlements with private lawsuit settlements. In that regard it is important to note that the report states that average securities class action settlement in 2010 was $32 million, the average breach of fiduciary duty settlement was $17 million, and the average derivative settlement was $11 million. In each case the private lawsuit settlements averages are substantially influenced by outlier settlements.

The Advisen report also notes that securities litigation has been "on the rise" in recent years outside of the U.S. The report notes that there were 36 "securities suits" in courts outside the U.S., which is ‘in line" with 2006-2008 totals.

Discussion

The data point to which most discussions default in trying to gauge the level of corporate and securities litigation activity is the level of securities class action lawsuit filings. Indeed, a number of commentators (including this blog) release annual studies of securities class action lawsuit filing levels, which typically trigger discussions about whether or not lawsuits are up or down.

The Advisen study makes it clear that if the discussion is focused solely on securities class action litigation activity, then there may be a misleading impression about the level of overall corporate and securities litigation.

The fact is that securities class action litigation is an increasingly smaller part of all corporate and securities litigation. So even though the number of securities class action lawsuits filed in 2010 was down relative to recent annual averages, the overall level of corporate and securities litigation was up in 2010 – in fact, according to the Advisen report, it was at "record" levels.

There are probably a few caveats that need to be supplied with these overall observations about filing levels. First, some readers may object to the conflation of regulatory and enforcement actions with private civil lawsuits. One obvious concern is that the conclusion that corporate and securities litigation overall is reaching "record" levels may simply be a reflection of the fact that regulatory authorities have ramped up their enforcement activities – indeed, there is no doubt that that is at least part of what is going on.

Along those lines, I think it is fair observation that the Advisen analysis would be improved if the regulatory and enforcement actions were separated out from the overall analysis. In that regard, it is particularly unfortunate that the "securities fraud" category is both confusingly named and also incorporates both regulatory actions and securities lawsuits not brought as securities class action lawsuits, eliminating any chance that a reader might try to filter out the regulatory and enforcement activity from the private litigation activity.

Another concern is that even if securities class action lawsuit filing levels are down relative to historical norms and as a percentage of all corporate and securities lawsuits, securities class action lawsuits remain the most significant source of severity risk – at least in terms of private civil litigation, as distinct from regulatory and enforcement actions.

However, from the perspective of the likelihood of litigation, and in particular from the perspective of the claims experience of D&O insurance carriers most active in the primary layer, the increasing incidence of other types of corporate and securities litigation is a very significant development. An analysis focused solely on securities class action litigation would miss the significance of the increase claim frequency coming from these other kinds of claims, and the resulting claim exposure for companies and for the D&O insurers.

My own analysis of the 2010 securities class action lawsuit filings can be found here.　 

2010  Securities Litigation Overview Webinar: On Friday January 21, 2011, at 11:00 am EST, I will be participating in a free webinar on the topic "Year End 2010 Securities Litigation Overview," sponsored by Advisen, to discuss 2010 securities litigation trends and developments.. Other panelists participating in the webinar include David Bradford of Advisen, Kevin Mattesich of the Kaufman Dolowich law firm and Gerald Silk of the Bernstein Litowitz firm. Further information about the webinar, including registration instructions, can be found here. 

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As detailed in the accompanying blog post, all signs are that the FDIC will be filing increasing numbers of civil actions against former officials of banks that have been closed as part of the current round of bank failures. With this possibility in mind, it seems like it is time for The D&O Diary to initiate yet another of its litigation tracking lists.

A list reflecting the civil lawsuits that the FDIC has filed in its capacity as receiver against former officials of failed banks can be found here.

I will be updating this list periodically as I become of aware of additional civil lawsuits that the FDIC has filed. This list is a community resource for readers of this blog, and I hope that readers will help maintain the value of this resource for the community by advising me of any new lawsuits that have been filed and of any omission from the list. As I update the list, I will indicate at the top of this blog post the last date on which the list was most recently updated.

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2010 was a year of transition for securities class action lawsuit filings, as a number of trends that have been dominant in recent years diminished as the year progressed, while at the same time other trends emerged. Overall, the number of filings during the year was up slightly from last year, although below long term averages. But as noted below, the securities class action lawsuit filing levels are only part of what has been happening from an overall claims frequency standpoint.

Overall Numbers

By my count, there were 177 new securities class action lawsuit filings during 2010. (Please see my notes below regarding counting methodology.) The 2010 total is up from the 168 new securities suits in 2009, although below the 1997-2008 average of 197.

The 2010 filings were weighted toward the year’s second half, as there were only 74 new securities class action lawsuit filings the first six months of the year, compared with 103 during the last six months.

There were a number of different factors behind the relatively greater number of filing in second half of the year.

2010 Filing Trends

Perhaps the most significant factor behind these annual filing numbers is the diminishing numbers of subprime and credit crisis related cases during year.

The credit crisis cases had been a significant of all filings during the years 2008 (when there were 102 credit crisis-related lawsuit filings) and 2009 (62). By contrast during 2010, there were only 23 new credit crisis-related securities lawsuits, representing about 13% percent of the total. Of these 23 new credit crisis cases, only nine of these cases were filed in the year’s second half, and only one was filed after August 2010. Clearly, the credit crisis litigation wave is winding down.

Similarly, another important factor in recent years’ filings has been the phenomenon of belatedly filed cases. These cases, filed more than a year or more after the proposed class period cutoff date, had surged during 2009. The belated filings did continue in 2010, as there were 17 of these belated cases during the year. However, there were only three of these cases were filed in the year’s second half, and none were filed after September. Again, the phenomenon of belatedly filed class action seems to be winding down.

While these dominant trends from prior years diminished in the second half of 2010, a number of other trends emerged that largely explain the increase in filings during the last six months of the year.

First, a significant percentage of all 2010 filings were lawsuits related to mergers or acquisitions. These merger objection cases involve acquisitions, going private transactions or management buyouts, or allegations of proxy violations in connection with these kinds of corporate activities. There were 37 of these cases in 2010, representing more than one-fifth of all 2010 filings. 23 of these cases were filed in the year’s second half. These merger objection cases were a significant part of the increased number of filings in the year’s second half.

Second, there were several sector specific contagion events that resulted in a rash of cases against a number of companies in a specific category. As I have previously noted on this blog, these contagion events include an outbreak of lawsuits against for-profit education companies (as discussed here), and against companies domiciled in China (as discussed here).

By my count, 12 for-profit education companies were sued during 2010, all of them after August 1, 2010. These cases against for-profit education companies represent 6.7% of all new 2010 filings.

Similarly, there were 10 Chinese domiciled companied sued during 2010, eight of them in the year’s second half. These cases against Chinese companies represented 5.6% of all 2010 filings.

Together the cases against companies in these two categories were a significant factor in the increase in second half filings, as they represent nearly 20% of all filings in the year’s second half.

Another significant category of cases during the year are those involving failed and troubled banks. There were 13 cases filed against banking institutions during 2010, representing 7.3% of all 2010 filings.

One other 2010 filing trend worth noting is the securities class action lawsuit headline hit parade. In a sequence that was well-established this year, securities class action lawsuit filings followed almost immediately for companies suffering significant adverse publicity events. Companies hit with class action lawsuits this year as part of this pattern include Toyota, Massey Energy, Goldman Sachs, BP and even Lender Processing Services (a company caught up in the foreclosure process scandal). Indeed, it could be argued that the wave of suits against the for-profit education companies fit this same pattern.

Recurring Filing Trends

While some recent trends diminished during the year and other new trends emerged, there were some long-standing patterns that continued during the year. Among the most distinct of these continuing trends is that life sciences companies continued to attract plaintiffs’ lawyers’ attention as they have in past years (about which refer here).

During 2010, securities class action lawsuits were filed against 18 companies in the 283 Standard Industrial Classification (SIC) Code Group (Drugs), and against nine companies in the 384 SIC Code Group (Surgical, Medical and Dental Instruments). These 27 companies represent about 15% of all securities lawsuit filings during the year. By way of comparison, life sciences companies were sued in about 10% of all filings in 2009.

In addition, as has been the case for the last several years, financially-related companies also remained a prominent securities litigation target. There were 34 companies in the 6000 SIC Code series (Finance, Insurance and Real Estate) named in securities suits during the year. In addition, there were 18 other entities named as defendants to which no SIC code designation has been assigned. Most of these entities lacking SIC Codes are financially related. These two groups together represent a total of 52 of the 2010, or 29.3% of the total (compared with 37% during 2009).

But while there were concentrations in certain industry categories, the 2010 filings overall involved a surprisingly broad array of kinds of companies. Overall, the companies targeted in the 2010 represented 80 different SIC Code categories.

The 2010 filings were also generally geographically dispersed. The 2010 securities cases were filed in 47 different U.S. district courts. However, there were certain courts that saw high levels of new filings during the year. 35 of the cases ( nearly 20%) were filed in the S.D.N.Y., 19 (10.7%) were filed in the Northern District of California, and 19 (10.7%) were filed in the Central District of California. Together the cases filed in just these three courts represent more than 41% of all 2010 filings.

19 (or 10.7%) of the cases filed during 2010 involved companies domiciled outside the U.S. Surprisingly, 12 of these cases were first filed after the U.S. Supreme Court’s June 2010 decision in the Morrison v. National Australia Bank case, which narrowed the availability of U.S. courts for the claims of some claimants with claims against non-U.S. companies (about which refer here). As noted above, many of these cases against non-U.S. companies involved Chinese companies. There were cases filed against companies domiciled in eight other countries as well.

Looking Ahead

While it may be safe to say that the filings during 2010 represented some form of a transition, it is difficult to say what the year’s developments may portend as we head into 2011.

On the one hand, the upswing in cases in the year’s second half might be interpreted to suggest that 2011 will be an active year for new securities lawsuit filings.

On the other hand, the upswing in the second half was in many ways a reflection of outbreaks of litigation activity related to very specific and short term events, such as the scandal involving student lending in the for-profit education sector. Similarly, the uptick in cases filed against Chinese companies may signify nothing more than a reflection of the fact that an increased number of Chinese companies recently have sought U.S. listings. The litigation in the second half of the year from these kinds of events and activities may or may not continue to lead to litigation activity in 2011.

There are certain 2011 litigation trends that do seem relatively likely to continue in 2011. The merger related litigation activity show no signs of slowing down. Given the continuing surge of bank failures, it seems likely that we will continue to see new filings involved failed and troubled banks. And there doesn’t seem to be any reason to assume that the historically elevated levels of litigation activity involving life sciences companies will not continue into next year as well.

Some Observations About "Counting"

Although the process of counting lawsuits would seem like a relatively straightforward exercise, there are a number of issues that complicate the process and that can significantly affect the outcome. First and foremost you have to decide what "counts." For purposes of my analysis, I count each claim against a company raising the same allegations only once, regardless of the number of complaints that are filed. This counting method means that my lawsuit count will appear lower than that of other observers, like for example NERA Economic Consulting, which will count different complaints against the same company in different jurisdictions as separate lawsuits (at least until the complaints are consolidated).

Another issue is what kind of lawsuit to count. In general, I try to count class action lawsuit alleging violations of the federal securities laws. One particular category I have always struggled with are the merger objection lawsuits, which may be framed as class actions and may allege violations of the securities laws, but generally are based on allegations of that some aspect of a merger or acquisition is unfair to investors, by comparison to the more traditional stock-drop-disclosure-violation lawsuit.

In the past I have tended against including the merger objection lawsuits. I opted to include these lawsuits this year, in part because without including them my lawsuit count would diverge materially from other public reports about the 2010 filings. Indeed, if I had not included the merger objection lawsuits in my 2010, I would be reporting only about 140 new securities class action lawsuit filings this year. It is arguable that by including the merger objection lawsuits in my 2010 count, I have inflated the reported number of filings.

Another category of cases that I have included in my 2010 count but about which reasonable minds might differ are the cases involving private or other nonpublic entities. I have wrestled with this question every year, as the inclusion of these kinds of cases in the count arguably could have the effect of overstating the frequency risk to the companies that are most concerned about securities class action litigation activity levels, namely publicly traded companies.

A total of 17 of the 2010 filings involved private entities. The nature of these cases varies. But the inclusion of these kinds of cases arguably also overstates the securities class action litigation activity levels, at least as respects publicly traded companies.

The inclusion of the private company claims and the inclusion of the merger objection cases have a very material impact on the reported number of overall filings. Without these cases, the reported number of filings would have been substantially lower (that is, it would be 123 rather than 177). Again reasonable minds could dispute whether or not these categories of cases should be considered. Regardless, in considering the level of 2010 securities class action litigation activity, it is important to understand how these categories of cases are treated.

On a final note, the treatment of one other category of cases had the effect of deflating the reported number of filings. That is, by my count, there were five new cases filed involving ETF funds during 2010. Cases involving ETF funds were a significant part of 2009 securities class action litigation activity. However, in April 2010, Southern District of New York Judge John Koeltl entered an order consolidating all of the ETF lawsuits, including those filed in 2009 and 2010, into a single case (refer here). Accordingly, because the ETF cases are no longer separate suits, I have not counted the five new 2010 ETF lawsuit filings as separate cases for purposes of my 2010 lawsuit count.

A Final Note About Securities Class Action Frequency

As insurance information firm Advisen has well documented, the mix of corporate and securities lawsuits has been evolving over the past several years. The most important feature of this changing mix of cases has been the decreasing prevalence of class action securities lawsuits as a percentage of all corporate and securities cases.

According to Advisen, securities class action lawsuits represented less than 20 percent of all corporate and securities class action lawsuits during the first three quarters of 2010, which represents a significant decline from more traditional patterns in which securities class action lawsuits represented half or more of all corporate and securities lawsuits.

As the percentage of class action securities lawsuits has declined, other types of lawsuits, particularly breach of fiduciary duty cases, have grown in relative frequency. Many of these breach of fiduciary duty cases are related to mergers and acquisitions activity. Indeed, as I noted in my year-end review of 2010 securities lawsuit filings, even many of the cases that are categorized as securities class action lawsuits involve merger objection cases.

It is important to keep this changing mix of cases in mind when considering the various year end reports on securities litigation activity. These reports typically will show that overall 2010 securities class action lawsuit filings are down compared to post-PSLRA averages. However, it would be mistake to conclude that the relatively reduced number of securities class action lawsuits means that claims activity in general is down. To the contrary, overall claims activity is actually up. The mere fact that securities class action lawsuits are down does not mean that fewer companies are being sued or that overall claims exposure has diminished, either for companies or insurers. Rather, what is happening is that the claims exposure is changing, away from securities class action lawsuits and toward other types of claims.

Coming Attractions: Tomorrow I will be posting my list of the Top Ten D&O Stories of 2010. Those who have read this post closely will recognize at least two of the top stories on tomorrow’s list, as there is some overlap between today’s post and the first two items in tomorrow’s list. A certain amount of overlap was unavoidable, but rest assured that most of tomorrow’s post reflects additional and comprehensive observations about the events of 2010.

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On December 14, 2010, NERA Economic Consulting released its annual year-end study of securities class action lawsuit filings and settlements. The report, entitled "Trends 2010 Year-End Update," can be found here. Among other things, the NERA study reports that class action filings "picked up substantially" in the second half of 2010, and that median class action settlements reached an all-time high in 2010.

There are a couple of important considerations to be taken into account with respect to the NERA report. The first is that its analysis is with respect to filings and settlements through November 30, 2010. The report does incorporate a number of projections to account for the year’s final month.

In addition, the NERA report’s "counting" methodology, as reflected in footnote 3 of the study, may differ from the methodology used in other publicly available analyses of securities class action filings.

The NERA report states that "until cases are consolidated, we report multiple filings that potentially are related to the same allegations if complaints are filed in different circuits." And until cases are consolidated, "we report multiple filings if different cases are filed on behalf of investors in common stock and other securities." If the cases are ultimately consolidated, the data are adjusted. NERA’s methodology differs from that used by other observers (including The D&O Diary), and may result in a filing count that is higher than reported elsewhere.

The study does report a number of interesting findings, including the fact that class action filings accelerated in the second half of 2010. In fact, the study reports, the number of new class action filings in September (25) represents the highest monthly total of new "standard"  filings since August 2004.

According to the NERA report, there were a total of 219 filings in the year’s first eleven months. NERA projects a total of 239 filings by year end, which would represent an increase over the 220 filed in 2009 and would be "broadly consistent with the long-term average."

Though companies in the financial sector remain the most frequently targeted, the number of credit crisis-related lawsuits continues to decline. There were only 31 credit crisis related filings in 2010, compared to 57 in 2009 and 103 in 2008. More than half of the new lawsuits against companies in the financial sector in 2010 were unrelated to the credit crisis. About 40% of all 2010 cases named companies in the financial sector, which, while well below the peak of 72% in 2008, still remains above the 28% in 2005 and 2006, prior to the credit crisis.

Other sectors that also saw significant amounts of securities class action litigation included health technology firms, electronic technology and technology services sector. As I previously noted (here), there was also a sharp upturn in cases against companies in the for-profit education sector.

Despite the U.S. Supreme Court’s holding in Morrison v. National Australia Bank (about which refer here), the anticipated drop in cases against non-U.S. companies did not really materialize, largely do to the "spate of suits against Chinese-domiciled companies" (about which I recently commented here).

On the other hand, the number of belated filings of securities lawsuits declined in the second half of 2010. As I previously noted, there had been an upsurge in new case filings reflecting a substantial time lag between the date of filing and the proposed class period cutoff. The NERA study reports that for 2010 filings, the median time to file was only a month, compare to nearly six months for cases in the second half of 2009.

Among trends in factual allegations, the NERA study reports that filings of cases alleging breach of fiduciary duty more than doubled in 2010. Many of these cases were related to mergers or acquisitions.

With respect to case resolutions, the NERA study reports a number of interesting filings. Among other things, the study reports that the average settlement for cases settled in 2010, adjusted for outlier settlements, was $42 million, which is in line with 2009’s record high but well above the $30.4 million average for the period 2003 to 2010.

Even more significantly, the NERA study reports that in 2010, the median settlement jumped to $11.1 million, which not only represents an all-time high, but is more than a third higher than the 2009 median of $8.5 million. However, the report also notes that median investor losses for cases filed in 2010 were down substantially and more in line with pre-credit crisis cases. These more recently filed cases may push median settlements down in future years closer to the historical median.

Consistent with this last point, though average and median settlements are elevated, the settlements as a percentage of investor losses were consistent with similar ratios going back to 2002. The percentage in 2010 was 2.4%, well within the 2.2% to 3.1% range between 2002 and 2009.

One factor that may affect average and median settlements in the near term is the substantial overhang of unresolved subprime and credit crisis-related lawsuits. Even though several high-profile credit crisis cases have been resolved, many more remain pending. The NERA study reports that of the 230 credit crisis-related securities class action lawsuits, only about 8% have been settled, and another 29% have been dismissed, but fully 63% remain unresolved. These cases will continue to work their way through the system in the months ahead.

The NERA report is full of a wide variety of interesting information and insights, and is worth reading at length and in full. I hope to have my own study of the 2010 filings shortly after year end.

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Overall levels of corporate and securities litigation remained at elevated levels in the most recent quarter even as securities class action filing levels remained flat, according to the third quarter 2010 report of the insurance information firm, Advisen. The October 2010 report can be found here. 

Preliminary Notes 

The litigation analyzed in the Advisen report includes not only securities class action litigation, but a broad collection of other types of suits as well, including regulatory and enforcement actions, individual actions, derivative actions, collective actions filed outside the U.S. and allegations of breach of fiduciary duty.

In considering the Advisen report, it is critically important to recognize that the report uses its own unique vocabulary to describe certain of the litigation categories.

For example, the report uses the phrase "securities fraud" lawsuits to describe a combination of both regulatory and enforcement actions, on the one hand, and private securities lawsuits brought as individual actions, on the other hand; however, the category of "securities fraud" lawsuits does NOT include private securities class action lawsuits, which are in their own separate category (SCAS").

In addition, both "securities fraud" lawsuits and securities class action lawsuits, as well as all of the other categories of lawsuits described in the report, are subparts of the aggregate group of corporate and securities litigation the report refers to as "securities suits."

Due to these unfamiliar usages and the similarity of category names, considerable care is required in reading the report.

The Report’s Analysis

According to the Report, corporate and securities litigation "remained at inflated levels" in the third quarter. There were 284 "securities suits" in the third quarter, which is slightly higher than the 278 filed in 2Q10 and the 276 filed in the third quarter of 2009. The filings for the first three quarters of 2010 annualize to 1,024 lawsuits, by comparison to the 1,105 filed in 2009 and 928 in 2008. These annual figures are significantly above the roughly 800 per year lawsuits filed in 2007 and 2006.

The new lawsuit filings have remained at elevated levels even though the number of securities class action lawsuit and "securities fraud" action (that is, enforcement actions and individual securities suits) have remained essentially flat. The heightened litigation activity levels is largely due to the number of breach of fiduciary duty suits, which "have grown rapidly as a percentage of all securities suits," now representing 34 percent of all "securities suits," compared to as little as 8 percent as recently as 2004. These breach of fiduciary duty lawsuits "often are filed in the wake of a merger or an acquisition by shareholders of the acquired company who believe the directors did not obtain an adequate price."

Securities class action lawsuits as a percentage of all "securities suits" has, by contrast, declined in recent years and now represents less that 20 percent of all corporate and securities lawsuits. According to the Report’s counting methodology, there were 144 securities class action lawsuits filed in the first three quarters of the year, which annualizes to 192 lawsuits. This annualized number compares to the 234 securities class action lawsuits filed in 2009. According to the Report, there average number of securities class action lawsuit filings during the period 2004 to 2009 is 226.

The Report attributes the relative decline of securities class action lawsuit filings in 2010 to the drop in the number of new lawsuits related to the credit crisis. But though the credit crisis lawsuits have declined, financial firms remain the most frequently named in securities class action lawsuits. Overall, though, the securities class action lawsuit filings "were much more broadly dispersed than in previous quarters." The two largest categories of lawsuit defendants after financial firms are companies in the consumer discretionary and healthcare categories.

My own analysis of third quarter securities class action lawsuit filings can be found here.

Advisen's Third Quarter Litigation Overview: On October 15, 2010 at 11:00 a.m. EDT, I will be participating in an Advisen webinar reviewing the firm's third quarter securities litigation report. Other participants in this webinar include Steve Carabases of ACE, Adam Savett  of Claims Compensation Bureau and David Bradford of Advisen. The session will reveiw Advisen's analysis of third quarter 2010 securities litigation and discuss the implications for brokers, underwriters and risk managers. Information about the session, including registration information, can be found here.

In BofA/ Merrill Case, Judge Castel Denies Motion for Reconsideration and Immediate Appeal: In an October 7, 2010 order (here), Judge Kevin Castel denied the defendants’ motion for interlocutory appeal or for reconsideration of Judge Castel’s August 27, 2010 order denying in part and granting in part the defendants’ motions to dismiss. Refer here for background regarding his August 27 ruling, which as noted here, has proven to be controversial, to the extent it seemed to suggest that BofA could not be liable under the federal securities for omission allegedly made at the direction of Secretary of the Treasury Paulson. That aspect of Judge Castel’s ruling, which clearly favors the defendants, was the subject of defendants’ motion.

Rather, as discussed in Alison Frankel’s October 12, 2010 Am Law Litigation Daily article (here), the defendants relied on three specific issues: "Did BofA have a duty to disclose Merrill's (disastrous) interim financial results; do shareholders of an acquiring comany have causation claims; and are covenants of a private merger agreement actionable under federal securities laws? "

Judge Castel denied the request for interlocutory appeal, noting that granting the motion would "grind this action to a halt." He also held that the defendants had not presented sufficient grounds for reconsideration.

Welcome to the Blogosphere: I am pleased to note that my friend Joe Monteleone of the Tressler law firm has joined the blogosphere with his new blog, The D&O and E&O Monitor, which can be found here. The new blog is off to a great start and it looks like a worthy new addition to the blogosphere. All I can say is that Joe will soon learn that a blog is harsh mistress.

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New securities class action lawsuit filings in the third quarter of 2010 remained below longer term historical averages, although consistent with filing levels in more recent quarters. There were 39 new securities class action lawsuits filed in the third quarter, bringing the 2010 YTD total number of new filings to 125, as of September 30, 2010.

The 125 new filings through the end of the third quarter compares with the 129 that were filed in the first three quarters of 2009, and implies a total of about 166 by year end 2010 (compared to 169 in 2009). The implied 2010 total is well below the annual average of 197 new securities class action lawsuits filed during the period 1996 to 2008.

Though the overall 2010 YTD filings levels remain below historical levels, new filings did turn up slightly in September 2010, when there were 21 new securities class action lawsuits filed, the highest monthly number of filings since 2008.

New filings against companies in the financial services sector remain an important component of new securities class action lawsuits. During the third quarter there were eight new filings in the 6000 SIC Code series (Finance, Insurance and Real Estate), and an additional three new filings involving firms without SIC Codes but that are financially related. These eleven total new filings against financially related firms represented about 28% of third quarter filings.

Subprime and credit crisis related securities class action lawsuits continue to be filed in the third quarter of 2010. Seven, or about 18%, of the third quarter filings were subprime or credit crisis-related.

While filings against financially related companies continue to predominate as they have since 2007, there were a number of other areas of concentration in the third quarter as well. As I have noted elsewhere, there was a proliferation of filings in the third quarter against for-profit education companies. A total of six for-profit educational companies were sued in the third quarter.

In addition, as has been the case over time, new filings against life sciences companies was also an important part of the third quarter filings. There were a total of seven new filings against companies in the life sciences sector, including four against companies in the 2834 SIC Code category (pharmaceutical preparations). .

For the first three quarters of 2010, there have been 26 new securities lawsuits filed against companies in the 6000 SIC Code series and another 15 against financially-related companies without SIC codes, for a total of 41 new lawsuits against financial companies, or about one third of all 2010 filings. 22 (or about 17.5%) of all 2010 filings have been subprime or credit crisis-related.

Filings against life sciences companies have also been a significant component of 2010 YTD filings. There have been 19 new securities lawsuits filed against companies in the life sciences industry, including 13 against companies in the 2834 and 2835 SIC Code categories. (SIC Code 2835 include in vitro and in vitro diagnostic substances).

There have been ten new securities class action lawsuits filed this year against foreign-domiciled companies, or about eight percent of the total. Interestingly, there have been four new securities class action lawsuits filed against foreign-domiciled companies since the U.S. Supreme Court issued its opinion in Morrison v. National Australia Bank.

Of the 125 YTD filings, 17 (or about 13.6%) represented so-called "belated filings" – that is, cases in which the filing date came more than a year after the proposed class period cutoff date. Though there have been a significant number of these belated filings this year, the number of these filings has slowed as the year has progressed. Only four of these 17 belated cases have been filed since June 30, 2010.

Apple Turnover: You may have missed it this past week, but the parties to the long-running Apple Computer options backdating-related securities class action lawsuit have reached a settlement, as reflected in their September 28, 2010 memorandum in support of their settlement stipulation. The Apple case is one of the last of the 39 options backdating related securities class action lawsuits to finally be resolved.

The Apple settlement incorporates a rather unusual feature. On the one hand, the parties have agreed to settle the case for two conventional settlement terms -- a payment of $14 million in cash for the benefit of the plaintiff class and the company’s agreement to adopt certain corporate governance reforms. But in addition, the company has agreed to make payments totaling $2.5 million to 12 educational institutions’ corporate governance programs.

These payments work out to approximately $208,333 for each of the twelve institutions. The memorandum in support of the parties’ settlement stipulation reports that the lead plaintiff selected the twelve institutions "after conducting a review of corporate governance programs nationally."

While these corporate governance programs undoubtedly represent worthy causes, you do have to wonder about this settlement feature, which arguably provides no benefit either to members of the class or to current Apple shareholders. It also raises questions about compelled corporate philanthropy at shareholders’ expense.

I have in any event added the Apple settlement to my running table of options backdating related case resolutions, which can be accessed here.

Advisen’s Third Quarter Litigation Overview: On October 15, 2010 at 11:00 a.m. EDT, I will be participating in an Advisen webinar reviewing the Third Quarter Securities Litigation. Other participants include Scott Meyer from ACE, Adam Savett of Claims Compensation Bureau, and Dave Bradford of Advisen. The session will review Advisen's analysis of third quarter 2010 Securities litigation and settlements and discuss the larger implications for underwriters, brokers and risk managers. Information about the free webinar, including registration instructions, can be found here.

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Overall levels of corporate and securities litigation increased during the second quarter of 2010, according to a new study released on July 15, 2010 by the insurance information firm Advisen. A copy of the report can be found here.

Preliminary Notes

The litigation analyzed in the Advisen report includes not only securities class action litigation, but a broad collection of other types of suits as well, including regulatory and enforcement actions, individual actions, derivative actions, collective actions filed outside the U.S. and allegations of breach of fiduciary duty.

In considering the Advisen report, it is critically important to recognize that the report uses its own unique vocabulary to describe certain of the litigation categories.

For example, the report uses the phrase "securities fraud" lawsuits to describe a combination of both regulatory and enforcement actions, on the one hand, and private securities lawsuits brought as individual actions, on the other hand; however, the category of "securities fraud" lawsuits does NOT include private securities class action lawsuits, which is its own separate category (SCAS").

In addition, both "securities fraud" lawsuits and securities class action lawsuits, as well as all of the other categories of lawsuits described in the report, are subparts of the aggregate group of corporate and securities litigation the report refers to as "securities suits."

Due to these unfamiliar usages and the similarity of category names, considerable care is required in reading the report.

The Report’s Analysis

Even though subprime and credit crisis case filings during the second quarter were well below 2009 levels, overall corporate and securities litigation activity was up in the quarter – "nearly 30 percent higher than the first quarter and about 19 percent above the very active second quarter."

The report also notes that securities class action litigation activity was up in the quarter as well, largely as a result of litigation relating to the government investigation of Goldman Sachs and the Deepwater Horizon oil spill.

However, in what may be the report’s most significant observation, securities class action litigation is becoming an increasingly smaller percentage of all corporate and securities litigation. The report notes that this percentage has been trending downward for several years; securities class action lawsuits, which represented more than half of all corporate and securities lawsuits before 2006, represented only 23 percent of these suits in 2009 and only 19 percent in the first half of 2010.

In addition to the relative number of securities class action lawsuits, the absolute number of securities class action suits also declined in the first half of the year. According to the Advisen report, there were 85 securities class action lawsuits in the first half of 2010, which annualizes to 170 cases. The average annual number of securities class action filings during the period 2005-2009, according to the report, is 213. The 2010 decline "is due substantially to a sharp drop in subprime/credit crisis cases."

The report also notes that the average time between the end of the class period and the date the lawsuit was filed is lengthening, from 126 days in 2008 to 228 days in the first half of 2010.

Though new subprime and credit crisis cases continue to decline, companies in the financial sector remain the most frequent corporate and securities litigation target. According to the report, financial firms were named in about 34 percent of all corporate and securities lawsuits in the second quarter.

Though securities class action lawsuit filings as a percentage of all corporate and securities lawsuits have declined, lawsuits alleging breach of fiduciary duty are becoming an increasingly larger percentage of all corporate and securities lawsuits, primarily in connection with merger and acquisition activity. Breach of fiduciary duty cases represented only eight percent of all corporate and securities lawsuits in 2004, but 32 percent of all such litigation in 2009.

Discussion

The public dialog about securities litigation tends to concentrate on securities class action lawsuit filings. Though securities class action litigation remains the most costly type of corporate and securities litigation, from a frequency standpoint, securities class action litigation is becoming increasingly less important. According to the Advisen report, more than 80 percent of all corporate and securities litigation in the first half of 2010 involved types of litigation other than class action securities litigation.

Moreover this movement of litigation activity away from securities class action litigation is now well-established, having persisted (and indeed accelerated) for well over five years now.

The fact is that companies and their senior managers face an increasingly diverse range of potential litigation exposures. The changing landscape of corporate and securities litigation may have important implications for companies’ management liability insurance decisions. At a minimum, the changing mix of litigation suggests that companies should carefully consider potential liability exposures beyond just those involved with possible securities class action litigation.

The changing mix of litigation also provides an important context within which to interpret apparent declines in securities class action litigation activity. Even if fewer class action lawsuits are being filed (at least lately, anyway), that does not mean the overall threat of litigation has declined. To the contrary, the Advisen report shows that the threat of corporate and securities litigation generally continues to increase. The litigation threat is not declining, it is simply changing.

The more interesting question is what the future may hold for securities class action litigation. In all likelihood the apparent recent decline in new securities class action lawsuits is merely cyclical – there have certainly been prior periods where new securities class action lawsuits fell below historical levels (for example, during the period from mid-2005 to mid-2007). On the other hand, some recent activity – for example, the increase in the number of belated lawsuit filings – suggests that a variety of forces and factors are at work.

My own view is that, as has always been the case in the past, the litigation cycle will eventually turn and filing activity levels will revert to the mean. There is an entrenched industry of highly entrepreneurial plaintiffs’ securities class action lawyers who have every incentive to continue to file lawsuits. I suspect strongly that one factor in the current relative downturn in new securities class action filings is that the plaintiffs’ lawyers are simply swamped trying to keep up with the massive wave of complex lawsuits they filed in the wake of the subprime meltdown and the credit crisis. Eventually the decks will clear and they will resume their normal activities, particularly if there are headline-grabbing events that provide litigation fodder.

My own prior analysis of first half 2010 securities class action litigation filing activity can be found here. The Advisen report’s analysis of securities class action lawsuit filings in the year’s first half is directionally consistent with my own observations.

Advisen Securities Litigation Webinar: At 11:00 am EDT on Friday July 16, 2010, I will be participating in a free, one-hour Advisen webinar to discuss the firm’s Second Quarter Securities Litigation Report. Joining me for the webinar panel discussion will be Carl Metzger from the Goodwin Proctor firm; Carol Zacharias from ACE, and Louise Pennington of Integro. Information about and registration instructions for the webinar can be found here.

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On April 14, 2010, the insurance information firm Advisen released its analysis of first quarter 2010 securities litigation filings and trends. The quarterly report, which is entitled "Securities Suits Ease Back to Normal Following a Frantic Two Years," can be accessed here. As detailed below, the Advisen report concludes that the securities lawsuit filing activity "floated back to earth in 2010, to a pre-credit crisis plateau."

Before any attempt can be made to try to read the Advisen report, it is absolutely indispensible to understand that the Advisen report uses its own terminology.　

The most important thing to understand is that the Advisen report uses the term "securities litigation" to include a very broad range of kinds of lawsuits, including not just securities class action lawsuits, but also derivative actions, regulatory and enforcement actions, individual lawsuits, and collective actions in courts outside the United States.　

The Advisen report also apparently includes within the category "securities lawsuits" cases that many readers might not think of as "securities claims," including claims alleging "common law torts, contract violations and breaches of fiduciary duties."

The Advisen report uses the term "securities lawsuits" basically to mean any type of corporate or securities litigation (other than ERISA litigation), regardless whether or not the legal action was commenced in the U.S. or even apparently whether it alleges a violation of the securities laws. Because of the enormous variety of litigation encompassed within this category, throughout this post I have put the phrase "securities lawsuits" or "securities litigation" in quotation marks.　

The Advisen report also uses the phrase "securities fraud" lawsuits as a subset of the larger group of "securities lawsuits." Contrary to what you might expect, however, the category of "securities fraud" lawsuits does not include class action lawsuits alleging securities fraud – securities fraud class action lawsuits are their own separate category ("SCAS"). Instead, the phrase is used to refer to regulatory and enforcement actions -- yet somehow also includes private securities lawsuits that are not filed as class actions.

So the "securities fraud" lawsuit category includes, in addition to regulatory and enforcement actions, lawsuits alleging fraud under the federal securities laws if the fraud is alleged by an individual but not if it is alleged on behalf of a class.

The Report’s Conclusions

Though the Advisen report’s title suggests that "securities litigation" is "back to normal," overall what the report seems to show is that "securities litigation" declined in the first quarter relative to recent periods.

Thus the report shows that there were 178 "securities lawsuits" (again, as that term is very broadly defined in the report). This first quarter filing rate for this broad category of litigation is down 34 percent from the final quarter of 2009 and 39 percent compared the year prior first quarter. This relative reduction in filing activity appears to be due to the decline in the number of credit crisis and Madoff-related lawsuits.

The 178 "securities lawsuits" in the first quarter represents an annualized filing rate of 712 "securities lawsuits," which would be 29 percent below the 2009 total number of "securities lawsuits" of 1,003.

This filing decline also affected the number of securities class action lawsuit filings as well. (Again, securities class action lawsuits, or "SCAS," represent a subset of "securities lawsuits.") According to the Advisen study, there were 38 securities class action lawsuits filed in the first quarter, which would represent an annualized filing rate of only 152 lawsuits. (Just by way of comparison, Cornerstone reports that the annual average number of securities class action lawsuits during the period 1996 to 2008 was 197.)

In continuation of a recent trend, the proportion of securities class action lawsuits as a percentage of all "securities lawsuits" continued to decline in the first quarter of 2010. Securities class action lawsuits represent 21 percent of all "securities lawsuits" in the first quarter of 2010, down from 23 percent in all of 2009, and 28 percent in 2004.

Though the decline in quarterly filing activity is attributable to the decline in Madoff and credit crisis-related lawsuit filings, financial firms remained the most frequently targeted. Financial firms were named as defendants in 31 percent of all "securities lawsuits," down from 39 percent in 2009 and 42 percent in 2008.

In addition to this still significant but declining level of filings involving financial companies, the report also notes "a wider spread of suits by industry sector," including the following sectors, indentified by their prevalence as targets as a percentage of all "securities suits"; "information technology (14 percent), consumer discretionary (13 percent), healthcare (11 percent), and industrials (11 percent).

Seventeen (or ten percent) of first quarter 2010 "securities lawsuits" were filed against non-U.S companies, down from 12 percent in all of 2009. The report states that there was "one large suit [against a non-U.S. company] filed in a non-U.S. court." The report does not define what is meant by "large."

Advisen Webinar: On Friday On Friday April 16, 2010, I will be participating in an Advisen webinar, entitled "First Quarter Securities Litigation Review," to discuss first quarter 2010 securities lawsuit filings as well as other first quarter securities litigation developments. Other participants in the webinar, which will take place at 11:00 am EDT, include Ken Ross from Willis, ACE’s Scott Meyer, Wilkie Farr’s Michael Young, and Advisen’s David Bradford. Advisen’s Jim Blinn will moderate. Registration information for the webinar can be found here.　

Reader Advisory: Terminology Matters!

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As the various year-end securities litigation studies have all shown, cases against financial services companies have dominated securities lawsuit filings for the last several years. But throughout that period, the plaintiffs’ attorneys have also continued to pursue claims against companies in other industries, particularly companies in the life sciences sector. A recent memorandum from David Kotler of the Dechert law firm entitled "Dechert Survey of Securities Fraud Class Actions Brought Against Life Sciences Companies" (here) takes a closer look at the securities lawsuits that were filed against life sciences companies in 2009.

According to the memo, there were 19 life sciences companies sued in securities class action lawsuits in 2009, representing roughly 10% of all 2009 securities suits. The 2009 filings against life sciences companies represents a slight decline from the 23 that were filed in 2008, but the proportion of all filings as the same, as the 23 filing in 2008 also represented about 10% of all filing. These proportions are slightly down from but roughly equal with the immediately preceding years – 14% in 2007, 13% in 2006 and 16% in 2005.

Consistent with prior years, the majority of 2009 life sciences company filings (12 out of 19) were brought against companies with market capitalizations under $250 million. This is roughly proportionate to the representation of companies of that size among all life sciences companies, as companies with market capitalizations under $250 million represent about 65% of all life sciences companies.

By contrast to prior years, but perhaps consistent with the overall economic environment, the 2009 life sciences lawsuits were more focused on allegations of financial improprieties rather than claims of misrepresentations involving industry-specific issues such as product safety or efficacy. Nine of the nineteen cases involved allegations of accounting improprieties, compared to six alleging misrepresentations involving product safety and six involving the prospects for or timing of FDA approval.

One particularly interesting section of the memorandum is its analysis of the current status of the securities lawsuits that were filed against life sciences companies in 2007. The memo reports that of the 25 life sciences lawsuits filed that year, 13 (or more than half) have either been dismissed or had summary judgment entered for the defense. As the memo notes this is "an exceptionally high rate of dismissals" (compared, for example, to the historical norms of securities lawsuit dismissals in the 33-40% range).

According to the memo, this dismissal rate suggests that "the securities fraud complaints brought against life sciences companies (at least in 2007) were not particularly well founded." The basis for dismissal of a majority of the dismissed cases was the plaintiffs’ failure to adequately plead scienter.

The memo includes a reference to the possibility, based on statements of DoJ officials, of life sciences companies’ increased exposure to FCPA enforcement proceedings, which also includes the possibility of civil litigation following on in the wake of disclosures of FCPA actions.

The memo’s analysis of the outcomes of the 2007 cases squares with my own perception that life sciences companies are frequently sued, perhaps more frequently than other companies, but that plaintiffs’ lawyers often have a hard time making the allegations stick. The memos analysis suggests that even if life sciences companies are sued more frequently than companies in other industries, the claims against life science companies may be dismissed more frequently as well.

Special thanks to David Kotler, the author of the Dechert memo, for sending me a copy of the memo.

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On March 24, 2010, Cornerstone Research released its annual study of securities class action lawsuit settlements. The most recent study, which is entitled "Securities Class Action Settlements: 2009 Review and Analysis" and is written by Ellen M. Ryan and Laura E. Simmons, can be found here. Cornerstone’s March 24, 2010 press release concerning the study can be found here.

The study reflects a number of interesting observations about median and average securities class action lawsuit settlements that were approved during 2009. The study also includes a useful analysis of the factors that affect settlement size, and concludes with some commentary about likely future settlement trends.

First, the median 2009 settlement of $8.0 million is unchanged from 2008, although slightly up from the $7.4 median of all settlements during the years 1996 through 2008.

Second, the 2009 average settlement amount of $37.2 million is up from the 2009 average of $28.4 million. The 2009 average of $37.2 million is well below the $55.4 million average of all settlements during the period 1996 through 2009. However, if the largest four settlements during the period 1996 through 2008 are removed from the analysis, the average 2009 settlement of $37.2 million is slightly higher than the adjusted $34.4 million average for the 1996 to 2008 period.

(This analysis of average settlements excludes the settlements associated with the IPO Laddering cases, which given the number of cases resolved in that settlement has the effect of distorting the average settlement values.)

Third, the distribution of 2009 settlements also is comparable to prior years. Almost 60% of all settlements during the period 1996 through 2009 are below $10 million, and more than 80 percent settled for less than $25 million. Settlements in excess of $100 million remain relatively infrequent, occurring in approximately 7 percent of all cases.

Fourth, according to the study, the largest single most important factor is the amount of so-called plaintiffs’ style damages (that is, "damages" calculated using the methodology most often urged by securities class action plaintiffs). However, settlements as a percentage of plaintiffs’ style damages generally decrease as damages increase, and this observation is particularly valid for very large cases.

Fifth, the Cornerstone also assesses settlement values relative to what it calls Disclosure Dollar Loss, which compares the defendants company’s stock prices on the days before and the days after the corrective disclosure. The study reports that settlements as a percentage of the disclosure dollar loss generally decline as the loss increases.

The study also identified a number of other factors that affect overall settlement size:

1. GAAP Violations: Approximately 65% of 2009 settlements involved cases included alleged violations of GAAP. These cases "continued to be resolved for larger settlements that for cases not involving accounting allegations.

2. Auditor Defendants: Cases in which auditors are defendants settle for a relatively higher percentage of estimated plaintiffs’ style damages even when compared to the broader set of all cases in which improper accounting allegations were made. Since the cases filed in 2009 involve an increased number of auditor defendants even while the overall number of filings declined compared to the prior year, the presence of auditor defendants could become an increasingly significant factor in future settlements.

3. Financial Restatements: Approximately 45 percent of 2009 settlements involved financial restatements, which contrasts with reports of declining numbers of financial restatements. However, given the general lag between filing and settlement, the 2009 settlements generally involve cases filed during the 2004 to 2006 period, which was when the most significant numbers of restatements occurred.

4. ’33 Act Allegations: After controlling for the presence of underwriter defendants and controlling for other factors, the inclusion of ’33 Act claims does not result in a statistically significant increase in settlement amounts.

5. Institutional Investors Plaintiffs: Cases involving institutional investors as lead plaintiffs are associated with significantly higher settlements. The higher settlements are associated with cases involving public pension plans as lead plaintiffs as opposed to union funds or other institutional investors. These larger settlements may be due to the fact that the sophisticated investors get involved in the stronger cases and the larger cases. However, even when controlling for case size and other factors the presence of a public pension plan as lead plaintiff is still associated with a statistically significant increase in settlement size.

6. Companion Derivative Suits: Securities class action lawsuits associated with companion derivative cases are associated with statistically significant higher settlement amounts.

7. SEC Enforcement Actions: Cases that involve SEC actions are associated with significantly higher settlements, as well as higher settlements as a percentage of estimated "plaintiffs’ style" damages.

The study concludes with the observation that the economic environment during 2009 "did not have a distinguishable effect either on the number of settled cases or on the total value of securities case settlements approved during the year.’

The study also notes that as a general matter the securities class action lawsuits associated with credit crisis largely have not yet settled. Looking ahead, the study’s authors "anticipate that as these cases are resolved, settlements are likely to increase both in number and in value."

Discussion

As has been the case in prior years, Cornerstone’s analysis of the 2009 settlements is interesting and full of useful information. There are a number of important considerations to keep in mind in assessing the information in the study.

The first is that the Cornerstone analysis is limited exclusively to aggregate amounts paid in settlement of securities class action lawsuits. It does not reflect, or even provide any indication of, settlement amounts that were or were not paid for out of D&O insurance.

Second, the settlement values do not reflect costs incurred in connection with the defending the securities class action lawsuits, or any related proceedings (for example, derivative suits or SEC enforcement proceedings). In considering the Cornerstone data for purposes of assessing D&O limits adequacy, appropriate adjustment would have to made for associated defense expense. Given the incredible escalation of defense expenses in recent years, the adjustment required to accommodate likely defense expense is substantial.

Third, the data set upon which the Cornerstone analysis is based is limited exclusively to class action settlements. In recent years, however, there has been the increased incidence of claimants opting out of the class settlement and reaching their own separate settlements. This phenomenon potentially increases the aggregate dollar costs required to resolve all related securities litigation, which is an additional factor that needs to be taken into account in connection with the overall question of D&O limits adequacy.

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On January 27, 2010, NERA Economic Consulting released its updated annual review of Canadian securities class litigation entitled "Trends in Canadian Securities Class Actions: 2009 Update" (here). The report presents an interesting study of the evolution of class action litigation in a jurisdiction outside the U.S.

According to the report, there were eight new securities class action lawsuits filed in 2009, which is fewer that the ten filed in 2008 "but still greater than filings in previous years." With the addition of the eight new cases, there are now 23 pending securities class actions, representing more than $14.7 billion in claims. Most of these cases were filed in the last three years although some of the pending cases were filed almost 10 years ago.

Though the number of new filings is noteworthy, the more significant developments may be the class certifications in three cases and the ruling allowing the IMAX securities class action plaintiffs leave to proceed under the new Ontario securities laws. (My prior detailed discussion of the rulings in the IMAX case can be found here.). The NERA report comments that these rulings "may ultimately prove to be an inflection point" for securities class action litigation in Canada.

Though there were significant new filings in 2009, one noteworthy feature of the cases that were filed is the "absence in Canada of class actions filings relating to the credit crisis." This absence may be due in part to the relatively smaller impact of the credit crisis in Canada compared to the U.S. and the negotiated $32 billion restructuring of the Canadian Asset Backed Commercial Paper market, which may have preempted further litigation.

Six cases settled in 2009 for a total of approximately $51 million, for an average of approximately $8.5 million and a median of approximately $9 million (which is roughly comparable to the median settlement of U.S. securities class action lawsuits). 2009 settlements averaged 13.7% of the amount of claimed damages. Cases with cross-border litigation counterparts in the U.S. tended to settle for larger amounts both in terms of absolute dollars and as a percentage of claimed damages.

According to a January 27, 2010 article in the Vancouver Sun (here), the number of filings and the procedural developments (including the rulings in the IMAX case) are "a wake up call for publicly traded companies." Law firms are "advising their clients to revisit their compliance and corporate-governance procedures to protect against similar suits."

One lawyer quoted in the article says that he is also advising his clients to review their corporate insurance, as well. He goes on to state that "We’ve seen over the years there are a lot of problems in terms of clients don’t really have the type of coverage they need."

Yet, as for the question of whether there may be a flood of litigation, one plaintiffs’ attorney quoted in the article sounds a note of caution. The attorney, Dimitri Lascaris, who is one of the lead attorneys in the IMAX case, notes that that the Canadian system still provides for adverse costs, and even the liberalized standard under the new Ontario law are time consuming and expensive. So, he says, "we’re never going to achieve the level of activity in securities class actions that we see in the United States."

In light of these developments and their potential significance regarding insurance coverage, the session planned for the upcoming PLUS D&O Symposium (scheduled next Wednesday and Thursday in New York) on the topic of Canadian Securities Class Action Litigation is quite timely. The panel will be moderated by my friend Dave Williams from Chubb (Canada) and planned speakers include a number of prominent players in the area in Canada, including Dimitri Lascaris. Information about the Symposium can be found here.

The Securities Litigation Watch blog has a post about the NERA study here.

Excess Side A Carrier Contributes to Options Backdating Settlement: On January 25, 2010, a judge in the Western District of Pennsylvania preliminarily approved the settlement of the options backdating lawsuit that had been filed against Black Box, as nominal defendant and certain of its directors and officers. As part of the settlement, the company agreed to pay plaintiffs’ counsel $1.6 million and the company agreed to adopt certain corporate governance measures.

As reflected in the parties’ stipulation of settlement (here), as part of the settlement, the company is to receive a payment of $1.5 million from its Excess Side A carrier as well as another $500,000 from its EPL carrier.

According to a January 25, 2010 article about the settlement in the Pittsburgh Tribune-Review (here), the company also separately settled a claim against the company by its former CEO, who left the company in connection with the options backdating related matters. At the time he left, the CEO claimed, the company took away over $19.6 million in options related compensation. The company settled these claims for its agreement to pay $4 million.

The Black Box settlement marks the second instance of which I am aware in which an Excess Side A carrier contributed toward an options backdating related derivative lawsuit settlement. (The first instance is the Broadcom settlement, about which refer here.) This is yet another instance where Excess Side A insurance is being called on to provide protection outside of the insolvency context. As I have previously noted, the Excess Side A carrier’s contribution to these settlements may be a significant development for the carriers, who have offered the product in a largely low loss environment, at least outside the insolvency context.

The settlement with the CEO is an odd component of this settlement. There aren’t many of these cases where the former CEO who left as a result of backdating related issues walked away with a cash payment.

I have in any event added the Black Box settlement to my table of options backdating related lawsuit settlements and dismissal motion rulings, which can be accessed here.

SEC Will Issue Guidance on Climate Change Disclosure: On January 27, 2010, the SEC voted 3-2 to provide interpretive guidance on existing dislosure requirements to require climate change related disclosure under certain circumstances. The SEC's January 27 release can be found here. The SEC's release states that the interpretive release will be posted on the SEC web site as soon as possible. The news release identifies several examples of situations that might trigger disclosure requirements, including: impact of legislation and regulation; impact of international accords; indirect consequences of regulation or business trends; and physical impacts of climate change.

Suit Against Rating Agencies Dismissed, But Without Reaching First Amendment Issues: According to a January 27, 2010 Am Law Litigation Daily article by Andrew Longstreth (here), Judge Lewis Kaplan has granted the motions of Moody's and S&P to be dismissed from a securities lawsuit filed by certain investors who had invested in certain mortgage-backed securities underrwitten by Lehman Brothers. Judge Kaplan has not yet issued a written opinion but according to the article his opinion was based solely on the fact that the rating agencies didn't have anything to do with the offering documents at issue in the case. HIs ruling reportedly did not reach the rating agencies first amendment defenses (about which refer here.)  

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Securities class action lawsuit filings were "down sharply" according to the annual study of securities class action litigation released jointly today by the Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research. The full report can be found here and the January 5, 2010 press release accompanying the report can be found here.

According to the study, which found that there were a total of 169 securities class action lawsuit filings through December 21, 2009, the 2009 filings were both 24% below the 223 filings in 2008 and 14% below the annual average of 197 filings during the years 1997 through 2008.

The Stanford study reports a lower lawsuit count than previously published studies of the 2009 securities lawsuit filings, including the prior report of NERA Economic Consulting (refer here) as well as my own prior analysis (refer here). I discuss these differences below.

The relative decline in the number of lawsuit filings in 2009 compared to prior years, according to the Stanford report, is attributable in part to the decline in subprime and credit crisis related filings. Among other things, the report notes that there were only 17 subprime and credit crisis related lawsuits in the second half of 2009.

The press release accompanying the report also quotes Dr. John Gould of Cornerstone Research as saying that the observed decline is consistent with the decline in stock market volatility during 2009, noting that after increasing during the preceding two years, volatility declined both in the first and second halves of 2009.

The study also details the large number of filings that were characterized by "a substantial lag between the end of the class period and the filing" date, a phenomenon about which I written extensively in the past (most recently here). The report notes that the percentage of filings with a lag of more than a year has increased steadily from 5% in 2005 to a historical high of 18% in 2009.

According to the study, historically, class action lawsuit with longer filing lags "have been dismissed at a higher rate than class actions with shorter filings lags," at a rate of 55% for the one-year lag filings versus 42% for filings with a lag between one year and six months, and 36% with a lag of less than six months.

The study also notes that the lag filings are largely the work of the Coughlin Stoia law firm, which was "involved in 63% of the filings with lags longer than six months and 58% of filings with lags longer than a year." This activity levels compares to the firms involvement in 39% of all filings and 29 percent of filings with lags shorter than six months.

The press release quotes Stanford Law Professor Joseph Grundfest as saying, with respect to the lag filings, that the belated filings suggest that "plaintiffs are trying to fill the litigation pipeline by bringing older lawsuits that weren’t attractive enough to file while the firms were busy pursuing financial sector claims," adding that "these lawsuits are more likely to be dismissed and can therefore be characterized as lower quality claims" and that the filings may "reflect factors idiosyncratic to one large plaintiff firm’s strategy, and have little to do with larger market forces."

In addition to tracking the overall number of filings, the report also notes the number of lawsuits filed against unique issuers, which declined even more sharply than the overall number of filings. Thus, while the report found that overall filings declined by 24% between 2008 and 2009, the total number of unique issuers involved in securities lawsuits decreased by 32 percent. The difference in the attributable to the number of multiple filings against the same target, as well as the relatively large number of filings against private companies and other non-exchange traded entities.

The report further notes that of all exchange traded companies, 1.8 percent were defendants in federal securities class action lawsuits filed in 2009 compared to 2.6% in 2008 and compared to a 2.4% annual average for the 12 years ending December 2008.

The number of lawsuits against foreign issuers also declined in 2009, according to the study. After peaking at 16.4% of all filings in 2007, the percentage of filings against foreign issuers declined to 12.4% in 2009. The study attributes the relative decline to the falling off of the credit crisis lawsuits, because so many of the suits against foreign companies were related to the subprime and credit crisis.

Finally, the decline in 2009 credit crisis filings was also associated with a decline in market capitalization losses in 2009. The disclosure dollar loss attributable to 2009 class actions was $83 billion, a 62 percent decrease from 2008.

Some Thoughts about the Numbers: As noted above, the Stanford study’s 2009 lawsuit count varies from previously published figures, including my own. NERA reported 235 filings in 2009, and I reported 189 (I discuss the difference between my count and NERA’s in my prior post, here), compared to the 169 reported by Stanford.

I know that part of the explanation lies in the fact that the Stanford report cutoff at December 21, 2009, which meant that the Stanford study missed at least three more lawsuits filed before year end.

The Stanford study also counts multiple filings related to the same allegation against the same companies only once. This provides a partial explanation for the differences between the Stanford study and the NERA study, which separately counts separate actions in separate circuits unless and until the lawsuits are later consolidated.

Another difference between the studies may be the fact that the NERA study reported a projected year end number, as the result of an extrapolation from filings through mid-December. Though the Stanford study ended prior to year end, it did not incorporate any extrapolation for cases filed after the cutoff date and before year end.

All of these factors clearly are relevant but even collectively they don’t seem sufficient to explain the entire difference. Of course, another factor may simply be differences in information, but given that the plaintiffs’ lawyers put out press releases when they file lawsuits, the information differences likely account for only a small part of the differences in lawsuit counts.

All of this underscores a point that I made at length in connection with my own study of the 2009 filings, which is that readers would benefit enormously from knowing more about what protocols the various study publishers use when the are deciding what "counts."

The Stanford analysis is certainly easier to decode in this respect that other reports since the Stanford Clearinghouse publishes its list of lawsuits on its website — for free, which is a tremendous public service for which all of us should be grateful. But merely knowing which cases were put on the list does not tell us why those cases were included, nor does it tell us what other cases might have been omitted and why. (Indeed, the reason I continue to do my own count and analysis every year, even though Stanford publishes its own list for free on the web, is the uncertainty about what the list does and does not include.)

The Stanford report also gets high marks for stating right on its cover what it is included in its "research sample," which is very helpful and very commendable. But even taking this very explicit information into account, it still seems like there must be more going on that would explain the differences between the various reports.

Here are some illustrations of questions that would be helpful to know: Are securities lawsuits filed in state courts included? Are merger objection suits included? Are proxy solicitation misrepresentation cases included? How about lawsuits filed separately on behalf of equity shareholders and bondholders – one lawsuit or two? How about lawsuits that only allege state securities law violations? What kinds of cases are omitted from the count? What other sorting criteria are used?

The more of this type of information that readers are provided, the more helpful the published reports would be for readers. The approach that would be most helpful to readers would be for the reports to identify the way that their counting protocols differ from those used by other studies, in order to help readers understand the differences.

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What a difference a year makes. Just 12 months ago, the subprime and credit crisis litigation wave was in full spate, and the onslaught of Madoff and other Ponzi scheme cases had just begun to surge. And while both of these lawsuit filing trends continued well into 2009, by year’s end both of these phenomena had largely played out. At the same time, however, other litigation trends emerged as the year progressed, and in the end, the number of new securities class action lawsuits filed during 2009, though significantly below the number filed in 2008, was well within historical norms.

First, let’s run the numbers. By my count -- please see the note below about how I "counted" -- there were 189 new securities class action lawsuits in 2009, which is just below but within range of the 1966-2007 annual average of 192, although 15.6% below the 2008 total of 224 new securities lawsuits.

As was the case for the two preceding years, the 2009 lawsuit filings were largely driven by lawsuits against financially-related firms. Of the 189 new securities suits in 2009, 69 were against companies in the 6000 Standard Industrial Classification (SIC) code series (Finance, Insurance, and Real Estate). In addition, another 39 of the defendant firms targeted in 2009 securities class action lawsuits lacked SIC Codes. These lawsuit targets without SIC code designations included mutual funds, ETFs, and closed end funds. In general, the defendant entities that lacked SIC codes were all financially related.

If these two groups, the companies in the 6000 SIC code series and the entities that lacked SIC code designations, are added together, the total is 108. So these two groups together represented roughly 57.1% of the new lawsuits filed in 2009.

A significant factor driving this concentration of filings in the financial sector was the number of credit crisis-related lawsuits. By my count, there were 62 new credit crisis-related securities lawsuits filed in 2009, bringing to 205 the total number of credit crisis related securities lawsuits that were filed since the litigation wave commenced in February 2007. (My complete list of the subprime and credit crisis-related securities suits can be found here.)

But though the credit crisis litigation wave carried over into 2009, as the year progressed the number of credit crisis-related filings dropped off. So too did the concentration of filings against financial companies. Thus, while 72.6% of the lawsuits in the first half of 2009 were against financially-related companies, only 41.3% of the filings in the year’s second half involved financial companies.

And even though the lawsuits filed against financially related companies declined in the second half of the year, by and large, the rate of lawsuit filings overall did not decline. Thus, while there were 95 new securities class action lawsuits in the first half of 2009, there were 94 in the second half – virtually the same filing rate in both halves of the year.

Part of the reason that the overall lawsuit filing rate did not decline in the second half of the year even though the credit crisis-related lawsuits trailed off is that a couple of filing trends emerged in the second half of the year that fueled lawsuit filings and took up the slack.

The first of these two trends was the outbreak of a rash of lawsuits against leveraged exchange-traded funds (ETFs), which I discussed in a prior post here. By my count, there were twelve separate securities lawsuits filed against ETFs, all during the second half of 2009. These suits largely have been filed against leveraged ETFs drawn from within a single fund family, and all present more or less the same allegations (essentially that investors were not told that the funds would track their target measures or ratios only for very short periods). Because these lawsuits represent more than 6% of all new 2009 securities lawsuits, they represent a significant part of the year’s securities litigation activity.

The second trend that emerged during the second half of 2009 was the emergence of a significant number of belated lawsuit filings, where the lawsuit filing date came long after the proposed class period cut-off date, a phenomenon I discussed several times in the latter half of the year (most recently here). These belated filings appear to be the result of a lawsuit backlog that developed while the plaintiffs’ lawyers were preoccupied with the credit crisis related lawsuit filings.

By my count, 22 of the 94 securities lawsuits filed during the second half of 2009 were filed more than a year after their proposed class period cut-off date. In some instances, the lawsuit filings came at the very end of the two-year limitations period. For example, the Pitney Bowes securities class action lawsuit was filed one year and 364 days after the proposed class period cutoff date. Indeed, in at least two cases (the Avanir Pharmaceuticals case and the Regions Financial case), the filing came nearly three years after the proposed class period cutoff, raising a rather obvious question about how these cases will withstand statute of limitations objections.

The belated filings continued to arrive right through the end of the year, with several of December’s filings including cases with filing dates more than a year after the proposed class period cutoff date, including the new lawsuits filed against Siemens (about which refer here), NightHawk Radiology Holdings (here), and Terex (refer here).

Almost all of these backlog cases have been filed against companies outside the financial sector, which accounts in part for the shift in filings away from financial companies in the second half of 2009. That is, it appears that while the plaintiffs’ lawyers were rushing to file credit crisis-related lawsuits during the period mid-2007 through mid-2009, they were also building up a backlog of cases against nonfinancial companies, and now they are working off the backlog.

And so, while over half of the new securities lawsuits filed in 2009 involved financial companies, by year’s end, the 2009 securities lawsuits overall involved a broad spectrum of kinds of companies. The 2009 securities lawsuits were filed against firms in 90 different SIC Code categories. Many of these categories had lawsuits against only a single company. Outside the financial sector, the SIC code categories with the highest number of lawsuits were SIC Code category 2834 (Pharmaceutical Preparations), which had five lawsuits, and SIC Code category 2836 (Biological Products), which had four lawsuits.

The 2009 securities lawsuits were filed in 38 different federal district courts, but, due to the number of lawsuits against financial companies, the largest number of lawsuits (78, or about 41% of all 2009 lawsuits) were filed in the S.D.N.Y. The courts with the next highest number of 2009 securities lawsuit filings were N.D. Cal (12) and C.D. Cal. (9). There were five different courts -- D.N.J., E.D.N.Y., N.D. Ill., S.D. Fla., and S.D. Tex. – that had six securities lawsuit filings each. The eight courts with the highest number of 2009 filings together had 128 new lawsuits, or 67.7% of all 2009 securities lawsuit filings.

24 (or 12.7%) of the 2009 securities lawsuit filings involved companies that are domiciled outside the United States. These lawsuits involved companies from 12 different countries. The countries with the highest number of companies suit were the U.K. (with 6), Germany (with 5), and Canada (3).

Some Thoughts about Counting Securities Lawsuits: I know that many readers wonder why the various annual securities litigation studies report such materially different lawsuit filing numbers. The reason the studies’ lawsuit counts vary so widely is not just that the various studies’ authors have different information; another significant factor is that the different studies use different protocols to count lawsuits.

For example, some of the studies count duplicate complaint filings in separate circuits as a single lawsuit (that is, the case counts only once), while other studies count duplicate complaints filed in different circuits as separate lawsuits until they are formally consolidated (that is, the case can be counted multiple times). For my purposes, I count duplicate complaints only once regardless of whether there are duplicates filed in different circuits, which is one reason why my 2009 securities lawsuit count appears lower than, for example, NERA’s 2009 securities litigation study.

There is of course absolutely no reason why separate studies should not use their own preferred counting protocol. But I do believe that the studies’ readers would be enormously benefitted if each study would explicitly state what their study "counted" – that is, what does the study include in its tally of securities lawsuits, and what does it omit?

In the best of all worlds, the studies would also explain how their methodology differs from those used by other published reports. These reports do not after all exist in a vacuum, and by and large the audience for each of the various reports basically consists of the same group of readers. It would be helpful, I think, if the reports were to recognize both the fact that their audience reads the other reports and that these readers want to understand any and all identifiable reasons why the various reported numbers differ.

In my own analysis of the 2009 securities lawsuit filings, I have tried to tally up the separate class action lawsuits seeking to recover damages under the federal securities laws. I don’t count lawsuits that were not filed as class actions; that do not seek to recover damages; or that don’t allege violations of the federal securities laws. Thus, for example, I would not count a lawsuit that alleges common law fraud but that does not allege a securities fraud under the federal statutes. I would not count an indiviudal lawsuit that does not purport to proceed as a class action.

Two particular recurring lawsuit categories that I do not count are merger objection lawsuits, where the lawsuit’s goal is simply to increase a proposed acquisition price; and lawsuits against private entities in which the plaintiffs’ allegation is that the defendants failed to register securities.

Even within my overall counting criteria, it can sometimes be very difficult to determine whether or not a new complaint represents a new lawsuit or is merely a duplicate of a previously filed complaint. For example, in December, when plaintiffs’ lawyers filed a complaint on behalf of Bank of America bondholders relating to the Merrill Lynch acquisition and bonus payments, the question arose whether the complaint counted as a separate lawsuit, or was just a duplicate of the suit filed earlier in the year on behalf a purported class of Bank of America equity securityholders?

In the end, I concluded that because the two complaints involved separate classes of claimants, the bondholder suit represented a separate lawsuit that should be counted separately. This is undeniably a very close question, and reasonable minds might well reach a different conclusion.

Because there are many of these kinds of close questions in the course of trying to keep a count of securities lawsuit filings, it is almost inevitable that different lawsuit counts will vary. But though the variance of lawsuit counts may be inevitable, readers at least want to be able to understand the reasons why the lawsuit counts vary. The publishers of the various annual securities litigation studies would significantly benefit their readers if they were to explicitly and expressly state (and not just in footnotes or endnotes, but in a conspicuous way) what their study purports to be counting, and what protocols were used to determine what was and what wasn’t included in the count.

It would be even more helpful to readers if the reports were to recognize that their readers also read the other reports and to state explicitly and expressly how their methodology may differ from the other annual litigation studies.

I know the various annual litigation study publishers view themselves as in competition with each other, and so it may be difficult for them to acknowledge each other’s existence. They may believe that it as not their job to explain competing analyses. However, each publisher’s silence on these issues means the readers are left on their own trying to figure out why the numbers vary so widely.

The fact is that most of us read all of the reports. I feel quite confident in saying that readers would find it extremely helpful to have better information to understand why the studies’ numbers differ. The reports that recognize and their readers’ needs into account would win their readers’ loyalty, gratitude and appreciation.

Speakers’ Corner: On January 4, 2010, I will be presenting with Jason Cronic of the Wiley Rein law firm on a panel entitled "Directors and Officers Liability Insurance" at the Practicing Law Institute's Current Developments in Insurance Law 2010 conference. Background regarding the conference can be found here.

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On December 15, 2009, NERA Economic Consulting released its annual study of securities class action litigation trends. The study, entitled "Recent Trends in Securities Class Action Litigation: 2009 Year-End Update," and written by my friends Stephanie Plancich and Svetlana Starykh, can be found here. The study concludes that, notwithstanding the decline in credit crisis related filings in the second half of 2009, the projected year-end filing levels will be within historical norms. Average and median securities class action settlements are also consistent with recent trends.

According to the study, credit crisis related filings, which predominated class action filings during 2007 and 2008, "gradually declined" as 2009 progressed. Despite this decline, the total number of securities suit filings has not dropped off, "as other types of cases replaced credit crisis filings."

Based on NERA’s own counting methodology (which, as is explained in footnote 2 of the report, counts separate filings in separate circuits as separate lawsuits until the cases are consolidated), NERA counted 215 securities class action lawsuit filings through November 30, 2009, which projects to 235 filings by year end. Though the projected total of 235 would be below the 2008 level of 253 filings, it is well within the 1997-2004 average of 231 annual filings.

Although the 2009 filing levels look as if they will fall within historical levels, the 2009 filings were swollen by at least a several phenomena that may be short lived. Thus, for example, 36 of the 2009 filings involve Ponzi schemes. Though there may continue to be Ponzi scheme revelations as we head into 2010, it does seem likely that there may be fewer of those stories ahead.

Similarly, the 2009 filings were also increased by 13 new cases related to leveraged ETFs. (My prior post about ETF-related lawsuits can be found here). Though there may be further ETF cases yet to come, this group of cases seems likely to decline, as virtually all of these filings relate to a single family of funds and all relate to a single set of disclosures about the funds’ performance over time.

A third filing pattern that may not continue going forward is the number of cases in which the filing date falls well after the proposed class action cutoff date. (My most recent post about these apparently belated securities suit filings can be found here.) The NERA study shows that during the second half of 2009, the average time between the end of the class period and the date of the first filing lengthened to 279 days (versus a period of 161 days for suits filed during the preceding three years). The NERA study speculates that this may be a reflection of the fact that plaintiffs firms have been "focused on the large credit crisis cases over the last two years," but that they are "now able to focus on bringing other, non-credit-crisis cases with older class periods."

The NERA study reports that cases in 2009 continued to be clustered in the financial sector, with 53% of all filings naming a defendant in the finance sector. Another sector that has continued to see substantial activity is the health technology and services sector.

As far as case resolutions, the NERA study reports that for cases that were filed in 2000, 36% have been dismissed and 61% have settled, but that "even almost a decade after filing, there are still approximately 3% of cases that have yet to reach a final resolution," which underscores the fact that in some instances these cases can take as much as a decade or more to resolve.

Of course, the majority of cases filed in recent years remain pending. For these most recent cases, a higher proportion of resolutions have been dismissals rather than settlements, which the NERA study notes "is unsurprising, as motions to dismiss are usually fled relatively early in the litigation process, often before settlement discussions commence." Ultimately however, the NERA study comments, "we expect that a higher proportion of these recent filings will result in settlements."

With respect to the credit crisis cases, the NERA study notes that over 80% of the cases remain pending, with only 15% of the cases dismissed compared to only 4% (nine cases that have settled.) My running tally of subprime case resolutions can be accessed here. The NERA report comments that this pattern is consistent with observed patterns in which early on more cases are dismissed but that ultimately over time a large proportion of cases settle than are dismissed.

As far as settlements, the NERA study reports that the average securities class action settlement in 2009, if the IPO laddering settlement is removed from the equation, was $42 million, which is substantially above the 2003-2009 average of $29 million, but which is consistent with the overall trend, which is that "there has been a general increase in the average settlement values since 1996."

But though the average settlements continue to increase, median settlements have held relatively steady. In 2009, the median settlement was $9 million, similar to the medians in 2007 ($9.4 million) and 2008 ($8.0 million).

Over the past several years, the ratio of settlement to investor losses has held steady at around 2.5%. The NERA study speculates that because this ratio has held reasonably steady and because investor losses historically have been correlated with settlement values, the fact that investor losses in cases filed during 2007 and 2008 were significantly higher than prior years may be "a signal of potentially higher settlements in the future," as the 2007 and 2008 cases move toward settlement.

As always, the 2009 version of the NERA study provides interesting and thorough analyses. It is worth noting that, because the NERA study "counts" separate filings in separate circuits as separate filings as separate cases, the NERA filing will differ from (and almost certainly be higher than) the figures that other commentators may report in their year end reports.

One thing about the average and median settlement figures that I think all observers should keep in mind is that these figures do not include defense expense, which can be considerable and in many cases can represent a significant percentage of the settlement amounts. In addition, these class settlement figures do not reflect the value of any separate opt-out settlements, nor do they reflect the amounts of other litigation settlements, such as might be incurred in connection with parallel derivative or ERISA class action lawsuits.

My point is that as impressive as the settlement figures reflected in the NERA report are, they represent only a portion of the litigation exposure that the affected companies may have faced, and therefore represent only a partial and incomplete measure, for example, of what insurance limits may be sufficient to protect companies and their directors and officers from their claim exposures.

NERA’s December 15, 2009 press release regarding the 2009 study can be found here.

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On December 7, 2009, NERA released its most recent update on trends in the numbers and values of settlements of SEC enforcement actions. The latest study, which is as of September 30, 2009 and complete through the end of the SEC’s 2009 fiscal year, shows that the number of settlements during the year declined for the second straight year, but the average settlement amount increased, and the median settlement amount held steady. NERA’s December 7 press release regarding the study can be found here.

As the report notes, because the 2009 settlements largely relate actions initiated in earlier periods, they may or may not be indicative of what reasonably may be expected in the SEC’s current heightened enforcement environment.

In addition, the reports observations about the high frequency of individual participation in the settlement of SEC enforcement actions may provide important additional context for Judge Rakoff’s recent high profile rejection of the proposed settlement of the SEC’s enforcement action involving the Merrill Lynch bonuses.

First, with respect to the numbers of settlements, the report shows that there were 626 settlements in fiscal 2009, compared to 673 in fiscal and 717 in fiscal 2007. Among other things, the report notes that fiscal 2009 was a year characterized by staff turnover and transition for the agency’s top leadership, which may be relevant to understanding the relative decline in the numbers of settlements.

Monetary payments were a component of 58.6% of company settlements and 58.9% of individual settlements for FY 2009. The average monetary SEC settlement during fiscal 2009 was $10.7 million, compared to only $4.7 million in fiscal 2008, but the increased 2009 average is largely a reflection of several very large settlements during fiscal 2009, including, for example, the $350 million Siemens paid in settlement of the FCPA enforcement action the agency filed against the company. Removing the settlements in excess of $100 million reduces the FY 2009 average to $4.4 million.

By contrast to the average, the median SEC enforcement settlement was about $1.0 million, about equal to the prior fiscal year’s median.

Among largest source of SEC enforcement actions are cases involving alleged misstatements. In an interesting analysis of the relationship between individual and corporate settlements in misstatement cases, the report notes that between the enactment of SOX and the end of FY 2009, the SEC had reached settlements in 353 cases involving alleged misstatements by corporate companies. Of these 353 settlements, 62 involved only the company, 99 cases involve only individual directors or employees, but the remaining 192 cases involved both the company and individuals.

In other words, individuals participate to a greater or lesser extent in the vast majority of SEC enforcement actions involving misstatements. As the report points, this pattern presents interesting additional context for Judge Rakoff’s high profile rejection of the SEC’s proposed settlement of the Merrill Lynch bonus enforcement action. Judge Rakoff faulted the proposed settlement because it fined the company (and its shareholders) but not the supposedly blameworthy individuals.

The report notes that this outcome is likely to spur the SEC to pursue individuals with "renewed vigor" and indeed SEC officials have made statements to that effect. The SEC’s own settlement patterns show that in general it is the agency’s practice to involve individuals in settlement of restatement cases.

The report reflects a number of different interesting findings, and also contains some helpful and interesting tables, including lists of the ten largest corporate and individual post-SOX settlements, as well as interesting data showing relating to the number of insider trading settlements – somewhat unexpectedly, the number of inside trading settlements hit a post-SOX low during fiscal 2009.

The report concludes with the observation that the full impact of the reforms that the SEC has only just begun to initiate "is likely yet to be seen." The report suggests that the trends observed in the most recent report are likely to change in the periods ahead.

SEC Files Enforcement Action Against Former New Century Officials: Perhaps as a reflection of the newly more active SEC, on December 7, 2009, the SEC filed an enforcement action in the Central District of California against three former New Century Financial Corporation officials.

The SEC’s complaint, which can be found here, alleges that the three defendants violated the securities laws failed to disclose important negative information, including dramatic increases in early loan defaults, loan repurchases, and pending loan repurchase requests. Defendants knew this negative information from numerous internal reports they regularly received, including weekly reports ominously referred to internally as "Storm Watch." The SEC’s December 7 litigation release about the action can be found here. 

The timing of the SEC's enforcement action against the three New Century officials stands in interesting contrast to the private securities class action lawsuit filed against certain former New Century officials. The private securities, which was the first of the subprime related securities class action lawsuits when it was first filed in February 2007, is nearly three years old. The court denied the defendants' motion to dismiss almost exactly a year ago.

 The more interesting question is whether the filing of the New Century action represents the first in a series of enforcement actions related to the subprime meltdown and credit crisis. In light of the new environment at the agency and the pressure it is under to reestablish its regulatory credentials, there may well be further actions yet to come.

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Bankruptcy cases filed in the U.S. federal courts continued to surge in the twelve months ended September 30, 2009, according to statistics released on November 25, 2009 by the Administrative Office of the U.S. Courts. The statistical release, which can be found here, shows that for year ending on September 30, 2009, there were 58,771 business bankruptcy filings, up 52 percent from the 38,651 business filings in the 12-month period ending September 30, 2008.

Data accompanying the release show that the number of filings has increased in the 12-month periods preceding the quarter end for each quarter since the end of the third quarter of 2006.

Though the twelve-month data show a rising number of bankruptcy filings, the quarterly data for the most recent quarter show a slightly different picture, suggesting that the number of bankruptcy filings may have peaked earlier this year, and that during the most recent months the number of business-related bankruptcy filings may even have begun to decline slightly, at least from their 2009 year-to-date highs.

Thus, according to the Administrative Office’s monthly filing data (which can be found here), there were 15,177 business-related bankruptcies in the third quarter of 2009, compared to 16,098 during 2Q08, which represents a third quarter filing decline of about 5.7%. The highest monthly total during 2009 was in April 2009, when there were 5,621 business-related bankruptcy filings, compared to 4,853 in September 2009.

But while the 3Q09 business filings were down slightly from the preceding quarter, the third quarter filings nonetheless remained at very high levels. Thus, by way of comparison, the third quarter business bankruptcy filing total of 15,177 filings is considerably higher than the quarterly totals in 4Q08, when there were 13,021 filings, and in 1Q04, when there were 14,425 filings.

Whether or not bankruptcy filing peaked earlier this year, the number of bankruptcy filings remains significant. The possibility of bankruptcy remains a significant threat for financially troubled businesses. As I have previously noted (here), among the events that often follows after the filing of a bankruptcy petition is the arrival of claims against the bankrupt firm’s directors and officers.

Bankruptcy associated-claims present a host of complications, not least of which is the intricate way that D&O insurance policies respond in the bankruptcy context. One recent development illustrating the difficulties that can arise in the bankruptcy context was the July 2009 decision in the Visitalk case (about which refer here), in which the Ninth Circuit upheld the carriers’ denial of coverage for a lawsuit brought by a company as debtor in possession against former directors and officers of the company, as a result of the policies’ insured vs. insured exclusion.

These kinds of complications underscore the need for D&O insurance policies to be closely scrutinized for their ability both to withstand and to respond to claims arising in the context of bankruptcy.

Hat tip to the SOX First blog (here) for the link to the bankruptcy statistics.

More About FCPA Enforcement and Pharmaceutical Companies: As I recently noted (here, scroll down), both the DoJ and the SEC have indicated that Foreign Corrupt Practices Act enforcement has a high priority and that FCPA enforcement in the pharmaceutical industry is a particular focus.

A November 24, 2009 memo from the Latham & Watkins law firm entitled "U.S. Department of Justice Announces Stepped-Up Criminal Enforcement of Foreign Corrupt Practices Act Against Pharmaceutical Industry" (here) takes a closer look at these prosecutorial priorities.

The memorandum explains that among other reasons for the new focus on pharmaceutical companies is that "many foreign health systems, are regulated, operated and financed by government entities, and competition is intense, which creates more opportunities to ‘pay off foreign officials for the sake of profit.’" Of particular concern is the fact that it may not always be obvious which medical functionaries are "foreign officials" within the meaning of the FCPA.

The article includes a variety of suggested practical steps that pharmaceutical companies can take in light of these concerns.

Special thanks to Adam Savett of the Securities Litigation Watch for providing a copy of the law firm memo.

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After a brief lull during the second quarter, securities class action lawsuit filings during the third quarter were closer to historical norms, although the filings levels did drop again during September.

By my count, there were 49 new securities class action lawsuits during the third quarter. For reasons discussed below, my count could vary significantly from third quarter tallies that others may publish. But the 49 third quarter filings brings the year to date total through September 30, 2009 to which brings the year to date total of new securities class action lawsuit filings to 143.

The annualized equivalent of the filings for the first nine months of 2009 projects to a twelve-month filing rate of 191, which is slightly below but still well within range of the average of 197.7 annual filings during the 13-year period between 1996 and 2008.

After a decline in filings during April and May at the end of the second quarter, when there were monthly filing totals of 11 and six respectively, there were 20 new securities lawsuit filings in June. But the number dropped to 17 in July and only 12 in September. Clearly, the filing activity levels have fluctuated month to month so far during 2009.

There may be any number of reasons for this fluctuation, but I continue to believe that the fluctuations are largely due to the fact that the plaintiffs’ lawyers are jammed up with the mass of lawsuits they filed over the last three years. As I have detailed at length elsewhere (here), many of the third quarter filings have proposed class period cutoffs well in the past, in some cases more than a year in the past. These filings may suggest that the plaintiffs’ lawyers have been so preoccupied with the other cases and with the Madoff lawsuits that they developed a backlog, which they are now getting around to working off.

The filings during the third quarter were not nearly so concentrated in the financial sector as during the first half of the year. In the first six months of 2009, about two thirds of the target defendant companies were in the financial sector. However, in the third quarter, only 12 of the 49 new securities lawsuit involved companies with Standard Industrial Classification Codes in the 6000 series (Finance, Insurance and Real Estate). There were also nine new securities class actions involving firms without SIC codes, most of which were financially related companies.

Even if all nine of those companies lacking SIC Codes are counted as financial, that still makes only 21 out of the 48 third court suits in the financial sector. Thus less than half of the third quarter filings were against companies in the financial sector, as compared to over two-thirds in the first half of the year.

One contributing factor in the relative decline in the number of new securities suits against financial companies may be the declining number of new lawsuits relating to the subprime meltdown and credit crisis. Thus, while there have been nearly 200 securities lawsuits filed since February 2007 related to the subprime and credit crisis litigation wave, including as many as 58 total in 2009, only about seven of subprime and credit crisis related cases were filed in the third quarter (depending on how you count).

As I noted in my recent interim update of the subprime and credit crisis related litigation (here), this apparent decline in the cases related to these phenomena may be due to the changing financial circumstances. What started several years ago with the subprime meltdown has evolved into a global financial crisis, affecting all companies across the entire economy. As a result of these developments, it has become increasingly difficult to define precisely what constitutes a subprime and credit crisis-related lawsuit. It may not be so much that the subprime and credit crisis litigation wave has crested as it is that the wave has merged into a larger tidal movement and is no longer its own separately identifiable phenomenon.

The high incidence of lawsuits involving companies without SIC Codes is a reflection of the number of new cases involving unusual lawsuit targets. There were, for example, several filings during the third quarter involving ETF Funds (refer here, here and here, for example). There were also new lawsuits filed involving closed end investment funds (refer here) and mortgage trusts (refer here and here). These actions are a continuation of the filing activity we have seen for several quarters, as a wide variety of complex financial firms and investment vehicles have been and continue to be drawn into securities litigation.

But though the third quarter filings, as was the case with the filings in the first half of the year, involved a number of these unusual targets, many of the companies named in third quarter lawsuits are more representative both of the larger economy and of more traditional securities litigation targets. Overall the companies named as defendants represented over 30 different SIC Code categories. For example, six of the third quarter filings involved life sciences companies in the 2830 SIC Code category and three involved filings against medical device companies in the 3840 SIC Code category.

By contrast to the first six months of the year, relatively few of the third quarter filings involved foreign domiciled companies. Thus, while 18 of the first half lawsuits involved foreign companies, only two of the third quarter lawsuits involved foreign companies. Many of the foreign targets in the first half of the year were financial companies, so the relative decline in filings against foreign companies may simply be a reflection of overall reduction in lawsuits against financial firms.

The new securities lawsuit filings in the third quarter were not nearly so heavily concentrated in the Southern District of New York as in the first half of the year. Thus, while in the six months of 2009, 45 out of 94 (or nearly half) of the new securities lawsuits were filed in the Southern District, only 12 of the 48 third quarter filings (or only 25%) were initiated in the S.D.N.Y. Again, this relative decline may be a reflection of the reduced number of lawsuits involving financial companies.

About Counting: As has been the case in recent quarters, the process of "counting" new securities lawsuits continued to be quite challenging during the third quarter. As has been the case in the past, I have not counted breach of fiduciary duty/merger objection lawsuits. In addition, I have also excluded from my count the "failure to register securities" lawsuits when these suits have been filed in state court (refer for example here), or even if filed in federal court assert only state law claims (refer for example here). In addition, the recurring phenomenon of lawsuit involving nontraditional financial vehicles makes it extremely challenging, given the outward similarity of many of these vehicles and their names, to tell whether or new complaint represents a new or a duplicate lawsuit.

These kinds of sorting issues inevitably result in some line drawing and some marginal categorization issues. Reasonable minds clearly could differ on many of these sorting concerns.

The bottom line is that my lawsuit count for the third quarter and for the first nine months almost certainly will differ from similar tallies that other may publish – indeed, for the same reason, the various other tallies will also likely disagree with each other as well. Certainly, anyone trying to come up with their own count that were to include, for example, merger objection suits or failure to register claims, would reach a substantially different number than the one I came up with.

I emphasize these counting issues, as I have in the past, as a way to try to explain the differences that may appear in the various published accounts. No one should be surprised by the differences, although consumers of the counting data have every right to know what has been included and excluded from any given count in order to understand how and why the count differs from other published versions.

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As D&O maven Dan Bailey noted in a recent memo (here), ERISA class action litigation represents a significant and growing liability exposure for benefit plan fiduciaries. With the recent addition of the $70.5 million settlement in the Tyco ERISA class action lawsuit (about which refer here) and the $55 million settlement in the Countrywide ERISA class action lawsuit (refer here) to the long and growing list of significant ERISA class action settlements, it is clear that the these ERISA class action lawsuit represent an increasingly important area of potential liability exposure.

In light of the increasing prevalence of these significant ERISA class action lawsuits, it seems to me that the time has arrived for a more systematic tracking of significant settlements.

Accordingly, I have prepared a list of the largest ERISA class action settlements of which I am aware. The list, in the form of a Word document, can be found here.

This list is comprehensive, but it likely is incomplete. I suspect strongly that there may be other similarly significant ERISA class action settlements of which I am unaware that should be included in order for the list to be complete. I would be very grateful if any readers who are aware of any specific settlements that I omitted from the list but that should have included would please let know so that I can incorporate them into the list and make the information available to all readers.

In any event, as new ERISA class action settlements arise in the future, I will add them to the list, and I will indicate on the top of the Word document the most recent date on which the list was updated. I encourage readers to let me know about any significant ERISA class action settlements of which they become aware.

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On July 27, 2009, NERA Economic Consulting became the latest to publish a mid-year analysis of the year to date securities litigation developments. The NERA report, written by Stephanie Plancich and Svetlana Starykh, is entitled "Recent Trends in Securities Class Actions Litigation: 2009 Mid-Year Update," and can be found here. The NERA Report joins the earlier mid-year report of Cornerstone Research (refer here). My own mid-year review can be found here.

The NERA report seemingly reports a higher number of securities class action filings than the earlier reports, although the seeming difference requires some explanation; on closer review, the apparent difference arguably becomes more apparent than real. In addition to an analysis of the first half lawsuit filings, the NERA report also includes a review of the first half securities lawsuit settlements as well.

For the first six months of 2009, NERA reports that there were 127 new securities class action filings. This tally is quite a bit higher than the 87 first half filings that Cornerstone reported in its recent study of first half filings. However the difference may be attributable to a difference in counting methodology. As explained in footnote 2 of the NERA report, "unless cases are consolidated, we report all filings potentially related to the same alleged fraud, if the complaints are filed in different Circuits or if different securities are alleged to be affected by the fraud." Since many of the complaints filed in the first half involve duplicated allegations with multiple complaints filed in different circuits, NERA’s reported number of filings is quite a bit higher than other published reports. NERA notes that "if cases are ultimately consolidated, the data are adjusted." Hence, my statement that the seeming difference in the number of filings may be more apparent than real.

The NERA report notes that the first half filings are on an annualized pace of more than 250 filings, which would be more than in 2008. Consistent with earlier reports, the NERA report does note that the number of filings declined in the second quarter. The NERA report also notes that the first half filings were largely driven by the credit crisis cases and new lawsuits relating to the Ponzi schemes. Over 40% of first half filings were credit crisis related and over 20% were related to the Ponzi scheme allegations. About 67% of first half filings named at least one financial company as a primary co-defendant.

In addition, the NERA report notes that accounting firms have been named as co-defendants in 17.3% of filings, which represents a significant increase from prior years. Cases against foreign domiciled defendants have also increased, with 19 cases or 15% of all cases naming a foreign company as a primary defendant, the highest percentage since the passage of the PSLRA.

In terms of drivers affecting the pace of securities class action lawsuit filings, the report confirms that the filing rate is correlated to overall market volatility, but the relationship is "not tight" and in fact volatility accounts for only about 28% of the variability in quarterly filing levels.

In looking at case resolutions, the report attempts to determine how long on average it takes for these cases to be resolved. Looking back at the cases filed in 2000, the report finds that on average, the time to resolution is 2.9 year, with an average time for dismissals of 1.7 years and settlements it was 3.5 years. Most of the more recent cases, particularly those related to the subprime meltdown and the credit crisis still remain only in their earliest stages, and so it is too early to tell how these cases ultimately will be resolved.

In analyzing case outcomes overtime, the report finds that a higher fraction of cases have been dismissed since the U.S. Supreme Court’s 2005 ruling in Dura Pharmaceuticals, consistent with the hypothesis that defendants are more likely to prevail in a motion to dismiss as a result of that decision.

With respect to settlements so far this year, the NERA report finds that the median securities class action settlement is $8 million, which is about the same as in 2008. Median values have remained very consistent for the past five years.

The average securities class action settlement during the first half of the year has been $43 million, about even with last year’s average and slightly below the average of $49.6 million for the period 2003 to 2009. The high average relative to the median is driven by large outlier settlements. If the settlements above $1 billion are removed, the average for the period 2003 to 2009 drops to $27.6 million, although the year to date average for 2009 settlements remains at $43 million. A substantial number of settlements this year have been over $100 though less than $1 billion.

Median investor losses for cases filed in 2009 ($600 million) are much higher than for cases settled in 2009 ($289 million). Since settlement amounts traditionally have been "strongly correlated" to investor losses, this would seem to suggest that the 2009 cases would be much higher than more recently settled cases. However, given that the companies affected by the credit crisis "may no longer have …substantial resources to make …large settlement payouts" the traditional relationship of settlement amount to investor losses may or may not hold.

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As I have shown (here) and has been detailed by others (here), the number of securities class action lawsuits declined during the first half of 2009 compared both to last year and to historical norms. There is a lot that might be said about the decline and its causes. However, the mainstream media (refer, for example, here) has latched onto the message that the number of securities suits is declining because the plaintiffs are "running out of people to sue."

Let’s be honest -- fish gotta swim, birds gotta fly, and plaintiffs’ lawyers make their living filing lawsuits. The fish and the birds can be counted upon to continue their traditional activities, and so can the plaintiffs’ lawyers. The very idea that the plaintiffs have run out of targets is a flawed conclusion built on a faulty premise.

Before I get started on this topic, I think it would be useful to review why this question matters. Once before, the idea circulated that the securities class action plaintiffs’ lawyers were going out of business. This hypothesis turned out to be very wrong and it proved to be a very expensive mistake.

After the PSLRA was enacted at the end of 1995, some D&O insurers assumed the statute’s passage would mean that many fewer securities lawsuits would be filed, and so they slashed their insurance pricing. The marketplace followed. When securities litigation ramped back up, the D&O insurance industry suffered hundreds of millions of dollars in losses. The industry paid a lot of tuition to learn that what plaintiffs’ lawyers do is file lawsuits. Given how expensive the lesson was, it would seem unwise to start assuming now that anything has changed.

But with respect to the recent decline in securities lawsuits, let’s at least get the facts straight. The number of lawsuits did not decline during the entire first six months of the year. During the period January through April, the number of new securities lawsuit filings was more or less at normal levels. The drop took place in May and June. Now, looking at the ebb and flow of securities lawsuit filings during the last 14 years, there arguably is nothing noteworthy about a two-month decline. It could just be a blip. It may or may not continue; only time will tell. It does seem important (to me at least) that so far in July, there have already been at least twelve new securities lawsuits, more than were filed in either May or June.

The other thing about the first half of 2009 is that it was not as if the plaintiffs’ lawyers were idle -- they were just otherwise occupied. Among other things, they were busy filing lawsuits related to Madoff, the Stanford Financial Group and other Ponzi schemes. Indeed, my list of Madoff-related lawsuits (which can be accessed here) now runs to some 23 pages, with more than 40 new cases filed during May and June.

This other extensive litigation activity is highly relevant, because of the similarity to what happened back in the period mid-2005 to mid-2007. That was the period when there was a sustained "lull" in new securities class action lawsuit filings. During that period as well, the plaintiffs’ lawyers were also otherwise engaged. Then, they were busy filing options backdating-related shareholders’ derivative lawsuits, eventually filing 168 of them (as shown here).

That prior "lull" in new securities lawsuit filings motivated some observers to speculate that the move to lower securities litigation levels might represent a "permanent" change. Subsequent history has shown that in fact there was no permanent change, and indeed the securities lawsuit activity returned with a vengeance.

Of course, it is possible that plaintiffs’ lawyers have indeed run out of targets and that lower level of new securities class action filings will persist going forward. Only time will tell. Just based on what history has shown, though, both after the passage of the PSLRA and after the so-called "lull," I think it would be unwise to bet that hereafter the plaintiffs lawyers will file fewer securities lawsuits.

My own theory about why the number of lawsuits has dipped is that the plaintiffs’ lawyers have been busy, not just with the Madoff lawsuits, but also dealing with the extraordinary number of lawsuits they previously filed in connection with the subprime meltdown and credit crisis. Many of these lawsuits are uncommonly complicated and they have in many cases entered procedurally demanding stages.

The main reason I believe that the plaintiffs’ lawyers have just been jammed up is that I think there is evidence that they are dealing with a backlog of cases, a point that I have made before (here). Recent filings even further reinforce the conclusion that the plaintiffs’ lawyers are now starting to work off a backlog.

Many of the recent filings have proposed class periods that are well in the past, sometimes years in the past. For example, the securities lawsuit filed on July 14, 2009 against Ambassador Group (refer here) has a proposed class period cutoff date of October 23, 2007. The securities lawsuit filed on July 17, 2009 against Bare Escentuals (refer here) has proposed class period cutoff date of November 26, 2007. The securities lawsuit filed on July 22, 2009 against Accuray (refer here) proposes a class period cutoff of August 19, 2008. Other recent filings though not quite as superannuated involve class period cutoff dates that well over six months past (refer, for example, here).

If you notice from the cases I have listed above and in my prior post, these cases not only involve a time gap, but they also are all outside the financial sector. It seems as if the plaintiffs lawyers have been so preoccupied with the race to the courthouse in lawsuits against the financial sector, they are just now getting around to filing the cases against the other kinds of companies.

The way I look at it, the plaintiffs’ lawyers have not had a shortage of targets, they have just had a shortage of time. But evidence suggests that they are getting caught up and they are now getting around to working off the backlog that has been accumulating. The one thing I know for certain is that they will continue to file lawsuits. Consider how reliable the birds and fishes are, and I think you will see what I mean.

One line of analysis that does give me pause is the suggestion that the lawsuit filings declined because of diminished stock market volatility. According to this theory, there is a correlation between overall market volatility and the level of securities lawsuit activity. This theory may have something to it; it is certainly the case that an individual lawsuit is directly related to the target company’s experience of volatility in its own share price. If this market volatility theory is true and if the lower volatility persists, then we could be in for a period of lower numbers of security lawsuits. We had a lull before, we could certainly have one again.

Because of the possibility that persistent lower market volatility might mean reduced lawsuit filings for awhile, I am not making any absolute predictions. I am just saying that I wouldn’t make any bets based on the assumption that the plaintiffs lawyers have run out of people to sue.

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While the number of securities class action filings through the year’s first half still project to an annualized filing rate consistent with historical averages, there was a noticeable slackening in the number of new securities lawsuits filed as the second quarter of 2009 progressed. New filings in the second quarter were well below the number of filings in the first quarter as well as in last year’s second quarter. There were few new filings in May and even fewer in June.

Overall, the filings continue to be largely concentrated in the financial sector. In addition, as discussed below, a significant number of the securities lawsuit filings in the first half of 2009 did not involve publicly traded companies, but instead involved other types of entities, such as private investment partnerships and mutual funds.

Based on my review of the securities filings through June 30, 2009, there were 94 securities class action lawsuits filed in the first half of 2009. (Please see my comments below on the topic of “counting” the lawsuits during the year’s first half.) The 94 first half filings represent an annualized filing rate of 188, which is slightly below but within range of the average number of filings of 197.7 during the 13-year period between 1996 and 2008. The annualized rate of 2009 filings is also below the average filing level of 204.7 for the most recent seven year period of 2002 through 2008.

The filing level during the second quarter of 2009 was below both the first quarter of this year and last year’s second quarter. There were only 35 new securities lawsuit filed during the second quarter of 2009, compared to 59 during the first quarter of this year and 56 in the second quarter of 2008.

The lower filing level during the second quarter of 2009 reflects the low number of new securities class action lawsuit filings during the months of May and June. There were just eleven new securities lawsuit filings in May and only six in June. The June filings represent the lowest monthly number of new filings since December 1996, when there were just five new securities class action filings.

But though there were fewer new securities class action filings during the second quarter of 2009, the total number of filings for the twelve-month period ending June 30 remains within historical annual averages. There were 205 new filings during the twelve month period ending on June 30, 2009, which, though below the 219 new filings during the twelve month period ending on June 30, 2008, is consistent with the average annual number of filings noted above.  

In addition to the filing activity levels, the first half filings were characterized by the relatively unusual types of claimants involved. For example, as many as ten of the first half lawsuits were filed on behalf of holders of preferred or subordinated securities. As I noted at greater length here, these are relatively unusual claimants.

The securities class action litigation targets during the first half were also unusual. An uncharacteristically high number of the first half lawsuit defendants were entities other than public companies, including private investment partnerships, mutual funds, and other nonpublic entities. As many as sixteen of the new first half lawsuit filings involved primary defendant entities that lacked Standard Industrial Classification code (SIC) designations. As many as eight of the new filings in the first half involved mutual funds (many of them in the Oppenheimer mutual fund family).

One characteristic that the first half filings did have in common with the filings in immediately preceding periods is that the new filings continue to be concentrated in the financial sector. Though the first half filings represented 38 different SIC Code classes, fully 51 of the first half filings against entities with SIC Codes involved companies in the 6000 SIC Code series (Finance, Insurance and Real Estate). In addition, virtually all of the 16 actions involving entities that lacked SIC codes also involved enterprises in the financial sector, so that more than two-thirds of the new first half filings involved financial services entities of one kind or another.

The concentration of the filings in the financial sector is largely a result of the continuing subprime and credit crisis litigation wave. By my count, 51 of the first half filings involved subprime and credit crisis related allegations. My complete list of all subprime and credit crisis securities lawsuit filings can be accessed here.

Another factor contributing to the concentration of securities lawsuit filings in the financial sector is the number of new securities class action lawsuits that were filed in the first half related to the Madoff scandal. By my count there were 11 new Madoff-related securities lawsuit in the first half, although there were many more duplicate Madoff-related lawsuits filed during that same period as well. My complete list of the Madoff related lawsuit filings can be accessed here.

The first half securities lawsuit filings were filed in 26 different courts, but fully 45 of them, or nearly half, were filed in the Southern District of New York.

Eighteen of the first half lawsuit filings involved foreign domiciled companies, representing ten different countries. The country with the largest number of first half filings was the United Kingdom. However, a number of these lawsuits against foreign-domiciled companies involve multiple separate lawsuits against a single target. For example, the six lawsuits filed against U.K. companies actually involve just two different companies, Royal Bank of Scotland and Barclays.

Of the actions against U.S.-domiciled companies, the first half lawsuits involved companies from 22 different states, with the largest number in New York (28) and California (12).

Why the Apparent Slowdown?: There may be any number of possible reasons for the relative slowdown in the number of filings during the second quarter. My own theory is that the plaintiffs’ lawyers may have found themselves in a logjam, due to two factors. One factor is the onslaught of Madoff-related litigation (which is not fully reflected in the above numbers but has nevertheless been massive) Another factor is the sheer quantity of previously filed subprime and credit crisis-related litigation, which in many instances has reached critical procedural stages.

If I am correct about the reasons for the second quarter slowdown, then the downturn could proved to be temporary and filing levels could ramp back up as plaintiffs’ lawyers circle back and attempt to work off the backlog. (Indeed, I have previously noticed signs that plaintiffs lawyers could already have been working off backlogs from earlier periods, as noted here). My view is that we will soon see filing activity return to historical norms. Of course, only time will tell.

Some Comments on “Counting”: The various litigation statistical services will also be issuing their counts for the first half of 2009 and their counts almost certainly will vary from mine. Because the Stanford Law School Securities Class Action Clearinghouse publishes all of the actions that it includes in its running tally, it is easiest for me to compare my count with theirs, and so I already know that my count differs from theirs, as I have both omitted lawsuits Stanford Clearinghouse has counted and I have counted lawsuits that the Stanford Clearinghouse omitted.

I have set forth these differences below not because I think I am right and alternative version wrong, but simply so readers might be able to understand the differences. Reasonable minds might well reach different conclusion as to whether the items mentioned below should or should not be recognized in any count.

Thus, I have omitted at least a couple of cases from the Stanford Clearinghouse list that to me appear to represent double counting of lawsuits that were counted elsewhere in the Clearinghouse’s list. (Refer for example here and here for examples of cases previously counted in the Stanford Clearinghouse tally.) Also, because I only count class actions seeking damages for disclosure violations under the federal securities laws, I have omitted merger objection lawsuits (refer for example here).

By the same token, I have included federal securities class action lawsuits that were filed in state court (refer for example here), which the Stanford Clearinghouse did not. I have also included a number of other actions that do not appear on the Stanford Clearinghouse list, including lawsuits involving Metaldyne (here); Royal Bank of Scotland Series Q preferred shares (here), Deutsche Bank Alt-A Securities (here); Merrill Lynch Mortgage Pass-Through Certificates (here); FM Multi-Strategy Investment Fund (here); Citigroup 8.125% Non-Cumulative Preferred Stock, Series AA (here); Agape World (here); Wells Fargo Mortgage Pass-Through Certificates Series 2006 et seq. (here); Citigroup 8.50% Non-Cumulative Preferred Stock (here); and Thornburgh Mortgage Pass-Through Certificates (here).

During the first half of 2009 the seemingly simple process of counting new lawsuit filings was extraordinarily complicated. As the filings have continued to emerge involving different classes of securities, it is increasingly challenging to determine whether or not each additional complaint represents a duplicate lawsuit or a separate action. In addition, the flood of Madoff-related litigation has involved an enormous number of similar or overlapping lawsuits.

If you would like a particularly challenging example of the difficulties involved in “counting,” refer to this June 30, 2009 press release in which plaintiffs’ counsel describe the class complaint they filed in the Eastern District of California on behalf of holders of derivative interests in bonds issued by the California Infrastructure and Economic Development Bank. To greatly oversimplify the action, the lawsuit alleges that the bond documents misrepresented certain bond attributes, for which the plaintiffs seek to recover damages under the federal securities laws. It is an investor class action lawsuit seeking to recover damages under the federal securities laws, and for that reason I included it in my count. On the other hand, it involves public financing authority rather than a public company; others might not count it. Read the press release and I think you will see what I mean. This is not simple.

Whether or not to count any of these complaints as a new action or as a duplicate lawsuit, or at all, is enormously challenging and reasonable minds almost certainly would reach differing results. The various published versions of the number of lawsuits filed during the first half of 2009 almost certainly will vary, perhaps substantially.

Securities Docket Mid-Year Litigation Update Webcast: On July 9, 2009, at 2:00 P.M. EDT, I will be participating in a Securities Docket webcast entitled “2009 Mid-Year Review: Securities Litigation and Enforcement.” The webcast will be moderated by Bruce Carton of Securities Docket and the panelists will also include Francine McKenna of the Re: The Auditors blog; Lyle Roberts of The 10b-5 Daily blog; and Tom Gorman of the SEC Actions blog. Further information and registration instructions can be found here.

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Securities class action lawsuits filings are on pace to make 2009 the most active for securities class action filings in years, according to Advisen’s May 1, 2009 Securities Litigation Quarterly (here). According to the report, there were 67 securities class action lawsuits in the first quarter of 2009, up from 56 a year earlier. The first quarter filings represent an annualized filing rate of 268 securities class action lawsuits, which would not only represent a significant increase over 2008 but would even be greater that the "relatively litigious year of 2004."

My own analysis of the first quarter 2009 securities class action filings can be found here.

The overall purpose of the Advisen report is to analyze "securities lawsuits" in the first quarter of 2009. As used in the Advisen report, the term "securities lawsuits" refers not just "securities class action lawsuits," but also includes SEC enforcement actions, state court fiduciary duty cases, and even lawsuits filed in non-U.S. courts.

In addition, the report uses yet a different term – "securities fraud lawsuits" – as a subset of "securities lawsuits," to describe SEC enforcement proceedings and other regulatory actions.

So in the report "securities class action lawsuits" and "securities fraud lawsuits" are each separate and distinct subcategories of the larger category of "securities lawsuits."

According to the Advisen report, filings in the broadest category -- "securities lawsuits" -- were up significantly in the first quarter of 2009, with 169 of these actions, compared with only 125 in the fourth quarter of 2008, and 134 in the first quarter of 2008. These filings (which, again, represent a broader category than just "securities class action lawsuits") were significantly increased by Madoff-related lawsuit filings, which represented 30% of all the "securities lawsuits" in the first quarter. The report notes that "2009 might end up as a year with a heavy front-end load of lawsuits" due to the "flurry of Madoff-related cases" in the first quarter.

Using its own categorization, the report notes that fewer of the "securities cases" plaintiffs are filing are "securities class action lawsuits," and that plaintiffs increasingly have been filing securities lawsuits alleging common law torts, contract law violations, and breach of fiduciary duties." The report speculates that plaintiffs’ counsel may be pursing these alternatives in order to be able to proceed in state court and to avoid having their case consolidated with the larger class action suit.

With respect to "securities lawsuits" other than "securities class action lawsuits," the enforcement and regulatory actions that the report categorizes as "securities fraud lawsuits" accounted for 34 suits filed in the first quarter, up from 19 in fourth quarter of 2008, but down from 54 in third quarter of 2008. The "securities fraud lawsuits" filed in first quarter of 2009 represent an annualized filing rate136 cases, flat with 2008 but down from 175 in 2007.

Other types of "securities lawsuits" other than "securities class action lawsuits" filed in the first quarter of 2009 were: breach of fiduciary duties (26), collective actions in non-US courts (20), derivative shareholder actions and other derivative cases (14), and others (8).

The Advisen report notes that suits against financial firms dominated the "securities lawsuit" filings in the first quarter. The report notes that 117 out of the 169 "securities lawsuits" filed (or 69%) in the first quarter involved financial services firms (including insurance companies). These financial services claims fall in four basic groups: the Madoff-related claims; subprime and credit crisis-related claims; specialist improper trading claims; and Stanford Group-related claims.

With respect to the subprime and credit crisis-related claims, the report suggests that these claims "will crest in 2009," adding that "as bankruptcies rise through the economy, hitting all sectors, and securities suits are filed as a consequence, suits filed will become more dispersed…broadly affecting all sectors."

The report notes that many of the cases will not only potentially trigger D&O insurance policies, but "may also trigger coverage under errors and omissions (E&O) and fiduciary liability policies" which is true with respect to may of the Ponzi scheme cases as well as with to some of the subprime and credit crisis-related cases.

First Quarter Report Webinar: On Friday May 8, 2009, at Noon EDT, I will be joining David Bradford and Jim Blinn of Advisen for a free one-hour webinar to discuss the findings in the Advisen quarterly report and to discuss the implications for the liability insurance market. Registration for this free webinar is available here.

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In prior posts (most recently here), I discussed the fact that while litigation against the financial sector has predominated recent securities lawsuit filings, plaintiffs’ attorneys also have targeted other sectors, including in particularly the life sciences sector. An April 2009 memorandum by David Kotler of the Dechert law firm entitled "Dechert Survey of Securities Fraud Class Actions Brought Against Life Sciences Companies" (here) takes a closer look at the 2008 life sciences securities lawsuits and analyzes the allegations on which the claims are based.

The memo notes that the 23 securities lawsuits filed against life sciences companies in 2008 is about the same number as the 25 life sciences securities lawsuits filed in 2007. However, the report also notes that the 2008 life sciences securities lawsuit filings represented only 10% of all securities lawsuit filings during the year, compared to 14% in 2007. The report attributes this slight drop to the fact that securities lawsuits in the financial sector "skyrocketed" in 2008.

The memo reports that, similarly to prior years, half of the life sciences companies sued in 2008 were very small, with market capitalizations below $250 million. However, by contrast to 2007, when nearly half of the life sciences companies sued had market capitalizations greater than $10 billion, on 2008 "only 13% of total actions were brought against the largest companies."

With respect to the allegations raised in the new lawsuits, the memo notes that in 2008, the majority of claims "pertained to accounting improprieties and/or misstated or misleading financial results and forecasts, by comparison to the 2007 filings, where industry-specific issues such as product safety, efficacy or marketing predominated.

The memo does note that about 25% of the 2008 filings contained allegations of alleged misrepresentations or nondisclosure regarding the commercialization or marketing of the product, and about 25% alleged that the defendants had made false and misleading statements about the safety of their product.

The memo also notes that one trend observed in 2007 had continued in 2008; that is, the plaintiffs’ lawyers are continuing to include key research personnel as defendants, on the apparent theory that these individuals "had a high level position within the company and access to internal information," and therefore "they knew and failed to disclose the allged adverse non-public information." The memo reports that key research personnel were named as defendants in five of the 23 life sciences securities lawsuits filed in 2008.

With respect to the likelihood of future litigation in the sector, the memo notes that life sciences companies "are particularly vulnerable to securities lawsuits because of their inherently volatile stock prices, often driven by a drug or device product life cycle that is fraught with potential for adverse and unpredictable events." That vulnerability "may increase in coming months and years when the boom of securities class actions in the financial sector busts." The memo speculates that "once plaintiffs’ targets in the financial sector dry up, other sectors, including life sciences, may see an increase in lawsuits aimed their way."

In discussing the 2007 version of Dechert’s life sciences securities litigation report, I had raised (here) the question whether or not the numerous lawsuits against life sciences companies actually were successful, and in particular, I asked whether or not the cases were dismissed more frequently than other securities lawsuits. The 2008 Dechert memo addresses these questions by taking a look at how the 2007 life sciences securities lawsuits have fared so far.

The 2008 memo reports that of the 25 life sciences securities lawsuits filed in 2007, eleven have been dismissed and two have settled. The memo states that the two settlements are "within the standard range" for securities lawsuit settlements generally, and that the dismissal rate "mirrors that of securities class actions in general."

The dismissals largely have been based on the plaintiffs’ failure to fulfill the requirements for pleading scienter. The memo comments that "though plaintiffs may be given multiple opportunities to amend their complaints, they will not be able to survive a motion to dismiss with general, conclusory or generic allegations of knowing misconduct."

The Dechert memo’s tally of 23 life sciences securities lawsuits in 2008 squares with my own count. I note that in preparing my count of the life sciences lawsuits, I had used a rather narrow definition of the category, limiting the "life sciences" companies to those either in SIC Code series 283 (Drugs) or SIC Code series 384 (Surgical, Medical and Dental Instruments and Supplies).

The memo, which concludes with practical risk minimization suggestions, is quite good and merits reading at length and in full.

Special thanks to the author of the Dechert memo, David Kotler, for providing me with a copy of the memo.

The Rise and Fall of Bill Lerach: The Professional Liability Underwriting Society (PLUS) has posted its acclaimed video, "The Rise and Fall of Bill Lerach," on the members’ section of its website. PLUS members can access the video here. The video alone might justify cost of membership. A trailer of the video can be found on the Securities Docket site, here.

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On April 1, 2009, PricewaterhouseCoopers issued this year’s version of its annual study of securities class action litigation (here). The PwC report differs in certain particulars from previously released studies of the 2008 securities lawsuit filings, but the overall findings are directionally consistent with the prior reports. The PwC report also adds some interesting observations of its own.

My own analysis of the 2008 securities lawsuit filings can be found here. Cornerstone’s previously released study of 2008 filings can be found here and Cornerstone’s study of the 2008 securities lawsuit settlements can be found here. NERA’s 2008 study can be found here and Advisen’s can be found here.

The PwC study found, consistently with the prior reports, that as a result of the financial crisis, the number of securities class action lawsuits rose for the second year in a row in 2008. The PwC report tallied 210 securities lawsuits in 2008, a number that is notably below the numbers reported by other studies. The 2008 total represents a 29 percent increase over 2007. The report found that the filings were steady throughout the year, with a slight uptick in the fourth quarter.

The report found that the majority of the 2008 filings were related to the financial crisis. Indeed, the report noted that "for the first time since the PSLRA, in 2008 the plaintiffs’ bar filed more federal securities lawsuits against the financial services industry group (banking, brokerage, financial services and insurance) than any other industry." By the same token, for the first time since the PSLRA’s passage, high tech companies were not the most frequently targeted.

The number of filings against companies in the pharmaceutical industry remained consistent with 2007, with 21 lawsuits in the sector in both years. My own analysis of the 2008 securities filings in the life sciences sector can be found here.

Filings against companies in the Fortune 500 were up in 2008, with 37 filings during the year, or 18% of all cases filed. The average annual percentage of filings against Fortune 500 companies since the PSLRA’s enactment is 13%. The majority (65%) of the Fortune 500 companies sued in 2008 were in the financial sector.

The report notes that the profile of financial companies sued in 2008 changed from those named as defendants in 2008. The focus changed from loan originators in 2007 to entities involved in loan securitization in 2008. (I might add parenthetically that the loan securitizers remain a target in 2009.) In 2008, the auction rate securities lawsuits were a significant part (38%) of the suits filed against entities involved in loan securitization.

According to the PwC report, securities lawsuits in the United States against foreign issuers "reached an all-time high in 2008, with 36 cases representing 17 percent of the total federal securities class actions filed." These filings against foreign issuers represent the highest percentage of the total cases in any year since the enactment of the PSLRA. 15 (or 42%) of the 36 cases filed against foreign issuers involved companies in the financial services industry, and 32 out of the 36 of the suits against foreign issuers were filed in the Second Circuit. The countries whose companies were sued most frequently were Canada, China and Switzerland.

The report notes that the number and aggregate dollar value of securities lawsuit settlements declined in 2008. However, if the $3.2 billion Tyco settlement is excluded from the 2007 numbers, the remaining total value of the 2007 settlements ($3.3 billion) is 9 percent less than the total value of the 2008 settlements ($3.6 billion).

The average 2008 settlement of $41 million represented a substantial increase from 2007’s average of $28.3 million, but the 2008 average was still well below the 2005 average of $67.6 million. The median 2008 settlement of $8 million was unchanged from 2007.

The report has an interesting statistic showing that the 2008 average for settlements greater than $1 million but less than $50 million was $11.2 million, which not only represents an increase over the equivalent 2007 average of $9.6 million, but also represents the highest such average since the PSLRA’s enactment.

The report also has extensive additional interesting analysis regarding the prevalence and type of accounting allegations, and their impact on settlement; the nature of SEC enforcement activity; and the increase in foreign regulatory activity.

The report concludes by noting that there are three areas in which "companies will want to remain especially vigilant," which are "institutional plaintiff activity (particularly activity relating to public and union pension funds), internal controls accounting-related allegations, and FCPA enforcement." The report ends with the observation that "securities litigation activity in 2009 is likely to reflect [the] new era of accountability and oversight, particularly if the regulatory environment is overhauled, as most think inevitable."

An interesting interview discussing the PwC report can be found here.

Special thanks to a loyal reader for providing me with a link to the PwC report.

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As a result of recent legislative changes, Canadian securities litigation filings increased substantially in 2008, according to a January 26, 2009 Report by NERA Economic Consulting entitled "Trends in Canadian Securities Class Actions: 1997-2008" (here). A January 26, 2009 press release describing the report can be found here.

According to the Report, plaintiffs filed a record nine new securities class action lawsuits in Canada during 2008, which represented an 80% increase over the previous annual maximum and a 125% increase over the prior year.

This level of filing activity is still "miniscule" compare to the securities litigation filings in the U.S., even allowing for the fact that the Canadian securities markets are in the aggregate much smaller than those in the U.S.

However, in recent years, four Canadian provinces have introduced "continuous disclosure" regimes and have enacted civil liability provisions as well. These provisions include certain "gate keeping" mechanisms (including, for example the requirement that the plaintiffs seek leave of court to pursue a class action), but plaintiffs nevertheless seem interested in pursuing relief under these new statutory regimes.

For example there have now been a total of twelve new securities lawsuits filed in Ontario since the 2006 revisions to the relevant laws. (The Ontario Securities Act, as amended, can be found here.)

One of these Ontario cases involves IMAX Corporation, which is also the subject of a U.S. securities lawsuit. As I discussed in a prior post (here), the prospect for Canadian securities actions may have, as the NERA Report puts it, "received a boost" with a ruling in the IMAX case, which permitted the plaintiffs in that case to conduct a certain amount of discovery at the pre-approval state.

As NERA Report observes, "for parallel US-Canada actions, the IMAX ruling may enable plaintiffs to do an end-run around the discovery stay provisions of the PSLRA by brining an action north of the border."

The NERA report also observes that the recent filing in Ontario of a class action against AIG may be an example of this tactic. My prior post discussing the Ontario securities action against AIG and its possible tactical purposes can be found here.

The NERA Reports that among the Canadian filings are cases demonstrating the impact of several trends that have also driven U.S. securities litigation. That is, the 2008 cases include lawsuit filings related to the credit crisis (against CIBC and AIG), as well as cases based on allegations of options backdating.

Nearly one-quarter of the Canadian class actions involve companies in the financial sector, and nearly one fifth involve resources companies.

The Report states that there have been twenty securities class action settlements, but only one (the Southwestern Resources case, which settled for CAN$15.5 million) involved a case brought pursuant to new securities legislation. The Report shows that cross-border cases tend to result in larger settlements than Canadian-only cases.

Overall the Report notes that while the plaintiffs’ bar is "more active than ever" and filed a record number of new lawsuits in 2008, "it remains to be seen whether the gate-keeping aspects of the new amendments to the legislation, as interpreted by the courts, will meaningfully hinder the ability of plaintiffs to prosecute class actions in Canada."

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2008 was a remarkably eventful year, from the dramatic events that rocked the financial markets to the Presidential election that resulted in a change in national leadership. Virtually all of the significant events during 2008 also had an impact on the world of D&O insurance, one way or another. In all likelihood, significant developments will continue to emerge during 2009, with further implications for the D&O marketplace.

In a year as eventful as 2008, selecting as the most significant events is a challenging task. But with an eye toward the developments of greatest significance for the D&O industry, I have prepared the following list of the top ten stories of 2008.

1. Credit Crisis Becomes Global Financial Calamity: What began in 2007 as a subprime meltdown had by early 2008 become a credit crisis, which in turn evolved during Fall 2008 into a full blown global financial disaster.

Within the space of just a few short weeks, the government took control of Fannie Mae and Freddie Mac; the FDIC took over Washington Mutual, in the largest U.S. bank failure ever; Lehman Brothers collapsed, in the largest U.S. bankruptcy ever; Bank of America agreed to acquire Merrill Lynch in a government brokered deal; the government undertook a massive bailout of AIG; Congress enacted a colossal $700 billion bailout package; and Wells Fargo agreed to acquire Wachovia. And those events came after a raft of prior financial shocks, including the collapse of Bear Stearns, the seizure of the auction rate securities market, and the disintegration of U.S. residential real estate market.

Any one of these events on its own would be significant. Taken collectively these events represent an enormous upheaval, the full ramifications and consequences of which will only emerge over the months and years to come.

And those are just the headlines. In other developments reported "below the fold," companies around the world have grappled with a general business downturn, wrestled with the threat of their own insolvency or that of their customers or suppliers, and basically tried to maintain their ground in an increasingly hostile financial environment.

All of these developments have enormous potential significance, much of it yet to unfold. These events have not only fueled litigation, but they have also presented D&O underwriters with a dramatically altered underwriting environment. The perils involve not only the challenge of underwriting financially troubled companies, but also the trial of underwriting in the context of rapidly changing (and deteriorating) conditions in the financial and credit markets.

During 2008, the world became significantly more dangerous for D&O underwriters. All signs suggest the current perilous conditions will continue into 2009, and perhaps beyond.

2. Financial Market Disruptions Hit Major Insurers: The turmoil in the financial markets also battered three insurers that are major players in the D&O marketplace. AIG’s woes required an enormous government bailout. XL and Hartford both faced differing degrees of turbulence due to write-downs in their respective investment portfolios.

Each of one of these insurers is dealing with their own unique set of circumstances. Rating agencies have noted and responded to these developments. Insurance buyers remain anxious and wary. The implications of these developments, both for each of these insurers and for the marketplace as a whole, remain to be seen. At a minimum, these events have disrupted the D&O insurance marketplace and introduced a significant element of uncertainty. The disruptive impact from these developments is likely to continue to affect the D&O industry throughout 2009.

3. Subprime and Credit Crisis Litigation Wave Rolls On: The subprime litigation wave that began in 2007 continued to surge in 2008, as there were 101 new subprime and credit-crisis related securities lawsuits filed during 2008, bringing the two-year total to 141. My running tally of the subprime and credit crisis-related securities lawsuits can be accessed here.

As time has passed, the litigation wave has continued to evolve; for example, the 2008 subprime and credit crisis-related litigation included as many as 21 auction rate securities lawsuits all of which were filed in the earlier part of 2008. Later in the year, a string of lawsuits initiated by holders of preferred or subordinated securities emerged (as discussed here).

In February 2009, the subprime and credit crisis-related litigation wave will enter its third year, but the phenomenon shows no signs of abating. The credit crisis-related securities lawsuits continued to accumulate throughout 2008. Of the 101 subprime and credit crisis-related lawsuits filed in 2008, 45 were filed in the second half of the year, including ten in December alone.

The credit crisis lawsuit filings remained high as the year ended, suggesting that significant credit crisis litigation activity will continue well into 2009 and perhaps beyond.

4. Credit Crisis Litigation Spreads Beyond the Financial Sector: As massive as the subprime and credit crisis-related litigation wave has been, it had until recently been concentrated in the financial sector. But as 2008 wore on, and largely as a result of the dramatic events in the global financial markets during September and October 2008, the litigation wave spread beyond the financial sector.

The companies that have become involved in this extended litigation wave include, for example, those that had significant exposure to Lehman Brothers or other companies that collapsed this fall. (Refer here and here for discussion of these "new wave" credit crisis lawsuits). In addition, companies that have been drawn in include companies that made wrong way bets on commodities or currencies (about which refer here).

These developments suggest that the credit crisis-related litigation wave may have entered a dangerous new phase, as I discuss at greater length here. These developments also underscore the challenges for D&O underwriters in the current environment.

My complete rundown of all 2008 securities litigation can be found here.

5. Bank Failures Surge: Led by the FDIC’s assumption of control of Washington Mutual in the largest bank failure in U.S. history, bank failures surged in 2008. According to the FDIC’s website (here), there were 25 bank failures in 2008, the highest annual total since 1994, at the end of the last era of failed banks. Perhaps even more significantly, the pace of bank closures increased as the year progressed; 21 of the 2008 bank closures took place in the second half of 2008, 12 of them in the fourth quarter.

In many ways, other financial events have overshadowed this sudden surge in bank failures. Indeed, as I noted here, the WaMu failure, the largest in U.S. history, has largely been relegated to yesterday’s news pile. But the timing and pace of the bank closures during 2008 suggests that there are likely to be further bank failures ahead, carrying with it the threat of associated "dead bank" litigation, a possibility I previously discussed here.

6. Madoff Scandal Triggers Litigation Torrent: The revelation of the massive Ponzi scheme involving Bernard Madoff and his firm has triggered a wave of litigation as aggrieved investors scrambled to try to recoup their losses. The first Madoff-related lawsuits targeted Madoff and his firm. But given the unlikelihood of a significant recovery there, investors have quickly moved on to other targets. A running tally of the Madoff investor litigation can be accessed here.

The primary Madoff-related litigation targets are the so-called "feeder funds" that invested with Madoff on their clients behalf. Recent blog posts discussing these "feeder funds" lawsuits can be found here and here. Given the magnitude of the investor losses and the depth of investor outrage, these lawsuits are likely to continue to accrue for some time to come. Press reports (for example, here) suggest that lawyers are gearing up for a litigation onslaught.

7. Presidential Election Signals Changes: I don’t know whether you heard, but there was an election in November. The coming changes in the White House as well as the increased Democratic majority in Congress could signal significant future legislative and other developments.

The arrival of the new administration will likely mean a change in direction for judicial appointments. A more interesting question is whether the Democratic control of Congress and the White House could lead to legislative changes in the securities laws. As discussed at the PLUS International Conference in November (about which refer here), the current financial turmoil could be used as a justification for legislative reform efforts – for example, an attempt to overturn Central Bank and Stoneridge.

At a minimum, the coming changes in the leadership at the SEC, together with a different leadership interpretation of the meaning and value of regulation, could lead to a changed environment for the enforcement of the securities laws.

8. Largest-Ever Fine Underscores the Growing Significance of the FCPA: For some time now (most recently here), I have been writing about the growing importance of Foreign Corrupt Practices Act (FCPA) enforcement activity and associated civil litigation. The FCPA mounting significance was dramatically underscored recently when Siemens agreed to pay an $800 million fine.

The Siemens fine is the largest ever, dwarfing the previous record fine, paid by Baker Hughes, of $44 million (about which refer here). The outcome of the Siemens investigation is merely the latest development in a long chain of events highlighting the growing importance of the FCPA.

As I have previously noted (refer here), one of the usual accompaniments of an FCPA investigation is follow-on civil litigation. As the threat of FCPA-related exposure continues to grow, the threat of follow-on civil litigation will also increase.

The FCPA Blog has a detailed overview of 2008 FCPA enforcement activity here.

9. Defense Expense Tests Limits Adequacy: Companies ensnared in high stakes litigation may find themselves confronting an unexpected new challenge – the increasing likelihood that defense costs alone could exhaust the entire amount of available D&O insurance coverage. This threat was unfortuntately realized in connection with the Collins & Aikman bankruptcy and related criminal proceeding (about which refer here), where accumulated defense expense exhausted the company’s entire $50 million D&O insurance, before the criminal case even went to trial.

The possibility that escalating defense expense could entirely deplete available insurance presents a frightening prospect for individuals involved in a serious D&O claim, and also raises troubling questions about traditional notions of limits adequacy. In addition, the possibility of total limits exhaustion as the result of the requirements of multiple claims and multiple insureds underscores the need for insurance buyers to consider alternative insurance structures (such as, for example, separate insurance for an individual or a group of individuals) to ensure that segregated funds remain available in the event of a catastrophic claim.

10. Indemnity Developments Trigger Additional Insurance Structure Concerns: In the Schoon v. Troy case (about which refer here), the Delaware Chancery Court held that a board of directors properly could eliminate former directors' advancement rights retroactively. The possibility that former directors could lose their rights to advancement or indemnification comes as unwelcome news to many directors.

This case development, like the development about limits adequacy noted above, highlights the need to address program structure as part of the insurance acquisition process. In general, directors and officers have become more concerned about the availability of insurance protection when they need it most. As a result, interest in a wider variety of auxiliary insurance structures has increased. These structures can include new insurance solutions designed for the needs of retiring directors.

In a year as eventful as 2008, reasonable minds could differ about what events deserve to be included in any Top Ten list. I am very interested in readers’ views about the top stories, particularly those who feel that other events deserved to be included on the list.

More "Top" Lists: Making year-end lists seems to be a nearly universal phenomenon, and Top Ten lists abound. Time Magazine simplified things by creating "The Top Ten of Everything of 2008," which can be found here.

Then  there are always the lists of the "Bottom Ten," like Business Week’s list of the Ten Worst Predictions About 2008 (here). Fortune has a list (here) of the "dumbest" business decisions of 2008, but given the kind of year 2008 was, a list of just ten was not enough – the magazine’s targets 21 business decisions as "dumbest."

Perhaps the most entertaining "Top" list is VideoGum’s list of the Top Viral Videos of 2008, which can be viewed below. (Viewer discretion is advised as some persons may find some of the content offensive.)

PLUS D&O Symposium: Readers will also want to be sure to register for the annual PLUS D&O Symposium, which will be held on February 25 and 26, 2009, at the Marriott Marquis Hotel in New York. Information about the Symposium, including registration instructions, can be found here.

The Symposium will feature an all-star cast, including keynote speakers Madeline Albright and NY Insurance Department Superintendant Eric Dinallo. Wilson Sonsini partner Boris Feldman will once again be moderating the annual panel on securities litigation developments. The schedule also includes a panel on Bankruptcies and Bailouts, with panelists including VJ Dowling of Dowling & Partners Securities and David Bradford of Advisen.

The conference will also include a replay of the excellent video, "The Rise and Fall of Bill Lerach" (a movie trailer for which can be found here). Stanford Law Professor Joseph Grundfest will lead a panel discussion of the video. The video was shown at the PLUS International Conference in November 2008 and received rave reviews.

Readers with any questions about the Symposium should feel free to drop me a note or give me a call.

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As other commentators previously have noted (refer here), the pace of securities lawsuit filings increased significantly in 2008 compared to recent years. According to my tally, there were 224 new securities lawsuits filed in 2008. The 2008 total represents a 30% increase over the 172 securities lawsuits filed in 2007, and an 88% increase over the 119 securities lawsuits filed in 2006.

The 2008 filing total also represents the highest annual filing total since 2004. All signs seem to indicate that the heightened filing levels will continue into 2009.

My 2008 securities lawsuit filing tally reflects a lower number than the figures NERA Economic Consulting recently published (refer here), and in that regard I urge readers to refer to my comments below about the particular complications associated with "counting" securities lawsuits in 2008.

Overall Observations

The most significant factor in this year’s heightened securities litigation filing activity was the number of subprime and credit crisis-related securities lawsuit filings. Of the 224 new securities cases filed in 2008, 101 were subprime or credit crisis-related. As reflected on my running tally of subprime and credit crisis-related securities lawsuits, which can be accessed here, there have been 141 total of these cases filed overall during 2007 and 2008 combined.

One factor that increased the number of subprime-related lawsuit filings in 2008 was the influx of auction rate securities lawsuit filings (about which refer here). There were 21 of these auction rate securities lawsuits filed in 2008, largely in the first half of the year.

Another factor that increased the 2008 filings was the influx of Madoff-related litigation during December 2008. My running tally of the Madoff lawsuits can be found here. Investors have initiated Madoff-related securities class action lawsuits against at least seven distinct investment groups, and every sign is that this litigation will continue to flood in during the early weeks and months of 2009.

2008 Filings by SIC Code

The predominance of the subprime and credit crisis-related litigation during 2008 is borne out in the profile of the companies that were sued in securities lawsuits during the year. Though the companies targeted represent over 90 different Standard Industrial Classifications (SIC) Codes, fully 99 of the lawsuits hit companies with SIC Codes in the 6000 series (Finance, Insurance and Real Estate), including 19 in SIC Code 6021 (National Commercial Banks) and 20 in SIC Code 6211 (Security Brokers and Dealers).

There were a number of securities lawsuit defendants entities in 2008 that have no SIC Code designated. These defendants include mutual funds, private investment firms and other entities. By my count, there were as many as 23 new lawsuits filed in 2008 against entities that lack an SIC designation. In most cases, these entities are involved in investment or financial services-related businesses, which even further underscores the fact that much of the securities litigation activity in 2008 was concentrated in the financial sector.

But while securities suits against companies in the financial sector were a predominant factor in the 2008 securities lawsuits filings, there were other SIC Code categories that also saw significant litigation activity, including SIC Code 3674 (Semiconductors) which also saw ten filings; SIC Code 2834 (Pharmaceutical Preparations) which saw nine lawsuit filings; and SIC Code 3845 (Electromedical and Electrotherapeutic Apparatus) which had five.

In addition, while the credit crisis lawsuits hit the financial sector hard, the credit crisis litigation wave spread outside the financial sector as the year progressed and the financial turmoil spread. As I noted here, and as a result of the dramatic events in the financial markets during September and October 2008, a number of companies outside the financial sector were hit with credit crisis-related lawsuits, particularly those with exposure to Lehman Brothers, Fannie Mae and Freddie Mac, or those that made wrong-way bets on currencies or commodities.

State and Court Distribution of Filings and Defendants

The concentration of cases in the financial sector also affected the geographic distribution of the 2008 case filings. Though securities lawsuits were filed in 48 different federal district courts (as well as several state courts), 97 of the 224 securities filings in 2008 were filed in the Southern District of New York. The federal district with the second highest number of new lawsuit filings was the Northern District of California, where 12 new securities lawsuits were filed. Other districts with a significant number of filings include the District of Massachusetts (10), and the Central District of California (9).

Another factor contributing to the significant number of filings in the Southern District of New York was the number of lawsuits filed there against foreign-domiciled companies. Overall, there were 34 foreign companies sued in securities lawsuits in 2008, all but five of which were initiated in the Southern District of New York. The 34 foreign companies sued represented 17 different countries, with the largest number from Canada (8), China (5) and Switzerland (4).

The domestic U.S. companies hit with securities lawsuits were based in 31 different states, and the District of Columbia. The state with the largest number of new securities lawsuits was New York (42), followed by California (23), Massachusetts (13) and Ohio (10).

The Pace of Filings and Likely Future Trends

The pace of new lawsuit filings increased during the year, with 105 during the first half and 119 in the second half. The fact that the fourth quarter, with 67 new filings, was the most active quarter during the year, together with the fact that there were a significant number of filings (30) in December (typically a quiet month for securities lawsuit filings), suggests that the heightened level of securities filings will continue into 2009. Indeed, the filings in the fourth quarter of 2008 and during December 2008 represent, respectively, the highest quarterly and monthly totals in more than five years.

My conclusion that the increased securities litigation activity levels will continue in 2009 is reinforced by the likelihood that the credit crisis litigation wave will continue to spread outside the financial sector in 2009.

Some Comments about "Counting": One reason for the wide disparity in the various published versions of the 2008 securities lawsuit filings is that the seemingly simple task of counting lawsuits was particularly complicated during 2008.

One complication is that some companies were sued multiple different times by different sets of claimants, on different legal theories, or with respect to different sets of circumstances. For example, one historically unusual phenomenon that recurred during 2008 was the initiation of new securities lawsuits initiated by preferred shareholders or subordinate securities holders (about which refer here). The multiplication of lawsuits involving different claimants or different legal theories but related defendants raised a continuing series of questions whether or not a new action does or does not represent a separate lawsuit that should be separately counted.

This question whether or not a separate complaint represents a new lawsuit was particularly complicated with respect to the Madoff-related litigation that flooded in during the final weeks of December. As reflected in my running tally of these lawsuits, which can be accessed here, there have already been multiple lawsuits against related Madoff-feeder funds. Reasonable minds might well differ as to whether or not a particular complaint represents an entirely new lawsuit or simply a related or duplicate complaint.

Another attribute of this multiplicity of lawsuit filings is that the number of new lawsuits filed may be significantly different than the number of companies sued, as some companies were sued multiple times in multiple different lawsuits. As a result, there may be a certain amount of double counting associated with some of the lawsuit tallies or some of the analysis of lawsuit filings.

Yet another factor complicating the counting is that during 2008 plaintiffs initiated a number of securities class action lawsuits in state court (about which I previously commented here). In many instances these lawsuits are difficult simply to find. The inclusion of these cases, and the uncertainty around their numbers, could significantly affect the overall lawsuit tally.

As has been increasingly the case in recent years, it has become progressively more difficult simply to maintain definitional clarity about what exactly is being counted. To clarify what I have been tracking, I try to count class action lawsuits that allege violations of the federal securities laws. That said, I have excluded certain lawsuits that other reasonable minds might include. For example, I generally exclude merger objection lawsuits. In addition, I generally exclude lawsuits in which the securities allegation is simply that the defendants failed to register securities. On the other hand, I include lawsuits even if the defendant entity is not a publicly traded entity (for example, if the defendant is a private equity fund or a hedge fund.)

Because of these definitional issues, it is almost inevitable that various tallies of the 2008 securities lawsuits will differ.

UPDATE: The WSJ.com Law Blog has a January 5, 2009 post (here) regarding the 2008 securiteis class action filings. The Law Blog entry links to this post and includes comments from a number of commentators and practitioners in the field.

Impact on D&O Pricing?: The uptick in securities lawsuit filings in 2008 might well be expected to have an upward impact on D&O pricing, and indeed it may yet have that effect. But particular features of the 2008 filings might moderate that expected effect.

First, the concentration of the filings in the financial sector means that the impact from the heightened filing levels is not widespread throughout the D&O industry. D&O carriers are not yet experiencing the impact of the filing levels across their entire portfolio, and carriers that do not have significant financial industry exposure may not yet be experiencing elevated claims activity, although that likely will change as the credit crisis litigation wave spreads outside the financial sector.

Second, even with respect to the heightened activity levels, the impact is muted somewhat by the multiple different lawsuit filings against the same companies. The D&O impact from the third, fourth or fifth new lawsuit against the same company may not increase the aggregate losses to which insurance applies. Because the number of companies sued is less than the number of new lawsuits initiated, the aggregate claims frequency level is less than the overall filing levels might indicate.

Third, many of the defendant entities are not publicly traded companies. As I noted above, many of the defendant entities in new 2008 lawsuits were mutual funds, investment partnerships, hedge funds, or other investment vehicles. The incidence of litigation against these types of entities would have only an indirect impact at most on the market for public company D&O insurance.

Fourth, a significant amount of the securities litigation activity in 2008 involved claims likelier to create errors and omissions (E&O) insurance losses, rather than D&O losses. For example, the Madoff-related litigation and the auction rate securities litigation may or may not produce D&O insurance losses, but may well produce significant E&O losses. The spread of losses to other insurance lines could dilute the overall impact from the 2008 litigation on the D&O carriers.

Fifth, most of these cases are still in their earliest stages, and it will be some time yet before the losses begin to accrue. Until loss payments begin to mount, D&O pricing is unlikely to make dramatic changes (at least as a result of securities filing activity levels).

All of that said, the increase in litigation activity in 2008, together with the disruption involving market leader AIG and other leading carriers, as well as the prospect for continued significant litigation activity in 2009, are likely to create uncertain conditions in the D&O marketplace and could lead to increased carrier caution as 2009 progresses. Indeed, Advisen, a leading industry observer, is predicting that a hard market for insurance will develop toward the end of 2009 (about which refer here).

2008: The Year in Review: Readers interested in learning more about the 2008 securities litigation trends will want to the January 6, 2009 webcast sponsored by Securities Docket.

I will be participating in this free webcast, which will begin at 2 pm EST, along with a number of my esteemed fellow bloggers, including the Securities Docket’s own Bruce Carton; Walter Olson of the Point of Law blog; Tom Gorman of the SEC Actions blog; Francine McKenna of the Re: The Auditors blog; and Lyle Roberts of the 10b-5 Daily blog. Further information about the podcast can be found here.

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Securities lawsuit filings reached a six-year high in 2008, according to a year-end report released today by NERA Economic Consulting. The report, entitled "2008 Trends in Securities Class Actions" (here), was written by NERA economists Stephanie Plancich and Svetlana Starykh, and reports that through December 14, 2008, there were 255 securities class action filings, up from only 131 filings in 2006 and 195 filings in 2007. NERA's December 18, 2008 press release regarding the report can be found here.

If the "atypical" cases (e.g., IPO laddering) are excluded from the comparison, the 2008 filings are "on pace to reach a 10-year high." The filings are also on pace for a 37% increase over 2007 and the highest annual increase since 2002 (the year of the corporate scandals).

The report attributes the "surge" in filings to the credit crisis. Of the 255 YTD filings, 110 were credit crisis related, and almost 50% of cases involved defendants in the financial sector, as compared to only 16% of cases in the 2005-06 period. (My table of the credit crisis-related securities lawsuit filings can be accessed  here.)

But while the financial sector saw increased litigation activity, "other sectors also saw continued filing activity." For example, though lawsuits against companies in the health technology sector declined as a percentage of all filings, the absolute number of filings against companies in the health technology sector increased, as there were 29 filings against health technology companies in 2008, compared to only 19 in 2006.

The 2008 filings have been concentrated in the second and ninth circuits. The second circuit filings were increased by the large number of filings in the Southern District of New York, particularly financial companies domiciled there.

Though the pattern of increased filing activity in 2008 is clear, "there have been no clear increasing or decreasing trends in the patter of resolutions." The report notes that median settlements have "remained relatively stable." The 2008 median settlement of $7.5 million is slightly below the 2007 median of $9.4 million, but above the 2006 median of $7.0 milllion.

Average settlements, which can be substantially affected by large settlements, were up in 2008 relative to 2007. The average settlement in 2008 was $38 million, up from $31 million in 2007, but well below the post-Sarbanes Oxley average from 2003 to 2008 of $45 million. (The annual average settlement has ranged from $21 million to $82 million during this six-year period.)

The report does observe that over time there has been an increase in the dollar value of claimed investor losses, from about $120 million ten years ago, to around $340 million during 2008. However, the ratio of median settlement to median investor losses has "stayed relatively steady in the 2-3% range over the past few years."

Looking forward, the report notes that there could be "two opposing factors" that could determine whether or not average or median settlements will increase in the future. On the one hand, investor losses associated with the credit crisis lawsuits in 2008 are very large, which could be "an indicator of big settlements to come." On the other hand, the credit crisis has "dramatically shrunk the size of many defendants’ pockets." Lower financial wherewithal might operate as a downward force on settlement values.

The report concludes that "only time will tell if the huge investor losses for credit crisis filings may put upward press on median settlements in the future, or if the financial distress faced by defendant companies may pull median settlement values down."

My own observations on the 2008 securities litigation activity will be detailed in my year-end analysis, which will be forthcoming after the first of the new year. UPDATE: My year end analysis can be found here. For now, I note a few things.

First, this has been an extraordinarily difficult year in which to just try and count the cases. For example, many litigation targets have been sued multiple times by different claimants, whether they are shareholders who acquired their shares over different time periods, or they are security holders with different classes of equity interests. Whether a new filing should or should not be "counted" has been difficult. Further complicating this has been the large number of state court filings, which are difficult just to find. I emphasize this point simply because there is going to be a significant variation in the various commentators’ year-end reports about how many filings there were this year. My own count is lower than NERA’s.

Second, while the 2008 filings were significantly increased by filings against companies in the financial sector, as the year has progressed and the impact of the credit crisis has become more widespread, the credit crisis-related filings have spread outside the financial sector (refer for example here).

Third, you may see comments elsewhere that the 2008 filings were inflated by one-time sector events, like the auction rate securities lawsuits. While this is true, the recent surge of litigation activity involving the Madoff victims demonstrates that in many ways the pace of securities litigation activity is simply a reflection of a series of supposed one-time events. The mere fact that there is an identifiable event arguably may be irrelevant to analyses of current or future filing trends.

Fourth, the NERA report makes no projections about what is likely to happen to the pace of filing activity in 2009. My own view is that the current active filing pace is likely to continue well into 2009 and perhaps beyond. Among other things, filing activity has been elevated over the last several weeks, which is unusual for December, historically a slow month. The continued spread of credit crisis filings outside the financial sector is likely to continue in 2009. Moreover, the impacts of the financial downturn will begin to emerge as company’s report their 2008 results and as the year progresses, which could contribute to litigation activity.

As I said, my own report will be forthcoming. I am very interested in hearing readers’ thoughts and reactions in the interim.

Special thanks to Ben Seggerson of NERA for providing me with a copy of the NERA report.

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Has the "due diligence" standard articulated in the WorldCom securities litigation produced an increase in the Section 11 litigation? That is the question addressed in David J. Michaels’s November 29, 2008 paper entitled "An Empirical Study of Securities Litigation After World Com" (here).

In this post, I review the analysis based upon which Michaels contends that, due to the WorldCom due diligence decision, Section 11 filings have increased as a percentage of all securities lawsuits, followed by my own discussion of the data on which Michaels relies.

The Author’s Analysis

Outside directors historically have had little Section 11 liability exposure, owing to their ability to rely on Section 11’s due diligence defense. Michaels notes that courts generally have found outside directors’ due diligence obligations to be minimal. However, Michaels contends, the Southern District of New York’s Section 11 due diligence decision in In re WorldCom Securities Litigation, 2005 WL 638268 (S.D.N.Y. 2005) (refer here) "significantly changed the landscape for outside directors" by holding them to a "stringent standard of liability."

A more detailed review of the impact of the WorldCom litigation on the due diligence defense can be found here.

Michaels hypothesized that because the WorldCom decision represents a change in the due diligence standard, making it easier for plaintiffs to pursue Section 11 claims (particularly against outside directors), securities cases under Section 11 would increase. In order to test this hypothesis, Michaels examined the ratio of securities filings asserting Section 11 claims to Section 10b-5 filings during the period 2002 through 2007, using data from the Stanford Law School Class Action Clearinghouse website. Because the court issued the WorldCom opinion in March 2005, the period selected included both years preceding and following the decision.

Michaels reported the following ratios of Section 11 filings to Section 10b-5 filings for the years 2002 through 2007:

2002 13%

2003 11%

2004 6%

2005 10%

2006 13%

2007 23%

Michaels concludes that these data suggest an "abnormal rise in Section 11 filings." Michaels concedes that "it is difficult [to] prove a causal relationship between WorldCom and the rise in Section 11 filings," he nevertheless asserts that it "is reasonable to attribute causation of the rise in Section 11 filings to WorldCom." In support of this conclusion, Michaels states:

Consider the following series of events. Prior to WorldCom, Section 11 filings were relatively constant; WorldCom comes along and greatly alters 35 years of precedent by making it easier for plaintiffs to survive a motion for summary judgment; Section 11 filings increase.

Michaels ends his paper by arguing that the upward trend in Section 11 cases will continue, but also that WorldCom’s holding applying a stringent standard to outside directors’ "due diligence" defenses is contrary to the ’33 Act’s purposes. He proposes a safe harbor for outside directors that "would exclude from liability outside directors who follow certain procedures designed to inform them of all material information surrounding a given offering."

Discussion

Michaels may be correct that the WorldCom decision will result in an increase in Section 11 filings. Reasonable minds may differ on whether the data support his conclusion that there already has been a demonstrable increase in Section 11 filings. Those same reasonable minds might hesitate before jumping to any conclusions about the causes of any increase that arguably may have taken place. A more conservative view is that it is at best premature to reach any conclusions in that regard.

First, the data on which Michaels relies represents only a brief time period. Since the WorldCom opinion was issued in 2005, that data from calendar year 2005 represent only a partial year. Michaels’s analysis places an enormous weight on data from just two years, 2006 and 2007. Michaels does not explain why he believes a data set that small is sufficient to support his conclusions.

Second, Michaels does not consider whether or not there were external factors that may have affected securities filings during the period after the WorldCom decision. In fact, it has been well documented (refer, for example, here) that there was a filing "lull" during the period from mid-2005 through mid-2007, in which there were an historically low number of securities filings overall. Michaels does not even mention this fact, nor does he consider whether the filing levels during that period may suggest that other factors may have been at work during this period.

Third, although Michaels is convinced that there was an "abnormal rise" in the Section 11 filings after WorldCom, the only thing I can conclude from looking at the data is that something was going on during 2007, as the 2005 and 2006 data are consistent with the prior years’ data. Michaels is essentially arguing the filing activity in a single year supports his hypothesis. Again, Michaels does not consider whether or not there may have been some anomalous factor behind the 2007 data.

My own prior review of the 2007 filing data (refer here) concluded that a significant number of the overall 2007 filings involved companies that conducted IPOs during the 12 months prior to getting sued. Many of these IPO cases involved foreign domiciled companies. Perhaps it may be concluded that the 2007 uptick in Section 11 litigation was due to a wave of IPOs involving foreign companies that were not ready to go public. At a minimum, there are certainly other plausible explanations for the 2007 uptick in Section 11 litigation other than the WorldCom decision alone.

Not only does Michaels fail to consider other possible explanations for the anomalies in the data, but the basis on which he nevertheless argues that WorldCom decision alone explains the supposed increase is also suspect.

In effect, he urges us to conclude that because the supposed increase in Section 11 filings came after the WorldCom decision, the decision must have been the cause of the supposed increase. This analysis arguably represents an example of the logical fallacy post hoc ergo propter hoc (after this, therefore because of this). Essentially, Michaels is trying to substitute chronological sequence for causation. However, the mere order of events does not rule out other factors that might explain the data, as the preceding paragraph shows.

From my perspective, given the anomalousness of the 2007 data, it is premature to reach any conclusions without the opportunity to consider subsequent years’ data, to see, for example, whether the 2007 uptick represented a trend or (as I strongly suspect) is merely a statistical outlier. I can say from my own informal review of the 2008 year to date filing data, a much smaller percentage of 2008 cases involve IPOs (14 out of 195 year to date in 2008, compared to 29 out of 172 in 2007), which suggests that the number of Section 11 filings will prove to have been down substantially in 2008 compared to 2007.

The decline in 2008 IPO-related lawsuits is hardly surprising given the downturn in the number of IPOs in recent months. Given the low level of IPO activity during 2008, and indeed the low level of securities offerings of any kind, it seems probable that Section 11 litigation could well taper off in the months ahead. All of which suggests to me the inadvisability of trying to make a few months of filing data support sweeping conclusions.

It may well be, as Michaels argues, that WorldCom’s articulation of the Section 11 due diligence standard arguably is inconsistent with the ’33 Act’s goals, particularly to the extent it may result in the imposition of greater Section 11 liability on outside directors. I simply disagree with Michaels’s conclusion that WorldCom decision has demonstrably caused an increase in Section 11 filings. Michaels’s hypothesis may or may not eventually prove to be correct, but it will be a significantly longer period of time than he has allowed before we can reach any conclusions.

Special thanks to Werner Kranenburg of the With Vigour and Zeal blog for the link to Michaels’s article.

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Following close on the heels of the Cornerstone mid-year report released earlier in the day, on July 29, 2008, NERA Economic Consulting also released its mid-year 2008 securities class action report entitled “2008 Trends: Subprime and Auction Rate Cases Continue to Drive Filings, and Large Settlements Keep Averages High” (here). A copy of the July 29 press release describing the NERA Report can be found here.

The NERA Report differs in its numerical particulars from the Cornerstone Report, but the two reports are at least directionally consistent. The NERA Report is also directionally consistent with my own mid-year securities litigation study, which can be found here.

According to the NERA Report, there were 139 securities lawsuits filed in the first half of 2008 (by way of comparison, Cornerstone has the number at 110). Based on NERA’s analysis, the 2008 filings are on pace to reach almost 280 (compared to Cornerstone’s estimate of 220). The NERA Report, like prior mid-year reports concludes that the increased pace of filing activity is largely driven by the current subprime and credit crisis-related litigation.

The NERA Report also concludes that market volatility is positively correlated with the number of securities class action filings, and the “if market volatility is higher during a quarter, controlling for market returns, filings are likely to be higher in the same quarter.”

The NERA Report also notes that “the probability of a suit rises with the size of the price decline: whereas only 9% of drops of 20-30% are followed by a shareholder class action within three months, almost 31% of drops of 40% or more are followed by a filing within that time frame.”

Taking into account the settlements over $1 billion, the average settlement in the first half of the year remained around $30 million, but excluding the $1 billion settlements reduces the average first half settlement to around $10 million. The median settlement in the first half of 2008 was $6.2 million. Both the average and median are below similar figures for recent years.

However, the Report also notes that the investor losses associated with the recently filed lawsuits were substantially higher than the median for cases settled in the 2005-2007 time frame, suggesting that the 2008 cases (largely driven by the subprime-related cases) potentially could result in much larger settlements.

The Report also contains interesting and detailed information regarding the 21 cases that have gone to trial since the enactment of the PSLRA.

The NERA Report is quite detailed and very interesting, and contains numerous other useful observations beyond those summarized here.

The material divergence in lawsuit count between the NERA Report and the Cornerstone Report (and for that matter between the NERA Report and my own mid-year analysis) is a cause of concern for anyone interested in a precise understanding of the current lawsuit trends. In my own mid-year analysis of the 2008 securities lawsuit filings, I noted some of the reasons why “counting” lawsuits is particularly difficult in the current environment, and some of those factors undoubtedly are at work here.

But these foreseeable difficulties notwithstanding, the divergence in the numbers is disconcerting. Because so many observers depend on these respectable sources to understand securities litigation developments, it is troublesome when the sources disagree so widely. If these industry sources are unwilling to make their lawsuit lists publicly available, it would be helpful if these sources would at least identify their sorting criteria. I know from my own experience that there are a lot of decisions that must be made about which lawsuits should be included and which should be kept out. At least with the benefit of these sorting criteria, we could try to understand the differences.

In the past, it has always been sufficient for me to recognize the numerical differences between different reports while noting their directional consistency. But the difference in count between the two leading reports of 29 lawsuits is a material difference. The differences in their respective year-end projections are even more dramatic. Differences of this degree not only cause problems for industry participants and observers. Without suggesting one way or another where the issues may be, at some level, questions regarding consistency and even reliability start coming into the picture.

I welcome comments from responsible sources on the issues surrounding the diverging lawsuit counts. There could be significant value in a public discussion of these issues and I would be particulary interested in adding comments to this post from the respective research groups that track this information.

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