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.
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.
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.