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.
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.
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.