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.”
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.