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.”
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.