Overall Filings of corporate and securities lawsuits during the first quarter of 2014 were at their lowest levels since before the financial crisis, according to the latest report from Advisen, the insurance information firm. The April 2014 report, which is entitled “D&O Claims Trends: 2014,” can be found here. As discussed below, the report will also be the subject of an Advisen webinar at 11:00 am EDT on Thursday, April 24, 2014.
It is important to note that unlike other regularly published reports in this area, the Advisen report analyses filings patterns for more than just securities class action lawsuits. The information in the report encompasses a broad range of corporate and securities lawsuits, including securities class action lawsuits but also including other types of lawsuits as well, including regulatory and enforcement actions; breach of fiduciary duty lawsuits; and securities lawsuits not filed as class actions. In addition, the Advisen reports includes litigation activity both inside the outside the United States. The Advisen report also uses its own “counting” protocols. These important characteristics of the Advisen report account for the signficiant differences between the statistics and information discussed in the Adivsen report and the information found in other published reports.
The first quarter traditionally is a busier period during the calendar year for the filing of corporate and securities lawsuits. However, according to the report, there was a 35 percent decline in the number of new corporate and securities lawsuits filed during the first quarter of 2014 compared to the same quarter a year ago and a 17 percent decline from the final quarter of 2013. The 238 first quarter filing “events” noted in the Adivsen report “represent the lowest quarterly total since prior to the financial crisis.”
Lawsuit filings were generally down across all categories of cases that Advisen follows during the first quarter. However, securities class action lawsuit filings were basically flat on a year-over-year quarterly basis, as there were 39 securities lawsuit filings in the first quarter of 2014, compared to 38 in the first quarter of 2013.
With the decline of other types of suits and with securities class action lawsuit filings remaining flat, the proportion that securities class action lawsuit filings represent of all corporate and securities filings increased in the first quarter. During the first quarter of 2014, securities class action lawsuits represented 17 of all corporate and securities lawsuit filings, which is the highest quarterly percentage since the third quarter of 2009. The report notes with respect to this percentage that “coming on the heels of two consecutive years of growth as a percentage of total events, this is a trend that is certainly worth following.”
Consistent with the overall downward trend, the report notes that M&A litigation, which had surged in recent years, was down in the first quarter of 2014 at least on an absolute basis. Indeed, the total number of M&A lawsuits peaked in 2011 and have decreased materially over the two years following. The report does not consider whether or not the decline in the absolute numbers of M&A lawsuits is due to a decline in overall M&A activity or how the numbers of M&A lawsuits filed compared to the varying levels of M&A activity over the time period under consideration.
The financial services sector “continues to be a lightening rod for D&O related litigation.” As has been the case in recent quarter, the financial services sector is the “leading target of new filings.” Companies in the financial services sector were the target of new filings in 29 percent of the total. Other active sectors included consumer discretionary at 17 percent and health care at 13 percent.
Long time observers of corporate and securities claims activity know that lawsuit filings in this arena ebb and flow over time, and that the filings trends play out across multiyear periods, not on a quarterly basis. The fact that filings in any given quarterly period are “up” or “down” compared to a prior quarter or a year prior quarter may or may not tell you what you need to know to identify filing trends.
There are obviously a number of factors involved here. We are still coming out of the very active litigation period following the credit crisis, and while there may be many fewer credit crisis related lawsuit filings, many of the credit crisis cases are still playing out. If you talk to plaintiffs lawyers, they will tell you they are as busy as they have ever been. The relative number of quarterly filings may not mean the plaintiffs are inactive, it may only mean they are busy with other things.
One thing to keep in mind about apparently lower filing levels is that there have been short periods of apparently decreased filing activity in the past. For example, during the period from mid-2005 to mid-2007, there was a so-called “lull” in new securities lawsuit filings. However, the lull ended abruptly when the early fallout from the credit crisis started to hit, and we then moved into a period of very active litigation activity that lasted for several years. The point is that during the first quarter 2014, there were no events driving litigation activity, but if an event were to occure, there would likely soon be a swift upswing in new filings activity. In other words, it would be dangerous for anyone to presume that the apparently quiet first quarter of 2014 represents some kind of permanent downshift in the corporate and securities litigation arena. You can be sure that as soon as the next bandwagon appears, the plaintiffs’ lawyers will be among the first to jump on.
The report itself supplies a number of possible explanations for the quarterly downturn, some of which that are consistent with my remarks here. For example, the report speculates that the quarterly decline is “likely due to a combination of factors” including the “continued wind down of credit crisis litigation, fewer U.S. public company targets, and a limited number ability to settle due to fewer mediators.” For sure, the wind down of the credit crisis litigation is a factor as is the historical decline in the number of publicly traded companies (there are 40 percent fewer public companies than in 1997).
There are a number of current factors that could point to an upswing in the future or that at least seem likely to drive future litigation activity. The first is the new Financial Fraud Task force that the new SEC commissioner has formed. The activities of this task force seem likely to drive not only increased enforcement activity, but also follow-on civil litigation as well. Another factor is the Dodd Frank whistleblower program, which also seems likely to produce increased enforcement activity and follow-on civil litigation. In addition, the upswing in IPO activity, which picked up steam in 2013 and has continued so far in 2014, is likely to lead to increased activity due to the heightened susceptibility of IPO companies to litigation activity.
A wild card in all of this is the Halliburton case now pending before the U.S. Supreme Court. Although based on the tenor of the oral argument it seems unlikely, it is still at least theoretically possible that the Supreme Court will throw out the “fraud on the market’ theory. If that were to happen, it could be much harder for plaintiffs to pursue their claims. But while that might result in fewer class action filings, it could actually result in an increase in the number of filings, as more claimants pursue their claims as individual lawsuits. However, if, as seems likelier at this point, the Court adopts some middle course and doesn’t throw out but instead modifies the way the fraud on the market presumption operates, that could have yet a different impact on securities class action lawsuit filings. Until we know for sure what the outcome of the pending case is, it is premature to speculate on what will change. It is possible that while are waiting, the plaintiffs are holding back – although there have been plenty of case filings while the Halliburton case has been pending and in fact securities class action filings during the first quarter of 2014 were level with the first quarter of 2013.
Quarterly Advisen Claims Seminar: At 11:00 am EDT on Thursday April 24, 2014, I will be participating in a webinar entitled “Quarterly D&O Claims Trends: Q1” to discuss the findings in the Advisen report and other important D&O claims trends. The panel will also include my good friends Steve Shappell of AON and Will Fahey from Zurich. Jim Blinn of Advisen will moderate the panel. For further information about the webinar and to register, please refer here.