The level of all corporate and securities filings continued to decline in the second quarter of 2014 as filing activity returns to levels that prevailed before the financial crisis, according to the latest quarterly D&O claims activity report of Advisen. According to the report, filing levels in the second quarter reflected the “fewest securities and business litigation filings and enforcement actions in the post financial crisis era.” However, securities class action filings bounced back in the second quarter after a “downward fluctuation” in the first quarter. A copy of the Advisen report can be found here. My analysis of first half securities class action litigation filings can be found here.
It is important to understand that the Advisen report differs in significant respects from other published reports of securities litigation activity. The other published reports discuss only the levels of securities class action filings, whereas the Advisen report captures a broader sweep of corporate and securities litigation, including regulatory enforcement actions, individual securities actions, breach of fiduciary duty lawsuits and even foreign litigation. In addition, Advisen uses a counting methodology that differs from that used by other reporting sources, which count each action as a single suit no matter how many complaints are filed and no matter how many defendants are named. By contrast, Advisen “counts each company for which securities violations are alleged in a single complaint as a separate suit.” As a result of these features of Advisen’s approach, the figures Advisen reports may appear different from other reported figures.
According to Advisen, the quarterly decline in securities and business litigation filings puts filing activity in 2014 on pace for its third straight year of declines in litigation filings levels. Corporate and securities litigation filing levels declined in the second quarter by 26 percent from the first quarter of this year, and declined 25 percent compared to the second quarter of 2013, as the total number of events dropped from 303 to 227. Exhibit 1 to the report graphically depicts filings levels since 2005 and clearly shows that 2014 filing activity is on pace for its lowest level since 2008.
In contrast to the overall levels of corporate and securities litigation filing activity, securities class action litigation filings actually increased in the second quarter. According to the Advisen report, there were 44 new securities class actions filed in the second quarter, compared to 39 in the first quarter. The first-half total of 83 projects to a year-end filing total of 166, which is close to the 2013 filing level. (For example, Cornerstone Research tallied the 2013 year-end total of securities class action filings as 166.)
For the past several years, securities class action litigation as a percentage of all corporate and securities litigation had been declining. However, with the overall decline in the corporate and securities lawsuit filings and the increase in the number of securities class action litigation filings in the second quarter, the percentage that securities class action lawsuit filings represent of all corporate and securities lawsuit filings has increased. In the second quarter, securities class action lawsuit filings represented 20 percent of all filings. On an annualized basis, 2014 is on pace to be the third consecutive year in which securities class action lawsuit filings increased as a percentage of all corporate and securities litigation filings.
While securities class action lawsuit filings are up as a percentage of all corporate and securities filings, the number of new securities class action lawsuits is down from the longer term historical average. For example, Cornerstone Research reports that the 1997-2012 average annual number of securities class action lawsuits was 192, well above the projected number of 2014 securities class action lawsuit filings of 166. According to the Advisen report, “the general decline in the number of securities class actions may be driven by factors such as a reduction in the number of companies traded on the U.S. Stock Exchange or the winding down of credit crisis litigation.” The longer term trend “may also reflect a change in emphasis by plaintiffs’ firms.”
The sector experiencing the greatest number of corporate and securities lawsuits is the financial sector, as has been the case in every quarter since the beginning of the financial crisis. According to the Advisen report, 27 percent of all corporate and securities filings in the second quarter involved companies in the financial sector. Though this level is down compared to 2008, when financial firms were involved in 40 percent of all corporate and securities litigation, financial firms remain the leading sector for new filings.
One of the most noteworthy trends in corporate and securities litigation has been the explosion in recent years of M&A-related litigation. Various reports have noted that lawsuits are now filed in connection with virtually every M&A transaction. The most recent Advisen report notes that while M&A litigation increased dramatically through 2011, in the last two years, the trend in terms of absolute numbers of lawsuit filings has been downward. However, the report reflects only absolute numbers of M&A lawsuit filings; it does not attempt to express the M&A related litigation activity as a reflection of the levels of underlying merger and acquisition activity.
The report also notes that in the second quarter foreign firms were involved in fifteen percent of all corporate and securities litigation filings, the same level as in the first quarter. The average settlement cost for all types of cases in the second quarter was $16 million, up from $14 million in the first quarter, but well below the $41 million reported in the second quarter of 2013.
Advisen Quarterly Claims Trends Webinar: On Thursday July 24, 2014, I will be participating in a free Advisen webinar on the topic of Quarterly D&O Claims Trends. The hour-long call will begin at 11:00 am EDT. The webinar will also include Brenda Shelley of Marsh, Paul Rodriquez of Swiss Re Corporate Solutions, and Jim Blinn of Advisen. For additional information about the webinar and to register, please refer here.
PLUS Professional Liability Regional Symposium in Singapore: On August 21, 2014, I will be participating in the Professional Liability Insurance Society (PLUS) Regional Professional Liability Symposium in Singapore. This evening event, which will take place at the Singapore Cricket Club, will include a keynote presentation from Chelva Rajah of the Tan, Rajah & Cheah law firm. I already know that many industry professionals in the region plan to attend. I hope that everyone in the region will plan to attend and will encourage others to attend as well. Information about the event including registration can be found here.