The number of securities class action lawsuit filings during the first half of 2014 was slightly above the number of filings in the first half of 2013. On an annualized basis this year’s filings are consistent with the full year filing figures for 2012 and 2013, though well below longer term historical averages.
During the first half of 2014, there were 78 new securities class action lawsuit filings, compared to 74 in the first half of 2013. The 78 filings in this year’s first half annualizes to a full year number of filings of 156. This annualized figure is slightly below the 2013 year-end total of 166, but is slightly above the 2012 year-end total of 152. However, the projected 2014 year end total of 156 would be well below the annual average number of filings of 192 during the period 1997 to 2012.
The relatively lower number of filings in recent years compared to longer term averages has led some commentators to suggest that securities class action lawsuit filings are down. There is no doubt that in terms of absolute numbers of lawsuit filings, the numbers of filings are down. The 156 projected number of filings for 2014 would be about 18% below the 1997 to 2012 average number of filings, and about 31% below the number of filings in 2004, when there were 228 securities class action lawsuit filings.
But while the number of lawsuit filings unquestionably is down, the rate of lawsuit filings relative to the number of publicly traded companies is more or less unchanged. Thus, for example, in 2004, while there were 228 securities class action lawsuit filings, there were also 6,097 publicly traded companies at year’s end, implying an overall securities suit filing rate of 3.74%. At the end of 2013 there were only 4,972 publicly traded companies. I don’t have the updated figure for 2014, but the 2013 year end number of publicly traded companies and the projected number of 2014 filings, the projected filing rate is about 3.17%.
According to Cornerstone Research, the 1997-2012 average annual filing rate was about 2.85%.In other words, while the absolute number of lawsuit filings is down compared to long term annual filing averages, the current rate of securities class action lawsuit filings relative to the number of publicly traded companies is actually up compared to longer term filing rates. Please keep this in mind when you see reports in the mainstream media based only on the absolute numbers of filings suggesting that securities suits are down.
The securities lawsuits filed in the year’s first half involved companies in a broad variety of industries. The companies named as defendants in the lawsuits represented 51 different SIC Code categories. The largest number of first half filings involved companies in the life sciences industries. There were a total of 14 lawsuits against companies in Industry Group 283 (Drugs) and Industry Group 384 (Surgical, Medical and Dental Instruments), representing about 18% of all first half filings. There were also a total of seven lawsuits against companies in Industry Group 737 (Computer Programming and Data Processing), representing about 9% of securities suit filings in the year’s first six months.
The securities lawsuits in the first half of 2014 were filed in a total of 28 different federal district courts, but many of the filings were concentrated in just a few courts. There were 22 securities lawsuit filings in the S.D.N.Y., representing about more than a third (35%) of all first half filings. There were also nine filings in the N.D. Cal., representing another 11.5% of first half filings. Other district courts with a larger number of filings included D.N.J, which had five, and the S.D. Tex., which had four.
One feature of securities class action litigation in recent years has been the number of securities suit filings involving companies domiciled outside the United States. During the first half of 2014, there were a total of nine lawsuit filings involving non-U.S. companies, representing about 11.5% of all first half filings. (Please note that I included the “Flash Boys”/High Frequency Trading securities lawsuit in this tally, as many – though not all – of the defendants in the lawsuit are based outside the U.S.). By way of comparison, in 2013, about 15% of all securities suit filings involved non-U.S. companies. Non-U.S. companies represented about 16% of all companies listed on U.S. exchanges.
Another significant feature of corporate and securities litigation in recent years has been the growing numbers of lawsuits arising out of mergers and acquisitions activity. Most of these lawsuits are filed in state courts. However, during the first half of 2014 there were a number of these lawsuits filed in federal courts, generally alleging that the merger-related proxy disclosures were deficient in violation of Section 14 or other provisions of the federal securities laws. In the year’s first half, there were nine merger-related lawsuit filings, representing about 11.5% of the filings during that period.
Two other aspects of securities lawsuit filings that I have previously noted are the number of filings involving IPO companies and the number of lawsuits filed in the wake of regulatory investigations. Five of the first half securities suit filings (about 6.4%) involved allegations of misrepresentations in connection with the defendant companies’ initial public offerings. Eleven of the first half filings (or about 14%) involved companies that had announced that they were the subject of regulatory investigations.
One interesting note about the first half filings is that there were at least three new lawsuits in which the defendant company had been using the services of a public relations firm known as the Dream Team. The three lawsuit involved Galena Biopharma (here); Cytrx Corporation (here); and InterCloud Systems (here). The allegations in the three cases are similar. For example, the CytRx and Galena cases refer to a March 15, 2014 Barron’s article discussing the two companies and stating that Seeking Alpha and other publications removed from their sites articles about CytRx and Galena that had been submitted by The Dream Team. The Barron’s article states that The Dream Team had not disclosed its paid affiliations in submitting supposedly free-lance copy. The Barron’s article (and the Seeking Alpha article to which it refers) makes for interesting reading. The lawsuit against Galena alleges that articles submitted by the Dream Team to various publications (including Seeking Alpha) had driven up the company’s share price, after which its CEO allegedly sold $3.8 million of his company shares.
The other important securities litigation development in the year’s first half is something that did not happen. That is, the U.S. Supreme Court did not throw out the fraud-on-the-market theory in the Halliburton case. Had the Supreme Court tossed the presumption of reliance in class action securities suits, which is based on the theory, it seems likely that the litigation environment for Section 10(b) securities cases would have been changed dramatically. Reports like this one examining securities suit filings trends would have looked very different in the future.
Even though the Court did rule that defendants should have the opportunity at the class action stage to try to rebut the presumption of reliance by showing that the alleged misrepresentation did not impact the defendant company’s share price, that defense-oriented alteration to the class certification procedures seems unlikely to have a dramatic impact on the number of securities class action lawsuit filings.
In other words, readers can continue to look forward to period analyses, like this one, of securities class action lawsuit filing trends.