cornerAccording to the latest report from Cornerstone Research, the number of securities class action lawsuit filings during the first half of 2014 were down compared to historical filings semiannual filing levels although slightly higher than the number of filings in the first half of 2013. The report, which is entitled Securities Class Action Filings – 2014 Midyear Assessment, and which can be found here, notes that the number of large dollar-loss cases and the number of cases against S&P 500 firms is far off of historical levels. Cornerstone Research’s August 6, 2014 press release about the report can be found here.


Consistent with my own tally and analysis of securities class action lawsuit filings during the first six months of 2014, the Cornerstone Research study reports that there were 78 new securities class action lawsuit filing in 2014’s first half. This number of filings is well below the 91 filings in the second half of 2013 and is 18 percent below the historical semiannual average of 95 filings during the period 1997 to 2013. However, the 78 filings in 2014’s first half is slightly higher than the 75 filings in the first half of 2013. The 78 filings do represent an increase from the low-water mark of 64 filings in the second half of 2012.


What the report characterizes as a “traditional filing” – that is, excluding merger objection suits and Chinese reverse merger cases – decreased 17 percent to 68 in the first half of 2014 from 82 filings in the second half of 2013. Eight of the first half filings involved merger objection allegations and two involved Chinese reverse merger companies.


The annualized rate of securities class action lawsuit filings projects to a year-end 2014 total number of securities suits of 156, which would be below the 2013 total of 166, but above the 2012 total of 152. A year-end total of 156 would be 17 percent below the 1997-2013 historical annual average of 189 filings. Were 2014 to end up at that level, this year would represent the sixth consecutive year with below-average filing activity and would be the third lowest total in the last 18 years.


However, as I noted in detail in my analysis of first half filing, the relative decline in the absolute number of filings is attributable at least in part to the overall decline in the number of publicly traded companies. Indeed, Figure 6 in the Cornerstone Report shows that notwithstanding the decline in the absolute numbers of lawsuits filed, as a percentage of U.S. listed companies, the percentage of companies sued (about 3.2%) remains above the 1997-2013 average of 2.9%


The report also notes that during the course of the last year, the number of publicly traded companies increased for the first time since 1988, due to increased IPO activity. There were 112 IPOs on U.S. exchanges in the first half of 2014, which already represents 71 percent of the IPO activity in 2013 and already exceeds the full years of 2009, 2011 and 2012. However, IPO activity still remains well below the elevated IPO filings levels seen during the 1996-2000 period. The report includes a detailed analysis of the susceptibility of IPO companies to securities litigation and concludes that IPOs following the credit crisis have faced an increased litigation exposure compared to both the pre-credit crisis IPOs and the IPOs during the 1996-2000 period.


Of the 78 first half securities lawsuit filings, 9 cases (or twelve percent) involved non-U.S. domiciled companies, compared to 18 percent of all filings during the full-year of 2013. During 2013, the filings against non-U.S. companies declined for the third consecutive year, and at least based on the first half filings, it looks as if the number of filings against foreign companies will decline again in 2014, to roughly pre-2010 levels.


The filings in the first six months of the year seem to reflect a decline in the number of lawsuits against companies with larger market capitalizations. Of the companies listed in the S&P 500 at the beginning of the year, approximately 2.4 percent were hit with a securities class action lawsuit in the year’s first six months. This annualized rate is the lowest since 2000 when Cornerstone Research first bean tacking the rate. The 2000-2013 annual average for class action lawsuit filings against S&P 500 companies is 5.7%.


The first-half filings involve “some of the lowest aggregate market capitalization losses in recent years” according to a statement in the Cornerstone Research press release by Dr. John Gould.  The maximum dollar loss for filings in the first half is the lowest semiannual total in 16 years. In addition, there were no filings in the year’s first six months involving maximum dollar losses over $10 billion, the first time that has happened in a semiannual period since the second half of 1997. Obviously, the absence of the mega cases could have an impact on settlement levels as these 2014 cases work their way toward settlement in future years. The absence of mega settlements and the lower overall valuation levels are likely to translate into lower overall levels of settlement.


Healthcare, biotechnology and pharmaceutical companies together accounted for 21 percent of total filings in the first half of 2014. The pace of filings against biotechnology companies doubled compared with the two previous semiannual periods.


For another midyear review of securities class action litigation, see the August 4, 2014 report by Jonathan Dickey of the Gibson Dunn law firm posted on the Harvard Law School Forum on Corporate Governance and Financial Regulation, here.