In several posts of the last several months (most recently here), I have commented that with the increased number of IPOs, an increase in IPO-related securities litigation would likely follow. If the securities litigation filing activity over the last couple of weeks is any indication, the anticipated increase in IPO-related securities litigation has arrived. Interestingly, most of the recent activity involves companies that completed their IPOs in 2013, suggesting that IPO-related securities litigation involving the increased numbers of 2014 IPOs is largely yet to emerge.
The most recent IPO-related securities suits within the last week. The first involves Enzymotec, Ltd., an Israeli-based company that completed its IPO in the U.S. on September 27, 2013. In his complaint filed in the United States District Court for the District of New Jersey on September 5, 2014, the plaintiff alleges that in its offering documents, the company, a worldwide supplier of nutritional products whose primary source of revenue is through its baby formula business, had failed to disclose that its Chinese baby formula business was jeopardized by increased regulatory pressure and subject to increased volatility and increased revenues. The complaint also alleges that company’s joint venture was crumbling which subjected the company to liability and further decreased revenues. A copy of the complaint can be found here.
The second of the most recent IPO-related securities lawsuit was filed on September 8, 2014, and involves SeaWorld Entertainment, Inc. which completed its IPO on April 18. 2013. The complaint, which was filed in the Southern District of California, and which can be found here, alleges that the company completed its offering while failing to disclose to investors that the company’s theme park was experiencing falling attendance numbers after the release “Blackfish,” a documentary about the alleged mistreatment of orca whales at the company’s theme park. The complaint alleges that the company failed to disclose the alleged mistreatment of the whales in the company’s offering documents.
These two most recent lawsuits follow closely after the filing of two other IPO-related lawsuits in the days just prior to the most recent filings. The first of these two prior lawsuits was filed on August 28, 2014 in the Southern District of New York against Santander Consumer USA Holdings, Inc., certain of its directors and officers and its offering underwriters. A copy of the complaint can be found here. The company is engaged in the indirect provision of auto loans. The company completed its IPO on January 23, 2014.The lawsuit followed after the company announced that it had received a Department of Justice subpoena relating to its underwriting and securitization of subprime auto loans since 2007.
The second of these two prior lawsuits was filed on September 3, 2014 in the Northern District of California against Rocket Fuel, Inc., certain of its directors and officers and its offering underwriters. A copy of the complaint can be found here. The company completed its IPO on September 20, 2013. The company Is engaged in managing Internet marketing, which it accomplished by operating a media-buying platform across various video and social media. The lawsuit alleges that while the company reassured investors that it could identify and manage threats to its model from bot-driven traffic, it was unable to eliminate ad fraud and bot traffic in its advertising campaigns. The complaint alleges that the company overstated its ability to manage bot-generated ad fraud and understated the seriousness of the problem. The company’s share price declined in early August 2014 when the company announced customer concerns about the company’s inability to identify and eliminate fraudulent ad traffic.
The filing of these IPO-related securities suits in quick succession may be something of a coincidence. However, because IPO activity picked up in 2013 and has increased again 2014, it is hardly a surprise that we are seeing an uptick in IPO-related litigation. IPO companies tend to be more vulnerable to securities suits for at least three reasons. First, there is a lower standard of liability for securities suits under Section 11 of the ’33 Act, which is applicable to claims based on the public offering of securities, than is applicable to open market trading securities suits under Section 10 of the ’34 Act, and so lawsuits involving IPO companies are just more inviting the plaintiffs’ lawyers. Second, because IPO companies have little track record and experience as reporting companies, and because they sometimes (although not always) are relatively new or developmental stage companies, IPO companies sometimes stumble in the early reporting periods after the IPO. Third, because of IPO companies’ relatively short trading history, the markets tend to react more precipitously to any adverse developments.
It is interesting that all but one of these new lawsuits involves companies that completed their IPOs in 2013, and only one involves a 2014 IPO. That means that even though the IPO-related litigation activity is picking up we are really not even seeing the litigation activity from the increased numbers of IPOs in 2014. Given the lag between the dates of the 2013 IPOs and the filing of these lawsuits, it would seem that we will see more securities suits related to the 2014 class of IPOs beginning in 2015. In any event, it seems likely that in the coming months and into to 2015, we will continue to see a number of securities suits involving IPO companies.
In any event, the numbers of companies that recently completed IPOs that are finding themselves caught up in securities litigation serves as a reminder of how important it is for companies in the IPO process to carefully attend to the placement of the public company D&O insurance that will be in place following the offering. The careful structuring of the D&O insurance could turn out to be a very important planning step that, if properly completed, can make a significant difference in the company’s experience if it should get hit with a securities suit after the IPO. For that reason, it is particularly important for companies planning an IPO to carefully select and knowledgeable and experienced broker as part of the planning process.
Website Upgrade for The 10b-5 Daily: For those of you who like me follow The 10b-5 Daily blog, you will be interested to note that the blog has recently completed a significant upgrade to is website, which can be found here. I congratulate Lyle Roberts, the site’s author, on the great new site. While the new site is great, if like me you want to continue to receive email updates when new content is posted on the site, you will need to reregister your subscription, by entering your email address in the Subscribe box and then clicking on the link in the confirmation email you will receive. (You need to update the subscription even if you subscribed to the site in the past, if you want to continue to receive emails.) I have already updated my subscription, I hope other readers will do the same.
D&O Liability and Insurance Issues in Germany: Those readers interested in D&O liability and insurance issues in Germany will want to read the recent article by Dr. Burkhard Fassbach of the Hendrdicks & Co. GmbH law firm in Dusseldorf, entitled “D&O (Directors & Officers) Liability in Insurance in German Supervisory Board Practice” (here). In the article, Burkhard discusses the interest of German Supervisory Board members in their companies’ obtaining D&O insurance as a prerequisite to their board service. The article also discusses the conflicts of interests that can arise between the Supervisory Board and the Executive Board from the dual board structure under German corporate in liability cases. The article concludes by examining the question whether the two boards require separate insurance policies provided through distinct insurance companies. The law firm’s September 10, 2014 press release about the article can be found here. I would like to thank Burkhard for sending me a link to his interesting article.