A single case may involve a host of interesting issues but sometimes the important lessons can only be discerned when many cases are considered collectively. This past week saw the release of some interesting analyses of aggregate litigation and enforcement statistics, each set of which told some interesting tales to tell and identified some important trends.
The SEC’s FY 2014 Enforcement Statistics
The first of these sets of statistics was presented in the SEC’s October 16, 2014 announcement of its Fiscal Year 2014 enforcement statistics. (The 2014 fiscal year ended on September 30, 2014.) The SEC reported that it filed a “record” number of enforcement actions in 2014 involving a “wide range of misconduct” and including a “number of first-ever cases.”
During FY 2014, the SEC filed 755 enforcement actions, which represented a 10% increase over the 686 enforcement actions filed in FY 2013. In FY 2014, the agency also obtained orders totaling $4.16 billion, compared to $3.4 billion in 2013. By way of comparison to the statistics for FY 2013 and FY 2014, in FY 2012 the agency filed 734 enforcement actions and obtained orders totaling $3.1 billion in disgorgement and penalties.
The agency identified at least two significant factors driving the increase in enforcement actions. The first was the agency’s use of “new investigative approaches and the innovative use of data and analytic tools” and the second was the agency’s expansion into a number of new areas based on “first time cases.”
With respect to the use of data and analysis, the press release quotes SEC Chair Mary Jo White as saying that “the innovative use of technology – enhanced use of data and quantitative analysis – was instrumental in detecting misconduct and contributed to the Enforcement Division’s success in bringing quality actions.”
The kinds of “first-ever cases” identified in the press release included “actions involving the market access rule, the ‘pay-to-play’ rule for investment advisers, an emergency action to halt a municipal bond offering, and an action for whistleblower retaliation.”
The press release also quotes SEC Chair White as saying that “aggressive enforcement” will remain a “top priority” and quotes the head of the SEC Enforcement Division as saying that he expects “another year filled with high-impact enforcement actions.” Going forward, the SEC Enforcement head said, the agency will “continue to bring its resources to bear across the entire spectrum of the financial industry.” Ominously, for the clients of the readers of this blog, he noted that among other things the agency will focus on bringing “cases against gatekeepers.”
The SEC’s press release includes a detailed recitation of various enforcement initiatives and accomplishments during the year. Among other things, the press release notes that during FY 2014 the agency’s whistleblower program awarded nine whistleblowers with total awards of approximately $35 million (the bulk of which was a single $30 million award, the largest ever, as discussed here).
Among other accomplishments, the press release cites the agency’s success during the fiscal year in “holding gatekeepers accountable,” noting that during the year it “held attorneys, accountants and compliance professionals accountable for the important roles they play in the securities industry.” The report also highlights the fact that during the year the agency “obtained the highest-ever FCPA penalties against individuals.”
With respect to the agency’s new policy of requiring individual admissions of wrongdoing as a condition of settlement of cases involving “particularly egregious conduct,” the press release notes that during the fiscal year that it had “demanded and obtained acknowledgements of wrongdoing under the admissions policy announced in the previous fiscal year.”
Alix Partners 2014 Litigation and Corporate Compliance Survey
On October 16, 2014, the business advisory firm Alix Partners released the report of its 2014 Litigation and Compliance Survey. The report is the result of a June 2014 survey of general counsel and compliance officers at companies in the United States and Europe with annual revenues of $250 million or more. The report underscores the fact that companies of this size in both the US and Europe are experiencing increased levels of litigation activity and incurring increased litigation costs. The firm’s October 16, 2014 press release can be found here and the Survey Report itself can be found here.
According to the report, 32 percent of respondents reported an increase in the number of legal disputes in which their companies were involved in the 12 months preceding the survey. The five most frequent types of commercial disputes in which the respondents said their companies were involved in the preceding twelve months were: contract (58%); employment (50%); intellectual property or patent infringement (33%); accounting/financial reporting/disclosure (19%); and insurance (19%). (The results totaled greater than 100% because the survey allowed respondents to select multiple categories.)
A particularly interesting observation from the survey responses of the European respondents is that many companies are seeing increases in cross-border disputes, with 35% of European respondents reporting that the number of cross-border disputes had risen during the preceding 12 months.
Interestingly, 8% of all respondent and eleven percent of European respondents reported that their companies were involved in bet-the-company disputes during the preceding 12 months. The top five types of bet the company disputes in which the respondents reported that their companies were involved were: contract disputes (50%); intellectual property (38%); class action (38%); antitrust (31%); and securities (13%). (Results totaled greater than 100% because of the selection of multiple categories.) Among the European respondents reporting that their companies were involved in bet-the-company litigation, the most frequently reported categories were contracts (71%) and class actions (57%).
All of this litigation activity has led to an increase in litigation spending. 47% of all respondents reported that spending at their companies for litigation had increased in the past year and 38% reported that their litigation departments had grown in the past year. Among the European respondents, half said that their companies had increased spending and 37% reported an increase in the size of their companies’ litigation departments.
As a resulting of the growing litigation threats and the mounting litigation spending, many companies are implementing measures to try to detect potential problems. In particular, increased regulatory oversight has encouraged many companies to increase their focus on preventive measures.
Academics’ Review of Plaintiffs’ Firms Effectiveness in Merger Objection Litigation
Based on their review of M&A-related litigation over a ten year period, a trio of academics has concluded that the top plaintiffs firms obtain the best results for shareholders, because they aggressively litigate their cases. In their October 2014 paper entitled “Zealous Advocates or Self-Interested Actors?: Assessing the Value of Plaintiffs’ Law Firms in Merger Litigation” (here), Case Western Reserve University Professor C.N.V. Krishnan, U.Cal Berkley Law Professor Steven Davidoff Solomon, and Vanderbilt Law Professor Randall Thomas reviewed a sample of 1,739 merger objection class action lawsuits filed between 2003 and 2012, in order to assess the effectiveness of the plaintiffs’ law firms. The results of their analysis, summarized in an October 15, 2014 article on the Vanderbilt University Web Site entitled “Top Class-Action Law Firms Are Worth Hiring, Study Says” (here), showed, according to one of the study’s authors, that “the presence of one of the top plaintiffs’ law firms is significantly and positively associated with a higher probability of lawsuits success.”
The paper’s authors divided the plaintiffs law firms into groups they denominated “top-10” and “non-top-10” using “various reputation measures” The authors then further divided to top firms into “top-5 firms” based on their “popularity with informed plaintiffs and proven ability to obtain large attorneys’ fees awards” The authors then analyzed the results in the various lawsuits in their litigation database, from which they concluded that the involvement of one of the top five firms was very strongly correlated with what the authors described as lawsuit success. The authors said that these results hold even after controlling for selection bias – that is, the likelihood that the top law firms get to pick the better cases that have higher chances of success.
The authors concluded that the top plaintiffs’ law firms achieve the best results because the top firms are significantly more active in prosecuting cases than other plaintiffs firms, which adopt more passive strategies. The top firms’ more active prosecution of the cases is evidenced by the fact that they file more documents in their cases and the fact that they “have fewer cases dismissed, win more procedural motions and obtain more substantive settlements.” The lower tier firms, by contrast, appear to file lawsuits “in hopes of generating a quick settlement and avoiding the expense of trial,” with the settlements of the type that “many times are believed to profit the law firms more than their clients.”
As one of the authors quoted in the Vanderbilt web site article puts it, “not all plaintiffs’ law firms are alike and lawmakers, judges and regulators should act accordingly.” The authors’ research, they state, should give courts “guidance about the appropriate method for selecting lead counsel in shareholder class action litigation.”
Special thanks to a loyal reader for sending me a link to the Vanderbilt web site.
The SEC’s statement that its filing of a record number of enforcement actions during the past fiscal year was attributable in part to the agency’s “innovative use of data and statistical tools” is interesting. Since the agency announced the initiation of financial reporting task forces and implementation of data analytic tools to detect indicia of potential accounting fraud (dubbed in the media as “Robocop,” about which refer here), there has been speculation that these initiatives could lead to an upsurge in enforcement activity. Although the agency’s fiscal year report does not directly link the increase in the number of enforcement actions to these initiatives, the SEC”s press release certainly does suggest that these initiatives represent a significant part of the agency’s enforcement actions during the past year. It seems likely that there will be more of this in the months and years ahead.
The SEC report’s emphasis on its actions targeting individuals and gatekeepers is certainly ominous for the interests of this blog’s readers. The agency’s focus on individuals and gatekeepers could, among other things, represent a real threat to the public company officers and directors.
The Alix Partners survey report is interesting not just because it documents that many companies are experiencing increased litigation activity and litigation spending, but also because it shows that these developments are not limited just to the more litigious United States. The fact that an even greater percentage of the European respondents to the survey than U.S. respondents reported that their companies were involved in bet-the-company litigation is surprising, and the fact that the European reported that their companies are experiencing increased litigation activity and litigation spending at about exactly the same levels as the U.S. respondents strongly suggests that the forces shaping the litigation environment in the two arenas may be similar — and even perhaps that the natures of the two environments may be converging. If nothing else, it may become harder over time to contend that litigiousness is a curse unique to the U.S. business environment.
Finally the academics’ analysis of the plaintiffs’ law firms’ results in merger objection litigation may not be surprising – it is hardly unexpected that top law firms produce better results – but their analysis is nonetheless interesting. If nothing else, their analysis substantiates a point that many of the more prominent plaintiffs’ firms frequently make about how many of the litigation ills of which the business community so frequently complains are the results of the actions of the bottom feeder law firms. The academics’ analysis provides support for the argument that the frivolous lawsuits filed only to try to extract a quick fee are the handiwork of the lower tier law firms. The academics report also provides some support for the arguments that some of the top firms often make, which is that their efforts produce real shareholder value and provide real protection for shareholders. The problem of course is to eliminate the frivolous unproductive litigation without eliminating the lawsuit that produce real benefits for shareholders.