The number of securities class action lawsuit filings in 2014 was about the same as in 2013, but the cases that were filed were smaller than in the past, according to the annual securities litigation report from Cornerstone Research. However, the likelihood that a public company will be the subject of a filing remained above the historical average in 2014, as it has in each of the past five years.
The Report, entitled “Securities Class Action Filings: 2014 Year in Review,” can be found here. Cornerstone Research’s January 27, 2015 press release about the report can be found here. My own analysis of the 2014 securities class action lawsuit filing can be found here.
According to the report, there were a total of 170 securities class action lawsuit filings in 2014. While this figure represents an increase of four lawsuits over 2013, it is ten percent below the 1997-2913 average annual number of 189 filings.
However, while the annual number of filings is down compared to the historical average number of filings, the number of publicly traded companies has declined significantly from the early years in the measuring period. The report notes with respect to the decline in the number of annual filings compared to historical average, “The declining long-term trend in the total number of filings from the late 1990s through today is a result of a decline in the number of public companies rather than a decreased likelihood of being the subject of a class action.”
To put the relative likelihood today of a U.S.-listed company being hit with a securities lawsuit into perspective, the percentage of U.S. listed companies hit with securities suits was 3.6% in 2014, compared to the annual average percentage of 2.9% during the period 1997-2013. In other words, though the annual number of filings overall is down in more recent years compared to the historical annual average number of filings, due to the lower number of public companies, “the likelihood that a public company was the subject of a filing remained above the historical average in each of the past years.”
But while the overall likelihood of a U.S.-listed company becoming involved in a securities class action lawsuit is above long-term historical averages, companies in the S&P 500 were less likely to be targeted by a securities class action lawsuit in 2014 than in any year since 2000. Only 2.2 percent of S&P 500 companies were hit with lawsuits in 2014, compared to the annual average during the period 2000-2014 of 5.7%. In addition, the size of the S&P 500 companies involved has also changed. In the past, the larger companies in the S&P 500 were more likely to be targets of securities suits. However, during 2014, only 1.3 percent of the S&P 500 market capitalization was subject to new filings in 2014, the lowest on record, and well below the historical annual average of 10.1%.
As a general matter, the sizes of the companies and of the disputes involved in the lawsuits were smaller in 2014 compared to prior years. The report’s measure of the largest amount that plaintiffs, in the aggregate, might seek to recover from cases filed in 2014 (what the report calls Maximum Disclosure Dollar Loss) sank to the lowest level since 1997. In a press release accompanying the report, a Cornerstone Research spokesman is quoted as saying that “for the first time since 1997, there were not mega filings with investor losses of greater than $5 billion at disclosure.”
The press release also quotes Stanford Law School Professor Joseph Grundfest as saying that “although the number of lawsuits filed is little changed, the cases filed are much smaller and will lead to smaller recoveries for the plaintiff class down the road.” Professor Grundfest suggests that the data raise an interesting question of whether “large-scale securities class actions against corporate America are on the decline.”
While the long-term trend has been toward a declining number of publicly traded companies, the number of listed companies actually increased in 2014, due to increased IPO activity. According to the report, there were 206 IPOs in 2014, representing an increase in the number of IPOs in 2013 of 31%, and representing the highest level of IPO activity since 2000. However, number of IPOs during 2014 was still well below the 1996-2000 average annual number of IPOs of 458 IPOs. The report notes that the IPO activity in 2014 has “potential implications for future litigation.”
The report also contains an analysis of the status and disposition of securities class action lawsuit filings during the period 1996-2014. Among other things, the analysis shows that “dismissals were increasingly common for filings in the cohort years after 2003.” The aggregate dismissal rate for cases filed during the years 2003-2012 was 52 percent, compared to percentage well below that level prior to that period. The report suggests that the “underlying characteristics of the complaints” may help explain this increase. During the years 2008-2012, there were significant numbers of filings involving Chinese Reverse Merger companies, M&A lawsuits and credit crisis cases. These three categories of cases were dismissed at a 58% rate, compared to a 50% rate for all cases excluding these three categories. Other characteristics that can affect the likelihood of dismissal are: how quickly the case was filed, the length of the class period, and the size of the potential claims.
The number of filings against non-U.S. companies increased to 34 in 2014, well above the average historical average from 1997 to 2013 of 22 filings. The percentage of filings against foreign issuers was 20 percent in 2014 compared to the 1997-2013 historical average of 11 percent.