The number of federal securities class action lawsuit filings in the first half of 2015 was above the number of securities suits in the first half of 2014, although below long-term semiannual averages, according to the latest report from Cornerstone Research. The report, entitled “Securities Class Action Filings: 2015 Midyear Assessment,” can be found here. Cornerstone Research’s July 30, 2015 press release about the report can be found here. My own analysis of the first half securities class action lawsuit filings can be found here.
It is very important to note that while the Cornerstone Research study reports a decline in the absolute number of securities class action lawsuit filings, the rate of securities litigation relative to the number of U.S.-listed companies remains elevated compared to historical levels. As discussed below, though the absolute number of filings is down, the likelihood that any given U.S.-listed company will get hit with a securities lawsuit is actually up compared to long-term averages.
The Absolute Number of Lawsuit Filings
According to the report, there were 85 federal securities class action lawsuit filings in the first half of 2015, which is above the 78 securities class action lawsuits filed in the first half of 2014 but below the semiannual average number of filings during the period 1997 to 2014 of 94. The report also notes that if the filing activity in the second half of the year is equal to the first half, there would be a total of 170 filings this year, which would be 10 percent lower than the 1997-2014 historical average of 188 filings.
However, it should be noted that the Cornerstone Research report counts only securities class action lawsuits filed in federal court. As I noted in my analysis of the first half filings, there were a number of IPO-related securities class action lawsuits filed in state court in the year’s first half, pursuant to the concurrent jurisdiction provisions of the Securities Act of 1933. If these state court securities class action lawsuit filings are taking into account, the apparent decline in the absolute number of securities class action filings is less steep than reported in the Cornerstone Research report.
The Number of Lawsuit Filings Relative to the Numbers of U.S.-Listed Companies
There is a certain amount of discussion in the Cornerstone Research report about the declining levels of securities class action lawsuit filings. For example, the report itself states that were the year to finish up at the projected 170 lawsuit filings, this would be the seventh consecutive year with at- or below-average filings activity. The press release quotes Stanford Law Professor Joseph Grundfest as saying that “securities class actions continue to percolate at a relatively low level,” and as saying that some have suggested that the reasons for the decline has to do with “high stock price valuations and the lack of volatility in equity markets,” while others have suggested that “major accounting scandals now appear to be happening abroad.” The press release quotes Professor Grundfest as saying that “a combination of both factors could well be at work.”
It is very important to understand when considering this discussion about the apparent “decline” in securities class action lawsuit filings that the analysis relates only to the absolute number of lawsuit filings. However, as data in the report itself show, while the absolute number of lawsuit filings has been going down, the rate of securities class action lawsuit filings is actually up compared to historical levels.
In that regard, I refer readers to the discussion and table on page 8 of the report. This portion of the report shows that 1997-2014 annual average percentages of all U.S.-listed companies to get with a securities suit was 2.94%. If there were to be 170 federal securities class action lawsuits by year-end as the Cornerstone Research report projects, the annual percentage of U.S.-listed companies sued for the year would be 3.4%. That is, the rate of litigation is well above the long-term annual average rate. If that were to occur, this year would be the sixth consecutive year that the rate of securities litigation was above long-term average annual rates.
The reason the rate is up though the absolute number of lawsuit is down is because there are many fewer U.S-listed companies than there used to be. (Indeed, the report itself notes on page 11 that “from 1997 through the first half of 2015, the total number of companies listed on major U.S. exchanges fell by approximately one half.”) In other words, while the absolute number of lawsuit filings is declining, the number of U.S.-listed companies has been declining even faster.
So the discussion of why securities litigation is down is the wrong discussion. The fact is that securities litigation activity isn’t down, it is up; the likelihood of any given U.S.-listed company getting hit with a securities suit is up relative to historical levels, not down. D&O insurance professionals should not allow themselves to be distracted by the discussion of why securities class action litigation activity is down. It isn’t down. It is up, relative to the number of declining numbers of U.S.-listed companies.
And to put the final touch on this discussion, let me just say that the obvious reason why the absolute number of securities class action lawsuit filings is down is that there are many fewer U.S.-listed companies than there used to be. Fewer listed companies, fewer companies to be sued, fewer lawsuits.
Securities Lawsuits Against Non-U.S. Companies
The report has an extended and interesting discussion of the increased levels of securities class action lawsuit filings against non-U.S. companies. According to the report, 24 percent of the filings in the year’s first six months involved non-U.S. companies, compared to 20 percent for the full year of 2014. If filings against non-U.S. listed companies in the second half continue at the same pace as the first half, 2015 will represent the third year in a row in which the number of suits against non-U.S. companies increased.
The report also notes that in the first half of 2015, foreign domiciled companies accounted for slightly more than 18 percent of the U.S.-listed companies (by way of comparison, in 1997, only nine percent of U.S. listed companies were foreign). The percentage of non-U.S. companies sued relative to the number of listed non-U.S. companies increased from 1.4 percent in 2000 to an annualized rate of 3.9 percent in the first half of 2015. As the report states, “these data indicate that plaintiffs are increasingly likely to target foreign companies.” (As I have noted in a separate post, foreign U.S.-listed companies have been disproportionately likely to hit with a U.S. securities suit.)
Between 2000 and 2010, S&P 500 companies were consistently more likely to be hit with a securities suit than either the overall universe of U.S.-listed companies or non-U.S. listed companies. However, since 2014, foreign firms have been more likely to be hit that S&P 500 firms. So far in 2015, non-U.S. companies have been likelier to be hit with a securities suit than the overall universe of U.S.-listed companies.
The Cornerstone Research report does not make this point explicitly, but it appears from the report’s analysis of lawsuit filings against non-U.S. companies that the reason that the overall rate of securities litigation is up (as discussed in the preceding section of this blog post) is the heightened and disproportionate level of securities class action litigation activity involving non-U.S. companies.
The report contains a number of other interesting information. For example, the report notes that the percentage of cases dismissed within three years of their filings dates has increased, growing from 28 percent of cases filed in 2000 to 57 percent of cases filed 2011 (the last annual period for which three full years of resolution outcome data are available).
The report also notes that the median filing lag time between the end of the class period and the filing date of the lawsuit continued its declining trend in the first half of 2015, “suggesting intensifying competition for business by the plaintiff bar.”
Filing activity against companies with large market capitalizations, as represented by companies in the S&P 500, remained below historical averages. On an annualized basis, approximately 1.6% of S&P 500 companies were hit with securities suits in 2015, compared to a 2001 to 2014 annual average of 5.5%. Companies in the S&P 500 were less likely to be a defendant in a class action lawsuit than in any of the last 15 years.
Biotechnology, healthcare and pharmaceutical companies together accounted for 19 percent of total filings in the first half of 2015.