In an interesting post on his D&O Discourse blog earlier this fall (here), Doug Greene of the Lane Powell law firm raised the question whether there is a securities litigation storm brewing. Citing a number of different factors ranging from the SEC whistleblower program to changes in the plaintiffs’ bar, Greene suggested that we could be headed toward a significantly increased number of securities class action lawsuits. I agree with most of what Greene said, except for one thing. The securities litigation storm isn’t on the horizon – it is already here.
We are still more than a month away from year end, but – based on my YTD unaudited securities suit filing tally — the securities class action litigation lawsuit filing pace is already running well ahead of last year’s year-end total. As of November 25, 2016, there had already been a total of 244 federal court securities class action lawsuits filed this year, by comparison to the 188 federal court securities lawsuits that were filed during the full year of 2015. As of this point last year (that is, as of November 25, 2015) there had only been 169 securities class action lawsuits filed. In other words, there have been 75 more securities class action lawsuits filed this year than there were at the same point a year ago, representing an increase of 44%. (Please note that my figures differ from those currently available from other public sources; I am confident that by year end, the differences will have diminished.)
The increased pace of securities lawsuit filings in 2016 was already apparent at mid-year, as I noted at the time. If anything, the filing pace has quickened as the year has progressed. There were a total of 119 federal court securities class action lawsuits filed in the first six months of 2016; with a month still to go, there have already been a total of 125 federal court securities class action lawsuits filed in the year’s second half. Indeed, in November (so far) there have already been a total of 34 securities class action lawsuits filed, by far the largest monthly total of the year.
The filings so far this year are on pace for a year-end total of 266 securities class action lawsuits, which would be just about the same as the year-end 2002 total of 265, which (with the exception of 2011 when the filing figures were distorted by the IPO laddering lawsuit filings) is the highest annual total of securities class action lawsuits during the modern era. Indeed, even the YTD filings (244) represents the highest annual number of filings since 2002. The 2016 filings are in any event well above the 1997-2014 annual average number of filings of 188.
What is going on? There are a number of factors driving this heightened pace of securities lawsuit filings. One significant factor is that increased number of merger objection lawsuits that are being filed in federal court, rather than in state court. It appears that due to the Delaware court’s hostility to disclosure only settlements of merger objection lawsuits, the plaintiffs’ attorneys are filing these lawsuits in federal court rather than in state court, leading to an overall increase in the number of federal court securities class action lawsuits. By my tally, there have already been 57 federal court merger objection securities class action lawsuit filed in 2016, representing about 23% of all federal court securities suit filings. This compares with 14 federal court merger objection securities class action lawsuit filings during the full-year 2015, representing about 7% of all securities suit filings.
Another significant factor in the increase securities suit filings activity in 2016 has been the number of lawsuits filed against non-U.S. listed companies. So far this year, there has been a total of 40 securities class action lawsuits filed against non-U.S. companies, compared to 34 in both the full-year 2015 and the full-year 2014.
Another factor driving the pace of securities litigation filings has been the number of securities class action lawsuits filed so far this year as follow-on suits to antitrust enforcement activity. As I noted in a recent post (here), these kinds of suits have hit companies in the generic drug industry and in the poultry industry. There have been a total of six of these antitrust-follow on suits filed so far this year.
There have been a number of other types of follow-on suits as well, including environmental enforcement follow-on cases and anti-corruption enforcement cases, many of which have also involved non-U.S. companies. I will fully detail these topics in my final year-end analysis of the 2016 securities suit filings.
While all of these factors are significant in explaining the increase in 2016 securities lawsuit filings, there is yet another factor that may be the most important of all. That is that, due to changes in the plaintiffs’ bar, there is an increased number of small plaintiffs’ firms that has become active in filing securities class action lawsuits.
As Michael Klausner and Jason Hegland of Stanford Law School detailed in their June 2016 guest post on this blog (here), since 2009, a significantly larger number of securities class action lawsuits (both in terms of absolute numbers of lawsuit filings and in terms of percentage of all lawsuits filed) are now being filed by a group of small plaintiffs’ firms that were not previously active in filing securities lawsuits. These firms, which Klausner and Hegland call “emerging” law firms, have not only been responsible for the gradually increasing numbers of annual lawsuit filings since 2009, but they are also disproportionately responsible for the decrease in “average case quality” as measured a number of different ways. It appears to me that the activities of these “emerging law firms” accounts for a large proportion of increased numbers of 2016 securities class action lawsuits. (Indeed, the “expansion” of the securities litigation plaintiffs’ bar was in fact one of the significant reasons why Doug Greene was predicting an increase in the number of securities lawsuit filings, as I noted at the top of this post.)
With a few weeks yet to go, it remains to be seen how the final year-end securities lawsuit filing tally will ultimately turn out. However, just the YTD filings already make this year the most active year for securities class action lawsuit filings since 2002. The number of filings is all the more significant given that there are now many fewer publicly traded companies than there were in 2002. Once the year-end numbers are in, a final year end frequency level can be computed; what is already clear is that as a result of a number of different factors, any given U.S.-listed public company is likelier to be hit with a securities class action lawsuit filing than has been the case in the past.
In other words, you can cancel the storm warning, because the storm is already here.
I Am NOT Making This Up: Let’s say hypothetically that the name of your Chinese company happens to be LingLong. And let’s say that you wanted to make a product to compete with the Amazon Echo (essentially a voice-activated and web-enabled search device). And let’s say further that you knew you needed to come up with a catchy name to draw attention to your new device. You could do a lot worse than calling your product the LingLong DingDong. I report this here so that you all will know that the LingLong DingDong is an actual thing. You can read about it in this November 22, 2016 article from Wired (here).
Goal of the Week: I am sure that over the Thanksgiving holiday many readers took advantage of the down time to watch a lot of football on T.V. Here at The D&O Diary’s home base, we watched a lot of football too, but exclusively of the European rather than American variety. Along the way, we saw a lot of goals, including many worthy candidates to be called the Goal of the Week. But on careful consideration, our nomination for the goal of the week is this remarkable sequence from the November 23, 2016 UEFA Champions League game between Portuguese side Benfica and the Turkish team Beşiktaş. The exciting and entertaining game ended in a 3-3 draw – which was in itself nothing short of astonishing, because Beşiktaş went into halftime trailing 3-0. While Beşiktaş’ comeback was impressive, the high point of the game was Benfica’s third goal, scored well into the first half. As this short video shows, the goal answers the question, how many times can a team hit the goal post before scoring?