Securities class action lawsuits were filed at a record pace in the first half of 2017, according to the latest report from Cornerstone Research. While the surge in securities suit filings is due in part to the rise of federal court merger objection lawsuit filings, both traditional securities suit filings and M&A filings were “at historic levels.” The Report, jointly prepared by Cornerstone Research in conjunction with the Stanford Securities Class Action Clearinghouse and entitled “Securities Class Action Filings – 2017 Mid-Year Assessment,” can be found here. Cornerstone Research’s July 25, 2017 press release about the report can be found here. My own analysis of the first half securities suit filings can be found here.
According to the report, there were 226 federal court securities class action filings in the first six months of 2017. The 226 filings were 135 percent above the 1997-2016 historical semiannual average of 96. The 226 filings in the year’s first half represent a 49 percent increase over 152 filings in the second half of 2016.
The first-half filings pace projects to a year- end total of 452 federal court securities suit filings, which would represent an increase of 135 percent over the 1997-2016 annual average of 192 filings and an increase of 66 percent over 2016’s 272 filings. 2016 was itself an active year for securities suit filings; indeed, over the last 18 months, more securities suits have been filed in federal court than in any comparable period since the PLSRA was enacted in 1995.
The surge in securities suit filings is due in part to the rise in the number of federal court merger objection lawsuit filing. There were 95 of these M&A lawsuit filed in the first six months of 2017, compared to 85 during the entire year in 2016. The increase in the number of federal court merger objection lawsuits likely has been caused in the shift in these lawsuit filings away from state court due to the Delaware courts’ hostility to the kinds of disclosure-only settlements that typically resolve these kinds of suits.
However, the Report notes that even excluding these M&A lawsuit filings, the number of filings in the year’s first six months is still greater than during any semiannual period since the Clearinghouse began tracking filings in 1996.
Not only is the number of federal court securities class action lawsuit filing at record levels, but the litigation rate is also at record levels. If the number of lawsuits is measured as a percentage of all U.S. exchange listed companies, the 2017 filing rate (if projected to year end) equates to a 9.5% litigation rate, which is dramatically higher not only compared to last year’s record rate of 5.6%, but also compared to the 1997-2016 annual filing rate of 2.8%.
The litigation rate for the year’s first six months is still impressive even if the merger objection suits are disregarded. The litigation rate for the year’s first half with M&A lawsuits excluded equates to 4.7%, compared to 3.8% rate for 2016 (with M&A suits excluded). At the current rate, the likelihood of a company being hit with a securities suit will increase in 2017 for the fifth consecutive year
The press release that accompanied the report contains remarks by Stanford Law School Professor Joseph Grundfest seeking to explain the surge in securities suit filings. In addition to noting the increase switch of merger objection suits from state to federal court, Professor Grundfest also noted that at least part of the increase “seems to be attributable to a decline in the quality of complaints filed by attorneys who have recalibrated their business strategies to pursue a portfolio of cases with more remote payoffs because the costs of building such a portfolio remains low.”
In addition to federal court securities lawsuit filings, the Report also analyzes Securities Act class action lawsuits filed in state court, primarily in California. These suits are filed in state court in reliance on Section 22 of the Securities Act, which the plaintiffs contend provides concurrent state court jurisdiction for liability actions under the Act, including actions under Section 11. The question of whether or not the Act does in fact afford concurrent state court jurisdiction will be considered by the U.S. Supreme Court in its upcoming term, in the Cyan, Inc. v. Beaver County Employees Retirement Fund case, as discussed here.
According to the Report, between 2010 and the first half of 2017, there were 52 Section 11 actions filed in California state courts. During the first half of 2017, there were only four of these cases filed in California state court, “distinctly fewer that observed in either the first or second halves of 2016.”
The report also notes that over the last 20 years, filings against non-U.S. issuers listed on U.S. exchanges have trended upwards, with year-to-year variation. In 2017, the number of filings against non-U.S. companies is on pace to be at the highest level since 1997. During the first six months of 2017, there were 33 securities suits filed against non-U.S. companies, compared to 43 during the entire year in 2016.
The report includes an analysis of securities litigation frequency for non-U.S. companies, compared to the litigation rate for all U.S. exchange listed companies and for S&P 500 companies. Filings against non-U.S. companies are “occurring at a record pace” and rate of litigation against foreign companies exceeds the overall rate against all companies listed on U.S. exchanges. The analysis shows that plaintiffs “are increasingly likely to target non-U.S. companies,” with non-U.S. companies more likely to be sued than all U.S.-listed companies, but less likely to be sued than S&P 500 companies.
The report also contains in interesting analysis of filings by type of lead plaintiff (with the merger objection lawsuits excluded from the analysis). This analysis shows that from 2004 to 2012, institutional investors were as or more likely to be appointed as lead plaintiff as individuals. However, since 2013, individuals have been appointed as lead plaintiff more frequently than institutional investors.
The report also analyzed the filings by the industry of the defendant company. The analysis shows that companies in the pharmaceuticals sector were the most frequent lawsuit targets during the year’s first six months. The number of filings against pharmaceutical firms in the first half of 2017 (28) exceeded the 2017 full-year total (27).
Filings against companies in the S&P 500 were at their highest annualized rate in the first half of 2017 since at 2002. On an annualized basis, 11.2% of companies in the S&P 500 were subject to a securities suit in the year’s first six months. By way of contrast, during the period 2001-2016 the annual average securities litigation frequency rate for the S&P 500 was 5.5%.
The report also analyzes the Disclosure Dollar Loss (DDL) and Maximum Dollar Loss (MDL) for the securities suit filings. DDL measures the change in dollar value change in a company’s market capitalization between the trading day immediately before the end of the class period and the trading day immediately after the end of the class period. MDL measures the dollar value change in a company’s market capitalization from the trading day with the highest market capitalization during the class period to the trading day following the end of the class period. According to the report, the DDL rose to $74 billion during the first six months of 2017, 23 percent above the historical semiannual average. The MDL dropped to $302 billion, on par with the historical semiannual average.
More Securities Class Action Filing Analysis: Readers interested in further analysis of securities class action litigation trends will want to refer to the July 24, 2017 post on the Harvard Law School Forum on Corporate Governance and Financial Regulation by Stefan Boettrich and Svetlana Starykh of NERA Economic Consulting entitled “Securities Class Actions: 2016 Full-Year Review and Mid-2017 Flash Update” (here). The post reflects much of the analysis previously published in NERA’s 2016 securities litigation report (discussed here) and also includes a short news “flash” about 2017 YTD securities litigation filing trends.
Among other things, the authors report that the surge in securities lawsuit filings they observed in 2016 “has continued in the first half of 2017.” The authors note a 76% increase in the number of lawsuits filed in the first six months of 2017 compared to the same period a year prior, and a 54% increase over the second half of 2016. The authors also note increase in both the numbers of merger objection lawsuits and of “standard” cases.
D&O Claims Trends Webinar: On Wednesday July 26, 2017, at 11:00 am EDT, I will be participating as a panelist in a webinar sponsored by the insurance industry information firm Advisen on Quarterly D&O Claims Trends. The webinar, which will last for one hour, will be moderated by Jim Blinn of Advisen. The other panelists are Richard Edsall of Argo Group International Holdings and Phil Norton of Arthur J. Gallagher Risk Management Services. Information about the webinar including registration instructions can be found here.