For the second straight year, securities class action lawsuit filings reached record levels in 2017, according to the January 30, 2018 report from Cornerstone Research. According to the report, entitled “Securities Class Action Filings: 2017 Year in Review” (here), securities suit filings during the year reached “unprecedented levels” and companies on U.S. exchanges were more likely to be the subject of a securities suit than in any previous year. Cornerstone Research’s January 30, 2018 press release about the report can be found here. My own analysis of the 2017 securities class action lawsuit filings can be found here.
The Number of Lawsuits: According to the report, there 412 new securities class action lawsuit filings in 2017, 52 percent more than in 2016 and more than double the 1997-2016 average of 193. Federal court merger objection lawsuits were a significant part of this filing surge. There were 198 federal court merger objection lawsuit filings in 2017, representing over 48% percent of all securities suits during the year. Even without the merger objection lawsuits, traditional securities suit filings were at elevated levels. There were 214 “core filings” in 2017, representing a 15 percent increase over 2016, and the highest number since at least 2008.
Significantly, the filing pace decreased as the year progressed. Total filing activity declined by 15 percent in the second half of the year compared to the first half. In particular, the pace of core filings slowed in the second half of 2017; the 87 core filings in the year’s last six months is the lowest semiannual filings tally since the first half of 2015.
The Rate of Litigation: Not only did the number of securities lawsuit filings increase in 2017, but the litigation rate increased as well. According to the report, 8.4% of U.S.-listed companies were hit with a securities suit in 2017, a litigation rate that is greater than in any previous year. The litigation rate also increased for the fifth straight year. This measure reached record levels during the year because of “both the heightened filing activity against public companies and a recent decline in the number of public companies.”
Even if the merger objection suits are disregarded, the litigation rate is at elevated levels compared to historical norms. The likelihood of a U.S.-listed company getting hit with a “core” securities suit in 2017 was 4.2%, well above the 3.8% rate in 2016 and the 1997-2016 annual average for core filings of 2.9%.
Filings Against Non-U.S. Companies: Filings against non-U.S. companies in 2017 were at the highest rate since 2011 (when there was a flood of Chinese reverse-merger suit filings). There were 50 core filings against non-U.S. companies in 2017, representing about 23% of all securities suit filing during the year. The likelihood of a non-U.S. company getting hit with a “core” securities suit rose to 4.6% in 2017, compared to 4.0% in 2016. Core filings against non-U.S. companies exceeded the overall rate for core filings against all U.S. exchange-listed companies. While plaintiffs appear increasingly likely to target non-U.S. companies, non-U.S. companies are less likely to be sued than S&P 500 companies.
Dismissal Rates: Recently filed lawsuits are being dismissed at a greater rate than was the case historically. Securities suit filings from 2015 showed a higher rate of dismissals than in previous years. Over 50% of the 2015 securities suit filings have been dismissed. Present dismissal rates for the 2016 suits suggest that dismissals may continue at an elevated rate. Early indications of the 2017 cases suggest that the dismissal rate for the 2017 suits will be on par with or in excess of the highest dismissal rate on record.
M&A-related lawsuits were filed at a much greater rate than were core filings. Between 2009 and 2016, 78% percent of the merger suits were dismissed, compared to 48% of the core filings.
Plaintiffs’ Law Firms’ Involvement in the Increase: The growth in the number of core filings since 2011 coincided with the activity of three plaintiff law firms that “have increasingly been involved in securities class actions.” These law firms, which are typically involved in smaller cases, have been responsible for over 50 percent of initial complaints filed in connection with core suits. These law firms more typically represent individual investors rather than institutional investors as well. The percentage of cases for which these three firms were appointed as lead counsel rose steadily from 2008 to 2015, peaking at 41 percent in 2015, before declining to 36 percent in 2016.
Cornerstone Research’s press release about the report quotes Stanford Law School Professor Joseph Grundfest as saying that the 2017 filing trends and recent dismissal rates are “troubling from a public policy perspective.” He added that “The PSLRA was designed to deter plaintiffs from filing low-quality complaints, but this surge in complaints that are dismissed with greater frequency suggests that the law is no longer having its intended quality-enhancing effect. Policymakers should, I think, study these data carefully and ask whether the time is nigh for further reform.”
California State Court Securities Suits: While Section 11 filings in California State Court have increased in recent years, in 2017, California state Section 11 filings declined by nearly two-thirds from 2016. All of the 2017 state court suits also had parallel federal court suits. In general, state court suits have a lower dismissal rate compare to Section 11-only federal filings. The drop of state court suit filings in 2017 coincides with the U.S. Supreme Court’s consideration of Cyan, Inc. v. Beaver County Employees’ Retirement Fund, in which the Court will consider whether or not state courts retain concurrent jurisdiction for Section 11 suits under SLUSA (about which refer here).
The Disclosure Dollar Loss (DDL)– that is, the change in a firm’s market capitalization between the trading day preceding the end of the class period and the trading day following the end of the class period – increased by $24 billion (22 percent) from 2016 to 2017, exceeding the 1997-2016 annual average by 9 percent. The DDL index exceeded the 1997-2016 average for the first time in nine years.
The Maximum Dollar Loss (MDL) – that is, the change in a firm’s market capitalization from the trading day during the class with the highest market capitalization to the trading day following the end of the class period – decreased 35 percent from 2016 to 2017, returning to levels before 2016 and post financial crisis. The drop in MDL is due in part to a year-to-year drop in the number of mega MDL filings, or filings with an MDL of at least $10 billion. The 2017 MDL of $521 billion was however below the 1997-2016 annual average MDL of $606 and exceeded the 1997-2015 average by 38%.
Conclusion: The Cornerstone Research report is the latest in a series of recent reports detailing the 2017 securities suit filings. While the Cornerstone report follows the others, it still warrants reading at length and in full, as it contains extensive additional analysis of, for example, filings by industry, circuit, exchange, filing date timing, type of allegations, and duration to resolution.
It is worth nothing that though the various reports reflect slightly different numbers, the reports’ conclusions of are consistent – by any measure, 2017 was an exceptional year for securities suit filings.
The Cornerstone Research report’s observation about the key involvement of three specific plaintiffs’ law firms explains in part both the increasing number of lawsuit filing as well as the apparent overall decline in lawsuit quality (as measured by the increasing likelihood of dismissal) and is a critical observation in understanding what is driving the overall trends.