In general, securities litigation filing trends emerge gradually and across long stretches of time. These kinds of long term trends have been the subject of a number of recent reports discussed on this site – including, for example, recent reports from NERA Economic Consulting (about which refer here), Cornerstone Research (here), as well as my own report. Though trends often become apparent only over the course of months and years, sometimes they are apparent in much shorter time frames. As it happens, the securities suit filings on a single day last week managed to neatly encapsulate all of the important current securities litigation filing trends.
Event-Driven Securities Litigation
Many readers know that in recent years, the number of companies reporting financial restatements has declined, and as a result, securities class action lawsuits increasingly do not involved allegations of financial misrepresentations, but instead increasingly involve allegations based on events or operational developments at the defendant company.
On Thursday, February 8, 2018, plaintiff’s counsel filed a lawsuit in District of New Jersey against Johnson & Johnson and certain of its directors and officers that is representative of this type of event- or operations- based securities complaint. The plaintiff’s complaint can be found here.
As described in their February 9, 2018 press release (here), the plaintiff’s lawyers filed the securities lawsuit after “new documents were uncovered as part of existing lawsuits filed by ovarian cancer and mesothelioma victims.” The documents allegedly indicate J&J “knew for decades that cancer-causing asbestos and heavy metals were prevalent” in the talc used in its Johnson’s Baby Powder and other products but failed to put a warning label on them. The lawsuit alleges that the company misled investors when it concealed contingent liabilities and loss of future revenues from the product. The lawsuit claims investors suffered damages “when the true details entered the market.”
Consistent with the trend toward event-driven securities litigation, the new lawsuit against Johnson & Johnson was triggered not by revelations of financial misrepresentations, but instead was triggered by an event – in this case, the supposed disclosure of new documents in ongoing personal injury litigation. While in our litigious society is hardly surprising that supposed revelations of the kind on which the plaintiffs rely might give rise to litigation, the lawsuit the plaintiffs are asserting is not filed on behalf of persons injured by the allegedly dangerous talc powder, but instead are asserting claims on behalf of the company’s shareholders alleging that in addition to consumers investors were misled about the company’s products.
Securities Litigation Involving Life Sciences Companies
Readers that have been following the various analyses of the 2017 securities class action lawsuit filings know that a significant factor in the elevated filing levels during the year was the significant number of lawsuits filed against life sciences companies. Another of the securities lawsuits filed on Thursday February 8, 2017 was representative of this litigation trend, as it involved a life sciences company. Interestingly, and somewhat atypically for a suit against a life sciences company, the new lawsuit involves alleged financial misrepresentations, rather than as if more typical for lawsuits against these kinds of companies, involving setbacks in the clinical trial or regulatory process or allegations of product safety or efficacy.
On February 8, 2018, a shareholder plaintiff filed a securities class action lawsuit in the Eastern District of New York against Synergy Pharmaceuticals and certain of its directors and officers. The complaint, a copy of which can be found here, alleges that the developmental stage drug company did not truthfully disclose the details of the debt financing on which it was relying to fund operations while it sought to develop its principal drug candidate. The complaint alleges that the company was ultimately compelled to disclose that the debt financing did not allow the company to access funds “when needed” which forced the company to conduct a dilutive secondary offering that allegedly “blindsided” existing investors and “stoked fears” of future dilutive offerings. The plaintiff alleges that the company’s share price declined on these developments.
Synergy is not only a life sciences company but it is in SIC Code 2834 (Pharmaceutical Preparations). As I noted in my review of the 2017 securities suit filings, the 2834 SIC Code category experienced the highest number of securities suits during the year. By my count, there were 53 securities suits filed against companies in the SIC Code category during 2017, representing nearly 13% of all securities suit filed during the year. So while the lawsuit against Synergy is a little unusual in that, as noted above, it is a lawsuit against a life sciences company that involves alleged financial misrepresentations, it otherwise embodies several aspects of one of the year’s significant securities class action litigation filing trends.
Federal Court Merger Objection Litigation
Readers will also recall that among the most noteworthy characteristics of 2017 securities class action litigation filings was the significant volume of federal court merger objection litigation filed during the year. Indeed, nearly half of the federal court securities lawsuits filed during the year were merger objection suits. So it is hardly surprising that the collection of lawsuits filed in federal court on Thursday February 8, 2018 also included a merger objection lawsuit as well.
On February 8, 2018, a plaintiff shareholder filed a securities class action lawsuit against Bill Barrett Corporation and certain of its directors and officers. The company recently announced that a proposed merger with Fifth Creek Energy Operating Company. The complaint, a copy of which can be found here, asserts claims under Sections 14 and 20 of the Securities and Exchange Act of 1934 based on allegations that the proxy material issued in connection with the shareholder vote on the proposed merger omits material information relating to financial projections and valuation analyses. The plaintiff seeks to enjoin the shareholder vote until shareholders have been provided with the allegedly omitted information, or, if the proposed merger is consummated, the award of damages.
By my count there were 193 federal court merger objection lawsuits filed in 2017, representing 46% of all federal court securities class action lawsuits filed during the year. This surge of litigation represents at least in significant part a shift to federal court of lawsuits that otherwise and in the past might have been filed in state court. While the federal court merger objection lawsuit filing wave has a variety of important features, perhaps the most important detail for now is that the wave of filings that was so evident in 2017 has continued into the new year.
Through February 9, 2018, by my count there have been 51 federal court securities class action lawsuit filings this year, of which 22 are merger objection lawsuits, representing about 43% of all securities suit filings. In other words, the phenomenon of federal court merger objection lawsuit filings has continued more or less without abatement so far this year.
In fact, the merger objection lawsuit filed against Bill Barrett Corporation described above was not even the only federal court merger objection lawsuit filed on Thursday, February 8, 2017. In additional to the Bill Barrett Corporation lawsuit, a merger objection lawsuit was filed in the Southern District of New York against American Finance Trust, Inc. and certain of its directors and officers in connection with the company’s proposed merger into Retail Centers of America. A copy of the complaint against American Finance Trust can be found here.
Financial Misrepresentation Securities Litigation
There was one more lawsuit filed on Thursday, February 8, 2018. This one additional lawsuit is worth noting here not only as one more suit filed on a day that saw so much securities litigation filing activity. This additional lawsuit is also noteworthy here because it represents an example of a kind of securities lawsuit that seems to be becoming increasingly rare – a securities suit based on alleged financial statement misrepresentation.
On February 8, 2018, a shareholder plaintiff filed a securities class action lawsuit in the Northern District of California against Super Micro Computer and certain of its directors and officers. The company had announced in August 2017 it was postponing filing its annual report pending an internal investigation into its accounting practices. The investigation was focused on the timing of the recognition of revenue from certain sales transactions. In late January 2018, the company’s board’s audit committee completed its investigation, although it has yet to release the results of the investigation. At the same time as the company announced the completion its investigation, it also announced that its CFO and other officials had “resigned” effective immediately. The company has not yet published the postponed annual report nor announced a day on which the report will be released.
The Super Micro Complain complaint, a copy of which can be found here, alleges that the defendants failed to disclose that the company was “improperly and illicitly” recognizing revenue from certain sales transactions; that the company had failed to implement appropriate internal controls; that as result the company’s financial statements were not in accord with GAAP; that the company’s revenues and incomes were artificially inflated; and that the company’s financial statements were materially misleading.
The Super Micro Computer complaint, while it involves a set of troublesome circumstances that at one level appear very company-specific, at another level will be familiar to those who have been following securities litigation trends over the years, as the kind of complaint that used to be a more or less standard type of securities lawsuit. However, as I noted above, securities suit based on financial misstatements and accounting misrepresentations have in recent years become relatively uncommon.
In picking through the details of the various lawsuits that were filed last Thursday, there is a larger point here that should not be overlooked – that is, on a single day, five securities class action lawsuit were filed. And while two of the five were merger objections suits, three of them were traditional lawsuits. No matter how you slice it, that’s a lot of new securities litigation in just one day.
One common theme among the various analyses of the 2017 securities suit filings was the observation that the lawsuit filings had been front-loaded in the earlier part of the year, and that the filing pace had slowed in the year’s second half. The inference drawn from this pattern was that perhaps the year’s torrid filing pace had really been a reflection of a very significant level of activity in the year’s first months, and that the reduced pace in the year’s last months might be interpreted to suggest that the heightened filings levels might not continue into the New Year.
Well, there is still a lot of 2018 left to go and only time will tell what the numbers will show by year’s end. But now in the year’s first 39 days, signs are this year’s filing pace is roaring along unabated from last year’s extraordinary levels.
Let’s put the 2018 year-to-date securities suit filings into perspective. As noted above, I count 51 securities suit filings in the year’s first 39 days. 51 lawsuit filings in 39 calendar days translates to roughly 477 securities suit filings over the course of a full 365-day yearlong period. In other words, securities suit filings so far this year not only have not slowed down from last year’s record pace. At this very early point in the year, we are on a pace that would significantly exceed last year’s record numbers.
We are of course very early in the year, and most of this year’s story is yet to be told. The year could turn out very different than the early signs might now be interpreted to suggest. However, at a minimum, I think we can say that the idea that securities suit filings might slow down this year is supported by the evidence so far.
One final note. Just in case anybody who has read this far things I have made too big of a deal of what could have been a purely coincidental filing of five lawsuits on Thursday, let me just say that on Friday February 9, 2018, there were at least an additional four more new securities class action lawsuit filings. I stand by my analysis that the torrid filing pace that we saw in 2017 has continued so far in 2018.