The number of federal court securities class action lawsuit filings remained “near record levels” during 2018, according to the latest report published by Cornerstone Research in conjunction with the Stanford Law School Securities Class Action Clearinghouse. State court securities lawsuit filings, detailed in the report, drove securities class action litigation filing activity to even higher levels during 2018, arguably to the highest levels ever. According to the report, the likelihood of a U.S.-listed company getting hit with a securities suit was higher in 2018 than it has ever been. Driven by the sheer volume of litigation and the number of lawsuits against larger companies, the 2018 securities suit filings represented an aggregate market capitalization loss of over $1 trillion. The Cornerstone Research report, entitled “Securities Class Action Filings: 2018 Year in Review,” can be found here. Cornerstone Research’s January 30, 2019 press release can be found here. My own review of the 2018 securities class action lawsuit filings can be found here.
The Number of Federal Court Securities Class Action Lawsuits: According to the report, there were 403 federal court securities class action lawsuit filings in 2018, which is about 2 percent below the 412 securities suits filed in 2017, but still more than double the 1997-2017 annual average number of filings of 203. The total number of federal court securities lawsuit filings in 2018 was the second highest annual number of filings after only 2017. The heightened level of filings in the last two years took place despite the absence of “financial market turbulence that often accompanied substantial filing activity in prior years.”
The Number of Federal Court Merger Objection Lawsuits: As has been the case in the last several years, the total number of filings during 2018 was driven by the significant numbers of merger objection lawsuits. There were 182 federal court merger objection lawsuit filings in 2018, down slightly from the 198 such filings in 2017. While the number of federal court merger objection lawsuits declined slightly in 2018 compared to 2017, the 2018 tally of merger objection suits is second largest number of merger objection suit filings since 2009 (when Cornerstone began separately tallying merger objection suit filings.)
The Number of “Core” Federal Court Securities Class Action Lawsuits: While the merger objection suit filings was a significant contributing factor to the heightened number of securities suit filings in 2018, there also were significant numbers of traditional (or what the report calls “core” filings) in 2018. According to the report, there were 212 “core” filings in 2018, the highest number of core filings since at least 2008, during the global financial crisis. The 212 core number of filings during 2018 is still well above the 1997-2017 annual average of all securities suit filings, of 203.
The Number of State Court Securities Class Action Lawsuits: As significant as are the figures in the report of federal court securities class action lawsuit filings, the federal court figures alone may actually understate the total level of securities class action lawsuit filing activity. In its March 2018 decision in Cyan, the U.S. Supreme Court confirmed that plaintiffs may file liability actions under the Securities Act of 1933 in state court. Since the Cyan decision, there have been a number of securities class action lawsuits filed in state court. The state court actions are hard to track. Many of the previously published securities lawsuit filings tallies (including my own) have not included any reckoning for this state court litigation.
However, the Cornerstone Research report includes a separate section on state court filing activity during 2018 (on pages 4 and 19-23 of the report), showing that during 2018, there were at least 33 securities class action lawsuits filed in various state courts (including at least 16 in California state court and at least 13 were filed in New York state court), of which at least 17 did not involve a parallel federal court securities lawsuit.
Overall Levels of Securities Class Action Filing Activity: If these 17 stand-alone state court securities class action lawsuits filed in 2018 are added to the 403 securities class action lawsuits filed in federal court, the total of 420 securities class action lawsuit filings exceeds the total in 2017 (which including two stand-alone state court securities class action lawsuits amounts to 414), as reflected on page 22 of the report. In other words, taking the state court activity into account, 2018 arguably represents the most significant year of securities litigation filing activity since the end of the dot-com era.
The Problem with the Rise of State Court Securities Class Action Lawsuits: The increase in state court securities class action litigation activity is a problem, on many levels. It increases the likelihood that a company defendant might have to fight a multi-front war, in the event of parallel state court and federal court lawsuits. In addition, as reflected on page 23 of the report, state court securities class action lawsuits are less likely than federal court lawsuits to be dismissed. In addition, though we are just in the early days of the post-Cyan era, the suggestion in the data reflected on pages 24-25 of the report is that IPO companies now face a measurably more significant risk of getting hit with a securities lawsuit than may have been the case before Cyan.
The Litigation Rate: As significant as the number of lawsuit filings is, it is the rate of litigation that is of greatest significance. The litigation rate looks at the number of lawsuit filings relative to the number of listed companies. The litigation rate tells us the likelihood of any given U.S.-listed company getting hit with a securities suit. During 2018, the federal securities class action litigation rate, including the merger objection lawsuits, was 8.4%, which, according to the report is slightly above the rate for 2017 and the highest rate on record.
Litigation Rate for Core Securities Litigation: Even if the merger objection suits are disregarded and the litigation rate solely for core lawsuits is considered, the litigation rate was 4.5%. The litigation rate for core litigation has increased six years in a row, and is now substantially above the 1997-2017 annual average core litigation rate of 2.9%. The litigation rate for S&P 500 companies is even higher; during 2018, about one in eleven companies in the S&P 500 at the beginning of the year (about 9.4%) was the subject of a federal court securities class action lawsuit.
Federal Court Securities Suits Against Non-U.S. Companies: The number of federal court securities class action filings against Non-U.S. companies listed on the U.S. exchanges declined to 47 in 2018, compared to 50 in 2017; however, the 47 suits against non-U.S. companies is nearly double the 1997-2017 annual average number of suits against non-U.S. companies of 24. The percentage of non-U.S. listed companies subject to a “core” federal court securities lawsuit has increased every year from 2013. The percentage increased to 4.8% in 2018 from 4.6% in 2019. A chart on page 29 of the report shows that the likelihood of a non-U.S. company getting hit with a core securities suit in 2018 was slightly above the core litigation rate rate for all U.S. listed companies, although well below the litigation rate for S&P 500 companies.
The Impact of the “Emerging” Law Firms: An interesting table on page 36 of the report shows how the market share of the three “emerging” law firms – measured the percentage of cases in which the three firms were named as lead counsel or co-lead counsel – has increased from 2008, when these three firms lead were appointed as lead counsel in only about five percent of cases, to the period 2015-2017, when the firms were appointed as lead counsel or co-lead counsel in about 40% of cases. Since 2008, these firms typically have been appointed in smaller cases.
These firms’ increased involvement has, according to the report, coincided with an increase in the appointment of individual investors rather than institutional investors as lead plaintiff, and their involvement has also coincided with an increase in the “lag time” between a bad news announcement and the filing of a lawsuit. In the period 2013 to 2017, these three firms’ cases were associated with a 51 percent dismissal rate, as opposed to a 43 percent rate for all other firms.
Magnitude of Investor Losses: By a number of measures, the magnitude of investors putative losses reflected in the 2018 securities suit filings was at or near record levels. The investors’ disclosure dollar loss (or DDL, which is the dollar value change in a company market cap between trading day preceding the end of the class period and the trading day following the end of the class period) increased by 152 percent to $330 billion, which is 170 percent above the 1997-2017 annual average of $120 billion and is in fact the highest level on record. The investors’ maximum dollar loss (or MDL, which measures the market cap dollar value drop between the date of the highest class period valuation and the first trading day following the end of the class period) also rose by more than 150 percent, to $1.3 trillion. The increase in these measures was driven by the elevated number of mega filings (which are securities lawsuits with DDL of at least $5 billion or MDL of at least $10 billion), which increased to 27 during 2018 from only 14 in 2017.
Discussion
There have now been a number of year-in-review reports published regarding securities class action litigation activity. All of the reports are at least directionally consistent, but each report adds a little bit more to the picture. The Cornerstone Research report includes a significant amount of interesting detail but the report’s data and analysis of state court securities class action litigation is particularly valuable. I am not aware of any other publicly available source with statistical data on state court securities litigation; in the absence of any alternative source, this information is particularly useful and important.
Another particularly interesting aspect of the 2018 report is the discussion of the impact of the “Emerging” law firms. These firms’ activity is really having a significant impact on securities class action litigation in the U.S. The firms’ activity is clearly a factor in the increase in securities lawsuit filings. These firms concentration on smaller companies (clearly calculated to try to avoid competition with the larger plaintiffs’ securities firms) translates to increased securities litigation exposure for these companies compared to what they might have faced in the past. These firms’ involvement is also changing the dynamic in other ways, such as through a developing increased dismissal rate and increased involvement of retail investors (as opposed to institutional investors) as lead plaintiffs in securities cases.
The analysis in the Cornerstone report about the litigation rate, which is consistent with the analysis in other reports, is clearly the crux of the issue. It is not just that the number of lawsuits is at or near record levels. The fact is that the likelihood of a U.S.-listed company getting hit with a securities suit is higher than it has ever been. This is true even if the merger objection lawsuits are disregarded and the focus is just on core cases. Securities class action litigation exposure clearly is a significant and growing problem of U.S.-listed companies and their insurers. Indeed, as a result of the rise of state court securities litigation, this increase may even be more significant than may be perceived when the focus is just on federal court securities litigation. As the report documents, the likelihood of an IPO company getting hit with a securities suit may also be at its highest level ever.
I suspect strongly that as the year progresses, we will all be hearing increasing calls for securities class action litigation reform.