During the first six months of 2019, federal court securities class action lawsuit filings remained well above historical levels and roughly on pace with the elevated filing levels in 2018. The number of federal court securities suit filings was significantly increased by the number of federal court merger objection lawsuit filings; however, even disregarding the merger objection lawsuit filings, the number of new lawsuits remains well above historical averages. The total securities suit filings during the years first six months were even further raised by significant numbers of state court securities class action lawsuit filings, as well.

 

The Number of Federal Court Securities Suit Filings: During the first half of 2019, there were 199 federal court securities class action lawsuit filings. This is an extraordinary number of securities suit filings in just a six-month period. By way of comparison, the 199 securities suit filings in the year’s first six months is greater than the total annual number of securities suits filed in all but one year between 2005 and 2014.

 

A six-month total of 199 federal court securities class action lawsuits implies a 12-month total of 398, which would be slightly below the 412 filed in 2017 and 403 filed in 2018, but otherwise significantly above any other year since 2001. The projected year-end total of 398 lawsuit filings would significantly exceed the 1997-2017 annual average number of securities class action lawsuits of 203.

 

The 199 filings in the first-half of 2019 is equal to the 199 federal court securities suit filings in the second half of 2018 and but slightly below the 204 securities suit filings in the first half of 2018. While the filing pace in the year’s first half is slightly below the pace in the first half of 2018, the 199 federal court filings in the first half of 2019 is higher than any semi-annual total for any six -month period prior to the first half of 2017. The 199 filings is also nearly double the 1997-2017 semi-annual average of 102.

 

 

The Impact of Merger Objection Lawsuits: The total number of securities lawsuit filings in the first six months of 2019 was significantly increased by the numbers of federal court merger objection lawsuit filings. As readers will recall, in a series of decisions culminating with the January 2016 decision in the Trulia case, Delaware’s courts evinced their hostility the type of disclosure-only settlement that typically resolved the merger objection suits. Since 2016, there have been significantly increased numbers of federal court merger objection lawsuits as the plaintiffs lawyers have sought to avoid state court, particularly Delaware state court.

 

Of the 199 federal court securities class action lawsuits filed in the first six months of 2019, 73 (about 37%) were merger objection lawsuits. 121 of the 199 securities suits were so-called “traditional” lawsuits. The 126 traditional securities class action lawsuits filed in the first half of 2019 implies a year-end total of traditional suits of 242, which is by historical standards an extraordinary number of securities lawsuit filings. 242 traditional lawsuits would be higher than the annual total number of securities suit filings in any year between the period 2003 and 2015. In other words, even if the merger objection lawsuits are disregarded, there are still an extraordinary number of federal court securities class action lawsuits being filed.

 

The Rate of Federal Court Securities Class Action Litigation: Tallying up the number of federal court securities class action lawsuit filings is one way to look at securities litigation activity. Another way to view securities litigation activity is to look at the rate of federal court securities class action litigation – that is, the number of federal court securities lawsuits relative to the number of public companies.

 

Using the 2018 year-end number of U.S. listed companies (4,406) and using the projected 2019 year-end total number of filings (and being careful to back out the number of actual and projected filings against defendants that do not have U.S. listings, such as block chain companies, producing a year-end projection of 388) implies a litigation rate of 8.8%, which would be the highest litigation rate ever. By way of comparison, the 2018 litigation rate calculated by Cornerstone Research was 8.4% (refer here, page 11), which at the time was the highest litigation rate ever.

 

Even if the merger objection lawsuits are disregarded, the projected 2019 litigation rate is well above historical norms. The full-year projected 2019 total of  traditional lawsuits (calculated after backing out the actual and projected lawsuits against non-listed defendants) of 232 against 4,406 listed companies implies a litigation rate of core securities lawsuit filings of 5.2%, which is significantly above the 1996-2017 litigation rate for core securities suits of 2.9%.

 

In other words, the chance of a U.S.-listed company getting hit with a securities lawsuit is higher than it has ever been.

 

State Court Securities Class Action Lawsuit Filings: All of the foregoing discussion relates only to securities class action lawsuits filed in federal court. State court securities class action lawsuit filings must also be taken into account. As readers will recall, in March 2018, the U.S. Supreme Court held in the Cyan case that state courts retain concurrent jurisdiction for liability actions filed under The Securities Act of 1933. As a result, since Cyan, plaintiffs’ lawyers have been filing a number of securities class action lawsuits in state court. These state court suits sometimes also have parallel federal court lawsuits, but sometimes the defendant companies are sued in state court only.

 

Tracking the state court lawsuits is much more difficult than tracking the federal court lawsuits. Unlike in connection with a federal court lawsuit, in which the plaintiffs’ lawyer filing the lawsuit must put out a press release announcing the lawsuit filing, plaintiffs’ lawyers filing state court actions typically do not file a press release. Consequently, a great deal of resourcefulness is required to track down the state court securities class action lawsuit filings.

 

I have managed to identify 20 state court securities class action lawsuits that were filed in the first six months of 2019. This number is almost certainly too low; I have relatively little confidence that I have managed to track down all of the state court lawsuits that were filed in the year’s first half. However, I do believe the total of 20 suits that I identified is at least directionally representative of the number of state court lawsuits filed.

 

Of the 20 state court securities class action lawsuits filed in the year’s first half, 14 appear to have parallel federal court lawsuits (some of which were filed in 2018 and some of which were filed in 2019). Six of twenty state court securities class action lawsuits filed in the year’s first half do not have a parallel state federal court securities suit. This suggests that in order to full asses the number of securities lawsuits in the first six months of 2019, these six additional state court lawsuits must be taken into account. Consideration of these six additional state court lawsuits suggests that the apparent decline of securities suits in the first half of 2019 compared to the half-year filings in 2018 in even less pronounced than appeared at first. (In other words, the likelihood of a company getting hit with a securities suit is even greater than calculated in the preceding section.)

 

The state court securities class action lawsuits that do have parallel federal counterparts are not without their own significance. The presence of these state court suits means that the defendant companies involved will face the increased cost and complexity involved with having to fight a multi-front war. The fact that companies have to deal with this kind of needless duplication is a very strong reason why current effort to reform the securities laws – and in particular to undo the impact of the Cyan decision –is something that everyone in the D&O insurance industry should support.

 

Filings by Industry: The federal court securities suits in the first six months of the year hit companies in a wide variety of industries. The companies sued in the year’s first half represented companies in 66 different Standard Industrial Classification Code (SIC) categories.

 

As has always been the case in the past, there were concentrations in certain industry sectors. There were 25 federal court securities suits filed against companies in the SIC Code Category 2834 (Pharmaceutical Preparations), the largest number in any single SIC category. There were a total of 30 securities class actions overall filed against companies in the SIC Code Group 283 (Drugs),and another 7 filed against companies in the SIC Code Group 384 (Surgical, Medical and Dental Instruments, bringing the total number of federal court securities class action lawsuits filed against life sciences companies to 37, meaning that lawsuits against life sciences companies represented 18.6 percent of all federal court securities class action lawsuits in the year’s first six months.

 

There were some other categories that also saw significant activity in the year’s first six months. There were 14 federal court securities lawsuits filed against companies in SIC Code Group 737 (Computer Programming and Data Processing), including 11 against companies in SIC Code Category 7372 (Prepackaged Software). There were also six federal court lawsuits against REITs in SIC code category 6798.

 

Filings by Court: The federal court securities class action lawsuits in the year’s first six months were filed in a wide number of courts. There were federal court securities lawsuit filed in 34 different federal district courts in the first half of the year, although there were a number of courts with a significant number of suits. The federal district court with the highest number of securities lawsuits in the first half of the year was the Southern District of New York, which had 46 lawsuits; interestingly, the district with the second most number of securities lawsuits in the first six months of the year was the District of Delaware, which had 45 lawsuits filed in the year’s first half. All of the lawsuits filed in the District of Delaware were merger objection lawsuits.

 

With respect to the New York federal districts other than the Southern District, there were 11 securities suits filed in the Eastern District of New York, and one filed in the Northern District, bringing the total number of securities lawsuits filed in New York federal courts to 56, meaning that securities suits filed in federal district courts in New York represent over 28% of the federal court securities class action lawsuits during the first six months of the year.

 

The federal district court with the third highest number of securities lawsuits was the Northern District of California, which had 19. The Southern District of California had six lawsuits and the Central District of California had nine, bringing the total of lawsuits filed in the California federal district courts to 34, representing a little over 17% of the first half federal court securities lawsuit filings. There were a total of 91 lawsuits filed in federal courts in New York and California in the year’ first six months, representing a  total of over 45% of all federal court securities lawsuit filings.

 

Filings Against Non-U.S. Companies: There were a number of federal court securities class action lawsuits filed against companies either domesticated or based outside the U.S. There were a total of 33 federal court securities lawsuits filed against these non-U.S. companies, representing about 16% of all of the first half federal court filings. These suits against non-U.S. companies hit companies from 16 different countries. The country with the most was China, with 11, followed by the U.K, with four.

 

Filings Against IPO Companies: There were nine securities class action lawsuit in the year’s first half filed against IPO companies. Three of the companies completed their IPOs in 2017, eight in 2018, and three in 2019. There were also at least 13 state court securities class action lawsuits filed against IPO companies in the year’s first half. Of these eight has some form of a parallel federal court securities class action lawsuit (filed in either 2018 or 2019), while five IPO companies had no parallel federal court securities lawsuit, which suggests that there were a total of 14 IPO companies hit with securities lawsuits in state and federal court in the year’s first half.

 

Some Final Notes about Data and Methodology: I count each company that has been sued in a securities class action lawsuit for essentially the same allegations only once, regardless of the number of complaints actually filed. This methodology may differ from the methodology used by other public sources that track securities lawsuit filings, which it turn may cause my tallies to differ from other published tallies.

 

In tracking the securities lawsuits, I rely on a number of different sources including the Stanford Law School Securities Class Action Clearinghouse; Law 360; Justia; ISS Securities Class Action Services; and Stanford Securities Litigation Analytics. I also audit my tally against other resources periodically throughout the year.