Plaintiffs filed federal court securities class action lawsuits at “near-record levels” during the first six months of 2019, according to a new report from Cornerstone Research. The July 31, 2019 report, entitled “Securities Class Action Filings: 2019 Midyear Assessment,” notes that the elevated filing levels continued in the year’s first half despite reduced numbers of merger objection lawsuit filings. In addition to the number of federal court filings, there were a significant number of state court securities suit filings, bringing overall filing levels close to all-time highs. The new report can be found here. Cornerstone Research’s July 31, 2019 press release about the report can be found here. My own analysis of the first half filings can be found here.
Number of Federal Court Filings: According to the report, there were 198 federal court securities class action lawsuit filings in 2019, which is 87 percent higher than the 1997-2018 semiannual average of 106. The 198 filings in the year’s first half is one fewer than in the second half of 2018. The 198 filings in the first six months annualizes to a year-end total of 396 filings, which represents an 87 increase over the 1997-2018 annual average of 212, but a slight decrease from the 403 year-end total for 2018.
The elevated federal court securities class action lawsuit filings in the first half of 2019 continue a filing trend that has continued now across several of the last years. Indeed, plaintiffs have filed more than 1,000 federal court securities class action lawsuits over the last five semiannual periods, representing over 20 percent of all filings since 1997.
Number of State Court Filings: In order to have a complete picture of securities class action filing activity, state court securities class action lawsuit filings must also be taken into account. In March 2018, the U.S. Supreme Court in the Cyan case confirmed that state courts retain concurrent jurisdiction for liability actions under the ’33 Act. Since that time, the number of state court securities class action lawsuit filings has increased. In the first six months of 2019, there were 19 state court securities class action lawsuit filings, of which 7 had a parallel federal court filings, and 12 of which were standalone.
If the separate state court suits are taken into account, the projected number of year-end filings (including both state and federal court) increases to 418, which is the second-highest number ever and which is only slightly below the equivalent year-end total for 2018 of 423.
Impact of M&A Filings: The elevated number of filings continued in the year’s first half despite the relative decline in the number of federal court merger objection lawsuit filings. Readers may recall that as a result of a series of rulings in the Delaware Chancery Court in which the Court expressed its hostility to the kind of disclosure-only settlements that typically resolved these kinds of cases, plaintiffs began filing these lawsuits in federal court based on alleged violations of the federal securities laws. These federal court merger objection lawsuits were a significant factor in the dramatic increase in the number of federal court securities class action lawsuit filings during the period 2016-2018.
However, during the first half of 2019, there were relatively fewer federal court merger objection lawsuit filings. In the first six months of 2019, there were 72 merger objection lawsuit filings, representing a 21 percent decline from both the second half of 2018 and the first half of 2018 (during which there were 91 filings). The 72 federal court merger objection lawsuit filings during the 1H19 is the lowest semiannual number of M&A suit filings since the second half of 2016, when there were 57.
The Number of Core Filings: The overall number of federal court securities suit filings remained elevated in the first half of 2019 despite the relative decline in the number of merger objection lawsuit filings because of the heightened number of so-called “core” filings (or traditional securities suit filings). There were 126 core filings in the first half of 2019, one less than the all-time high number of core lawsuit filings in the first half of 2017 (when there were 127). The number of core filings in the first half of 2019 increased 17 percent from the second half of 2018. If filings continue at the same pace for rest of the year, there will be “a considerable shift in the ratio of M&A to core filings compared to recent years, and core filings may reach their highest mark on record.”
The Litigation Rate: While it is important to keep track of the number of securities suit filings, the more important consideration may be the rate of litigation – that is, the number of lawsuit filings relative to the number of publicly traded companies. The number of lawsuit has increased in recent years while the number of listed companies has declined, which translates into a higher litigation rate.
In the first half of 2019, the annualized litigation rate was 8.4%, when merger objection lawsuits are taken into consideration. This rate is significantly above historical averages and equal to the 2017 and 2018 rate. This rate means that the chance of a U.S.-listed company getting hit was a federal court securities lawsuit is 8.4%, which is significantly greater than in the past.
The litigation rate during the year’s first half was elevated even if the merger objection suits are disregarded. The rate for core securities lawsuits during the first six months of 2019 was, on an annualized basis, 5.2 percent, which is significantly above the 1997-2018 core filings annual litigation rate of 2.99%. The chance of a U.S.-listed company getting hit with a core federal court securities class action lawsuit filing is as high as it has ever been.
S&P 500 Litigation Rate: The litigation rate for companies in the S&P 500 is even greater than for market as a whole. On an annualized basis, 6.4% of S&P 500 companies were defendants in a core federal court securities class action lawsuit. On average, each year from 2001 through 2018, approximately 5.5% of S&P 500 companies, or about one in 18, were the subject of a core federal court securities class action lawsuit filing.
Filings Against Non-U.S. Companies: Federal court securities suit filings against non-U.S. companies listed on U.S. exchanges also remained elevated during the first half of 2019. During the 1H19, the percentage of core federal court securities class action lawsuits filed against non-U.S. companies list on U.S. exchanges increased to 23 percent. This percentage of all federal court securities suits is noteworthy and greater than these non-U.S. companies’ presence on the U.S. exchanges would suggest. While core suits against foreign companies represent 23 percent of all filings, non-U.S. companies represent only about 17 percent of all U.S.-listed companies.
The Dollar Losses Represented by First Half Filings: Both the aggregate disclosure dollar loss (DDL) and the aggregate maximum dollar loss (MDL) represented by the first half filings was at significantly elevated levels compared to historical figures. DDL represent the decline in market value between the day before a corrective disclosure and the day after the corrective disclosure. MDL represents the decline in market value from the trading day with the highest market capitalization during the class period and the trading day after the close of the class period.
The aggregate DDL for the first half filings was $180 billion, the highest on record and almost three times the annual average. In the first half of 2019, the aggregate MDL rose by 17 percent to $781 billion, a level more than double the historical average.