Cornerstone Research has released its annual survey of securities class action lawsuit filings for 2019. The year’s version of the report introduces some notable innovations. In prior years, the annual report focused exclusively on federal court securities suit filings. In last year’s report, the survey also incorporated significant state court securities litigation data. This year for the first time the report fully incorporates the state court data in the presentation and analysis. The updated report also includes several new interesting perspectives on the past year’s securities litigation filings, particularly with respect to state court lawsuit filings. As the report details, the state court filings “helped push filing activity to record levels.”
The Cornerstone Research report, prepared in collaboration with the Stanford Securities Class Action Clearinghouse, and entitled “Securities Class Action Filings: 2019 Year in Review,” can be found here. Cornerstone Research’s January 29, 2020 press release about the report can be found here. My own analysis of the 2019 securities class action lawsuit filings can be found here.
The Total Number of Securities Suit Filings: According to the report, there were a total of 428 new class action securities filing across both state and federal courts in 2019, “the most on record.” (The report makes no reference to the IPO laddering lawsuit-inflated total of 498 securities suit filings in 2001). Interestingly, the familiar bar graph presentation of the annual number of securities suit filings, on page 5 of the report, incorporates both state and federal suits. The 2019 total of 428 securities class action lawsuit filings is nearly double (99%) the 1997-2018 annual average number of filings of 215.
The 428 federal court securities suit filings in 2019 represents the third year in a row of over 400 securities class action lawsuit filing. The 428 total in 2019 is slightly above the 420 in 2018 and the 413 in 2017.
The Breakdown between Federal and State Court Filings: In presenting the total number of filings, the report does not expressly break down the suit filings between state and federal court suits. However, interpreting the report’s state court filing data (see pages 4 and 22), which suggests that there were 27 “standalone” state court securities lawsuits (i.e., in which there was no parallel federal lawsuit), in turn implies that the 428 total number of securities suits includes 401 federal court securities lawsuit filings.
The Impact of Merger Objection Lawsuit Filings: As has been the case for the last several years, the total number of securities suit filings in 2019 was substantially increased by the number of federal court merger objection lawsuits. While the merger suits were again a big factor in 2019, the actual number of merger objection lawsuits decreased to 160 in 2019, from 182 in 2018. Though the number of merger suits decreased, the 2019 total of merger objection lawsuit filings is still the third highest on record.
The Number of Core Lawsuits: While the number of merger objection lawsuit filings decreased in 2019, the number of “core” lawsuit filings (that is, lawsuits alleging violations Section 10(b) of the ’34 Act and Sections 11 and 12 of the ’33 Act), “rose the highest level on record.” There were more core filings in federal and state courts in 2019 (268) than in any other year, topping even 2008 when filings surged due to volatility in the financial markets. (There were 224 core lawsuit filings in 2008.) The number of core filings in 2019 increased 21.6% over the number in 2018, when there were 238 core filings. The 268 core filings in 2019 is 24.6% above the 1997-2018 annual average number of all filings of 215.
The Overall Litigation Rate is at Record High Levels: While the number of lawsuits filed is interesting, the overall rate of litigation (that is, the number of lawsuits relative to the number of public companies) is arguably even more meaningful. The litigation rate measures the likelihood that a public company will get hit with a securities suit. The overall litigation rate (inclusive of merger lawsuit filings) in 2019 was 8.9%, the highest level ever, and nearly 196% greater than the 1997-2018 annual average litigation rate of 3.0%. The overall litigation rate has increased every year since 2012.
The Core Litigation Rate is also at Record High Levels: The overall litigation rate is inflated in part by the significant numbers of merger objection lawsuit filings. However, even if the merger suits are taken out of the equation and only core lawsuit are considered, the litigation rate is still at record levels. In 2019, the core litigation rate was 5.5%, well above the 4.8% core litigation rate in 2018, far above the 1997-2018 annual average core litigation rate of 3.0%, and more than double the 2012 core litigation rate of 2.6%. The 2019 core litigation rate suggests that about one in 18 U.S.-listed companies was hit with a core securities suit during the year. The chances of a U.S.-listed company getting hit with a core securities suit is the highest that it has ever been.
The Core Litigation Rate for S&P 500 Companies: The core litigation rate for S&P 500 companies was even higher than the core litigation rate for the marketplace as a whole. Of the companies listed in the S&P 500 at the beginning of 2019, about one in 14 companies (7.2%) was hit with a new securities suit during the year. The 7.2% core litigation rate for S&P 500 companies in 2019 was down from the 9.4% core litigation rate for S&P 500 companies in 2018, but still well above the annual average core litigation rate of 5.5% for S&P 500 companies during the period 2001-2018.
Core Federal Securities Class Action Lawsuit Dismissal Rates: While many securities lawsuits are filed, many are also dismissed. During the period 1997-2018, 43 percent of all core federal filings were dismissed, 49 percent settled, 7 percent are continuing, and less than one percent proceeded to a trial verdict. Recent annual dismissal rates have been closer to 50 percent, though the dismissal rates for the most recent years are still undeveloped as there are too many ongoing cases. (It is important to note that these dismissal figures relate to core federal filings, not federal court merger cases or state court cases. See below relative to state court dismissal rates).
Plaintiffs’ Law Firm Activity and the Rising Litigation Rate: The increase in the number and rate of core litigation filings over the last seven years “has coincided with the activity of three plaintiff law firms that have increasingly been involved in securities class actions.” The three law firms are The Rosen Law Firm, Pomerantz LLP, and Glancy Prongay & Murray LLP. These three law firms have been responsible for the majority of first identified complaints since 2014; in 2019, they were responsible for 62% of first identified complaints. Their rate of appointment as lead counsel is lower than their filing rate. These firms are responsible for the decreasing filing lag time between 2013 and 2018 and for the increasing frequency of the appointment of individuals rather than institutional investors as lead plaintiffs. From 2013 through 2018, these three firms have had 52 percent of their class actions dismissed, compared to 42 percent for all other plaintiffs firms. In 2017, in core federal suits in which these three firms were lead or co-lead counsel, the dismissal rate (with many cases still pending) is 61%, compared to 40% for all other firms.
Section 11 and Other ’33 Act Lawsuits Factored into Record Overall 2019 Filings Levels: A significant factor in the number and rate of litigation filings in 2019 was the elevated level of ’33 Act liability litigation filings in state and federal courts. There were a total of 65 federal Section 11 and state ’33 Act lawsuit filings in 2019, including 27 standalone state actions, well above the 41 total federal Section 11 and state ’33 Act filings in 2018 (representing a 58.3% year over year increase), and the highest annual number of such filings. Interestingly, the number of filings in state courts with 1933 Act claims (49) exceeded those in federal court (16). The number of standalone state court actions increased from 16 in 2018 to 27 in 2019, representing an increase of 68.7%.
State Court Securities Suit Filings By State and Whether Parallel to Federal Suit: The rise in state court securities class action lawsuit filings since the U.S. Supreme Court’s March 2018 decision in Cyan, Inc. v. Beaver County Employees Retirement Fund is “one of the more meaningful trends in securities litigation in the last few years.” Of the 49 total state court securities class action lawsuit filings in 2019, 15 were filed in California (slightly down from 16 in 2918), 18 were filed in New York (up from 13 in 2018), and 16 were filed in other states’ court (up from only 6 filed in other state in 2018). Of the 49 total state court securities suit filings, 22 involved parallel state and federal court lawsuits (about 45%), while 27 were state-court only filings (44%). Since the Cyan ruling, there have been 43 parallel class actions that have been filed in multiple jurisdictions; seven companies have faced multiple state filings.
State Court Securities Suit by Type of Securities Offering: Interestingly, not all of the defendants in the state court lawsuits were IPO companies; as detailed on page 23 of the report, only 31 of the 49 state court securities suits involved IPO transactions only. Nine of the 49 involved merger/spin-off transactions, six involved seasoned equity offerings/follow-on offerings.
State Court Securities Suit Dismissals: During the period 2010-2018, a smaller portion of Section 11-only cases were dismissed in state courts compared to federal court. Only 26% of state court Section 11 filings during that period were dismissed, compared to 43 percent of Section 11-only federal filings.
Likelihood of Securities Litigation Activity for IPO Companies: The report does not attempt to analyze whether or post-Cyan IPO companies face a greater likelihood of securities litigation. However, the report does show (on page 28) that companies that completed IPOs during the period 2009-2018 faced a higher litigation exposure in the first few years after an offering than IPOs completed in prior periods. For example, 20 percent of companies completing IPOs during the period 2009-2018 were the subject of a core securities suit filings within four years of their IPO date, compared to 14 percent for companies completing IPOs during the period 2001-2008, and 12.6 percent for companies in the period 1996-2000.
Core Securities Litigation Against Non-U.S. Companies Listed on U.S. Exchanges: There were 57 core federal securities suit filings against non-U.S. companies with U.S. listings in 2019, the highest number of such lawsuits ever. Core lawsuits against foreign companies as a percentage of all core federal lawsuit filings increased to 23.4 percent, the second highest since 2011 and the third highest overall. The number of lawsuits against non-U.S. issuers has been trending higher over the last decade. For the sixth consecutive year, in 2019 the percentages of non-U.S. companies subject to core federal filings increased. The number of filings against European companies (23) was the highest on record. 17 of the filings involved Chinese companies. Nine involved Canadian companies, of which six involved cannabis companies.
Disclosure Dollar Loss: Disclosure Dollar Loss (DDL) measures the dollar value change in the defendant firm’s market capitalization between the trading day immediately preceding the end of the class period and the trading day immediately following the end of the class period. The DDL index (which measures aggregate DDL during the time period) decreased by 14 percent to $285 billion in 2019, from $331 billion in 2018, but remained more than double the 1997-2018 annual DDL index average of $130 billion. Though the DDL index dropped from 2018, it is still the second highest on record.
Maximum Dollar Loss: Maximum Dollar Loss (MDL) measures the dollar value change in the defendant firm’s market capitalization from the trading day with the highest market capitalization during the class period to the trading day immediately following the end of the class period. The MDL index (which measures the aggregate annual MDL for all federal and state filings) fell 9 percent to $1,199 billion in 2019, from $1,317 billion in 2018. The 2019 MDL index, which slightly down from the year prior, is still the fourth highest annual total on record. The 2019 MDL index is nearly double the 1997-2018 annual average MDL index of $638 billion.
The Cornerstone Research report’s inclusion and integration of the state court filings data is informative with respect to overall class action claims frequency. The combination of federal and state litigation data provides a clearer picture of the overall securities litigation frequency risk.
It should also be noted that the combination of the data also means increased complexity. The 2019 report (inclusive of tables, appendices and glossaries) weighs in at 50 pages. The report is detailed and a close reading is required. There is much information in the report, and it rewards reading at length and in full. (To get a sense of the complexity, take a look at the formula for correcting for survivorship bias in fn. 2 on page 47.)
Many readers will note that the federal court lawsuit tallies in the Cornerstone Research report differ slightly from other published tallies. In that regard, it is important to read the description of the research sample on page 50 of the report to understand the counting methodology used in the Cornerstone Research report. Though the tallies differ slightly, the various tallies are directionally consistent.
While there is a great deal of information in the report, some basic lessons should not be lost amidst the detail. The most important point is that the likelihood that a U.S. publicly traded company will get hit with a core securities class action lawsuit is higher than it has ever been, and the rate of core securities litigation has increased every year for the last seven years. The core litigation rate of 5.5% is nearly double the 1997-2018 annual core litigation rate of 3.0%. More to the point, we have now had three straight years of over 400 securities class action lawsuit filings. These litigation levels arguably represent the new normal. These levels of litigation also are an important factor in the recent disruption that has characterized the D&O insurance marketplace. Past D&O insurance pricing factors simply did not anticipate this level of claims frequency.
The rise of state court litigation, on both a standalone and parallel basis, is also a complicating factor. In particular, parallel litigation — without mechanisms for consolidation or coordination — mean increased complication and expense. The fact that state court securities suits are less likely that federal court securities suits to be dismissed doesn’t help. The increase in state court litigation is another factor contributing to the disruption in the D&O insurance marketplace.
We are seeing these increased levels of securities litigation activity not because there is more fraud; rather, we are seeing more securities lawsuits largely because three small plaintiffs’ law firms are filing more suits. If there is any good news amidst all of these statistical trends, it is that the suits filed by these firms seem likelier to be dismissed. An increased likelihood of dismissal, in turn, has implications for D&O insurance retentions. One part of the current D&O insurance market disruption has been the efforts by many primary public company D&O insurers to increase their retentions, which in effect puts many policyholders in the unfortunate position of having to self-insure for the risk of getting hit with a non-meritorious (but nonetheless expensive to defend) securities suit.
Statistics of this type are an important reason why there has been renewed discussion of the possibility of securities litigation reform. At the upcoming PLUS D&O Symposium, I will be moderating a panel of industry experts as we consider whether there is anything that can be done to try to avert these adverse securities litigation trends.