In a study that analyzes both federal and state securities suit filings during the first half of 2020 (unlike other prior first half reports that analyzed only federal court filings), Cornerstone Research reports that combined state and federal suits in the year’s first six months were down 18% compared to the second half of 2019 and at the lowest level since 2016. The report, which was published in conjunction with the Stanford Law School Securities Class Action Clearinghouse, is entitled “Securities Class Action Filings: 2020 Midyear Assessment,” can be found here. Cornerstone Research’s July 29, 2020 press release about the report can be found here.
Number of Filings: According to the report, there were 182 securities class action lawsuits filed in state and federal court in the first half of 2020, which while below the 221 filed in the second half of 2019 and 207 filed in the first half of 2019, is still well above the semiannual average of 112 filings during the period 1997-2019. The 182 filings in the year’s first half is the lowest semiannual number of securities suit filings since the second half of 2016. The report states its view that a decline in Section 11 filings “was the primary reason for the overall reduction in filing activity in the first half of the year.”
The decline in the number of filings from the second half of 2019 to the first half of 2020 represented a drop in the number of filings of 18%. Core (or traditional) filings declined 13%, from 134 in the second half of 2019 to 117 in the first half of 2020. Due to the slowdown in merger deal activity, merger objection lawsuit filings also declined, from 87 in the second half of 2019 to 65 in the first six months of this year, representing a decline of 25%. The 65 first half merger-related suit filings in the first half of this year is the fewest number in federal courts since the second half of 2016.
State Court Filings: The number of state court securities class action lawsuits decreased “substantially” in the first half of 2020, reversing a trend of increasing numbers of state court suits that had been in place since the U.S. Supreme Court’s March 2018 decision in Cyan. The number of state court ’33 claims filings was the lowest it has been since 2017, before Cyan. There were a total of 11 state court securities suits in the year’s first half, compared to 29 in the second half of 2019. Of the 11 state court suits, 5 involved parallel federal court filings. There were also six Section 11 actions filed in federal court with no parallel state court action. Interestingly, there were no standalone state court suits filed in California in the first half of 2020 (although there was one California state court action that also had a parallel federal court action).
Another interesting detail about the first half ’33 Act filings is that 83% were against foreign companies and 50% were against Chinese companies. However, 67% of the federal court-only Section 11 filings were against U.S. companies.
Percentage of Listed Companies Sued: On an annualized basis, the 2020 filings are on pace for a seven percent litigation rate – meaning that seven percent of U.S. listed companies would get hit with a securities suit this year, compared to 8.9 percent in 2019. While this rate is well above the 1998-2019 average annual litigation rate of 3.13%, it would represent the first decrease in the litigation rate since 2012 and the lowest level since 2016.
The core litigation rate (that is, the litigation rate if merger suits are disregarded), again on annualized basis, was 4.2% for the first half of 2020, compared to 5.5% in 2019. A core litigation rate of 4.2% would be the lowest core litigation rate since 2017, although still well above the 1998-2020 annual average litigation rate for all securities litigation of 3.13%.
The first half 2020 core litigation rate for S&P 500 companies was, on an annualized basis, 4.8%, compared to 7.2% for the full year 2019. The first half rate for S&P 500 companies was the lowest since 2015.
COVID-19 Securities Suits: According to the report, there were eleven COVID-19-related securities suit filings in the first half of the year. (Cornerstone Research’s tally of COVID cases can be found on the Stanford Law School Securities Class Action Clearinghouse, here.) My own tally of COVID cases through June 30, 2020 was 15. The four cases in my tally that Cornerstone Research has not included are the securities suits that have been filed against Zoom; Colony Capital; Wells Fargo; and iAnthus Capital Holdings. Each of the company names in the preceding sentence are linked to the blog posts in which I explain my reasoning for including these cases in my tally. The difference between the two tallies does underscore one problem with trying to track these kinds of cases cases; it can be quite difficult in defining what makes a case “COVID-19-related.”
Filings Against Non-U.S. Companies: There were 35 core federal court securities suit filings against non-U.S. firms in the first half of 2020, representing 31.5 percent of all core filings, the highest rate of litigation against non-U.S. firms since 2011 (when the number of suits against Chinese reverse merger firms swelled the total). While the annualized core federal filings are down nine percent, annualized core federal filings against non-U.S. firms were on pace to be the highest on record. The 35 first half core federal court filings annualizes to 70 total core federal court filings against non-U.S. firms, compared to 56 in 2019 and 47 in 2018. Of the 35 filings against foreign firms in the first half of 2020, 13 were against Chines firms
One factor driving the number of lawsuits against non-U.S. companies in the first half of 2020 was the number of suits filed against cryptocurrency-related companies. About 20 percent of the core federal court filings against foreign firms had allegations related to cryptocurrency. (There were 11 securities suits filed against cryptocurrency firms by the same plaintiffs firm and on the same day in April 2020.)
Case Resolutions: From 1997 to 2018, 50 percent of core federal court filings were settled, 44 percent were dismissed, less than one percent were remanded, and five percent are continuing.
Losses Involved: The Disclosure Dollar Loss Index, which measures the dollar value change in the defendant firm’s market capitalization between the trading day preceding the end of the class period and the trading day after then end of the class period, decreased by 25 percent from $108 billion in the second half of 2019, to $81 billion, in the first half of 2020. The Maximum Dollar Loss Index, 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, increased by 48 percent from $394 billion in the second half of 2019 to $584 billion in the first half of 2020. The increase in the MDL is “due in part to market capitalization losses in a broad swath of industry sectors during the first half of the year.”
Plaintiffs’ Lawyers: One new feature of this report is that it examines the prevalence of certain plaintiffs’ firms. The report focused on three particular plaintiffs’ firms, the Rosen Law Firm, Pomerantz LLP, and Glancy, Prongay & Murray LLP. These three law firms have been responsible for the majority of first filed federal court securities class action complaints every year since 2015. In the first six months of 2020, these three firms were responsible for 65 of the 111 core federal court filings, representing 59 percent of all federal court filings.
With respect to merger objection lawsuits, a different set of plaintiffs’ firms predominate. The five most active plaintiffs’ firms filing M&A lawsuits were responsible for 93.8 percent of the first identified complaints. Since 2015 at least one of these five plaintiffs firms was listed as counsel or co-counsel on 74.7% of M&A filings.
Overall this report is quite detailed and introduces a number of new features. It is worth reading at length and in full.