Federal court securities class action lawsuit filings declined 22% in 2020 compared to 2019, but the 2020 filings were still above the long-term historical average annual numbers of filings, according to NERA Economic Consulting’s annual securities litigation report. The 2020 securities suit filing drop-off reflected a decline in the number of federal court merger objection class action lawsuits filed during the year, offset in part by the number of coronavirus-related securities suits. NERA’s January 25, 2021 report can be found here.
NERA’s Counting Methodology: NERA’s counting methodology differs slightly from that of other publicly available sources, which would account for incremental differences between NERA’s tally (including my own, which can be found here). As explained in the footnotes to NERA’s report, NERA’s tally not only includes cases that allege violations of the federal securities laws, but also include cases that “allege violations of common law, including breach of fiduciary duty.” Also, if two actions alleging the same basic violations are filed in different circuits, the filings are counted as separate lawsuits unless and until consolidated. These counting differences may account for different overall tallies; while there are slight counting differences, the various tallies remain directionally consistent. It should be noted that the NERA tally includes only federal court securities class action lawsuits; the numbers do not reflect federal law securities class action lawsuits that were filed in state court.
The Number of Federal Court Lawsuits: According to the NERA report, there were 326 federal court securities class action lawsuits filed in 2020, representing a 22% decline from the 420 securities that NERA counted as having been filed in 2019. While the total number of federal court lawsuit filings declined in 2020 relative to 2019 and were below the over-400 total number of filings in each of the years 2016-2019, the 326 2020 filings remained well above the 2010-2015 annual average of 223 filings.
Rise in Coronavirus-Related Securities Suits: One factor affecting the number of 2020 federal court securities class action lawsuit filings was the number of coronavirus-related securities class action lawsuits. According to the NERA report, there were 33 lawsuits filed during 2020 with claims related to COVID-19 in the complaint. Of these complaints, 24% were against companies in the combined health technology and health services sectors, about 21% in the finance sector, and about 15% each in the technology services and consumer services sectors. In addition to the coronavirus-related lawsuits, the report tracks 2020 filings of several other types of event-driven lawsuits including bribery/kickbacks; cannabis; cybersecurity breach; environment; #me-too; opioid crisis; and money laundering.
The Decline in the Number of Merger Objection Lawsuits: The number of federal court merger objection class actions declined in 2020, when there were 106, compared to 2019, when there were 162. The decline in the number of federal court merger objection class action lawsuits in 2020 relative to 2019 accounts for a significant part of the overall decline in the number of federal court securities class action lawsuits in 2020. Indeed, the 106 federal court merger objection class action lawsuit filings in 2020 was the lowest number of federal court merger objection lawsuit filings since 2016 (when there were 92 federal court merger objection class action lawsuits filed). The number of federal court merger objection lawsuits filed declined relative to the prior year in each year during the period 2018-2020. While the number of merger objection lawsuits declined in 2020, the “proportion of new filings that were Rule 10b-5, Section 11, and/or Section 12 cases (standard cases) increased from 58% of the new filings in 2019 to 64% of new filings in 2020.”
The Litigation Rate: As a result of recent levels of IPO activity, the number of publicly traded companies increased in both 2019 and 2020, compared to long-term annual declines in the number of public companies during the period 1996-2018. As a result in the decline in the number of lawsuits in 2020 and the growth in the number of listed companies during the year, the ratio of new filings to listed companies declined to 5.7% — which the report states is the “lowest level in the last five years.” (The report does not expressly specify the ratios for prior years, but my calculation of the 2019 ratio, using the data in the NERA report, is approximately 7.4%. Keep in mind that these ratios include both traditional or core securities suits and also include merger objection lawsuits as well.) While the 2020 ratio declined compared to the preceding five years, the 2020 ratio “remains higher than the ratios in the first 20 years following the implementation of the PSLRA in 1995.”
Filings by Sector: Reflecting a general growth in the proportion of cases filed against companies in the electronic technology and technology services sector during the period 2016-2019, the electronic technology and technology services sector represented the largest proportion of new cases filed in 2020. In 2020, 23% of filings were against defendants in this sector, followed closely by defendants in the health technology and services sector which accounted for 22% of new filings.
Types of Allegations: In 2020, 35% of the complaints included a claim related to “misled future performance”; the NERA report notes that “this is the first time in the last five years that this allegation has been included in more complaints than those alleging accounting issues, missed earnings guidance, or regulatory issues.”
Case Resolutions: Following a decline in the number of case resolutions in 2019, the number of resolutions rose in 2020. There were 320 resolutions in 2020, representing about a 4% increase over the 309 resolutions in 2019. The increase was largely a result of the increase in the numbers of dismissals. The number of dismissals inclusive of merger objection lawsuit dismissals increased in 2020 to 247 from 212 in 2019, while the number of settlements inclusive of the number of merger objection lawsuit settlements decreased in 2020 to 73 from 97 in 2019. The number of cases settled in 2020 was the lowest number of settled cases in the past ten years and is more than 40% lower than the average number of settled cases (122) during the period 2016-2018. At the same time, there was an 26% increase in the number of dismissals of standard cases (from 96 in 2019 to 121 in 2020) and a 9% increase in the number of merger objection lawsuit dismissals (from 116 in 2019 to 126 in 2020). For the years 2015 to 2017 (the most recent fully developed years), the annual dismissal rates ranged from 44% to 49%.
Time to Resolution: For cases both filed and resolved between 2002 and 2020, more than 80% of suits were resolved within four years, and 65% were resolved within three years. The most common resolution period, representing 28% of cases, was between one and two years. Within the first year of filing, 14% of cases are resolved.
Average Settlements: The 2020 average for non-merger objection lawsuits of more than $0 was $44 million, representing a 50% increase over the 2019 inflation adjusted average for equivalent settlements of $29 million. If settlements over $1 billion are also disregarded, the 2020 average settlement is $30 million, compared to the 2019 inflation adjusted equivalent amount of $29 million.
Median Settlements: The 2020 median settlement was $13 million, which is equivalent to the highest annual median settlement during the past ten years – the 2018 median was also $13 million. The 2020 median settlement figure reflects an overall increase in the annual median settlement figure in recent years. The 2020 median was nearly twice the 2017 inflation adjusted median of $7 million. The report notes that the “general increasing trend in annual median settlement values indicates an upward drift in individual settlement values.” In other words, “a higher proportion of cases has settled for higher values in the last three years when compared to settlements that occurred in 2017 or before.” (For those looking for explanations for the current hard market for D&O insurance, the steady increase in median settlement values is clearly a contributing factor.)
Another factor contributing to the increasing median settlement values is that there has been a downward trend in the proportion of cases with individual settlements less than $10 million and a corresponding increase in the proportion of cases found in the higher settlement ranges. In 2017, 61% of cases had settlement values of less than $10 million, compared to 44% in 2020; similarly, 24% of 2017 settled cases had settlement values between $10 million and $50 million while 40% of 2020 settled cases had individual settlements within this range.
Settlements as Percentage of “Investor Losses”: The NERA report also looks at settlements of its own proprietary measure, NERA-Defined Investor Losses. As a general matter, during the period 2012 to 2020, the ratio of settlement to Investor Losses is higher for cases with lower settlement values than for cases with higher settlement values. The ratio of median settlements to median Investor Losses in 2020 was 1.7%, down slightly from 2.0% in 2019, and “one of the lowest ratios observed in the last nine years.”
Aggregate Plaintiffs’ Attorneys’ Fees: The aggregate amount of plaintiffs’ attorneys’ fees recoveries varies from year to year. In 2020, the aggregate plaintiffs’ fees and expenses totaled $613 million, representing an approximately 6% increase over the 2019 equivalent amount of $577 million but well below the 2018 amount of $1.2 billion. Plaintiffs’ attorneys’ fees as a percentage of the settlement amount decreases as the size of the settlement increases. Thus, for settlements during the period 2011-2020 with values over $1 billion, plaintiffs’ fees and expenses represented 10.5% of the settlement amounts, whereas for settlements during 2011-2020 with values under $5 million, plaintiffs’ fees and expenses were 33.8% of settlement values.