The number of federal court securities class action lawsuit filings declined in 2020 relative to the most recent prior years, largely due to short-term filing lulls during the second and fourth quarters of the year. Though the number of filings last year was below the record-setting levels seen during the years 2017 to 2019, the number of 2020 filings was still well above historical annual averages.
The Number of Federal Court Securities Suits: There were 324 federal court securities class action lawsuits filed in 2020, representing nearly a 20% decline from the 402 federal court securities suits filed in 2019, and also below the 402 federal securities suits filed in 2018 and the 411 filed in 2017. (Please see the note at the end of this post regarding my counting methodology. Please note that all figures in this post refer only to federal court filings only; the figures do not reflect separate state court securities class action lawsuit filings.)
Though the number of federal court securities class action lawsuit filings declined in 2020 relative to the elevated levels of filings during the three-year period 2017 to 2019, the 324 filings in 2020 were still well above the 1997-2018 annual average of 215 filings. Indeed, the 324 filings during 2020 was above the annual number of filings in every year during the period 2002-2016.
Factors Contributing to the Relative Decline in the Number of Filings: At least two factors contributed to the relative decline in the number of federal court securities suit filings in 2020. First, there were two filing lulls during the year, one during May and June, and one during the period October through December. Thus, there were 43 federal court securities class action lawsuits filed in April, but only 16 in May and 24 in June. Similarly, there were 42 federal securities suits filed in September, but only 21 in October, 11 in November, and 18 in December. When looking at the number of 2020 filings at the year’s midpoint, the second quarter filing lull looked as if it might be attributable to the coronavirus outbreak. The lull in year’s fourth quarter seems harder to explain, but it also may be attributable to the pandemic’s second wave during the Fall.
The Decline in the Number of Federal Court Merger Objection Class Action Lawsuits: At least one other factor contributed to the relative decline in the number of federal court securities suit filings during the year, and that was the decline in the number of federal court merger objection lawsuits. Readers will recall that in recent years there has been a flood of these merger objection lawsuit filings in federal court, as plaintiffs’ lawyers, reacting to adverse case law development in Delaware, shifted these kinds of lawsuits from state court to federal court. Indeed, the number of merger objection lawsuit filings was a significant factor in the surge of federal court securities class action lawsuit filings during the record-setting years of 2017 to 2019. However, there were only 102 federal court merger objection class action lawsuits filed in 2020, compared to 160 in 2019, 182 in 2018, and 198 in 2017.
In part this drop off in merger objection lawsuit filings is due to a relative decline in merger activity during the year’s second quarter. In part the decline is due to a change in the plaintiffs’ lawyers’ strategy; many of the merger objection lawsuits, which in the recent past would have been filed as class action lawsuits, are now being filed as individual actions (largely as a tactic to try to minimize the possibility of court intervention in the quick and dirty mootness fee settlement the plaintiffs’ lawyers’ extract as part of the truly execrable merger objection lawsuit game with which our business economy is cursed).
Factors Contributing to the Number of 2020 Filings: There were three factors that contributed to 2020 securities filings and maintained filing levels during the year above longer-term historical averages. First, there were roughly two dozen coronavirus-related securities class action lawsuits filed during the year. I will break these coronavirus-related lawsuits down in greater detail in tomorrow’s Top Ten Stories in D&O post, but suffice it to say here that while the coronavirus suits were an important factor in the overall number of securities suit filings during the year, the coronavirus-related securities suit filing activity was nowhere near the elevated levels of filings following the global financial crisis more than ten years ago.
A second factor contributing to the 2020 number of filings was the group of securities class action lawsuits filed on a single day in April by the same plaintiffs’ firm against 11 cryptocurrency companies. The third factor contributing to the 2020 filing levels was the heightened number of federal court securities suits filed against non-U.S. companies, as discussed further below.
The Number of Traditional or Core Securities Lawsuits: Of the 324 federal court securities class action lawsuits filed in 2020, 222 were “traditional” or “core” securities class action lawsuits (that is, securities suits seeking class damages under Section 10(b) or Section 11). The 222 traditional filings during 2020 represents about an 17% decline from the 268 traditional filings in 2019. However, the 222 traditional federal court securities suit filings in 2020 also represents the highest annual number of such filings in any year other than during the three record-setting years of 2017-2019. The 222 traditional securities suit filings during 2020 is also above the 1997-2018 annual average number of 215 for all federal securities suit filings.
The Litigation Rate: While the number of lawsuits filed each year is of significant interest to companies, insurers, and other observers, the rate of litigation (that is, number of lawsuits relative to the number of listed companies) arguably is of much greater significance. As the number of lawsuits has increased in recent years and the total number of listed companies has declined, the litigation rate has been going up, especially compared to long-term trends.
Using the 2019 year-end number of U.S. publicly traded companies (4,318), and subtracting the 22 non-exchange listed defendant lawsuits (for example, cases filed against cryptocurrency companies and OTC companies) from the 324 total number of securities lawsuits filed in 2020, leaves 302 lawsuits against listed companies, which translates to a 2020 litigation rate of 6.99%, meaning that in 2020 more than one out of twenty U.S. listed companies was hit with a securities suit. A litigation rate of 6.99% is below the over 8% annual litigation rate that Cornerstone Research calculated for the record-setting years of 2017-2019, but still more than double the 3.0% annual average litigation rate that Cornerstone Research calculated for the period 1996-2018. (Note, the Cornerstone Research figures also reflects state court securities class action litigation filings, so there is a bit of an apples to oranges problem comparing my figures to Cornerstone Research’s figures.)
The Litigation Rate for Traditional Securities Suits: Obviously, the merger objection lawsuit filings inflate the litigation rate. If the merger objection lawsuits are taken out of the equation and only traditional lawsuits filed against listed defendants are considered (of which there were 203 in 2020), and the year-end 2019 number of public companies (4,318) is used for calculation purposes, the 2020 federal court securities litigation rate for traditional securities suits calculates to 4.7%.
The 2020 federal court traditional securities suit litigation rate of 4.7% is below the 5.5% traditional litigation rate that Cornerstone Research calculated for 2019 (again, inclusive of state court securities suits) but the 2020 traditional litigation rate is still far above longer term historical levels; at the end of 2019, Cornerstone Research calculated the 1997-2018 “core” lawsuit litigation rate as 3.0%. In other words, the 2020 traditional litigation rate, though below last year’s rate, is more than 50% higher than the long-term annual average litigation rate for traditional federal court securities class action lawsuits.
The Federal Courts in Which the Lawsuits Were Filed: The 2020 federal court securities class action lawsuits were filed in 32 different federal district courts. The federal district court with the highest number of securities class action lawsuit filings during 2020 was the United States District Court for the District of Delaware, which had 90 filings during 2020 (of which all but four were merger objection lawsuit filings).
After Delaware, the district court with the highest number of filings was the Southern District of New York, with 61 suit filings. The next highest after the S.D.N.Y. was the Northern District of California, with 34.
The federal courts in New York and California each collectively had significant numbers of filings. The federal courts in New York, including the Eastern District of New York (28), had a total 89 federal court lawsuit filings. The federal courts in California also had a significant number of lawsuit filings in 2019; in addition to the N.D. Cal., the Central District of California had 28, the Southern District of California had 6, and the Eastern District of California had 1, bringing the total 2019 securities suit filings in California federal courts to 69.
Together there were 158 securities class action lawsuit filings in 2020 in the federal courts of California and New York combined, representing almost half (49%) of all of 2020 federal court securities suit filings.
The Industries of the Companies Hit with 2020 Federal Court Securities Suits: The 2020 federal court securities lawsuit filings hit companies in a wide variety of industries. The companies named as defendants in 2020 federal court securities suits represented 125 different Standard Industrial Classification codes.
The SIC code category with the highest number of federal court securities suit filings in 2020 was SIC Code 2834 (Pharmaceutical Preparations), which had 44 federal court securities suit filings during the year. A total of 58 companies in SIC Code Group 283 (Drugs) were hit with federal court securities suits in 2020. The number of federal court lawsuits against companies in this industrial sector was significantly higher in 2020 than in 2019, when there were 38 federal courts suits against these companies.
Another life sciences group, SIC Code Group 384 (Surgical, Medical, and Dental Instruments and Supplies) had 9 federal court securities suits in 2020, including 6 in SIC Code Category 3841 (Surgical and Medical Instruments and Apparatus).
Together, a total of 67 companies in these two life sciences groups were hit with federal court securities suits in 2020, representing about 21% of all federal court securities suits in 2020. Again, these figures for 2020 were significantly higher than the equivalent figures for 2019; in 2019, the filing total for companies in these categories was 51, representing 12.5% of 2019 federal court securities suit filings.
Another SIC Code category with a significant number of securities suit filings in 2020 was SIC Code Group 737 (Computer Programming and Data Processing), which had a total of 25 federal court securities suits, including 14 in SIC Code Category 7372 (Prepackaged Software). The 25 suits against companies in this group represented about 7.7% of all securities suits in 2020.
The suits filed against life sciences and high-tech companies taken together represented about 28.5% of all 2020 federal court securities class action lawsuits.
There were two other industrial sectors that saw significant securities class action lawsuit filing activity in 2020. Industrial Group 602 (Commercial Banks) had a total of 17 securities class action lawsuits during 2020, and SIC Code Category 1311 (Crude Petroleum and Natural Gas) had nine securities suits in 2020.
Federal Court Securities Lawsuit Filings Against Non-U.S. Companies: Of the 324 federal court securities class action lawsuits filed in 2020, 88 were filed against non-U.S. companies, representing about 27.1% of all 2020 federal court securities class action filings. These numbers represent a significant increase over the equivalent figures for 2019; in 2019, there were 62 federal court securities suits against non-U.S. companies, representing about 15% of all federal court securities suit filings in 2019. One factor contributing to the increase in the number of securities suits against non-U.S. companies was the raft of filings in April against cryptocurrency companies, many of which are foreign corporations. If the 11 cryptocurrency company lawsuits are disregarded, there were 77 federal court securities suits against non-U.S. companies, representing 23.7% of all 2020 securities suit filings – still significant figures, especially by comparison to the equivalent 2019 figures.
These suits against non-U.S. defendants involved companies from 25 different countries. The country with the highest number of federal court lawsuits in 2020 was China, which had 26 (representing 8% of all 2020 federal court securities lawsuit filings), of which six involved IPO companies. The country with the next highest number of securities lawsuits was Canada, which had 15, of which the majority involved companies in the cannabis industry. Other countries with significant number of federal court lawsuits include the U.K. and Israel, both of which had five, and Singapore, which had 4.
It is worth noting that none of the securities lawsuits filed in 2020 against non-U.S. companies were merger objection suits; all 88 securities lawsuits against non-U.S. companies were traditional lawsuits. These 88 lawsuits against non-U.S. companies represent a significant percentage of the 220 traditional securities lawsuits filed in 2020 — the lawsuits against foreign companies represent about 40% of the traditional lawsuits. Even if the eleven cryptocurrency-related cases are disregarded, the 77 remaining lawsuits against non-U.S. companies represented 36.8% of the non-cryptocurrency related traditional federal court securities lawsuits. The foreign companies listed on U.S. exchanges are hit with U.S. securities suits in far greater numbers than their presence on the U.S. exchanges would suggest, as non-U.S. companies represent only about 17% of U.S-listed companies.
Federal Court Securities Lawsuit Filings Against IPO Companies: A total of 22 of the 2020 federal court securities class action lawsuits involved IPO companies, representing just under seven percent of all 2020 filings. Of these suits involving IPO companies, 2 involved companies that had completed IPOs in 2017, 6 involved companies that had completed IPOs in 2018, 9 involved companies that completed IPOs in 2019, and 5 involved companies that completed IPOs in 2020. (Please note that these figures refer only to IPO companies sued in federal court securities suits; many of the state court securities class action lawsuit filings also involve IPO companies.)
Discussion: The decline in the number of federal court securities class action lawsuits in 2020 relative to the annual filing figures for the years 2017 to 2019 is interesting, but it is hard to know what to make of the two lulls during 2020 that account for the filing drop-off. The pandemic seems like the likely explanation for the lulls, but that answer seems less convincing for the lull during the fourth quarter. It is also hard to know what the lulls imply as far as future filing patterns as we head into 2021, as well. The fact that filings in all three months in the year’s final quarter were well off the pace raises the question of what we might expect going forward. At this point, it is simply not possible to tell if the lulls – particularly the fourth quarter lull – were simply short-term artifacts of the pandemic, or if they represent longer-term filing trends that will affect filing levels going forward. My own view is that they are simply short-term patterns that suggest nothing about filing patterns in the months ahead, but only time will tell if that is right or not.
Another very interesting aspect of the 2020 federal court securities suit filings is the surge in filings against U.S.-listed non-U.S. companies. Part of what is going on is the well-established and continuing flow of securities suits against Chinese companies, some of which are due to accounting scandals (e.g., Luckin Coffee), and others of which arise because many of the companies are unready for the scrutiny and disclosure obligations that come with a U.S. listing (as has long been the case with some U.S.-listed Chinese companies). The lawsuits filed against the foreign cryptocurrency companies is another factor accounting for the high number of federal securities suits against non-U.S. companies in 2020. But even if you factor out the Chinese companies and the cryptocurrency companies, you are still left with 51 federal securities lawsuits filed against non-U.S. companies, representing 23% of all traditional securities lawsuits filed during the year.
Looking at the range of foreign companies hit with U.S. securities suits in 2020, it is hard to say that there was any one thing driving the litigation. The one thing it does clearly suggest is that – as I have long pointed out – U.S.-listed non-U.S. companies should not be paying less than their U.S. counterparts for their D&O insurance. Beginning in 2019 and accelerating in 2020, the D&O insurance pricing for U.S.-listed non-U.S. companies began to move closer to the pricing U.S. companies pay. Based on the U.S. securities litigation activity, it seems likely that that D&O insurance pricing trend will continue into 2021.
Past experience teaches me to expect that when word gets out that the number of federal court securities lawsuit filings dropped in 2020 that I will be asked if D&O insurance pricing will go down as a result. There is no doubt that one of the factors behind the significant D&O insurance pricing increases in 2019 and 2020 was the flood of securities litigation that has been hitting U.S.-listed companies for the past several years. However, though the number of suits declined in 2020, the number did not decline enough to factor into a pricing decrease. As I noted above, though the number of federal court securities suit filings declined in 2020 relative to the number of filings in 2017-2019, the number of filings still remained well above historical filing levels. Moreover, D&O insurers are facing a massive backlog of cases from the 2017-2020 time period, in addition to the elevated number of new lawsuits in 2020. It will take several years of much steeper declines in the number of filings that happened in 2020 for the reduced number of lawsuits to begin to have a declining effect on D&O insurance pricing. (Other factors, and in particular new capital and increased competition could operate to at least slow the pricing increases in the months ahead, however)
A Preview of Coming Attractions: I will be publishing my annual Top Ten D&O Stories report on Tuesday, January 5, 2021.
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 counting 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 several 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.