Long-time readers know that I have frequently commented on this site on the phenomenon of “event-driven” litigation (for example, here). These are securities lawsuits filed in the wake of a significant operational event or development that disrupts a company and tanks its share price, as opposed to securities suits that are premised on accounting or financial misrepresentations. I am far from the only observer that has commented on this phenomenon. Among others, the Bloomberg columnist Matt Levine, in an article provocatively entitled, “Everything Everywhere is Securities Fraud” (here) also weighed in on the event-driven litigation trend.
There are, of course, usually two sides to every story, and in a April 5, 2023 Law360 article entitled “Why Event-Driven Securities Class Actions Often Succeed” (here, subscription required), Daniel Barenbaum and Michael Dark of the Berman Tabacco firm provide a plaintiffs’ side view of event-driven securities litigation, and make out their case that these cases are not only not frivolous but provide securities investors important remedies and protections.
The authors open their article by arguing that, contrary to the defense-side suggestion that event-driven lawsuits are “evidence that the American securities class action regime has gone haywire,” event-driven cases are “frequently successful” despite stringent pleading standards. In support of their position, the authors cite the recent academic paper by Duke Law School Professor Emily Straus entitled “Is Everything Securities Fraud?” (here). Professor Strauss analyzed 500 securities class action lawsuits filed between 2010 and 2015, differentiating them according to whether the primary victims of the alleged misconduct were investors (as is usually the case in instances of accounting fraud) or persons other than investors (such as, for example, when a pharmaceutical company sells a dangerous drug or an oil rig explodes).
Strauss found that only about 16.5% of the filed actions during the study period met her definition of event-driven litigation, and that these cases had significantly lower dismissal rates and generated higher settlements than in cases where the primary victims were investors. She found that in cases where investors were the primary victims, the cases had a 20% higher chance of dismissal, and cases where the misconduct most directly harmed other victims had more than double the average settlement than for cases where the primary victims were shareholders.
The article’s authors assert that Strauss’s findings are “at odds with the positions that commentators decrying event-driven litigation.” The authors suggest that the critics “routinely miss two fundamental points about these cases”: first, that investors attach importance to accurate risk disclosure; and second, that the typical event-driven case can confer “litigation advantages” on plaintiffs.
In support of the first point, the authors suggest that there is ample empirical evidence supporting the premise of event-driven cases that omissions and misrepresentations regarding risk disclosures affect investment decisions. Academics and analysts, the authors suggest, have concluded that the disclosure of risk-related information minimizes the information asymmetry between company insiders and outside investors about the company’s business risks and future prospects. By the same token, securities fraud cases, the authors suggest, “can deter public companies from misleading investors regarding information important to capital markets,” a consideration the authors suggest “cannot be deemed frivolous.”
According to the authors, the error critics of event-driven litigation make in not understanding why these claims can be very strong is they overlook the fact that corporate disasters often are accompanied by regulatory or legislative investigations that can provide valuable detail for fraud allegations. In addition, in the corporate disaster scenario, there often are many employees who can provide valuable insight and information to support the fraud allegations, by contrast to the accounting fraud scenario, where the details often are known to a very small number of financial executives. The authors also suggest that there are “fewer challenges tor plaintiffs seeking to demonstrate loss causation, as the disaster, and the stock drop that follows it, is “the materialization of the risks that were not disclosed to investors.”
The authors conclude by noting that the focus for companies and for investors should be “whether bad news and key risks already known to companies but not to the public are accurately reflected in corporate filings,” adding that “corporations and their advocates have no reason to fear that genuinely unforeseen events can give rise to liability.”
I found the authors’ commentary interesting, and I thought that their perspective to be sufficiently noteworthy to write about it here and to call readers’ attention to their commentary.
Even before reading the authors’ article, I was aware that plaintiffs’ lawyers were impatient with the label characterizing certain securities suits as “event-driven.” There are a couple of usual objections. The first is that this type of litigation is not new, and the second is that there are event-driven cases that have been successful. The prototypical case for both of these points is the BP Deepwater Horizon securities suit, which was filed in 2010 and which settled in 2016 for $175 million. Because I have become aware of the practitioners’ objection to the label, I have recently tried to stay away from describing cases as “event-driven.” (See for example my recent post about the Norfolk Southern case, here.)
For whatever it may be worth, I , for one, have never said or thought that event-driven cases are always frivolous or never successful. I know there have been both meritorious and successful event-driven cases and I have never argued to the contrary.
However, the authors’ article argues that event-driven cases are often successful. In support of their argument , the authors rely significantly on Professor Strauss’s research paper. In general, I have no issues with Professor Strauss’s analysis and conclusions. However, I suspect strongly that many of Professor Strauss’s conclusions reflects the time-period she chose to study.
I understand that Professor Strauss chose the 2010 to 2015 time period because cases filed in that time period are likely all or almost all resolved. Many more recently filed cases have not yet been resolved, which would prevent the same kind of analysis for more recent periods. Just the same, I think that her analysis and conclusions would be different if she were to study a later time period.
It is impossible now to prove at this point, but when enough time has passed to allow the cases filed in the 2015 to 2020 time period to be announced, I am almost certain that analysis will show that many more event-driven cases were filed in the later time period and that the dismissal rate for the event-driven cases will be much higher than was the case during the 2010 to 2015 time frame.
Readers will recall that during the 2015 to 2020 time period, the number of securities class action lawsuits increased substantially (particularly during the period 2017 to 2019). There were many factors that contributed to this increase but one of the important factors was the increased number of event-driven lawsuits filings, as Columbia Law Professor John Coffee noted in a 2018 article about securities litigation filings. Indeed, it was in fact during the 2015 to 2020 time frame that the number of event-driven cases became so significant that I first observed and described the phenomenon and began populating the data set.
Event-driven suits were of course around previously, but it was only after the 2010-2015 time frame that Professor Strauss studied that the phenomenon became sufficiently apparent for it to be identified, described, and studied. To put it a different way, there may have been event-driven cases in the 2010 to 2015 time frame that Professor Strauss studied, but event-driven litigation didn’t become a “thing” until after that period. For that reason, I think it is entirely possible that Professor Strauss’s conclusions simply reflect the time period she studied and a similar study of the subsequent five-year period will tell a different story.
In addition, the dismissal rate for cases filed in the 2015 to 2020 time frame has been higher than was the case previously; when the time comes for the analysis, I think the data will show that the dismissal rate for event-driven cases filed during that time period was higher as well.
Moving even further forward to the present time frame, I think the data will show an even higher dismissal rate for event-driven cases during the current period than in the two preceding five-year time blocks. Among other things, during this most recent time frame, the mother of all events has been driving a significant number of securities class action lawsuit filings. Since the initial outbreak of the coronavirus in the U.S. in March 2020, plaintiffs’ lawyers have filed nearly 70 COVID-related securities suits. While plaintiffs’ lawyers have been eager to file these COVID-related suits, the fact is that the cases have done poorly, and dismissal motions have been granted in almost all of the cases that have reached the dismissal motion stage so far (with the only exception being cases filed against drug companies that claimed to be developing COVID vaccines).
One other thing that I think is fair to point out here is that while the authors cite and rely on Professor Strauss’s analysis, they omit to mention two of the Professor’s observations about event-driven litigation that run counter to their thesis: First, in her conclusions, Professor Strauss states that, with respect to event-driven lawsuits, “the merit of these cases is not clear-cut.” Second, she said that, “from a policy perspective, while these cases may have deterrence value, they may not be an optimal means to monitor corporate misconduct that harms outsiders.”
I share Professor Strauss’s concerns. In some instances, at least, the lawyers filing the lawsuits clearly are taking advantage of public outrage and media attention to bring lawsuits that may have little relevance to the underlying incident. This is something disquieting about the securities suits’ inferential suggestion that the real victims are the shareholders.