Event-driven securities suits

Once again, wildfires are raging across the length of California, from San Francisco to Los Angeles. Once again, the electricity transmission facilities of PG&E are thought to have caused or contributed to at least some of the wildfires. And once again, in the wake of the wildfires, shareholders have launched a securities class action lawsuit against company executives. As discussed below, the new lawsuit is the latest example of the way in which transformative changes arising from climate change can lead to directors’ and officers’ liability litigation.
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Just about everyone who has been active in the D&O insurance arena for a while knows that every now and then one industrial segment or another will suddenly find itself in the midst of  a securities litigation blitz. Years ago after the Internet bubble burst, it was the dot com companies. Further back than that, as at least some of us can remember, there were all of the failed banks in the S&L Crisis (and, again, in the wake of the global financial crisis). More recently, companies in the opioid pharmaceuticals space have drawn the unwanted attention of the plaintiffs’ securities lawyers. Often these kinds of securities suits and other D&O claims follow after some industry-wide event or sector slide.

Now, it appears, another sector is drawing heat. The e-cigarette business has found itself in the headlines recently as health-related issues have been raised about the product. These health questions have been followed, almost inevitably as things go in this country, by lawsuits. As discussed below, these lawsuits now include, in at least some instances, securities class action lawsuits.
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At a time when litigation involving corporate disclosures regarding cybersecurity, privacy, and human resource practices and other hot topics dominate the discussion, potential corporate exposure arising from environmental liabilities and disclosures does not always receive the attention it deserves. However, as I have previously noted on this blog,  environmental disclosures can and frequently are the subject of D&O litigation, both in the form of securities class action litigation and shareholder derivative litigation. A new securities suit recently filed against 3M is the latest example of corporate and securities litigation arising from environmental disclosure-related issues. As discussed further below, the 3M complaint is also the latest example of event-driven securities litigation as well.
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A big factor in the heightened levels of securities litigation filings in 2018 and one of the most important recent litigation trends has been the rise of event-driven securities litigation. These are securities lawsuits based not – as was the case in the past – on accounting misstatements or financial misrepresentations, but on setbacks in a company’s operations that affect a company’s share price. In recent months, securities suits have been filed following wildfires, plane crashes and data breaches. Given this trend and in light of the significance of the event, it arguably should be no surprise that plaintiff lawyers have now filed a U.S. securities class action lawsuit after the most recent Brazilian dam collapse, the January 25, 2019 disaster at Brumadinho, in Minas Gerais, Brazil.
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When news of the recent massive data breach at Marriott began circulating late last week, a colleague emailed and asked me how long I thought it would take for a D&O lawsuit to be filed. I emailed back that I thought there would be a securities class action lawsuit before the end of business on Monday (December 3). Turns out, I didn’t give the plaintiffs’ lawyers nearly enough credit for haste. The plaintiffs’ lawyers managed to file a securities class action lawsuit against the company on December 1, 2018, just one day after Marriott announced the breach. The lawsuit is the latest example both of a data breach-related D&O lawsuit and an event-driven securities suit, as discussed further below.
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Late last month, Lion Air Flight 610 crashed into the Java Sea shortly after its takeoff in Jakarta, killing all 189 passengers and crew members on board. As details about the doomed flight have emerged, investigators have raised questions about the possible malfunction of new flight control features on the Boeing 737 MAX 8 jet involved in the crash, as well as about Boeing’s documentation and training relating to the flight control features. Under these circumstances, the possibility that there might be litigation is hardly surprising. What might be less obvious is that the litigation against Boeing relating to the crash might involve a securities class action lawsuit.
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The recent massive wildfires in California have caused the loss of dozens of lives, and many more people are missing. Thousands have been displaced and many millions more have been affected. The property damage has been devastating. The Camp Fire in Northern California alone has destroyed tens of thousands of 10,000 homes and businesses. Even as the fires raged, questions surrounding the fires’ causes were raised. Media stories have circulated raising the possibility that the electric utilities may be to blame for starting the fires. There undoubtedly will be substantial inquiries and perhaps even liability proceedings. Now it appears that the accountability process may not only include efforts by property owners and survivor and loved ones to recoup their losses, but it may also include securities lawsuits by utility company investors who claim they were misled about the company’s fire safety readiness and potential liability exposure.
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Richard Zelichov

One phenomenon I have noted on this blog is the rise of event-driven securities class action lawsuits. Rather than being based on alleged or financial misrepresentations, as has traditionally and historically been the case in securities suits, these suits follow in the wake of and are based on adverse events in the company’s operations. A recent high-profile example of an event-driven suit is the securities class action lawsuit that was filed against Arconic in the wake of the Grenfell Tower fire last year.  In the following guest post, Richard H. Zelichov, a partner at Katten Muchin Rosenman LLP specializing in defending issuers and their directors and officers in securities class actions and stockholder derivative litigation, takes a look at the event-driven litigation phenomenon and the larger rise of securities suits based on mismanagement allegations. I would like to thank Richard for his willingness to allow me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Richard’s article.
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Last week, the Wall Street Journal reported that this past spring Google had exposed thousands of the Google+ social network users’ private data and then opted to withhold disclosure of the incident because of concerns that doing so would attract regulatory scrutiny and harm the company’s reputation. Following the news reports, questions immediately were asked about a possible SEC investigation of the incident. And now, these developments have drawn two new securities class action lawsuits in which shareholders of Alphabet, Google’s parent company, allege that the company misled investors about the adequacy of the company’s security measures to protect user data from theft and security breaches. As discussed below, the new lawsuits bring together several securities litigation filing trends involving data and privacy-related issues.
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As I have often noted (for example, here), a company’s announcement that it is the subject of an FCPA-related investigation frequently leads to the filing of a follow-on civil lawsuit in which investor claimants allege either that the company’s senior officials have violated their oversight duties or that the company’s public disclosure statements were insufficient in some way relating to the alleged misconduct. As I have also noted, these kinds of follow-on lawsuits, while frequently filed, often are unsuccessful.

Both of these aspects of the follow-on civil lawsuit track record are relevant in connection with the wave of litigation that has followed in the wake of the massive anti-bribery investigation in Brazil. Many of the companies caught up in the continuing anti-corruption investigation in Brazil have been hit with follow-on securities suits in the U.S. While there have been noteworthy exceptions, many of these cases have been unsuccessful. Most recently, the defendants’ motion to dismiss was granted in the anti-bribery investigation-related securities class action lawsuit that had been filed against the Brazilian airplane manufacturer Embraer. Southern District of New York Richard M. Berman’s March 30, 2018 opinion granting the motion to dismiss can be found here. The decision is interesting and it highlights many of the challenges claimants face in pursuing these kinds of claims.
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