Next month the Supreme Court will hear argument in Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317 for the second time. The first time the High Court held that a securities law plaintiff need not establish loss causation at the class certification stage. This time the Court will consider an issue which may significantly impact the ability of plaintiffs to bring a securities class action. The question for resolution is if Basic Inc. v. Levinson, 485 U.S. 224 (1988), which adopted the fraud on the market theory as a substitute for the reliance element of an Exchange Act Section 10(b) damage claim, should be overruled or substantially modified. Halliburton will be previewed later this month.
While Halliburton may represent the future of securities class actions, there status today is chronicled in a new report from Cornerstone Research tiled Securities Class Action Filings, 2013 Year in Review (here). Last year the number of securities class actions filings ticked-up slightly to 166 compared to just 152 in the prior year, according to the Report. That number is, however, the lowest since 2006 and, excluding that year, the represents the fewest number of actions filed since 1997, the first year cited in the Report. For example, in 2011 there were 188 filings, 176 in 2010, 167 in 2009, 223 in 2008 and in 174 in 1997.
Similar results are seen for the aggregate dollar loss referenced in the filings. Last year that totaled $104 billion, up slightly from the $97 in 2012 but below the $110 billion in 2011. Indeed, in the last five years the amounts claimed have not exceeded the historical average, according to Cornerstone.
Over the years the legal basis for the actions has narrowed, focusing on Rule 10b-5 claims. In 2013 84% of the cases brought asserted a claim under this Rule. That is about the same as in 2012 but up substantially from 2011 at 71%, 2010 at 66% and 2009 at 69%. This trend contrasts with those for claims based on Securities Act Section 11 or Section 12(2). As to the former, in 2013 only 9% of the claims were based the Section which is about the same as in 2012 but which is down from the 11% in 2011, 15% in 2010 and 23% in 2009. As to the latter, only 7% of the claims were based on Section 12(2) while in 2012 and in 2011 it was 9%, 2010 10% and 2009 25%.
Similarly, claims asserted in class action filings are increasingly focusing on allegations of misrepresentations in financial documents. In 2013 97% of the cases were based on this claim compared to 89% in 2009. At the same time the number of cases based on an announced restatement has held essentially constant at 11% in 2013 and the same number in 2009.
The critical issue in Halliburton revolves around what must be demonstrated at class certification. Yet the Report notes that in a “great majority of cases” a class certification motion was never filed. Rather, an increasing number of cases are dismissed prior to certification. In 2002 29% of the cases were dismissed prior to class certification. By 2010 that number had increased to 57%. When the certification motion was denied, it typically was not on the merits. Frequently those motions were denied based on typicality and adequacy. Overall, in the few cases where the motion was filed in actions brought between 2002 and 2010, it had an equal chance of being granted or denied.
Two additional findings in the Report center on the number of companies listed on U.S. exchanges and IPO and M&A activity. As to the former, the number has declined 46% since 1998. However, the rate of decline has slowed to 3% from the 6% that had prevailed in earlier years. As to the latter, a comparison of IPO and M&A activity reflects a decline in the number of initial public offerings compared to mergers in recent years. From 1990 through 1997 IPOs equaled or outnumbered M&A deals in six of eight year. That trend reversed during the period 1998 through 2013 when M&A deals outnumbered IPOs in every year.