by T. GormanPosted on Posted in SECActions

The number of securities class actions filed in the first half of this year increased compared to the same period last year. During the same period the number of IPOs increased significantly, suggesting that in the future there may be even more securities class actions brought, according to a new report from Cornerstone Research (here).

This year plaintiffs have filed 78 new federal class action securities cases, an increase over the 66 filed during the same period in 2013. The number of actions filed in the first have of the year is less than the 82 filed in the second half of 2013, however. It is also less than the semiannual average between 1997 and 2013 of 95 cases filed.

If securities class actions continue to be filed for the remainder of the year at the same pace, a total of 156 suits will be brought in 2014. That would be the second lowest number since 2006 when a total of 120 securities class actions were filed. In the interim years there were 166 actions filed in 2013, 152 in 2012, 188 in 2011, 175 in 2010, 167 in 2009 223 in 2008 and 177 in 2007.

During the first half of 2014 there were no mega suits filed. The largest concentration of suits were filed against companies in the healthcare, biotechnology and pharmaceutical areas, accounted for 21% of the actions. Within the group suits against biotech companies doubled compared to the prior two semiannual periods. At the same time those brought against healthcare firms declined significantly in comparison.

Suits against firms in the financial sector increased slightly in the first half of this year compared to the second half of 2013. This sector accounted for 14% of all filings, the highest since the first half of 2011. Filings against communication companies, on the other hand, declined from 14 in the second half of 2013 to 5 in the first half of this year.

The number of suits brought against foreign firms declined in the first half of the year to 12% of the filings, compared to 18% for 2013. No suits were brought against Canadian firms in the first half of this year in contrast to the first and second halves of 2013 when those suits accounted for 27% and 26% of the total foreign filings, respectively. Filings against European companies, however, continued at a pace consistent with the rate in 2013.

Traditionally the Second and Ninth Circuits have been the leaders in the number of suits filed. In the first half of this year the 22 filings in the Second Circuit were close to its historical average of 24. Filings in the Ninth Circuit declined by 17% to 20 compared to its historical average of 24 to 20. Interestingly, filing activity for the first half of the year appears to have been less concentrated in the Second and Ninth Circuit. During the first half of the year the Sixth, Eighth and Tenth Circuits equaled or exceeded the number of filings in those circuits for the full year of 2013.

The number of suits brought against NYSE firms increased by 10% in the first half of this year, compared to the second half of 2013. For NASDAQ firms the trend was reversed. Filings decreased by 33% in the first half of this year compared to the second half of last year. Overall, about 1 in 60 companies listed on a major U.S. exchange was the subject of a securities class action in the first half of 2014. If the rate of filing these cases continues in the second half of the year, it will be comparable to 2013.

For the first time since 1998 the number of companies listed on U.S. exchanges increased over the course of the year. Likewise, IPO activity for the first half of the year was strong with 112 offerings. At this pace the number for the year will exceed 2013 by 43%. That would represent a increase for the third consecutive year. In the first half of the year IPO activity equaled 71% of 2013 and exceeds that of 2009, 2010 and 2012. These companies, however, tend to be higher risk in their high growth stage of development. Thus they are more likely to have extreme positive and negative performance surprises and thus increased litigation risk, according to the Cornerstone Report.

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by T. GormanPosted on Posted in SECActions

The SEC brought two investment fraud actions. One centered on defendant Thomas J. Lawler, known as the Reverend Tom, and the sale of administrative remedies or ARs which eliminated the purchaser’s debt while yielding significant profits. SEC v. Lawler, 1:14-cv-02468 (N.D. Ga. Filed July 31, 2014). The other focused on sales made by M. Shi Shailendra in a real estate investment vehicle which was based on distressed properties from the financial crisis. SEC v. Shailendra, Civil Action No. 1:14-cv-02465 (N.D. Ga. Filed July 31, 2014).

Lawler centers on The Reverend Tom, his Freedom Foundation and the related program. It evolved from his investigation into the banking system following debt he piled up related to the illness of his son. According to the theory, each investor has an account established at birth in their name. It is sufficient to fund all future borrowing by the person. When a person borrows from a bank they are actually drawing down their funds from the account. The Reverend Tom holds that charging interest for the loan under these circumstances is unfair.

The answer to correcting this injustice is the AR. When acquired, a series of thee notices to a creditor are prepared by the Reverend Tom and his staff to the identified creditor. Investors need only supply the funds. The AR then enters the “payment cycle” and awaits a series of events which will trigger a massive payoff. Debts will be eliminated, according to the theory and every $1,000 invested will yield at least $325,000.

Using a sales force of individuals he calls “Ambassadors,” the Reverend Tom has sold at least 2,000 ARs since 2004. Investors have put up sums ranging from $1,000 to $10,000. The Ambassadors have benefitted from the commissions paid to them. The Reverend Tom has benefitted from the use of the funds. The investors have not been paid a cent. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of Section 17(a) and Exchange Act Section 10(b). The case is in litigation. See Lit. Rel. No. 23054 (Aug. 1, 2014).

In Shailendra investors were not promised the huge returns of the ARs. Rather, toward the end of 2008 Mr. Shailendra set up Interstate North 5 Acres, known as Shi Investments Six. The purpose was to invest in newly acquired distressed real estate from the financial crisis. Investors were told that the purchases were discounted and would be flipped in three to five years at sizable profits.

During the period the properties would be managed under an operating agreement. Under the terms of the agreement Mr. Shailendra would manage the properties. Each investor would receive profits based on the number of membership interests they purchased.

There were two key points to the deal. One was Mr. Shailendra’s representation that he invested his own funds in Shi Investments Six. The other was the investors. Those solicited were primarily Atlanta-based doctors of Indian or Middle Eastern descent who placed great trust in him because of his heritage, prominence in the Indian-American community, political connections and willingness to risk his own funds.

In fact Mr. Shailendra allocated himself an equity interest but it was not funded. He also misappropriated investor cash and at times used it to fund earlier deals. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a).

Mr. Shailendra settled with the Commission, consenting to the entry of a permanent injunction prohibiting future violations of the Sections cited in the complaint. He also agreed to pay disgorgement of over $2 million and prejudgment interest but the settlement waives payment of that amount and a penalty based on inability to pay. Mr. Shailendra relinquished any claims he has against the development and agreed to the entry of an order barring him from the securities business and from participating in any penny stock offering. See Lit. Rel. No. 23055 (Aug. 1, 2014).

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