Securities Class Action Filings Increase – For Now
Two new reports chronicle the significant upward trend not just in the number of securities class actions filed in 2017 but also the increased chance for U.S. and foreign issuers to be named in such a suit. See Cornerstone Research, Securities Class Action Filings: 2017 Year in Review (here); NERA, Recent Trends In Securities Class Action Litigation: 2017 Year in Review (here). Together the reports provide a detailed analysis of trends in securities class actions.
Cornerstone and NERA agree that last year significantly more securities class actions were filed than in the prior year, although they disagree on the precise number because of the manner in which each compiles statistics. NERA, for example found that in 2017 432 securities class actions were filed. That compares to just 300 securities class action suits file in 2016, 229 suits in 2015 and 218 suits in 2014. The increase in filings last year is thus part of a trend over the last few years.
While the trend in the number of securities class actions being filed is up, there has been over the years a decline in the number of public companies listed on major U.S. securities exchanges. Since the passage of the PSLRA the number of U.S public companies has declined by about 40%. This means that the chances for an issuer to be named in a securities class action are increasing not just because more suits are being filed but also since there are less companies that can be named as defendants. In 2017, for example, the 432 securities class action cases filed involved about 8.2% of the publicly traded companies, according to NERA. That is nearly double the 2014 rate of 4.25%.
Drilling down in the numbers suggests a slightly different picture, however. Over the last two years the rapid increase in the number of securities class action suits being filed has been driven in part by merger objection cases. Those actions, which were in the past frequently filed in various state courts, are migrating to the federal courts in view of various state court rulings, particularly those which preclude disclosure only type settlements, NERA noted. If the merger objection cases are set aside (197 cases or about 46% of the filings) leaving only the so-called “standard” securities class action suit – ones based on Rule 10b-5, Section 11 and/or Section 12 – the probability of being named in such a suit in 2017 reduces to about 4.1%, according to a NERA calculation. While that exceeds the 3.0% that prevailed from 2000 to 2002, it is far below the 8.2% discussed earlier.
Examining the number of “standard” securities class actions filed last year also at least suggests that the upward trend in the filing of those cases may not continue. In the first quarter of 2017 90 standard cases were filed. That number is two-thirds higher than the number for the fourth quarter of 2016 and in fact was the highest quarterly rate since 2001. The fact that there was a lower filing rate in each of the remaining quarters of 2017 at least suggest that there may be fewer regular securities class actions filed in 2018 – if the trend continues.
Foreign issuers continued in 2017 to be named in a disproportionate number of standard securities class actions. In 2017 the number of filings which named a foreign issuer as a defendant increased significantly compared to earlier years, according to Cornerstone and NERA. For example, NERA found that there were 55 standard securities class actions filed against foreign issuers in 2017, an increase of 25%. Those cases have tended to focus on regulatory violations – the predicate for about one third of last year’s cases naming a foreign issuer. While at one point these types of suits focused on Chinese issuers, in recent years European firms have overtaken the Chinese companies.
The predominate allegations in the regular securities class actions was regulatory violations for the second straight year – the same trend noted above for foreign issuers. The number of filings alleging misleading future performance also rose for the second straight year, according to NERA. Those allegations tend to involve Health Technology and Service sector firms. At the same time the percentage of cases alleging insider trading sales continued to decline.
A different picture emerges when the resolution of these cases is considered. For example, last year a motion to dismiss was granted in 45% of those cases in which there was a ruling. In 30% of the cases in which there was a ruling, the motion to dismiss was granted in part. In contrast, the court denied a motion to dismiss in only 25% of those case in which there was a ruling in 2017, according to NERA.
In contrast, few cases reach the class certification stage. About 72% are settled prior to any ruling on such a motion. In the remaining 28% of the cases the court only ruled on such a motion in a little over half of the cases. When there was a ruling, however, 89% of the motions were granted and certified at least in part.
Overall, most of the securities class actions are so-called standard actions. Last year 116 of those cases were dismissed which was a record high. In contrast only 80 cases settled, near the 2012 post PSLRA low, according to NERA. The average settlement amount in those cases, NERA found, fell to less than $25 million, a drop of about two-thirds compared to the prior year after adjusting for inflation.