Security Class Actions Down, SPAC IPOs Up

Filings of securities class actions declined last year. Yet many of the key statistics regarding the filings are similar to those from prior years while IPOs from SPACs increased dramatically, according to a report by Cornerstone Research published yesterday. Securities Class Action Filings, 2020 Year in Review (here).

The key question each year when the Cornerstone Report is released is the number of filings. Last year 334 securities class actions were filed. That included 100 Federal M&A filings, 33 Federal Section 11 and State 1933 Act cases and 201 other federal filings. This is the lowest total number of actions filed since 2016 when a total of 288 cases were initiated. In contract, in 2019 a total of 427 actions were filed while in 2018 there were 420 filings and in 2017 412 cases were brought.

The complaints filed were based largely on Exchange Act Rule 10b -5. Last year 85% of the complaints alleged violations of that Rule while Securities Act Section 11 violations was alleged in about 16% of the cases and Section 12(a) claims were asserted in about 7%. Those numbers for each section are roughly comparable to those numbers in each of the four prior years.

The primary claim asserted in the complaints filed centered on misrepresentations in financial documents. Approximately 90% of the federal actions filed asserted this claim. The next largest group of claims was 43% which were based on assertions of false forward-looking statements followed by 27% based on alleged accounting violations. Again, the numbers were comparable to earlier years. For example, in 2019 misrepresentations in financial fraud documents was the largest category of claims. In that year the claim was asserted in 98%. The second largest category was false forward-looking statements at 47% while accounting violations were alleged in 23% of the cases.

Consideration of the heat map – the industry sector for companies in the SP 500 index – yields results that are similar to those from recent years. The largest sector in 2020 was the consumer discretionary at 8.1%. The next largest categories were utilities at 7.1%, and health care at 6.3%. In 2019 the leading category was health care at 12.9% followed by consumer staples at 12.1% and industrials at 10.1%. In 2018 the leader was health care at 16.1% followed by communication services at 12.7% and consumer staples at 11.8%.

Finally, the number of IPOs from operating companies and SPACs increase to 165, up by 47% compared to 2019. That is the largest percentage increase since 2013. Historically SPACs or blank-check companies have only represented a small percentage of the transactions. Last year the number quadrupled from 59 to 248.