TRENDS IN SECURITIES CLASS ACTIONS: 2011
The number federal securities class action suits filed in the first half of 2011 decreased compared to the second half of 2010. At the same time however the number of cases filed increased compared to the first half of 2010, according to a new report by Cornerstone Research (here). For the first half of 2011 there were 94 suits filed. That is below the 104 suits filed in the second half of 2010 but more than the 72 suits filed in the first half of 2010.
Securities class action filings in the first half of 2011 were driven by suits arising from M&A activity and those associated with Chinese issuers who conducted a reverse merger. In the first six months of the year 24 class actions were filed involving reverse merger cases. During the period 21 were associated with M&A activity. In contrast only two suits related to the credit crisis were brought.
If class action securities suits continue to be filed at the present pace, the report projects there will be a total of 190 cases brought in 2011. This is on par with the average number of filings from 1997 to 2010. However, if the number involving Chinese reverse mergers is excluded from the projection since there are only a finite number of these companies, only 165 filings would be made in 2011. That would be the second lowest number of suits brought during the period 1997 to 2010.
A decline in filings would be consistent with patterns in market volatility which tends to serve as a barometer for securities class action filings. For example, during periods of high volatility such as the fourth quarter of 2008, filings tend to increase. Over the last four quarters, in contrast, the downward trend in market volatility is mirrored by the decline (absent the Chinese issuer cases) in class action securities suit filings.
During the first half of 2011 there was also a decline in the number of suits filed involving companies in the S&P 500. In that period only 8.5 % of the cases involved a company on the index compared to 15.5% during the second half of 2010. This is partially explained by the number of cases involving Chinese issuers and M&A transaction related cases which tended to involve smaller issuers.
While M&A transactions cases continue to be a “notable phenomenon,” according to the report, the number of these actions declined in the first half of 2011 to 21 filings compared to the last half of 2010 in which there were 27 cases brought. At the same time however there was an increase in M&A activity. While the M&A related cases typically are filed in state court, at the end of 2010 a trend of filing a parallel federal court action took off and has continued into 2011. This trend may continue the report notes because the litigation creates an obstacle and financial risk to the completion of the transaction which tends to favor settlement.