Securities Class Action Lawsuits at Near-Record Level Says Cornerstone Research in a 2018 Mid-Year Report

• Posted on: Jul 31 2018

In the first six months of 2018, securities class action lawsuits were filed at “near record levels,” according to Cornerstone Research (“Cornerstone”).  In a July 25, 2018 report, entitled “Securities Class Action Filings – 2018 Midyear Assessment” (the “Report”), Cornerstone found that plaintiffs had “filed more than 750 federal securities class actions since midyear 2016,” the “most prolific 24-month period” since the passage of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). The Report can be found here. Cornerstone’s press release announcing its findings can be found here.

According to the Report, plaintiffs filed 204 securities fraud class action lawsuits during the first six months of 2018, which was twice 1997-2017, semi-annual historical average of 102 filings since the enactment of the PSLRA. Only the first half of 2017 exceeded the average with 223 filings. The 204 filings represent almost an 8 percent increase from the 189 securities fraud class action lawsuits filed in the second half of 2017.

Based upon the first-half filings, Cornerstone projects a year-end total of 408 securities class action lawsuit filings – a 101% increase over the 10-year (1997-2017) annual average of 203 filings. The projected year-end total of 408 filings is slightly lower than the total number of annual filings in 2017 of 412 securities class action lawsuits – approximately a 1% decrease. The 750 federal securities class action lawsuit filings since midyear 2016 constitutes the highest number of filings in a 24-month period since Congress passed the PSLRA.

“Despite the relatively stable markets, filing activity remains strong,” said Sasha Aganin, a vice president at Cornerstone Research and one of the report’s authors. “The record number of filings last year was primarily due to medium and smaller size cases, while in the first half of 2018 cases tend to be larger—we are seeing a return of mega filings and relatively fewer small cases.”

Breaking Down the Numbers

The Report breaks down the filings by type of lawsuits, e.g., merger and acquisition (“M&A”), securities fraud (“Core Filings”), and state court actions under the Securities Act of 1933 (“Securities Act”).

Of the 204 filings, 93 were M&A objection lawsuits and 111 were Core Filings. The 111 Core Filings during the first half of 2018 represented a 28% increase over the number of filings in the second half of 2017: 111 Core Filings in the first-half of 2018 from 87 in the second half of 2017.  The number of first-half filings in 2018, however, fell below the 127 Core Filings in the first half of 2017.

Cornerstone found that “the number of federal filings involving [M&A] transactions decreased” during the first half of 2018 from 102 to 93. The 93 M&A lawsuits filed during the first-six months of 2018 represent 46% of all first-half filings.

As noted, Cornerstone annualized the first half data to determine the number of securities class action lawsuits filed by year end. By doing so, Cornerstone concluded that 8.5% of companies listed on “major U.S. exchanges” may become the subject of a securities class action lawsuit. “This rate is significantly above the historical average and slightly above the annual 2017 rate of 8.4 percent.” The Report notes that if the trend continues throughout the year, “2018 will be the sixth consecutive year in which the likelihood of a company being the subject of a class action increases.”

The Report notes that even if M&A lawsuits were removed from the first-half totals, the number of issuers that would be subject to Core Filings in 2018 would still be higher compared to historical levels. The 2018 annualized percentage of listed companies subject to securities fraud class action lawsuits is 4.6%, slightly above the annual rate of 4.2% for such lawsuits in 2017. Notably, both rates are well above the 1997-2017 annual average rate for Core Filings of 2.9%.

During the first half of 2018, Core Flings against S&P 500 companies were at their highest annualized rate since 2002. “On an annualized basis, 9.6 percent of S&P 500 companies were defendants in a [traditional securities fraud] class action” lawsuit in the first six months of 2018. During the period 2001 to 2017, in comparison, approximately 5.2% of S&P 500 companies were the subject of a Core Filing.

First half Core Filings against non-U.S. companies (defined as companies headquartered outside the United States) declined slightly below 2017 levels, representing 22% of all Core Filings, compared to 23% in 2017. The Report noted that “[s]ince declining from the wave of Chinese reverse merger filings in 2011, the percentage of core filings against non-U.S. issuers steadily increased between 2013 and 2017, before falling slightly in the first half of 2018.”

The Report also examined whether there were any patterns related to the filing of Securities Act cases in the aftermath of Cyan, Inc. v. Beaver County Employees Retirement Fund.  In March 2018, the U.S. Supreme Court held that state courts retain concurrent jurisdiction over Securities Act claims and that such lawsuits filed in state court may not be removed to federal court. [This Blog examined the Cyan decision here.] In the second quarter of 2018 (post Cyan), there were seven new filings under the Securities Act, four in federal court and three in California state court. Based upon the small sample size, Cornerstone concluded “no pattern was yet evident.”

Cornerstone also analyzed the Disclosure Dollar Loss (“DDL”) and the Maximum Dollar Loss (“MDL”) for Core Filings. DDL measures the dollar value change in a company’s market capitalization between the trading day immediately before the end of the class period and the trading day immediately after the close of the class period. MDL measures the dollar value change in a company’s market capitalization from the trading day with the highest market capitalization during the class period to the trading day following the close of the class period.  According to the Report, DDL increased 166% to $157 billion in the first half of 2018, from $59 billion in the second half of 2017, the second highest semiannual amount since 1997. DDL in the first half of 2018 is 162% greater than the 1997-2017 semiannual average of $60 billion, due, in large part, to the increase in the number of mega filings (which include securities class action filings with a DDL of at least $5 billion and an MDL of at least $10 billion). The MDL index of $643 billion in the first half of 2018 increased 180% from $230 billion recorded in the second half of 2017. MDL in the first half of the year was more than double the 1997-2017 semiannual historical average of $301 billion.

Finally, by Circuit, Cornerstone found that the Ninth Circuit saw the most Core Filings – 42 in the first half of 2018, up from 13 in the second half of 2017.