A Spike in Federal Class Action Securities Fraud Cases in 2017Print Article
- Posted on: Aug 18 2017
According to the latest report from Cornerstone Research, which it jointly prepared with the Stanford Securities Class Action Clearinghouse, titled “Securities Class Action Filings – 2017 Mid-Year Assessment,” securities class action lawsuits hit a record pace during the first 6 months of 2017. (The press release announcing the issuance of the Report can be found here.) By the end of June 2017, plaintiffs filed 226 securities fraud class actions in federal court, more than in any equivalent period since the enactment of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). The surge in 2017 represents an increase of 135 percent of the semiannual average of class action filings (96 filings) between 1997 and 2016, and a 49 percent increase over the 152 filings in the second half of 2016.
Projecting forward for the entire year, plaintiffs are on pace to file 452 federal securities fraud class actions, which would represent an increase of 135 percent over the 1997-2016 annual average of 192 filings, and an increase of 66 percent over the number of filings in 2016 (272 actions). To put this surge in even more perspective, over the last year and a half, there have been more securities class action filings in federal court than in any comparable period since the PLSRA became law.
“If the litigation rate of traditional securities class actions in the second half of 2017 equals that of the first half, the annual rate will nearly double the historical average,” said Dr. John Gould, a senior vice president at Cornerstone Research. “If one considers M&A filings as well, 2017 is on pace to be more than double the historical average.”
According to the Report, the spike in securities fraud filings is due, in part, to an increase in the number of lawsuits challenging the price and/or fairness of mergers and acquisitions (“M&A”) in federal court. Plaintiffs filed 95 M&A objection lawsuits in the first half of 2017, compared to 85 during the entire year in 2016. The authors attribute the increase in the number M&A cases in federal court to a shift away from state court due to the Delaware Chancery Court’s hostility to disclosure only settlements in M&A objection actions.
In addition to the shift from state court to federal court, the authors attribute the spike in filings to a change in the business model used by plaintiffs’ counsel. In the press release accompanying the Report, Professor Joseph Grundfest, director of the Stanford Law School Securities Class Action Clearinghouse, opined: “[A]nother part of the spike seems attributable to a decline in the quality of complaints filed by attorneys who have recalibrated their business strategies to pursue a portfolio of cases with more remote payoffs because the costs of building such a portfolio remains low.”
The Report also contains an interesting analysis of the frequency with which individual and institutional investors have served as the lead plaintiff in securities class actions (excluding M&A objection cases) over the past 20 years. The authors found that from 1997 to 2003, individual investors were appointed more frequently than institutional investors in traditional securities class actions. Over the next nine years, from 2004 through 2012, institutional investors were as or more likely to be appointed lead plaintiff as individuals. However, since 2013, individual investors have been appointed lead plaintiff more frequently than institutional investors. Finally, the percentage of filings in which the lead plaintiff was both an individual and institution has declined since 2000; in fact, it has been below 10 percent since 2009.
Finally, the report highlights a number of key trends:
- Disclosure dollar loss or DDL (which measures the 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 end of the class period) rose to $74 billion during the time period (23 percent higher than the historical semiannual average);
- Mega filings declined to 24 percent of DDL and 43 percent of Mega Dollar Loss or MDL (which measures the 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 end of the class period). There were three mega filings with a DDL of at least $5 billion and eight with an MDL of at least $10 billion;
- Cases are being filed more quickly for traditional filings. The median lag time to file from the end of the class period fell to just 8 days — the shortest lag time since the enactment of the PSLRA;
- The number of filings against S&P 500 firms in the first half of 2017 occurred at an annualized pace of 11.2 percent, the highest rate since 2002; and
- Pharmaceutical firms were the most common targets of filings—the number at 2017 midyear already exceeds the full-year 2016 total.