CHICAGO (Legal Newsline) – U.S. federal courts
are being inundated with an unprecedented number of securities lawsuits, two recent reports indicate.
The record-setting pace of publicly traded companies being the targets of class action suits began last year and has continued so far in 2017.
The reports, issued by groups that track securities class action litigation
trends, show that 2016 was a record year for securities lawsuits. In a
year-end review of 2016, NERA Economic Consulting said the lawsuits were filed at their highest rate in more than 15 years.
courts saw 300 securities class-actions filed last year, according to
the NERA report, “the highest of any year since the aftermath of the
2000 dot-com crash.” After relatively steady rates from 2010 to 2012,
there were 32 percent more filings made in 2016 than 2015, or 36 percent
more than the average of the last five years.
The number of standard lawsuits alleging violations of federal laws
has grown yearly since 2012, but the significant jump this year comes
from an abundance of merger objection lawsuits being filed
in federal courts. These cases once dominated state courts, but
unfriendly rulings led plaintiffs' attorneys to file at the federal
instead. Between 2015 and 2016, the number of merger objection lawsuits
filed in federal courts doubled.
The 2016 filings data show that
a publicly traded company is more likely than ever to find itself in a
securities class-action lawsuit, Kevin LaCroix, an attorney and
executive vice president of RT ProExec, an insurance intermediary focused on management liability issues, told Legal Newsline.
possibility of a securities class-action lawsuit is the most
significant liability exposure that directors and officers of publicly
traded cases face,” LaCroix said. “It is important to track the level of
securities class-action filing activity in order to have a sense of the
relative degree of that exposure. The fact that filings are at record
levels shows that the liability exposure is elevated.”
has continued to track filings, noting that 41 cases were filed in the first few
weeks of 2017. If that rate were to continue, 2017 would set another record.
NERA reported that the combined amount being sought in last year's suits was another record: $468 billion. Known as
the NERA-defined investor losses variable, this figure connotes NERA’s
estimate of investors losses from buying the defendant’s stock as
opposed to investing elsewhere – usually a trustworthy method for
estimating the size of a settlement. Almost half – 44 percent – come
from cases claiming damages as a result of alleged regulatory violation.
NERA also reported that 262 securities class-actions were concluded, and more
cases were dismissed than were settled -- a
first-time occurrence since the Private Securities Litigation Reform Act
was passed in 1995 with the goal of reducing the number of frivolous
securities lawsuits. Despite a low settlement rate, the average
settlement amount grew by 36 percent, according to the report.
vast majority of lawsuits filed in 2016 involved standard allegations
of violations of the U.S. Securities Exchange Act of 1934. However, the
number of federal merger objection cases grew considerably,
driving the overall growth in the number of securities litigation
filings, NERA reported.
Merger objection lawsuits are filed by
shareholders of a company that has agreed to be acquired. Shareholders
filed 88 such objections in 2016, comprising 29 percent of all
securities filings, according to NERA’s data. This represents the
fastest growth rate in these cases since 2010.
merger objection cases, considered low-hanging fruit for plaintiffs'
attorneys, were previously filed in state courts, with Delaware leading all other states.
“Plaintiffs’ lawyers filed
the merger objection lawsuits because they can usually count on being
able to extract a payment of their fees, with relatively little effort,”
LaCroix said. “That dynamic is in fact the reason that the Delaware
courts have become hostile to these kinds of suits.”
2016, the Delaware Court of Chancery made an important decision
regarding “disclosure-only” settlements in a case involving Zillow
Inc.’s acquisition of Trulia Inc. According to court documents, the
company agreed to disclose certain information to shareholders if, in
return, the plaintiffs dropped their attempt to delay the acquisition
and released their claims on behalf of the proposed class. The
plaintiffs didn’t gain anything, financially speaking, except that the
company agreed to pay attorneys' fees.
settlements had become common in the court and raised concerns among
judges and others about whether such settlements were actually fair to
“On a broader level, this opinion discusses some of
the dynamics that have led to the proliferation of disclosure
settlements, noting the concerns that scholars, practitioners and
members of the judiciary have expressed that these settlements rarely
yield genuine benefits for stockholders and threaten the loss of
potentially valuable claims that have not been investigated with rigor,”
Chancellor Andre Bouchard wrote in the court’s opinion.
The court denied the settlement.
“The opinion further explains that, to the extent that litigants
continue to pursue disclosure settlements, they can expect that the
court will be increasingly vigilant in scrutinizing the ‘give’ and the
‘get’ of such settlements to ensure that they are genuinely fair and
reasonable to the absent class members,” Bouchard wrote.
decision reduced the number of lawsuits filed in the Delaware state
court and prompted plaintiffs' attorneys to file in federal court
instead, LaCroix said. “As long as the plaintiffs’ lawyers think they
can make money, they will keep filing the lawsuits.”
the dozens of merger objection cases played a major role in the jump in
cases, they remain a fraction of the lawsuits. Another 197
cases involved alleged violations of rules that govern fraud, liability
for misstatements or omissions and misrepresentation.
the fourth year with a notable increase in the number of these cases, NERA
reported. That data point hasn’t been this high since 2008, when 218
such filings were recorded.
“But even disregarding the merger
objection lawsuits, the number of securities suit filings is up, due to
the heightened number of lawsuits against foreign-domiciled U.S.-listed
companies and the number of lawsuits against life sciences companies,”
He said the life sciences – which includes
companies working in biotechnology, pharmaceuticals and biomedical
technology, among others – are magnets for litigation for complex
reasons. Their share prices are often “volatile,” meaning they’re
sensitive to business setbacks, which can tank their share prices. Also,
the regulatory process they go through is unpredictable.
the regulator delays or rejects a product in the clinical trial process,
it can send the company’s share price plunging,” LaCroix said.
these companies often put all of their eggs in one basket, so to speak.
With just one product in development or on the market, any hiccups can
put everything in jeopardy.
“Any type of setback can just about wipe out investors, often leaving them angry and ready to sue,” he said.