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Firm says securities firms can expect increased competition among themselves

By Kyla Asbury | May 13, 2014

KANSAS CITY, Mo. (Legal Newsline) - The world's largest privately owned independent insurance brokerage firm has released a report that assesses the current state of securities litigation and looks toward the future of lawsuit trends.

Lockton's report, titled "The Next Big Thing: Predicting the Changing Securities Litigation Landscape," points to sources of future litigation and advises companies on how to protect themselves. The report was written by Vice President Mark Weintraub and Senior Vice President Rodger Laurite.

As the number of public companies has decreased since 1997, the number of securities class actions has risen, according to the report.

In 1997, there were approximately 8,900 public companies. In 2013, there were approximately 5,000, according to the report.

The number of securities class actions remained robust "due to the emergence of certain novel litigation trends created by the credit crisis, Chinesee mergers and merger objection lawsuits," according to the report.

"Today, however, credit crisis-related lawsuits are precluded by statute of limitations, Chinese reverse merger suits have largely run their course and merger objection suits...are depended on M&A activity, which was down in 2013," the report states.

In short, securities plaintiffs firms that relied on litigation trends to supplement their caseloads over the last seven years will be facing unprecedented competition for cases at a time when there are fewer public companies to target, according to the report.

The U.S. Supreme Court is expected to issue a ruling in Halliburton Co. v. Erica P. John Fund Inc. this summer, which could alter the course of future securities class actions.

In Halliburton, the court will revisit a ruling from 1988 known as Basic Inc. v. Levinson, in which the court established the "fraud on the market" presumption.

Because of the fraud on the market presumption, reliance on alleged misleading disclosures is presumed, and a class may be certified without having to prove that each and every stockholder relied on a specific disclosure.

If Halliburton overturns Basic, each individual shareholder-plaintiff must show he or she relied on the allegedly misleading disclosure.

As data increasingly becomes a company's most valuable asset, Weintraub and Laurite note opportunities surrounding cyber risk.

They point to the infamous Target breach as an example, as shareholders have filed two suits against the company's directors and officers, claiming breach of fiduciary duty and waste of corporate assets.

"The lawsuit dynamics surrounding the Target cyber breach can easily develop into a new litigation trend as the foregoing pattern can be replicated whenever a company suffers a significant cyber event," Weintraub said.

The specter of cyber risk is relatively new, but it is nevertheless casting a growing shadow over board rooms and could be the mother lode for future securities litigation, the report states.

In the Target data breach lawsuits that have already been filed by shareholders, the plaintiffs allege that "company leaders knew the cyber risks but failed to protect customer data, and seek to hold the board accountable for cyber breach costs and any damages awarded in the related consumer class action lawsuits that have been filed."

"The lawsuit dynamics surrounding the Target cyber breach can easily develop into a new litigation trend as the foregoing pattern can be replicated whenever a company suffers a significant cyber event," the report states. "Moreover, data is rapidly becoming a company's most valuable asset and, with the increase of mobile apps, digital processes are replacing more and more manual transactions."

The report encourages companies to consistently review their policies and procedures surrounding data management and storage and follow the SEC guidelines for cyber-related disclosures.

While most directors and officers liability policies cover claims against individuals, they only cover an entity for limited securities-related claims. To be fully protected, a company should ensure their policy includes a broad definition of "securities claim" and does not limit coverage for follow-on civil litigation, Lockton says.

Lockton encouraged companies to pay attention to relevant, upcoming U.S. Supreme Court case outcomes; stay aware of emerging litigation trends based on SEC regulatory changes; and be sure directors and officers policy wording is broad.

From Legal Newsline: Kyla Asbury can be reached at classactions@legalnewsline.com.

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