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.
Federal 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 level 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.
“The 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.”
LaCroix 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.
The 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.
LaCroix said 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.”
In January 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.
These disclosure-only settlements had become common in the court and raised concerns among judges and others about whether such settlements were actually fair to shareholders.
“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.
The 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.”
While 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.
This is 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,” LaCroix said.
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.
“When the regulator delays or rejects a product in the clinical trial process, it can send the company’s share price plunging,” LaCroix said.
Additionally, 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.