Overall levels of corporate and securities litigation
during the second quarter and first half of 2011 remained at elevated levels
despite a decline in regulatory and enforcement activity during the quarter,
according to the latest Advisen quarterly litigation report. A copy of the report
can be found here. My
own survey of the second quarter and first half securities class action
litigation activity can be found here.
It is critically important to recognize that the Advisen
report uses its own unique vocabulary to describe certain of the corporate and
securities litigation categories.
The "securities litigation" and "securities suits"
analyzed in the Advisen report include not only securities class action
lawsuits, but a broad collection of other types of suits as well, including
regulatory and enforcement actions, individual actions, derivative actions,
collective actions filed outside the U.S. and allegations of breach of
fiduciary duty. All of these various kinds of lawsuits, whether or not
involving alleged violations of the securities laws, are referred to in the
aggregate in the Advisen report as "securities suits."
One subset of the overall collection of "securities
suits" is a category denominated as "securities fraud" lawsuits,
which includes a combination of both regulatory and enforcement actions, on the
one hand, and private securities lawsuits brought as individual actions, on the
other hand. However, the category of "securities fraud" lawsuits does
NOT include private securities class action lawsuits, which are in their own
separate category ("SCAS").
Due to these unfamiliar usages and the confusing
similarity of category names, considerable care is required in reading the
The Report's Findings
According to the report, the annualized level of all
corporate and securities litigation activity during the first half of 2011
remained "on par with the record-setting year of 2010," notwithstanding a
decline in the number of new regulatory actions against financial services
firms, as enforcement activity in the wake of the global financial crisis
Advisen tracked a total of 332 new actions across all
categories of corporate and securities lawsuits during the second quarter,
compared to 398 during 1Q11. Despite the falloff, the second quarter activity
remained as a "high level" and the first half activity annualizes to a record
level of corporate and securities litigation activity.
One category of litigation activity driving these numbers
is the group of lawsuits alleging breach of fiduciary duties. Many of these
breach of fiduciary duty lawsuits are merger objection lawsuits, the filing of
which has been "mushrooming" in recent years. The number of merger objection
suits has grown from only 21 in 2001 to 353 in 2010, and with 176 merger objection
suits in the first half of 2011, the pace of merger objection litigation
remains in line with 2010 levels. The report includes a chart on page 6
illustrating the dramatic growth in merger objection litigation activity.
According to the Advisen report, there were 63 new
securities class action lawsuit filings during the second quarter, which is
flat with the previous quarter, but above the 2010 quarterly average of 48 per
quarter and in line with the 60 suits per quarter during 2009. Securities class
action lawsuit filings as a percentage of all corporate and securities lawsuit
filings remains down from historical levels although up slightly from 2010
levels. Class action securities lawsuits represented as much as a third of all
corporate and securities litigation activity as recently as 2006, but during
the second quarter, securities class action lawsuits represented only 19
percent of all corporate and securities lawsuits, which while below historical
levels is up slightly from the 14 percent such suits represented in
2010. Three industrial sectors accounted for over 60 percent of all
securities class action lawsuit during the first half: information technology,
consumer discretionary, and industrial.
Actions involving companies in the financial services
industry accounted for a smaller percentage of all corporate and securities
litigation activity during the second quarter compared to recent periods.
Financial firms counted for 45 percent of all corporate and securities
litigation in 2008 and 45 percent in 2009. The number fell to 34 percent in
2010 and during the second quarter of 2011, the number fell to 25 percent.
Despite the decline, the financial services industry still remains the "leading
sector" for attracting corporate and securities litigation activity.
One prominent trend has been the growth in corporate and
securities litigation activity involving non-U.S. companies. A certain amount
of this litigation involving non-U.S. companies involves proceedings outside
the U.S. The Advisen study reports that during the first half of 2011, there
were 38 corporate and securities lawsuits filed outside the U.S., 18 of which
were filed during the second quarter. Corporate and securities lawsuits
involving non-U.S. companies, whether filed in the U.S. or elsewhere, have
accounted for about ten percent of all corporate and securities litigation
activity since 2005. But in the first half of 2011, corporate and securities
lawsuit activity against non-U.S. companies accounted for 17 percent of all
corporate and securities litigation activity, and during the second quarter of
2011, the figure for non-U.S. companies was up to 20 percent.
A substantial part of this rise in activity involving
non-U.S. companies has been the rise in the number of corporate and securities
lawsuits involving Chinese companies, of which there were 44 during the first
half of 2011.
Advisen's report takes a broader view of corporate and
securities litigation, because its scope reaches beyond just securities class
action lawsuits to include all corporate and securities litigation, and not
just in the U.S, but outside the U.S. as well. But even with this broader
scope, it is apparent that a couple of identifiable factors are currently
driving corporate and securities litigation activity, as is also the case with
securities class action litigation - that is, the high levels of litigation
largely is a factor of the suits connected to merger and acquisition
activity and by lawsuits involving Chinese companies.
The table in the report depicting merger objection
litigation filings dramatically illustrates the growth in this type of
litigation activity in recent years. This development has a number of
implications, including for the D&O insurance carriers that often wind up
picking a significant part of the defense expenses and settlement amounts
associated with these kinds of lawsuits. Even though these cases taken
individually do not present a significant severity risk, taken collectively
that represent a significant claims loss burden for the carriers, particularly
those that are the most active in the primary layers.
As the mix of litigation has shifted away from higher
severity claims such as securities class action lawsuits and toward higher
frequency claims such as merger objection suits, the D&O carriers' claims
experience has shifted as well. As I noted in my
own report on second quarter litigation activity, this is an
The burden these costs represent may be all the more
painful for the carriers because the exposures involved with these kinds of
suits likely are not priced into the risk premium. In addition, it is tough to
underwrite the likelihood that any one company will be acquired. But because
the discussion of carriers' loss exposures tends to focus on the higher
severity risk of securities class action litigation, there is relatively little
consideration given to the higher frequency exposure that these merger
objection lawsuits represent. This is one of those issues that just doesn't get
the airtime it deserves - at least not so far.
One interesting development involving these kinds of
merger objection lawsuits is that the judges in the Delaware Chancery Court
have started to show some resistence to the fee awards to plantiffs' counsel in
cases that do not produce a material benefit for shareholders. The Wall
Street Journal has a July 19, 2011 article (here)
discussing these developments. The flip side of this judicial resistence is
that in some instances the Delaware courts have proven more willing to approve
larger fee awards where the court concludes the plaintiffs have produced
substantial benefit for shareholders.
The surge in litigation involving U.S.-listed Chinese
companies also has important D&O insurance implications, as noted in a
recent Client Advisory I co-authored with Pillsbury Winthrop's Peter Gillon,
about which refer here.
Alison Frankel has a July 18, 2011 post on the same topic on her Thomson
Reuters News & Insight blog, here.
Second Quarter Litigation Update Webinar: And
speaking of first half 2011 litigation filing trends, on Tuesday July 19, 2011
at 11 a.m. EDT, I will be participating in the Advisen's "Q2 Securities
Litigation Webinar." My fellow panelists will include
Anderson Kill's Bill Passanante, Navigators' Scott Misson, and Willis'
John Connolly. The panel will be moderated by Advisen's Jim Blinn. Information
about this event, which is free, can be found here.
Outside Directors and SEC Enforcement
Actions: A July 16, 2011 post on the Harvard Law School Forum
on Corporate Governance and Financial Regulation entitled "SEC Enforcement
Actions Against Outside Directors Offer Reminder for Boards" (here)
takes a look at recent SEC Enforcement actions targeting outside directors. The
article concludes with respect to the recent SEC enforcement actions that "when
taken together, the cases signal the commission's continued interest in
bringing enforcement actions against directors of publicly traded companies who
personally violate securities laws or egregiously disregard their duties."
Among other implications, the article notes the
importance for board members of considering the coverage available through
their company's D&O insurance program for regulatory investigations and
Cordray for Consumers? :
Many readers may have seen the news that President Obama has
nominated former Ohio Attorney General Richard Cordray to head the new
Consumer Financial Protection Bureau. Cordray will be a familiar figure to
readers of this blog, as I have commented
in the past on Corday's actions while Ohio Attorney General in pursuing
securities class action lawsuits on behalf of Ohio's pension funds.
Reactions to Cordray's nomination to head the new
consumer agency include concerns regarding Cordray's connections to the
securities class action bar. In a July
18, 2011 post on his Full Disclosure blog on the Forbes website,
Daniel Fisher takes a look at the campaign contributions Cordray received in
the past from prominent members of the securities class action litigation bar
and comments that Cordray's "record of taking money from lawyers who
profit from private litigation that often follows closely on the heels of
government investigations could provide fodder for his enemies."
Ross Todd has a July
18, 2011 post on the Am Law Litigation Daily on the same questions
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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