The number of securities class action lawsuit filings was up slightly in 2013 compared to 2012, although the 2013 filings remained well below historical averages. While securities litigation picked up in 2013 compared to the year before, the more interesting question going forward is what the impact of the Halliburton case now pending before the U.S. Supreme Court will be; if the Court sets aside the presumption of reliance at the class certification stage based on the “fraud on the market” theory, the landscape for securities class action litigation could be changed entirely. Depending on the outcome of the Halliburton case, annual class action securities litigation tallies like this one could look very different in future years.
There were 165 securities class action lawsuit filings in 2013, compared to 152 in 2012, representing a year-over-year increase of about 8.5%. 2013’s 165 filings were about 13.6% below the annual average of 191 filings for the period 1997-2012. 2013 was the fifth year in a row that the annual filings have been below the historical average.
The increase in the number of filings in 2013 compared to 2012 was largely the result of the increased levels of filings in the second half of the year. There were 89 new securities class action lawsuits filed in the second half of 2013 compared to 76 in the first half and compared to only 64 in the second half of 2012.
The 2013 securities class action lawsuits were filed against a wide variety of kinds of companies. The 2013 securities suit filings involved companies in 90 different SIC code categories. There were, however, concentrations of securities litigation activity in certain industries.
As has been the case in recent years, a significant number of new securities suits involved companies in the life sciences industries. There were 34 new securities suits against companies in the life sciences industries (represented by companies in the 283 SIC Code group [Drugs] and the 384 SIC Code group [Surgical, Medical and Dental Instruments and Supplies]).These 34 new suits against life sciences companies represented more than one-fifth (20.6%) of all 2013 filings. Of particular note is that there were 17 new filings in the SIC Code category 2834 (Pharmaceutical Preparations) alone, representing about ten percent of all 2013 filings.
Another area of concentration involved natural resources companies. There were a total of 13 new securities class action lawsuits against companies in the Mining, Crude Petroleum and Natural Gas categories (represented by the 1000 SIC Code series). There were also a total of eight new securities lawsuits filed involving companies in the 737 and 738 SIC Code categories (computer services and business services).
The 2013 securities lawsuits were filed in 34 different federal district courts but the vast majority of the lawsuits were filed in just a few federal districts. 50 of the 2013 securities lawsuits, or around thirty percent of all 2013 securities suits, were filed in the Southern District of New York. Another 23 lawsuits (about 14%) were filed in the Northern District of California and 13 suits (about eight percent) were filed in the Central District of California. There were eleven new lawsuits, representing 6.7% of all lawsuits, filed in the District of Massachusetts. These four federal districts alone accounted for 97 of the 165 filings during the year, or about 58.8% of all 2013 filings.
27 of the 2013 securities suit filings involved non-U.S. companies, representing about 16.3% of all filings. These figures are below 2012 levels, when there were 32 filings against non-U.S. companies representing 21 percent of all filings, and 2011 levels, when there were 61 filings against non –U.S. companies representing 32 percent of all filings. However even though down compared to the two prior years, the level of filings against non-U.S. companies in 2013 remained elevated compared to historical levels. (The average number of filings against non-U.S. companies during the period 1997-2009 was 17, representing an annual average of nine percent of filings.)
The non-U.S. companies that became involved in U.S. securities litigation in 2013 represented twelve different countries. The two countries with the largest number of companies were sued Canada, with eight companies, and China, with seven companies.
Merger-related litigation remained an important part of securities litigation filings in 2013, although down from levels seen in recent years. There were 14 merger objection lawsuit filed in federal courts in 2013, representing about 8.5% of 2013 filings. (There were of course many more merger objection lawsuits filed in state courts, but these state court filings are not part of the present analysis.) The number of 2013 federal court merger objection lawsuit filings was comparable to the equivalent figures in 2012, when there were 13 merger objection lawsuit filings. However, the number of 2013 merger objection lawsuit filings was down sharply compared to 2010 and 2011, when there were 40 and 43 merger objection lawsuit filings, respectively.
Though merger objection cases are down from recent years, there has been an uptick in securities lawsuit filings involving IPO companies. As I noted in a recent post (here), IPO activity in the U.S. during 2013 was at its highest levels since 2007. While the listing activity seems to bode well for the general economy as well as for the financial markets, the increased number of IPOs also led to an uptick in IPO-related securities litigation. There were a total of six new securities lawsuits filed between August 1 and year end involving companies that had completed IPOs in 2012 or 2013. These IPO-related filings were one factor in the increase of securities suits filings in the year’s second half, compared to the filing levels in the two preceding six-month periods.
As I also noted in a recent post (here), another factor behind securities lawsuit filings in 2013 was the increase of regulatory activity triggering follow-on securities litigation. As many as 13, or nearly eight percent, of the 2013 securities suit filings followed prior regulatory or enforcement activity against the defendants companies. These new lawsuits clearly represented a significant part of 2013 securities litigation activity; however, the fillings may be even more significant to the extent they represent a securities suit filing trend in which increased numbers of securities class action lawsuit filings arise in the wake of governmental investigative or regulatory activity. As I noted in my prior blog post, these kinds of lawsuit filings are arising in the wake of an increasingly diverse array of regulatory activity, as governments around the world step up the efforts.
It is interesting to note that securities class action filing activity picked up in 2013 compared to 2012. However, the significance of this development pales by comparison to the potential significance of the Halliburton case now pending before the U.S. Supreme Court. If the Court’s reconsideration of the fraud on the market theory were to result in the Court setting aside the presumption of reliance at the class certification stage, it could become impossible for plaintiffs to have a class certified in a Section 10(b) misrepresentation cases. If that were to happen, the private securities class action litigation landscape would be completely altered. Annual analyses of class action securities litigation like this one could look very different, or even go out of existence.
With these kinds of potential changes looming, the subtle shifts in 2013 filings activity seem less important. Nevertheless, there are some noteworthy things to keep in mind about the 2013 securities litigation filings.
Even though there were slightly more securities class action lawsuit filings in 2013 than there were in 2012, 2013 continues a now several years-long trend of lower than average securities class action lawsuit filings. There has only been one year in the last nine – the credit crisis year of 2008 – when securities class action lawsuit filings were above the longer-term historical averages.
In my view, care should be taken in considering this apparent decline. The figures on which this impression is based represent absolute filing numbers only – that is, the figures represent only the number of lawsuits filed per year. These figures do not take into account changes in the number of publicly traded companies. The fact is that even with the recent uptick in IPOs there are still well more than a quarter fewer publicly traded companies than there were ten years ago. (Bankruptcies, mergers and going private transactions account for the decline in the number of public companies.)
It is hardly surprising that as the number of public companies has declined that the absolute number of securities lawsuits has declined as well. Though the 165 lawsuit filings in 2013 represent around 30 percent fewer filings than there were in 2004, that decline in the absolute number of lawsuit filings in roughly in line (although slightly greater than) the decline in the number of publicly traded companies. The decline in the number of lawsuit filings relative to the number of publicly traded companies is far less than the apparent decline in the absolute number of lawsuit filings might seem to suggest.
There are of course other factors at work affecting the numbers of securities lawsuit filings, beyond just the decline in the number of publicly traded companies. As a result of case law developments, particularly at the U.S. Supreme Court, the securities plaintiffs face a much greater burden trying to survive a motion to dismiss. These case law developments undoubtedly have had some deterrent effect on securities lawsuit filings. The Halliburton case could of course dramatically amplify this effect.
Beyond these considerations another factor affecting the filing levels in 2013 was the absence of any cyclical trend or sector development of the kind that might drive securities litigation. The uptick in filings related to the credit crisis has long since faded, and there was nothing in 2013 like the Chinese reverse merger litigation (which accounted for so many lawsuit filings in 2011). The absence of these kinds of trends mean that there were fewer filings in 2013 than there were in years in which trends of this type drove litigation activity.
On the other hand, the rise in IPO-related litigation activity and the increase in securities litigation following-on after regulatory activity could both potentially represent important trends to watch in 2014 – depending of course on what happens with the Halliburton case.
Read 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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