Considered on an absolute basis, securities class action lawsuit filings were up about nine percent in 2013 compared to 2012, although the number of 2013 lawsuits was about 13 percent below annual filings averages for the years 1996-2012, according to a new report from Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse. However, as the report also notes, the number of publicly traded companies has been declining steadily since 1997. Thus, while the absolute numbers of filings in 2013 may have been below historical averages, the number of securities lawsuits filed in 2013 relative to the reduced number of publicly traded companies represents a higher rate of litigation when compared to historical filings rates.
The Cornerstone Research report, which is entitled “Securities Class Action Filings: 2013 Year in Review,” can be found here. The January 28, 2014 press release accompanying the report can be found here. The statistics and analysis in the Cornerstone Research report are consistent with my own review of the 2013 securities class action lawsuit filings, which can be found here.
Owing to some methodological variances (which I discuss here), there are differences between the figures reported in the Cornerstone Research report and those recently reported in a similar analysis by NERA Economic Consulting. However, while the two reports differ in their details, the reports are directionally consistent and reach similar conclusions.
According to the Cornerstone Research report, there were 166 new federal securities class action lawsuits filings in 2013, compared to 152 in 2012, representing an increase of nine percent. The increase in filings in 2013 is largely a factor of a surge in filings in the year’s second half. There was a 21 percent increase in number of filings in the second half of 2013 compared to the first six months of the year. Though the number of filings was up in 2013 compared to 2012, the 166 filings during the year still are well below the 1997-2012 average number of filings of 191. The annual number of filings has not exceeded the historical average since 2008.
This generally downward trend in the absolute number of securities class action lawsuit filings may be due in part to the steady decline in the number of publicly traded companies. As detailed in Figure 10 in the Cornerstone Research report, the number of publicly traded companies in the U.S. has declined by 46 percent sine 1998. The report itself states that “the decline in listed companies is one explanation for the recent relatively low levels of filings activity compared to historical averages.”
Indeed, when the number of 2013 filings is considered relative to the remaining number of publicly companies, it is apparent that the 2013 filing activity is actually up compared to historical filing rates. During 2013, approximately 3.3% of all U.S.-listed companies were hit with a securities class action lawsuit. This figure is not only up from the 3.1% rate in 2012, but it is also above the 1997-2012 average annual lawsuit filings rate of 2.85%. Thus, taking into account the decline in the number of publicly traded companies, rather than simply considering the absolute number of lawsuit filings, the 2013 securities class action lawsuit filings are actually up compared to historical averages. Figure 10 in the report also show that the filing rate during the period 2006 to 2013, while ebbing and flowing when considered annually, has been generally upward.
Though the number of public companies is declining as a result of bankruptcies and mergers, there was an uptick in 2013 the number of companies listing their shares for the first time. The report notes that the 150 IPOs completed in 2013 represented the highest annual number of initial offerings since 2008. The press release accompanying the report quotes Dr. John Gould, Senior Vice President of Cornerstone Research, as saying that “the sharp increase in IPOs in 2013 may provide fuel for a new wave of filings in the next few years.” Indeed. as I previously have noted on this blog (refer here), the recent increased IPO activity already contributed to increased securities suit filings activity during the second half of 2013.
While the number of annual securities suit filings ebbs and flows over time, it seems that litigation activity increasingly is targeting smaller companies. The report shows that the median market cap of companies subject to a securities class action lawsuit has dropped from around $1 billion in 2008 to $697 million in 2013. By the same token, in 2013 only about 3.4% of companies in the S&P 500 were hit with a securities suit, compared with a historical annual average of about 5.9% of S&P 500 companies. Similarly, only 4.7% of the S&P 500 market capitalization was subject to a new securities suit filing in 2013 compared with the historical average of 10.6%.
Filings against Non-U.S companies declined in 2013 compared to the two prior years. In 2013, there were 30 suits against non-U.S. companies, representing 18 percent of all securities suit filings, compared to 32 suits in 2012 representing 21 percent of securities suit filings and 62 suits in 2011 representing 33 percent of filings. The 2011 numbers were elevated by a surge of class action lawsuit filings against U.S.-listed Chinese companies. The surge has abated but even so in 2013 China remained the country with the largest number of companies hit with securities suit filings.
Healthcare, biotechnology and pharmaceutical companies together accounted for 21 percent of total filings in 2013. Filings against energy companies also increased in 2013. (My own analysis confirmed these industrial sector frequency observations, as discussed in my year end survey of 2013 securities lawsuit filings.)
As I have noted on this site, many of these historical filings patterns and metrics could be changed significantly by the Halliburton case now before the U.S. Supreme Court. As Stanford Law Professor Joseph Grundfest is quoted as saying the press release accompanying the report, if the Supreme Court throws out the “fraud on the market” theory in the Halliburton case, “it will become impossible to certify a large number of Section 10(b) class actions.” If this were to happen, the report notes, “the entire ecology of the market for class action securities fraud litigation is likely to undergo a dramatic change.”
Professor Grundfest is quoted in the press release as saying that if the Supreme Court dumps the fraud on the market theory “Large investors with substantial losses in the biggest of the frauds will likely be able to litigate their clams on an individual basis, but small investors will have to look to Congress to fashion an alternative remedy.”
For far too long, public discussion of whether securities suits are increasing or decreasing has focused solely on the absolute number of filing. I have long thought that the number of filings can only be assessed in comparison to the number of publicly traded companies. In confirmation of an analysis that also appeared in the recent report from NERA Economic Consulting, the Cornerstone Research report shows that the number of publicly traded companies has fallen by almost half since the enactment of the PSLRA. So while the absolute number of securities suits are (and have been for several years) below longer term historical annual average numbers of annual filings, the trend in the number of lawsuits relative to the declining number of publicly traded companies has actually been increasing in recent years.
All of this may be changed dramatically with the Supreme Court’s consideration of the Halliburton case. If the Supreme Court should dump the fraud on the market theory without providing another way for securities plaintiffs to establish class-wide reliance, the number of Section 10(b) misrepresentation securities class action lawsuits could drop significantly (although whether replaced by other kinds of suits would remain to be seen). Depending on the outcome of the Halliburton case, future annual analyses of securities lawsuit filing patterns and trends could look very different.
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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