Cornerstone Research Report: Securities Class Action Filings Reach Record High for Second Straight Year, Spurred by Sharp Rise in M&A-Related Lawsuits

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New report shows dismissal rates also rising for both M&A and non-M&A actions.

The number of federal securities class action lawsuits filed in 2017 reached a record high for the second straight year, according to a new report issued by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse. The jump was spurred by a sharp increase in lawsuits targeting mergers and acquisitions.

The 412 securities class action filings in 2017 represented a more than 50 percent increase from the previous record of 271 filings in 2016, according to Securities Class Action Filings – 2017 Year in Review. It also was more than double the historical average over the previous 20 years and the highest level since the enactment of the Private Securities Litigation Reform Act of 1995 (PSLRA).

Filings involving M&A transactions increased to 198 and accounted for nearly half of all federal securities class action filings in 2017. This was more than double the number of M&A filings in 2016. In addition, core filings – those excluding M&A claims – rose 15 percent over the same period.

The growth in the number of core filings over the past six years has coincided with activity by three plaintiff law firms, which were typically appointed lead counsel in cases that were smaller than average in size.

“The number of filings has reached unprecedented levels. In 2017, companies on U.S. exchanges were more likely to be the subject of a class action than in any previous year,” said John Gould, a senior vice president at Cornerstone Research. “But unlike previous years with substantial filing activity, these recent increases have occurred during a period of thriving financial markets.”

The outcomes of securities class action filings in recent cohorts showed higher dismissal rates than in previous years, and filings in the 2017 cohort of core filings are on pace to have the record-highest rate of dismissal within the first year of filing. The report also finds that M&A cases filed from 2009 to 2016 have been dismissed at a much higher rate than other federal filings.

“The recent surge in lawsuits that are likely to be dismissed is troubling from a public policy perspective,” according to Professor Joseph Grundfest, director of the Stanford Law School Securities Class Action Clearinghouse. “The PSLRA was designed to deter plaintiffs from filing low-quality complaints, but this surge in complaints that are dismissed with greater frequency suggests that the law is no longer having its intended quality-enhancing effect. Policymakers should, I think, study these data carefully and ask whether the time is nigh for further reform.”

New Developments

Consistent with the recent rise of cryptocurrency, 2017 saw the emergence of filings against firms issuing initial coin offerings (ICOs). The price volatility of various cryptocurrencies resulted in five class actions involving ICOs, all of them in December 2017.

Key Trends

  •     The Maximum Dollar Loss Index® (MDL Index®) fell 35 percent from 2016 to 2017, returning to the level before the 2008 financial crisis. The decrease in the MDL Index from $804 billion to $521 billion is due in part to a year-to-year drop in the number of mega MDL filings, or filings with an MDL of at least $10 billion.
  •     Disclosure Dollar Loss (DDL) increased in 2017 to $131 billion, up 22 percent from 2016 and 9 percent higher than the 1997–2016 DDL average of $120 billion.
  •     Plaintiffs targeted more European issuers in 2017 than in any previous year, as the number of filings against non-U.S. issuers continued to increase. As a percentage of total filings, filings against non-U.S. issuers increased to the highest rate since 2011.
  •     The number of filings against firms in the Consumer Non-Cyclical sector (including biotechnology, pharmaceuticals, and healthcare) stayed constant from 2016 but saw the most activity among industry sectors for the eighth straight year.
  •     Filings against companies in the Financial sector fell from 22 in 2016 to 20 in 2017.
  •     In 2017, more than 8 percent of companies listed on U.S. exchanges were the subjects of class action filings, the highest in any of the previous nine years.
  •     Section 11 filings in California state courts decreased by nearly two-thirds from 2016, to numbers more similar to pre-2015 levels. This trend coincided with the U.S. Supreme Court’s decision to hear Cyan Inc. v. Beaver County Employees Retirement Fund, a case that will determine whether state venues may be used for adjudicating class actions with Section 11 claims.
  •     The number of M&A filings in each of the Second, Third, Fourth, and Ninth Circuits was the highest since this report began identifying them separately in 2009.

About Cornerstone Research

Cornerstone Research provides economic and financial consulting and expert testimony in all phases of complex litigation and regulatory proceedings. The firm works with an extensive network of prominent faculty and industry practitioners to identify the best-qualified expert for each assignment. Cornerstone Research has earned a reputation for consistent high quality and effectiveness by delivering rigorous, state-of-the-art analysis for over 25 years. The firm has 700 staff and offices in Boston, Chicago, London, Los Angeles, New York, San Francisco, Silicon Valley, and Washington. Please visit Cornerstone Research’s website for more information about the firm’s capabilities in economic and financial consulting and expert testimony.
Twitter: @Cornerstone_Res

About the Stanford Law School Securities Class Action Clearinghouse

The Securities Class Action Clearinghouse (SCAC) is an authoritative source of data and analysis on the financial and economic characteristics of federal securities fraud class action litigation. The SCAC maintains a database of more than 4,000 securities class action lawsuits filed since passage of the Private Securities Litigation Reform Act of 1995. The database also contains copies of complaints, briefs, filings, and other litigation-related materials filed in these cases.

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