Securities Class Action Filings in 2011

John Gould is Senior Vice President at Cornerstone Research. This post is based on the introduction of a Cornerstone Research report titled Securities Class Action Filings: 2011 Year in Review. For more information, contact Mr. Gould or Alexander Aganin. An updated version of the report is available here.

Federal securities fraud class action filing activity increased in 2011. For the full year of 2011, there were 188 filings compared with 176 in 2010. The number of class actions filed was 3.1 percent below the annual average of 194 filings observed between 1997 and 2010 (Figure 1). Filing activity in the second half of the year equaled the activity in the first half. A total of 94 federal securities fraud class actions (filings, class actions, or cases) were filed in both the first and second halves of 2011. Building on a trend first seen last year, 43 of the filings in 2011 were associated with merger and acquisition (M&A) transactions.

Litigation against Chinese issuers listed on U.S. exchanges through reverse mergers represented a major component of filings activity during 2011, although evidence indicates that this type of litigation is subsiding. In 2011, 33 such class actions were filed, constituting 17.6 percent of all federal securities class actions. This activity occurred predominantly in the first half of the year when 24 of these actions were filed; only nine were brought in the last six months, including five filed in the last three months of the year. In 2010, there were nine such class actions filed. The report illustrates the differences in allegations between Chinese reverse merger filings since 2010 and other Classic Filings, and indicates that complaints relating to Chinese reverse mergers statistically are more likely to allege violations of generally accepted accounting principles (GAAP) and financial restatements and are less likely to allege insider trading.

As the peak of the financial crisis recedes, filings related to the crisis also continue to decline. There were only three such filings in 2011, a decrease from 13 in 2010 and 53 in 2009. Overall filings in the financial sector also decreased, as financial companies were defendants in 13.3 percent of filings in 2011 compared with 24.7 percent in 2010. The Heat Maps of S&P 500 Securities Litigation™ show that in 2011, only 1.2 percent of S&P 500 companies in the Financials sector were named defendants in a class action compared with the 10-year historical average ending December 2010 of 11.7 percent. These companies represented 6.9 percent of the Financials sector’s market capitalization, well below the historical average of 24.3 percent.

The market capitalization declines associated with end-of-class-period announcements have increased from 2010 levels but remain below the historic average. The total Disclosure Dollar Loss (DDL) of $106 billion in 2011 represented a 47.2 percent increase from 2010 but remained 17.8 percent below the average of $129 billion observed between 1997 and 2010. There were four “mega DDL” filings in 2011 associated with end-of-class market capitalization losses exceeding $5 billion. These filings represented 58.9 percent of the DDL Index™ in 2011. Market capitalization declines during the class period increased slightly in 2011. The total Maximum Dollar Loss (MDL) of $493 billion in 2011 was 4.0 percent above the total MDL in 2010 and 27.5 percent below $680 billion, the average MDL observed between 1997 and 2010. The “mega MDL” filings with losses of more than $10 billion decreased in number in 2011 but increased in dollar value. Nine mega MDL filings represented 80.2 percent of the MDL Index™ in 2011, while 14 mega MDL filings represented 79.1 percent of the MDL Index™ in 2010. [1]

New for the 2011 Year in Review:

  • An analysis of filings related to the Foreign Corrupt Practices Act (FCPA). The FCPA was passed in 1977 and holds any company with securities issued in the United States liable for penalties if that company engaged in bribery of foreign officials or violated certain accounting requirements. The report documents the level of private securities class action litigation related to settled or pending FCPA investigations by the Securities and Exchange Commission (SEC) or the Department of Justice (DOJ).
  • An analysis of the relative frequency that a class action advanced through various stages of litigation. Using a sample of Classic Filings from 1997 to 2011, [2] we find that 75 percent of filings reached a ruling on motion to dismiss, and only 8 percent later reached a ruling on summary judgment.
  • An analysis of the relative experience of judges who presided over class actions between 1996 and 2011. The report indicates that relatively few judges have presided over multiple class actions. The report also shows that no judge has presided over more than three cases that reached a ruling on summary judgment.
  • An analysis of plaintiff law firm activity. The report shows the plaintiff law firms most commonly named lead counsel in 2009 and 2010. One firm, Robbins Geller Rudman & Dowd, represented the most class action plaintiffs in both years.

A notable development in 2011 was the finalization of the rules of the Dodd-Frank Whistleblower Program. The SEC published its annual report on the Dodd-Frank Whistleblower Program in November 2011, indicating that the SEC had received 334 tips since the rules were finalized on August 12, 2011. [3] These tips spanned 37 states and 11 different foreign countries. About 9.6 percent of the tips received were related to tips involving foreign companies.

The full report includes detailed figures and discussions about the topics presented here, along with other information about securities class action filings in 2011; the report is available here.


[1] Disclosure Dollar Loss and Maximum Dollar Loss are defined in the Market Capitalization Losses section of this report.
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[2] Data regarding the last stage of litigation are available for 94.3 percent of Classic Filings.
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[3] “Annual Report on the Dodd-Frank Whistleblower Program, Fiscal Year 2011,” U.S. Securities and Exchange Commission,
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