Federal Class Action Securities Fraud Filings Hit Record Pace in H1 2017

John Gould is senior vice president at Cornerstone Research. This post is based on a Cornerstone publication.

Executive Summary

Federal class action securities fraud filings hit a record pace in the first half of 2017. Over the past 18 months, more securities fraud class actions have been initiated in federal court than in any equivalent period since enactment of the Private Securities Litigation Reform Act of 1995 (PSLRA).

Number and Size of Filings

  • Plaintiffs filed 226 new federal class action securities fraud cases (filings) in the first six months of 2017. This was 135 percent above the 1997–2016 historical semiannual average of 96 filings and the highest filing rate since the Securities Clearinghouse began tracking these data.
  • Disclosure Dollar Loss (DDL) rose to $74 billion in the first half of 2017, 23 percent above the historical semiannual average of $60 billion. Neither DDL nor MDL, shown below, is at the historic levels exhibited by the number of filings.
  • After a large increase in 2016, Maximum Dollar Loss (MDL) dropped to $302 billion, on par with the historical semiannual average MDL of $303 billion.
  • In the first half of 2017, three mega filings made up 24 percent of DDL, and eight mega filings made up 43 percent of MDL. These filings comprised a smaller fraction of the DDL and MDL indices compared to 2016 and the 1997–2016 average. Filings with a DDL of at least $5 billion or an MDL of at least $10 billion are considered mega filings.

Other Measures of Litigation Intensity

  • In the first half of 2017, 4.7 percent of U.S. exchange-listed companies were sued in federal securities fraud class actions. If activity continues at the same pace, 9.5 percent of exchange-listed companies will be the subject of filings in 2017—the highest annual rate since 1997.
  • The number of filings against S&P 500 firms in the first half of 2017 occurred at an annualized pace of 11.2 percent, the highest rate since 2002.

Key Trends

  • Federal filings of class actions involving merger and acquisition (M&A) transactions increased to 95—up from 57 in the second half of 2016 and 28 in the first half of 2016.
  • Non-U.S. filings are on pace to hit a record high. and Asian firms were the most frequent targets.
  • The time between the end of the class period and the filing of a class action has continued to shorten. The median filing lag excluding M&A filings was eight days in the first half of 2017—a record low.
  • Filings against companies in the Communications sector increased to 25, more than double the number in the second half of 2016.
  • The Consumer Non-Cyclical sector again had the greatest number of filings with 85. Of these, 69 were against biotechnology, pharmaceutical, and healthcare companies.
  • There were 51 and 50 filings in the Ninth and Second Circuits, respectively.
  • Filings in the Third Circuit increased to 47, more than triple the number of filings in this circuit in either of the first or second halves of 2016. Much of the growth was driven by 16 M&A filings in the U.S. District Court of Delaware—the most M&A filings of any district court in the first half of 2017.

New and Updated Analyses for the 2017 Midyear Assessment

M&A Filings by Circuit

  • M&A filings continued to be most common in the Third and Ninth Circuits, with 23 and 18 filings, respectively.
  • The Delaware Court of Chancery’s rejection of a disclosure-only settlement in Trulia in January 2016 seems to have caused a shift of merger objection lawsuits from state to federal court.

Filings by Type of Lead Plaintiff

  • Since 2013, individuals have been appointed lead plaintiff more often than institutional investors in traditional federal filings, that is, those excluding M&A and Chinese reverse merger (CRM) claims.
  • The percentage of filings in which both institutional investors and individuals were appointed lead plaintiff has declined since 2000, and has consistently been less than 10 percent of all filings since 2009.

Non-U.S. Company Litigation Exposure

  • Filings against non-U.S. companies are occurring at a record pace, and exceeded the overall rate of filings against all companies on U.S. exchanges.
  • The percentage of non-U.S. companies sued relative to the total number of non-U.S. companies listed on U.S. exchanges increased from 4 percent in 2016 to an annualized rate of 6 percent in the first half of 2017.

California State Court Section 11 Cases

Class actions with Section 11 claims have been increasingly filed in California state courts (California State Section 11 filings). Many of these filings have parallel federal court proceedings, particularly over the last semiannual period. These California State Section 11 filings exclude Rule 10b-5 claims, but can include Section 12 or Section 15 claims.

  • Between 2010 and the first half of 2017, plaintiffs filed 52 Section 11 cases in California state courts.
  • In the first half of 2017, there were four cases brought in California state courts, distinctly fewer than observed in either of the first or second halves of 2016.
  • These cases were less concentrated in the San Francisco Bay Area during the first half of 2017 than in 2015 and 2016.

Number of Filings

  • There were 226 filings in the first half of 2017, a 49 percent increase from the second half of 2016.
  • The number of M&A filings increased to 95 in the first half of 2017, the highest since 2009 when the Clearinghouse began separately tracking M&A filings.
  • Even excluding M&A filings, the number of half-year filings has never been greater since the Clearinghouse began tracking filings in 1996.

  • An annualized number of filings of 452 for 2017 would represent an increase of 135 percent over the 1997–2016 historical average of 192 filings, and an increase of 66 percent from 2016.
  • If filings continue at the same pace for the remainder of 2017, filing activity will be at its highest level in the last 21 years. See Appendix 1 of the complete publication, available here.

The complete publication is available here.

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