Securities Class Action Activity Rose 11% in 2015: Cornerstone

January 26, 2016
Federal securities class action litigation rose to 189 filings in 2015, an 11 percent increase over 2014 levels, according to new research.
“Securities Class Action Filings—2015 Year in Review,” a report issued by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse, found that the market losses associated with these filings increased significantly from the depressed levels observed in 2014.
The Disclosure Dollar Loss (DDL) Index, which calculates investor losses at the time that an alleged fraud is made public, rose 86 percent, from $57 billion in 2014 to $106 billion last year. This was the largest annual DDL increase since 2008, and was caused by the reappearance of filings with DDL values exceeding $5 billion (mega filings). Mega filings returned to previous annual levels after sinking to historic lows in 2014. The litigation exposure of IPOs has also increased since the financial crisis in 2008.

Most measures of litigation activity increased in 2015.

“Companies on U.S. exchanges were more likely to be the target of a securities class action in 2015 than at any time since the Private Securities Litigation Reform Act took effect in the late 1990s,” said Dr. John Gould, a senior vice president of Cornerstone Research. “Most measures of litigation activity increased distinctly in 2015, including filings against companies headquartered in China and other Asian countries.”

Flings against the financial sector were down in 2015; there were none against banks.

Yet, despite the active mergers-and-acquisitions market in 2014, the number of new federal securities class actions barely budged from the level in 2013.

According to the 2014 report by Cornerstone and Stanford, the number (170) of filings in 2014 was 10 percent below the historical average of 189 filings observed annually between 1997 and 2013. The 2014 number was only four more than the 2013 number.

Professor Joseph Grundfest, director of the Stanford Law School Securities Class Action Clearinghouse and former SEC Commissioner, stressed that a view of 2015 must take into consideration that 2014 activity was unusually low.

“Securities class actions are driven by monster cases, and those cases were almost completely lacking in 2014, where not a single filing had market losses over $5 billion at the time when the alleged fraud was disclosed,” he said. “Contrast that with five such cases in 2015. That’s all you really need to know to explain why 2015 looks so much more active than 2014—but still below the peaks observed in the past.”

7 Key Trends

The report identifies seven key trends in securities transactions based on the 2015 data:

  • The Consumer Non-Cyclical sector again had the most filings in 2015. This sector is predominantly composed of biotechnology, healthcare and pharmaceutical firms, which collectively totaled 43 filings.
  • For U.S. exchange-listed companies, 4 percent were subject to filings in 2015, up from 3.6 percent in 2014 and the third consecutive yearly increase.
  • There were as many filings in the Ninth Circuit (which includes California and other western states) as at any time in the data period. The four largest industry subsectors by number of filings in the Ninth Circuit were internet, biotechnology, pharmaceutical and semiconductor. Filings in the Second (New York) and Ninth Circuits together made up just over 60 percent of all filings in 2015.
  • Filings against companies in the financial sector were well below historical averages, declining from 26 in 2014 to 17 in 2015. For the first time since 2006, there were no filings against banks.
  • The Maximum Dollar Loss (MDL) Index, a measure of market capitalization losses during the class period, increased 73 percent in 2015 to $371 billion, the largest annual dollar increase since 2007. MDL remains well below historical averages, however.
  • IPOs fell from 207 in 2014 to 117 in 2015, but remained above post dot-com bubble levels.
  • Beginning with the 2012 filing cohort and continuing through the 2014 filing cohort, evidence from the timing of dismissals in the first three years after filing indicates that dismissal rates have subsided.

Source: Cornerstone Research and Stanford Law School Securities Class Action Clearinghouse

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