Federal Class Action Securities Fraud Filings Set Historic Pace

July 28, 2017

Federal class action securities fraud filings hit a record pace in the first half of 2017. Over the past six months, plaintiffs initiated 226 securities fraud class actions in federal court, more than in any equivalent period since enactment of the Private Securities Litigation Reform Act of 1995 (PSLRA).

According to Securities Class Action Filings—2017 Midyear Assessment, a report by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse, the 226 filings were 135 percent higher than the historical semiannual average of 96 filings between 1997 and 2016.

It’s not clear what’s behind the surge.

“The record-setting pace of securities fraud litigation in equity market trading is causing record-setting head scratching among many analysts,” said Joseph Grundfest, director of the Stanford Law School Securities Class Action Clearinghouse.

He offered that “part of the spike is clearly attributable to the migration of merger claims from state to federal court by plaintiffs looking to avoid the experienced, skeptical judiciary in Delaware.”

However, detouring around Delaware alone does not explain the spike.

“Another part of the spike seems attributable to a decline in the quality of complaints filed by attorneys who have re-calibrated their business strategies to pursue a portfolio of cases with more remote payoffs because the costs of building such a portfolio remains low,” he said.

Both traditional and M&A-related filings were at record levels. Traditional filings increased from 95 in the second half of 2016 to 131 in the first half of 2017. At the same time, M&A-related filings rose from 57 to 95.

“If the litigation rate of traditional securities class actions in the second half of 2017 equals that of the first half, the annual rate will nearly double the historical average,” said John Gould, a senior vice president at Cornerstone Research. “If one considers M&A filings as well, 2017 is on pace to be more than double the historical average.”

Since 2013, individuals have been appointed lead plaintiff more often than institutional investors. In contrast, from 2004 to 2012, institutional investors were as or more likely to be appointed as lead plaintiff as were individuals.

Key trends identified in the study include:

  • Disclosure Dollar Loss (DDL) rose to $74 billion in the first half of 2017, 23 percent above the historical semiannual average. Maximum Dollar Loss (MDL) dropped to $302 billion, on par with the historical semiannual average.
  • Mega filings declined to 24 percent of DDL and 43 percent of MDL. There were three mega filings with a DDL of at least $5 billion and eight with an MDL of at least $10 billion.
  • The “race to the courthouse” accelerated. For traditional filings, the median lag time to file from the end of the class period was eight days—the shortest lag time since enactment of the PSLRA. Between 2010 and the first half of 2017, plaintiffs filed 52 Section 11 cases in California state courts. The U.S. Supreme Court will address the use of state venues for adjudicating class actions with Section 11 claims in Cyan Inc. v. Beaver County Employees Retirement Fund.
  • Filings against European firms were almost triple the historical semiannual average.
  • 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.
  • Pharmaceutical firms were the most common targets of filings—the number at 2017 midyear already exceeds the full-year 2016 total.
  • Third Circuit filings increased to 47, more than triple the number of filings in either the first or second half of 2016.

Cornerstone Research provides economic and financial consulting and expert testimony on complex litigation and regulatory proceedings. The firm has offices in Boston, Chicago, London, Los Angeles, New York, San Francisco, Silicon Valley, and Washington.

The Securities Class Action Clearinghouse (SCAC) is an 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.

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