Federal securities class action activity has been sluggish through the first half of 2013. According to a recent report by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse (the “Report”), plaintiffs filed only 74 complaints through Q2, a 16% decline from the same 6-month period in 2012.1 Well below historical norms, if the number of filings remains constant through year-end, 2013 will have the second-lowest total since 1997.
Several trends, characteristic of the more modest federal securities class action environment, include:
- A decrease in federal securities class actions associated with mergers and acquisitions—plaintiffs having brought only 9 cases through June 2013;
- Fewer federal securities class actions have been brought against Chinese issuers listed on U.S. exchanges, with only 2 filings through Q2—a drastic decline from the 31 actions filed in 2011; and
A gradual increase in the number of federal securities class actions resulting in dismissal between 2003 and 2010 (e.g., 50% of all federal securities class actions filed in 2008; 53% in 2009; and 56% in 2010).
According to the Report, a decrease in the loss of market capitalization may partially be responsible for the reduction in filings. Loss of market capitalization, an increase of which is typically associated with a surge in the filing of federal securities class actions, is currently $113 billion—65% below the semi-annual average of $326 billion recorded between 1997 and 2012.
In addition, Professor Joseph Grundfest, Director of the Stanford Law School Securities Class Action Clearinghouse, stated that a shift in defense litigation strategy will likely be the most significant development going forward. Specifically, Grundfest cited the Supreme Court’s recent decision in Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds, 133 S. Ct. 1184, 185 L. Ed. 2d 308 (2013). In Amgen, the Supreme Court affirmed certification of a class, holding that plaintiffs in a federal securities class action need only allege—not prove—materiality at the class certification stage. The Supreme Court ruled, in part, that plaintiffs can satisfy this burden by invoking the “fraud-on-the-market” theory, which entitles plaintiffs to a rebuttable presumption that defendants’ misstatements and omissions materially affected the price of the company’s securities. Several Justices, however, invited argument on the applicability of the “fraud-on-the-market” theory. Grundfest noted that defendants in securities class actions are increasingly challenging the propriety of the presumption at the class certification stage, and, if this defense strategy proves successful, “the class action securities fraud litigation market will likely shrink significantly.”2