Trends in the filing of securities class actions are chronicled in reports issued by Cornerstone Research and NERA Economic Consulting for the first half of 2012. The two reports agree on a number of items but differ on the overall trend regarding the pace of filings. Despite the differences in the reports, the key point which emerges from all the statistics and trends is that a public company has a much more significant chance of being named as a defendant in a securities class action today than several years ago.
Cornerstone Research concludes that “[f]ederal securities class action filing activity in the first half of 2012 has decreased compared with 2011 . . . “ Filings were down 6% with 88 cases being brought in the first half of 2012 compared to 94 during the comparable period one year earlier.
Studying the same period NERA concludes that “[s]ecurities class actions filed in Federal court have continued to be filed at their historical pace so far in 2012.” This conclusion is based on NERA’s finding that 116 actions have been filed in the first half of 2012. If filings continue at this pace, the Report projects that 232 securities class actions will be brought this year which would exceed the 234 filed in 2011. It would also be the largest number of cases brought since 2008 when 244 were filed.
The difference in the numerical counts in the two reports stems at least in part from the way cases are counted. Cornerstone counts as one case multiple complaints which are consolidated into one action. At the same time the trend analysis in the two reports differs. Cornerstone concludes that if the current trend continues there will be 176 filings in 2012 by year end which is less than the 1997 to 2011 average of 193 but in line with the 2009 to 2011 average of 177. On the other hand, NERA concludes that if current trends continue 232 cases will be filed in 2012, the third largest number filed since 2002 when Sarbanes-Oxley went into effect. Regardless of the absolute number of cases filed, it is clear from each report that a significant number of securities class actions are being filed.
Both reports agree that the composition of the cases is changing. NERA and Cornerstone agree that there has been a substantial decline in the number of Chinese reverse merger cases being filed. Cornerstone estimates that this type of filing has declined by 79% in the first half of 2012 compared to the same period one year earlier. Cornerstone also concludes that there has been a decline in the number of M&A related cases while NERA reports that merger objection cases continue to constitute a significant part of the actions brought.
For the first half of 2012 the cases brought have been concentrated in four sectors: electronic technology and technology services; the health technology and services area; finance; and energy and non-energy mineral areas. The number of filings against major accounting firms, traditionally a target of this type of case, declined significantly. Not one new case naming a major account firm has been filed in 2012, according to NERA.
The allegations in the cases filed tend to focus on product defects and operational shortcomings. About 45% of the cases contain these claims. Allegations regarding earnings guidance, breach of fiduciary duty and accounting represent about 25% of the filings.
Settlements appear to be slowing although their value is increasing. In the first half 2012 only 31 cases settled. By comparison, the low point for the number of settlements was 1999 with only 98. The average settlement of $71 million in the first half of 2012 is, however, significantly higher than the $46 million for the period 2005 to 2011. While the average settlement for 2012 is influenced by the cases such as the billion dollar AIG deal, when the billion dollar mega cases are excluded the average settlement is still $41 million compared to the $31 million average from 2011.
Perhaps the most critical point to emerge from the reports is one not readily evidenced by the raw statistics or even the trends – the impact of all these trends on public companies. Since 1996 the number of U.S. public companies has decreased by 43%. Yet a significant number of securities class actions continue to be filed each year. This means that the likelihood of being named as a defendant in a securities class action is increasing over time and that it will continue to do so in view of current trends.