Securities plaintiffs lawyers are a resourceful breed, and a new report suggests that their hardiness is being put to the test. Federal securities class action filings dropped by 20 percent in 2012, according to a report released Wednesday by Cornerstone Research and Stanford Law School. Experts we interviewed said the downturn wasn’t surprising, given the steep obstacles thrown up by the courts, and the near-death of two litigation trends: cases related to the 2008 credit crisis, and cases against Chinese companies that obtained U.S.-listings through a controversial practice known as a reverse merger.
The Cornerstone report showed that shareholders brought 152 securities class actions in federal court in 2012, compared to 188 in 2011 and 176 in 2010. The 2012 tally is the lowest since 2006, when shareholders brought 120 cases. According to the report, the average number of filings per year between 1997 and 2011 was 193.
Last year was the first year since the credit crisis erupted five years ago with no related filings, likely because the best targets were chosen long ago and the clock ran down for plaintiffs to bring new claims. There was also a sharp decrease in new class actions against Chinese companies that gained listings on U.S. stock exchanges through reverse mergers with U.S. companies, which allow foreign firms to bypass the regulatory scrutiny of an initial public offering. A few of those companies collapsed under the weight of accounting scandals in 2010, prompting a flood of shareholder class actions.
“In past years, there’s been some problem du jour driving new filings. That didn’t happen this year,” said Lyle Roberts, a securities litigator at Cooley and author of the 10b-5 Daily. “What we saw was a lot of standard cases in technology, health care, and other areas that have always seen a lot of activity.”
D&O Diary blogger Kevin LaCroix agreed that “there’s been an absence of major events driving the filings,” and he suggested another simple explanation: Superstorm Sandy, which brought the hub of securities litigation, Manhattan, to a near-halt in October 2012. Consistent with that theory, the fourth quarter of 2012 was the slowest quarter in 16 years, with just 25 new filings. According to LaCroix’s research, there was a slight uptick in new filings in December, when work returned to normal.
The downturn may also have been helped along by a shift in priorities at the U.S. Securities and Exchange Commission, said Thomas Gorman, a partner at Dorsey & Whitney and author of the SEC Actions blog. He said that in past years the SEC has brought lots of financial fraud cases, which in turn led to follow-on shareholder class actions. While the SEC brought some fraud cases in 2012, Gorman said, the agency’s focus was turned to rooting out insider trading rings and Ponzi schemes, which aren’t good fodder for shareholder class actions. “The composition of [the SEC's] current case load isn’t something that’s going to engender a lot of class actions,” he said.
Finally, securities plaintiffs lawyers have been forced to contend with a string of rulings from the U.S. Supreme Court and around the country that have made their jobs harder in recent years, including Tellabs v. Makor; Morrison v. National Australia Bank; and Janus v. First Derivative Traders. As we’ve reported, the Supreme Court could lower the hammer again when it rules in Amgen v. Connecticut Retirement Plans and Trust Funds.
But there are opportunities for a rebound. For one thing, increased SEC activity could be a boon to plaintiffs lawyers in years to come. The agency reported in November 2012 that the Dodd-Frank whistleblower program received 3,000 tips in its first year of operation. “The SEC has been sending out signals that the program has been fruitful,” Roberts told us. “While it hasn’t brought a ton of actions, that’s to be expected, because it takes time to build up a case. One that happens, the program could be a source of new litigation going forward.”
An improving economy could also help turn the tide. If the economy rebounds, so will IPO activity. And, noted Bruce Angiolillo of Simpson Thacher & Bartlett, that could also mean more securities class actions, since “immature companies have historically been the bread and butter of the securities bar.”
Of course, there could simply be a rash of new securities fraud around the corner inviting new litigation, or some new industrywide scandal that wipes out scores of investors. There’s always hope.