In 2016 and 2017, the number of federal securities class action lawsuits filed reached record highs, with 2018 on track to match or beat the record. “The number of filings has reached unprecedented levels. In 2017, companies on U.S. exchanges were more likely to be the subject of a class action than in any previous year,” said John Gould, a Cornerstone Research senior vice president, in a statement. “But unlike previous years with substantial filing activity, these recent increases have occurred during a period of thriving financial markets.”
The filings in 2017 alone more than doubled the 20-year historical average, according to Cornerstone Research.432 of the filed lawsuits accused companies of making false or misleading statements, concealing bad news about their businesses, or concealing information about mergers, according to NERA. Cases focusing on weak financial results or regulatory probes increased as well, from 195 in 2016 to 216 in the following year.Complaints involving mergers and acquisitions (M&A) doubled in 2017, accounting for 198 filings that year. And 55 complaints against non-U.S. companies were filed in 2017, up from 44 the previous year.
What’s Behind the Rise in Securities Class Action Filings?
It’s common for class action lawsuits to rise during times of economic stress or crisis. The recent rise, however, comes even as the economy is doing well, which indicates that other factors are in play.
One factor could be the prominence of cryptocurrencies. The number of securities class action lawsuits filed against cryptocurrency Initial Coin Offerings (ICOs) jumped sharply last year. ICOs offer a way for new blockchain projects to raise money by selling the project’s cryptocurrency tokens in exchange for either fiat currencies or more prominent cryptocurrencies, like Bitcoin. Once the project launches, those who bought the new tokens can use them on the project’s blockchain or trade them for other currencies.
To date, ICOs have not been strictly subject to national or international securities laws, leading countries like China and South Korea to ban them outright. Cases like the 2017 lawsuit filed against Centra ICO allege that ICOs often falsely portray their offerings as “utility-based tokens,” when they operate identically to securities, shares or investments – and therefore should be subject to U.S. securities laws.
Filing vs. Outcomes: What’s Happening to All These Complaints?
While securities class actions are being filed in record numbers, they aren’t being tried that way. The Cornerstone/Stanford Law report also found that these complaints are being dismissed in record numbers as well. In 2017, 205 securities class action lawsuits were dismissed, up from 142 in 2016 – and setting another record.
Experts say changes in Delaware courts’ approach to securities lawsuits played a role in the dismissal of many of the cases. In several cases, judges found that “disclosure-only” settlements, which demanded that companies reveal details about their mergers, often amounted to little material information being revealed. Approximately half of all Fortune 500 companies are incorporated in Delaware.
The number of settlements in 2017 rose to 148, over 133 the previous year. However, these settlements were considerably smaller than in previous years. Overall, settlements averaged less than $25 million each. The single largest settlement in 2017, in a case involving Salix Pharmaceuticals, totaled $210 million, making 2017 the first year since 1998 in which no securities class action settlement reached $250 million, according to NERA.
One type of securities class action filing, however, bucked these trends. The number of Section 11 filings in California state courts dropped by nearly two-thirds in 2017. The decrease may reflect the U.S. Supreme Court’s acceptance of Cyan Inc. v. Beaver County Employees Retirement Fund for oral argument. The case focuses on whether state courts may be used to adjudicate class action lawsuits.