Federal securities fraud class action filing activity decreased sharply in 2012, according to Securities Class Action Filings—2012 Year in Review, a semiannual report prepared by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse.
Only 152 federal securities class actions were filed in 2012 compared with 188 in 2011—the second-lowest number of annual filings in 16 years.
The decrease in total filings was largely due to declines in federal merger and acquisition (M&A) and Chinese reverse merger (CRM) filings. Together, they accounted for only 23 filings in 2012 compared with 74 in 2011. These waves of cases are most likely over, and future filings of these types are likely to remain at very low levels. In addition, 2012 was the first year in which there were no new filings related to the credit crisis.
Overall, filings in the financial sector continued to decrease, with 15 filings in 2012 compared with 25 in 2011 and 43 in 2010. Filing activity continued to be most prevalent against companies in the Consumer Non-Cyclical sector. Of the 49 filings in this sector, 33 were against healthcare, biotechnology, and pharmaceutical companies.
Continuing a pattern observed in 2011, fewer filings targeted very large companies in 2012. An analysis of S&P 500 companies named as defendants in securities class actions shows that only one out of every 29 was the subject of a new filing in 2012, making 2011 and 2012 the least litigious for S&P 500 companies in the past 13 years.
Data in the recently published SEC report on the Dodd-Frank whistleblower program provide potentially valuable insights for possible future securities litigation trends. From October 1, 2011, through September 30, 2012, the SEC received 3,001 whistleblower tips. The most common tip categories were Corporate Disclosure and Financials, Offering Fraud, and Market Manipulation. Together, these categories accounted for nearly 49 percent of all tips received.
“What stood out in 2012 was the absence of a filing trend that influenced the total number of new cases. In the past there have been observable filing types, such as IPO cases, options backdating, mergers and acquisitions, or most recently, Chinese reverse mergers. But 2012 was not dominated by any such trend. Interestingly, in a year characterized by a dramatic drop in securities class action filings, the number of traditional Rule 10b-5 “stock drop” filings actually increased in 2012,” said Dr. John Gould, senior vice president of Cornerstone Research.
“Is there a shoe waiting to drop? The SEC claims that the Dodd-Frank bounty program has helped it build a large inventory of high-quality leads as to fraud at publicly traded corporations. But will the Commission be able to transform these leads into quality enforcement actions? And, will private-party plaintiffs be successful in prosecuting “piggyback” claims that copy the Commission’s complaints? The current quiet patch in private securities fraud litigation could certainly be unsettled if the Dodd-Frank bounty program generates a new wave of private claims,” said Professor Joseph Grundfest, director of the Stanford Law School Securities Class Action Clearinghouse.
Number and Type of Filings
There were 152 federal securities class actions filed in 2012—21 percent below the annual average of 193 filings observed between 1997 and 2011.
The number of filings decreased from 88 in the first half of 2012 to 64 in the second half—a 27 percent decrease. There was a substantial reduction in filing activity in the fourth quarter of 2012. The 25 filings in the fourth quarter represent the lowest number of filings in any quarter during the last 16 years.
Compared with the last two years, federal filings associated with M&A transactions fell sharply to 13 cases in 2012, from 43 cases in 2011 and 40 cases in 2010. After the unusual jump in federal M&A filings in 2010 and 2011, these cases are now being pursued almost exclusively in state courts. CRM filings also declined substantially, from 31 filings in 2011 to 10 in 2012. The majority of these filings occurred in the first half of 2012.
Classification of Complaints
The percentage of filings with Rule 10b-5 claims increased to 85 percent in 2012 from 71 percent in 2011. This is the highest percentage of Rule 10b-5 claims since 2008 and the second year-over-year increase since 2010.
The number of filings in which no Rule 10b-5, Section 11, or Section 12(2) claims were made decreased from 23 percent in 2011 to 9 percent in 2012, due to the decline in federal M&A filings.
The percentage of filings in 2012 alleging violations of GAAP decreased to 23 percent from 37 percent in 2011. This is below the previous five-year low of 26 percent observed in 2010. This decrease is due in part to a decline in CRM filings from 2011 to 2012. SEC enforcement actions related to financial fraud also declined over the same timeframe. It is also notable that a sizable portion of tips that the SEC received in 2012 related to financial disclosure issues.
The median filing lag between the end of the class periods and the filing dates decreased from 36 days in the first six months of 2012 to 23 days in the second half of the year.
Based on a sample of 2,472 filings from 1996 to 2010 that have been resolved, filings that occurred within 60 days of the alleged class period (faster filings) were more likely to settle early and less likely to reach a motion to dismiss than filings that took longer than 60 days (slower filings). Overall, slower filings were more likely to be dismissed.
The number of filings against foreign issuers decreased from a historic high of 61 in 2011 (32 percent of total filings) to 32 in 2012 (21 percent of total filings). Despite the decrease, foreign filings in 2012 remained higher than the historical average of 9 percent, due primarily to non-CRM filings related to Chinese firms.
Source: Cornerstone Research and the Securities Class Action Clearinghouse