The 53 court-approved securities class action settlements reported in 2012 represent a 14-year low, according to Securities Class Action Settlements—2012 Review and Analysis by Cornerstone Research. This represents an 18 percent decrease from the number of approved settlements in 2011, and a decline of more than 45 percent from the 10-year average from 2002 through 2011.

As securities class actions historically take a number of years to settle, the decrease in settlements may be due in part to the relatively low number of securities class actions filed in 2009 and 2010. Despite the decrease in the number of cases settled, total settlement amounts increased by more than 100 percent in 2012 compared with 2011, with the number of mega-settlements (settlements in excess of $100 million) accounting for nearly 75 percent of all 2012 settlement dollars. One-third of the settlements in 2012 were for issuers in the financial services industry, with the technology and pharmaceutical industries being the next most prevalent sectors.

The average reported settlement amount dramatically increased from 2011 levels—in excess of 150 percent (from the inflation-adjusted amount of $21.6 million in 2011 to $54.7 million in 2012). The average settlement amount in 2012, however, is closer to the average for all prior post–Reform Act cases.

…continue reading: Securities Class Action Settlement Amounts Increase from 2011

The US Court of Appeals for the Eleventh Circuit recently issued an important decision that addresses two types of allegations that plaintiffs routinely rely on to plead loss causation in federal securities fraud cases. In Meyer v. Greene, 2013 US App. LEXIS 4187 (11th Cir. Feb. 25, 2013), the Eleventh Circuit appears to have become the first federal court of appeals to rule definitively that the mere announcement of an investigation by the US Securities and Exchange Commission (“SEC”) followed by a decline in a company’s stock price is insufficient to plead loss causation. The Court also ruled, consistent with decisions from other federal circuits, that a negative third-party analyst presentation is not a corrective disclosure for purposes of pleading loss causation if the presentation is based on publicly available information.

…continue reading: Court: Disclosure of SEC Investigation Insufficient to Plead Loss Causation

The United States Supreme Court ruled unanimously that a plaintiff’s pre-class certification stipulation, under which plaintiff committed not to seek damages on behalf of the proposed class in excess of $5,000,000 (the federal jurisdictional threshold under the Class Action Fairness Act (“CAFA”)), cannot bind absent class members and therefore cannot be used to defeat federal jurisdiction. Standard Fire Ins. Co. v. Knowles, No. 11-1450 (Mar. 19, 2013).

In 2005, Congress enacted CAFA, which provides that federal district courts have jurisdiction over class actions (subject to certain exceptions, including a carve-out for many state-law class actions for breach of fiduciary duty) if the proposed class has 100 or more members, the parties are minimally diverse (meaning that, for example, one member of the plaintiff class and one defendant are from different states) and the “matter in controversy” exceeds the sum or value of $5,000,000.

In Standard Fire, plaintiff sought to circumvent the federal jurisdiction provisions in CAFA by filing a class action in a state court on behalf of a proposed class of members from that state and stipulating that the plaintiff and the class would not seek to recover total aggregate damages of more than $5,000,000. The defendant nevertheless removed the case to federal court. The district court found that, absent the stipulation, the amount in controversy would have been just above the $5,000,000 jurisdictional threshold. But in light of the stipulation, the district court concluded that the amount in controversy was below the threshold and remanded the case to state court. The Court of Appeals declined to hear the appeal.

…continue reading: Class Certification and Federal Jurisdiction under CAFA: Supreme Court Ruling

In Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, No. 11-1085, 2013 WL 691001 (Feb. 27, 2013), the Supreme Court of the United States decided a significant issue concerning the requirements for class certification in actions based on alleged misrepresentations in violation of the federal securities laws. Under Amgen, a plaintiff in such an action is not required to prove the materiality of the alleged misrepresentation in order to obtain class certification. The Amgen decision will make it at least marginally easier for plaintiffs to obtain class certification in some Circuits.

Amgen is likely to be influential in ways that go well beyond its immediate holding. For example, the various opinions in Amgen debate the continuing vitality of the Supreme Court’s decision in Basic Inc. v. Levinson, 485 U.S. 224 (1988), which established the fundamental structure enabling claims under the federal securities laws to be litigated as class actions. These and other implications of the decision are discussed below. Readers not requiring a summary of the framework established in Basic may wish to go directly to section 2.

…continue reading: Materiality and Class Certification in Fraud-on-the-Market Cases

On February 27, 2013, in a 6-3 decision, the Supreme Court of the United States held in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds that a securities fraud plaintiff alleging fraud on the market need not establish the materiality of an alleged fraudulent statement in order to obtain class certification. Justice Ginsburg delivered the opinion of the Court, and Justices Scalia, Thomas and Kennedy dissented.

The particular questions presented by the Supreme Court’s grant of certiorari were whether, in a misrepresentation case under SEC Rule 10b-5, a securities fraud plaintiff alleging fraud on the market must establish materiality of the misstatements in order to obtain class certification and whether, in such a case, the district court must allow the defendant to present evidence rebutting the applicability of the fraud-on-the-market theory before certifying a plaintiff class based on that theory.

…continue reading: Supreme Court Rules on Proof of Materiality for Class Certification

Federal securities fraud class action filing activity slowed sharply in 2012. There were 152 filings in 2012 compared with 188 in 2011. The number of federal securities fraud class actions (also referred to in this report as filings, class actions, or cases) filed was 21 percent below the annual average of 193 filings observed between 1997 and 2011 (Figure 1).

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The following trends are noteworthy for 2012:

…continue reading: Securities Class Action Filings in 2012

The prevalence of settlements in class and derivative litigation challenging mergers and acquisitions in which the only payment is to plaintiffs’ attorneys suggests potential systemic dysfunction arising from the increased frequency of parallel litigation in multiple state courts. After examining possible explanations for that dysfunction, and the historical development of doctrines limiting parallel state court litigation — the doctrine of forum non conveniens and the “first-filed” doctrine — this paper suggests that those doctrines should be revised to better address shareholder class and derivative litigation. Revisions to the doctrine of forum non conveniens should continue the historical trend, deemphasizing fortuitous and increasingly irrelevant geographic considerations, and should place greater emphasis on voluntary choice of law and the development of precedential guidance by the courts of the state responsible for supplying the chosen law. The “first-filed” rule should be replaced in shareholder representative litigation by meaningful consideration of affected parties’ interests and judicial efficiency.

Putting Stockholders First responds to the observation that in 2011, only 5% of settlements of shareholder litigation challenging mergers and acquisitions involved an additional payout to stockholders, 84% of such settlements were based on additional disclosure only, but all of such settlements involved payment of fees for plaintiffs’ attorneys. These figures reflect a significant change from 1999 to 2000, when 52% of suits filed on behalf of shareholders produced a financial benefit for the class, and only 10% of settlements were “disclosure-only.”

…continue reading: Putting Stockholders First, Not the First-Filed Complaint

The Steady Stream of Filings Has Continued Throughout 2012

The steady stream of federal securities class actions has continued unabated throughout 2012. [1] Through the end of November, 195 securities class actions were filed in federal courts—a pace that, if continued through December, would lead to a total of 213 cases for the full year. (See Figure 1.) This would put 2012 filings just slightly below their average rate over the previous five years.

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It is noteworthy that this level of filings has been maintained even though cases related to the credit crisis, which had been prominent in recent years, have all but ended. [2] For example, of the 208 filings in 2009, 59 were related to the credit crisis; by contrast, only four cases of the 195 filed through November of this year involved such allegations. While the decline in credit crisis cases itself is not surprising, it is notable that this decline has not translated into an overall decline in federal filings. The average number of federal filings in 2005-2006, just before the crisis hit, was only 160. One might have expected the rate of filings to return to this lower level after the wave of credit crisis cases subsided, but that has not happened: the plaintiffs’ bar has found new causes of action, with merger objection cases picking up much of the slack.

…continue reading: 2012 Trends in Securities Class Actions

In our paper, SEC Investigations and Securities Class Actions: An Empirical Comparison, we compare investigations by the SEC with securities fraud class action filings involving public companies. Critics of securities class actions commonly contrast those suits with enforcement actions brought by the SEC. According to those critics, the SEC is superior to plaintiffs’ lawyers both in targeting defendants and securing sanctions against them. With respect to targeting, critics of securities class actions claim that the settlement dynamics of class actions encourage plaintiffs’ lawyers to bring a high proportion of non-meritorious suits. If companies must pay substantial costs when they are unjustifiably targeted, the deterrent value of class actions is diluted. With regard to sanctions, class action settlements are almost always paid by the company and its directors’ & officers (D&O) insurance; the corporate officers responsible for the fraud rarely contribute. By contrast, SEC enforcement actions commonly lead to payments from the responsible officers; the SEC also has the authority to bar individuals from serving as directors and officers of public companies, a career death sentence for the individual subjected to a bar. Critics of class actions argue that the combination of more precise targeting of suits and more individual sanctions yields a stronger deterrent punch for SEC enforcement relative to class actions.

…continue reading: SEC Investigations and Securities Class Actions: An Empirical Comparison

The volume of US securities class action litigation targeting companies outside the US has recently reached record levels, despite a 2010 decision by the US Supreme Court, in Morrison v. National Australia Bank, which substantially restricted the extraterritorial reach of many such cases. This increase is attributable in large part to a wave of suits filed against Chinese companies listed on US stock markets. Even excluding Chinesecompany litigation, however, the pace of US securities class actions against non-US companies has not fallen below the levels observed prior to the Morrison decision.

On the other hand, Morrison may have had some effect on settlement sizes. In the past several years, there have been few very large settlements in US securities class actions against non-US companies, a development that, as discussed below, may be attributable in part to the decision. This article surveys recent trends in filings of US securities class actions against non-US company defendants, drawing upon data up to mid-2012. It also discusses trends in settlements, and concludes by reviewing the outlook for such litigation going forward.

…continue reading: Recent Trends in US Securities Class Actions against Non-US Companies