Federal securities class action activity decreased in the first six months of 2012 compared with 2011, according to Securities Class Action Filings—2012 Mid-Year Assessment, a semiannual report prepared by the Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research. There were 88 filings in the first six months of 2012, down 6 percent from both the first half and second half of 2011.
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The slight decrease in total filings was largely due to the substantial decline in Chinese reverse merger (CRM) and merger and acquisition (M&A) filings. There were five CRM-related filings and seven M&A-related filings in the past six months. Compared with the first half of 2011, CRM filings were down 79 percent and M&A filings were down 67 percent. Compared with the second half of 2011, CRM filings were down 44 percent and M&A filings were down 68 percent. Despite the drop in CRM-related filings, filings against foreign issuers as a percentage of all filings were greater than every year since 1997, with the exception of 2011. While the number of these nontraditional filings (i.e., CRM and M&A filings) has declined, traditional securities class action filings have increased by 23 percent since the second half of 2011.
The median filing lag between the end of the class periods and the filing dates increased from 20 days in the last six months of 2011 to 36 days in the first half of 2012. This increase is above the median lag of 26 days from 1997 to 2011. This increase is driven by an increase in filings with a filing lag of more than 50 days. In the first half of 2012, more than 43 percent of all filings had a lag of more than 50 days, compared with a quarter of all filings throughout 2011. Consistent with past years, M&A filings tend to have a shorter filing lag compared with other filings. If M&A filings were excluded from this analysis, the median lag would have been 45 days for the first half of 2012 compared with 37 days for the second half of 2011.
In the first half of 2012, the market capitalization declines associated with announcements at the end of the class period were consistent with 2011 results and remained below historical levels. The total Disclosure Dollar Loss (DDL) of $54 billion in the first six months of 2012 represented a slight decrease from the second half of 2011 and was lower than the 1997 to 2011 historical average of $64 billion. There were two “mega DDL” filings in the first half of 2012 associated with combined end-of-class market capitalization losses exceeding $26 billion. These two filings constituted 49 percent of the DDL Index™ in the first half of 2012.
The total Maximum Dollar Loss (MDL) of $249 billion in the first half of 2012 fell between the totals from the first and last six months of 2011. The total in the first half of 2012 was 25 percent below $334 billion, the average MDL observed in the six-month periods between 1997 and 2011. Eight mega MDL filings constituted 65 percent of the MDL Index™ in the first half of 2012, while four mega MDL filings accounted for 76 percent of the MDL Index™ in the second half of 2011.
Professor Joseph Grundfest, Director of the Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research:
“The decline in litigation activity related to Chinese reverse mergers comes as little surprise, as that sector of the market has already been badly hit by concerns over the integrity of Chinese private-company financial statements and these deals have been disappearing from the market. As for M&A-related filings, Bloomberg reports that in the second quarter of 2012, the aggregate deal count reached the lowest level since the third quarter of 2009, and that factor would contribute to the decline in federally filed M&A litigation: you can’t bring merger litigation over a merger that hasn’t happened.”
“Looking over the horizon, the Libor-litigation industry is clearly a sector to watch for years to come. The magnitude of the potential exposures and the complexity of the underlying damages claims will likely generate large amounts of litigation activity in many geographies. Much of that litigation activity will occur away from the U.S. class action securities fraud sector, but more lawsuits are virtually assured.”
Dr. John Gould, Senior Vice President of Cornerstone Research:
“The Supreme Court’s decision to hear the Amgen case marks the second time in recent years that the Court has taken on class certification questions in securities litigation. In 2011, the Supreme Court’s ruling in Halliburton clarified that plaintiffs are not required to establish loss causation as a precondition to class certification. In Amgen, the Court will be called upon to decide whether plaintiffs have to establish materiality as a precondition to class certification, and will be further urged to clarify that materiality has to be reflected in the price of the security and has to be established by a preponderance of the evidence.”
“Together with the Halliburton ruling, the Amgen ruling may have a significant impact on the dynamics of settlement negotiations at the class certification stage in cases where there are questions surrounding loss causation or the materiality of the alleged misrepresentation or omission. In addition, after hearing Halliburton and Matrixx in 2011 and now Amgen in 2012, the Supreme Court has shown a continued interest in securities class action fraud litigation.”
- Filings against foreign issuers as a percentage of total filings decreased in the first half of 2012 after a sharp increase in 2011—driven by CRM filings—but remained significantly above historical levels. After rising to 36 percent in 2011, the percentage of total filings against foreign issuers in the first half of 2012 decreased to 26 percent, still well above the average of 14 percent from 2008 to 2010 and 9 percent from 1997 to 2010.
- In 2011, Chinese firms were named in 40 of the 68 filings against foreign issuers, but in the first half of 2012, they accounted for only 12 of the 23 filings against foreign issuers. In the first half of 2012, there were seven filings against Chinese companies that were not related to CRMs, compared with eight such filings in all of 2011.
- Out of the 88 filings in the first half of 2012, 10 involved companies in the S&P 500. This is slightly more than at mid-year 2011 when eight S&P 500 companies had been named in new securities class actions.
- Companies listed in the S&P 500 subject to new filings in the first half of 2012 constitute 3.7 percent of the overall S&P 500 market capitalization compared with 3.3 percent in the first half of 2011. Financials and Consumer Staples were the two sectors with the largest percentage of affected market capitalization.
On June 11, 2012, the Supreme Court agreed to hear an appeal of Amgen v. Connecticut Retirement Plans and Trust Funds, a securities class action in which the plaintiffs alleged that Amgen misled the market about the safety of two of its drugs, thus artificially inflating the company’s share price. When the Food and Drug Administration raised concerns about the safety of these drugs, Amgen’s share price dropped by 9 percent. The Ninth Circuit ruled in this case that plaintiffs need only plausibly allege materiality at the class certification stage. This is consistent with similar rulings in the Third and Seventh Circuits. However, the Second and Fifth Circuits do require a plaintiff to establish materiality at the class certification stage. If the Supreme Court rules that materiality must be established at the class certification stage, it may be more difficult for plaintiffs to advance their cases past the class certification stage, potentially resulting in fewer filings and/or more dismissals prior to class certification. If the Court rules the other way, plaintiffs will have an easier path through class certification in those circuits that currently require that plaintiffs prove materiality at the class certification stage.