Federal securities fraud class action filing activity increased slightly in 2011, according to Securities Class Action Filings—2011 Year in Review, a semiannual report prepared by the Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research. A total of 188 federal securities class actions were filed in 2011 compared with 176 filings in 2010, with an equal number of actions (94) being filed in the first and second halves of the year. The number of class actions filed was 3.1 percent below the annual average of 194 filings observed between 1997 and 2010.
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Consistent with a trend first observed in 2010, filings related to merger and acquisition (M&A) transactions continued to constitute a large percentage of total filings, accounting for 22.9 percent of 2011 activity. There were 20 such filings in the first half of 2011 and 23 filings in the last six months of the year. In 2010, M&A filings constituted 22.7 percent of all filings.
Litigation against Chinese issuers listed on U.S. exchanges through reverse mergers represented a major component of filings activity during 2011, although evidence indicates that this type of litigation is subsiding. In 2011, 33 such actions were filed, constituting 17.6 percent of all federal securities class actions. This activity occurred predominantly in the first half of the year, when 24 of these actions were filed; only nine were brought in the last six months, including five filed in the last three months of the year. In contrast, there were only nine such cases filed during 2010, suggesting both a rapid peak and decline in this type of litigation activity. Compared to other class action securities fraud complaints, Chinese reverse merger filings are more likely to allege violations of generally accepted accounting principles and financial restatements and are less likely to allege insider trading.
The number of filings related to the credit crisis continued to decline. There were only three such filings in 2011, a decrease from 13 in 2010 and 53 in 2009. Overall filings in the financial sector also decreased, as financial companies were defendants in 13.3 percent of filings in 2011 compared with 24.4 percent in 2010. The Heat Maps of S&P 500 Securities Litigation™ show that in 2011, only 1.2 percent of S&P 500 companies in the Financials sector were named defendants in a class action compared with 11.7 percent, the 10-year historical average ending December 2010. These companies represented 6.9 percent of the Financials sector’s market capitalization, well below the historical average of 24.3 percent. There also was very little activity in the Health Care sector of the S&P 500 in 2011, with only 2.0 percent of Health Care companies subject to new filings.
According to Professor Joseph Grundfest, Director of the Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research, “This corner of the litigation market continues to run at a pace well below historic norms. The rapid run-up and subsequent decline of litigation against Chinese issuers that entered the U.S. market through reverse mergers suggest that this form of litigation may be close to having run its course. The decline in financial crisis claims further depressed the overall statistics. It’s only the growth of merger-related litigation, which has historically been brought in state courts, that inflates the aggregate statistics so that they even approach historic norms. Taken together, these data suggest that there are far fewer claims of traditional securities fraud by U.S. issuers than has been the case since the mid-1990s.”
Dr. John Gould, Senior Vice President of Cornerstone Research, stated, “While the number of securities class action filings in 2011 increased slightly compared with 2010, the number of filings and the associated market capitalization losses are still well below historical levels. Filings related to the financial crisis have continued to decrease, but we are seeing increases in the number of M&A filings. The upward trend of Chinese reverse merger filings peaked in the first half of 2011 and now appears to be dissipating.”
“At mid-year, I noted that ‘We saw the lowest level of class action filing activity in S&P 500 companies since we began tracking this sector of the market in 2000.’ This remained true when all filings for the year were examined. The two historically most active sectors of the S&P 500, Financials and Health Care, had the fewest number of new filings compared with any year between 2000 and 2010.”