Securities class actions inched up in 2010; those targeting M&As surged

Karen Sloan, The National Law Journal, January 19, 2011:
2010 was a relatively slow year for federal securities class action filings, according to the latest research from the Securities Class Action Clearinghouse — a partnership between Stanford Law School and Cornerstone Research. There were 176 filings throughout the year, a slight increase from the 168 filings in 2009 but nearly 10% below the average from the previous 13 years. Filings were significantly slower in the first half of the 2010 but picked up later in the year. The past year saw a surge in the number of class action filings resulting from alleged disclosure violations in mergers and acquisitions. That number rose from seven in 2009 to 40 in 2010. The report points out that the 20% increase in merger activity last year does not alone explain the much larger increase in M&A securities class action filings. "The sharp increase in federal litigation alleging disclosure violations in M&A transactions suggests that plaintiff lawyers are scrambling for new business as traditional fraud cases seem to be on the decline," said Joseph Grundfest, the director of the Stanford Law School Securities Class Action Clearinghouse. "There is little reason to believe that this trend will reverse or slow down; if anything, plaintiff lawyers may well bring an increasing percentage of these claims in federal court in an effort to control the litigation and share in any fees that may result." Continuing with a trend from 2009, filings related to the credit crisis waned last year, making up slightly more than 7% of filings — down from nearly 33% last year. Settlement rates for those filings tend to be lower compared with other types of filings, though there is no difference in dismissal rates, the study found. The research shows that firms with recent initial public offerings are most at risk to be targeted by securities class actions, said John Gould, senior vice president of Cornerstone Research. In fact, companies are most likely to be sued in their second year of public trading, when they have a 4% chance of being targeted. Exposure to litigation typically decreases over time, though a newly public company has a nearly 34% chance of being sued in its first 11 years. Among those newly public companies targeted by suits last year were 12 Chinese entities, a trend that appears to be emerging, Gould said. Foreign companies were targets in nearly 16% of the filings in 2010, a record high. "These are companies that just became public in the U.S. in the past year or two," Gould said. One out of every 19 companies on the Standard & Poor's 500 index was a defendant in a class action filing in the past year, which is down from the average one in 15 during the previous decade. Filings against companies in the financial sector declined, while filings against health care companies rose. "With the wave of credit-crisis filings behind us, the industry focus for class action filings shifted to health care, where more than one out of every seven S&P 500 companies was involved in a class action," Gould said. For-profit colleges were also the target of 10 securities class action filings, which came on the heels of several government reports that alleged that prospective students were provided with fraudulent information and had low loan-repayment rates. Karen Sloan can be contacted at ksloan@alm.com.