Recent Trends in Securities Class Action Litigation: 2017 Full-Year Review

In the 25th anniversary edition of NERA’s annual study, Recent Trends in Securities Class Action Litigation, we examine trends in securities class action filings and resolutions in 2017. New findings discussed in this year’s report include an increase in filings, again led by a doubling of merger-objection filings.

Highlights of the 2017 report include:

• A record 432 federal securities class actions filed in 2017, the third straight year of growth, and a 44% increase over 2016.
• Federal merger-objection filings more than doubled for the second consecutive year to 197 in 2017.
• A total of 353 securities class actions were resolved in 2017—a post-PSLRA high. Of those, 148 cases settled, coming close to the 2007 record of 150.
• The average settlement in 2017 fell to less than $25 million, a drop of roughly two-thirds compared to 2016.
• Aggregate NERA-defined Investor Losses were $334 billion in 2017, a 50% increase over the five-year average.
• Aggregate plaintiffs’ attorneys’ fees and expenses were $467 million, a drop of roughly 65% to a level not seen since 2004.

This year’s report builds on our work in analyzing trends in securities class actions for 25 years, and underscores NERA’s commitment to offering advice in the economics of securities, finance, and commerce.

Recent court citations of NERA’s Recent Trends publications:

• US Supreme Court in California Public Employees’ Retirement System v. ANZ Securities, Inc., 582 U. S. ____ (2017).
• Beaver County Employees’ Retirement Fund v. Tile Shop Holdings, Inc. No. 0: 14-cv-00786-ADM-TNL (D. Minn. June 14, 2017).
• In Re Ocean Power Technologies, Inc. Securities Litigation, Civil Action No. 3: 14-CV-3799 (D.N.J. Nov. 15, 2016).
• New York State Teachers’ Retirement System v. General Motors Company, Civil Case No. 14-11191 (E.D. Mich. May 19, 2016).
• Phillips v. Triad Guaranty Inc., No. 1: 09CV71 (M.D.N.C. May 9, 2016).
• Medoff v. CVS Caremark Corp., Civil No. 09-cv-554-JNL (D.R.I. Feb. 17, 2016).
• Destefano v. Zynga, Inc., No. 12-cv-04007-JSC (N.D. Cal. Feb. 11, 2016).
• In Re Viropharma Inc. Securities Litigation, Civil Action No. 12-2714 (E.D. Pa. Jan. 25, 2016).
• In Re Vivendi Universal, S.A. Securities Litig., 123 F. Supp. 3d 424 (S.D.N.Y. Aug. 11, 2015).
• In Re Indymac Mortgage-Backed Securities Lit., 94 F. Supp. 3d 517 (S.D.N.Y. Mar. 24, 2015).

Dramatic Filings Growth in 2017 Fueled by Federal Merger Objections

A surge in merger-objection filings during 2017, coupled with a steady stream of cases alleging regulatory violations or misleading firm performance, marked a continuation of trends that have defined the federal securities litigation landscape since early 2016. A 44% jump in filings last year was heavily driven by new merger-objection litigation, which more than doubled for the second straight year. A record amount of litigation was also resolved in 2017, with dismissal and settlement counts each jumping more than 30%. Recent growth in federal filings and resolutions was sparked by the January 2016 Trulia decision in the Delaware Court of Chancery that led to a large number of merger-objection suits being filed in federal, instead of state, courts.

A total of 203 federal merger-objection cases were filed in 2017, or about 47% of total filings. Of those, 71 filings targeted companies incorporated outside of Delaware, up considerably from 27 in 2016 and the five years prior to the Trulia decision when between 22 and 31 non-Delaware firms were targeted. Outside of Delaware, firms incorporated in Maryland were most frequently targeted in federal merger-objection cases in 2017.

The rapid growth in merger-objection cases also drove considerable changes in the distribution of new filings between federal circuits. Merger-objection cases accounted for the vast majority of filings in the First, Third, and Fourth Circuits. Such filings more than doubled in the Fourth Circuit, and quadrupled in the Third Circuit (which includes Delaware).

Dockets Increasingly Dominated by Large Cases Alleging Regulatory Violations and Misleading Performance Projections

In the first quarter of 2017, more cases alleging violations of US Securities and Exchange Commission Rule 10b-5 were filed than in any quarter since the aftermath of the dotcom boom. Over the entire year, filings of “standard” cases—claims alleging violations of SEC Rule 10b-5, or Section 11 or Section 12 of the Securities Act of 1933—grew for a record fifth consecutive year.

Allegations related to regulatory violations and misleading performance projections by management seem to be slowly supplanting claims related to accounting issues and missed earnings guidance. In 2017, 56 filings alleged regulatory violations, a 43% jump over 2016 and, for the first time on record, such violations were the most frequent allegation tracked by NERA. Relative to prior years, regulatory filings have also become broader in scope, affected more industries, and grown in size (as measured by NERA-defined Investor Losses). The largest regulatory cases of 2017 included allegations related to safety recalls, emissions defeat devices, customer account creation, and antitrust violations.

Since 2016, filings alleging regulatory violations drove the total size of filed cases higher, as measured by NERA-defined Investor Losses. In 2017, aggregate Investor Losses exceeded $300 billion for the second consecutive year, and were 50% more than the five-year average. Not only have there been more filings related to regulatory violations, but the size of individual cases has generally grown. The median size of such filings grew from about $250 million over the 2014–2015 period to $1.05 billion over the 2016–2017 period.

The number of filings alleging misleading performance projections by management also rose for the second consecutive year and constituted about 23% of standard filings. Such allegations are more frequent in the life sciences industry, and particularly in the Pharmaceutical Preparations sub-industry (SIC code 2834), which sees many cases related to drug development.

More Cases are Resolved, Yet Settlement Values Nosedive

In 2017, 353 securities class actions were resolved across all case types. The record high rate of resolution over the post-PSLRA period was driven by more than a 30% increase in settlements and a 40% increase in dismissals. For the second consecutive year (and the second year since the PSLRA), more cases were dismissed than settled.

Recent growth in federal merger-objection litigation drove much of the recent surge in case resolution. Since such cases tend to be resolved more than four times faster than standard cases, even recently filed merger objections already affect case resolution metrics. For example, although merger objections only made up 30% of all active cases during 2017, they constituted 43% of dismissals and 46% of settlements.

In 2017, the number of standard case settlements dropped toward post-PSLRA lows seen in 2012 and 2013, while a record number of such cases were dismissed. This was largely due to a substantial increase in voluntary dismissals, which more than doubled. In particular, the number of voluntary dismissals without prejudice increased from two in 2016 to 32 in 2017. Out of all standard filings in 2017, a record 12% were voluntarily dismissed by the end of the year.

Settlement values of standard cases fell dramatically in 2017 across several metrics toward lows not seen since the early 2000s. The average settlement plunged from $72 million in 2016 to approximately $25 million, marking a reversal from the upward trend in preceding years. Even excluding two exceptionally large settlements in 2016, each of which exceeded $1 billion (Household International Inc. and Merck & Co.), the average settlement in 2017 was down over 43% from last year. This was driven by a complete lack of even moderately-sized settlements; for the first time since 1998, no case settled for more than $250 million.

The total value of settlements in 2017 was about $1.8 billion, a low not seen since 2001. This reflects both the drop in the settlement count and the near-record low average settlement value.

Early 2018 Trends Indicate another Active Year

Persistent growth in federal merger-objection litigation coupled with a moderate rate of standard case filings signal a continuation of 2017 trends into the new year. During the first quarter of 2018, 123 securities class actions were filed, about 7% fewer than the first quarter of 2017. Merger objections dominated, with a total of 61 filings. Fifty-seven standard cases were filed, which represents a reversal from the near-record 90 filings in the first quarter of 2017 to a rate in line with the long-term average of about 50 per quarter.

Despite the growth in IPO activity last year, in the first quarter of 2018, federal filings alleging violations of Section 11 of the Securities Act of 1933 fell 50% year-over-year. [1] The slowdown may have stemmed from the recent US Supreme Court decision in Cyan, Inc. v. Beaver County Employees Retirement Fund. The ruling, which was pending over much of the quarter, held that state courts have jurisdiction over class actions with claims under the Securities Act of 1933, including historically plaintiff-friendly California state courts.

Settlement news over the first quarter was dominated by the $2.95 billion tentative settlement of Petróleo Brasileiro S.A.—Petrobras, as well as the $290 million tentative settlement of litigation against Allergan Inc. These tentative settlements are outliers relative to 2017 settlement trends. The Allergan tentative settlement is nearly 40% higher than the highest settlement of 2017, while the Petrobras settlement alone exceeds the aggregate of all settled litigation last year.

Tentative settlements aside, resolved litigation over the first quarter mirrored, or even amplified, 2017 trends: more dismissals than settlements coupled with low final settlement values. Overall, dismissals outpaced settlements nearly three-to-one, mostly due to resolutions of merger-objection cases. However, of non-merger-objection cases, more than twice as many suits were dismissed than settled. Of those that did settle, the average settlement was a mere $11 million, while the median settlement was about $7 million.

The complete publication is available here, and additional slides pertaining to the first quarter of 2018 are available here.

Endnotes

1Ted Vaughan, 2018 Retail IPO Outlook, 12 January 2018, BDO, USA LLP.(go back)