For most readers of this blog, it is now old news that securities class action filings were down in 2012, especially in the second half of the year – this was extensively discussed and examined over the last several weeks by Kevin LaCroix in his blog, The D&O Diary, by Cornerstone Research, and by Law360 and newspapers across the country. These reports followed NERA’s December publication of data that showed a smaller decrease in filings.
I’ve received many questions about what it means. I don’t pretend to have all the answers.
But there is one thing I am certain of: it does not mean that plaintiffs’ lawyers plan to stop focusing on securities class action litigation. I say that for one main reason: there is a group of national, highly specialized plaintiffs’ lawyers whose practices are devoted to securities class actions. Since the passage of the Private Securities Litigation Reform Act of 1995, these lawyers and their firms have devoted enormous resources to courting institutional investors to serve as lead plaintiffs and developing systems for evaluating cases and deciding which companies to sue.
These lawyers aren’t suddenly going to become intellectual property attorneys, or go into privacy law – and they are going to continue to put the resources they have invested in to good use. So, as long as these attorneys still practice law and Congress does not abolish this type of litigation, securities class actions will continue. Companies will continue to have stock drops, and plaintiffs’ attorneys will continue to find ways to profit from them.
Plaintiffs’ lawyers would put it in less crass terms, of course. For example, Gerald Silk of Bernstein Litowitz, in a Law360 article by Max Stendahl, put it this way:
“It’s important to read this report for what it is: a snapshot in time of class litigation,” Silk said. “Our firm focuses on recommending to institutional clients highly meritorious securities litigation. As far as we’re concerned, we haven’t seen a trend one way or the other in that regard.”
Though securities class actions will continue, the type of actions filed will undoubtedly vary – just as they have for well over a decade – as plaintiffs’ attorneys encounter new obstacles, and find new opportunities. In other words, plaintiffs’ attorneys adapt to survive. The best example of this evolution is their response to the Reform Act, which put in place many provisions to protect companies from securities class actions. Many said that the securities class action was dead.
But the plaintiffs’ bar adjusted and found a way to work within the new system. For example, they started to file securities class actions in state court, until Congress largely put an end to that through the Securities Litigation Uniform Standards Act. They also began to use the ubiquitous “confidential witness,” obtaining internal company information from former employees, as a way to meet the Reform Act’s heightened pleading standards despite the mandatory stay of discovery during the motion-to-dismiss process. And they developed new techniques to land the biggest fish as their clients, to meet the Reform Act’s standard to serve as the lead plaintiffs’ counsel.
In addition to adjusting to changes in the standards governing these actions, plaintiffs’ attorneys have also shown agility in responding to economic developments and public disclosure of potentially fraudulent practices. As a result, a number of litigation trends have come and gone:
- the IPO laddering cases, which involved more than 300 issuers and their underwriters;
- the Sarbanes-Oxley era “corporate scandal” cases, which involved massive litigation against Enron, WorldCom, Tyco, Adelphia, HealthSouth, and others;
- the mutual fund market timing cases;
- the options backdating cases, most of which were actually derivative cases, but many plaintiffs’ firms devoted class action resources to them; and
- the credit crisis cases, on which many plaintiffs’ firms are still spending much of their time.
In fact, you could say that the out-of-the-ordinary type of securities case has become ordinary: we have been in the midst of one wave or another of them for the past 15 years.
Yet even as they ride out these litigation waves, plaintiffs’ firms have also continued to file plenty of plain vanilla stock drop cases – and they still dependably file them when there are very large declines and/or particularly bad facts. Some years they file more, some years they file less – and much of this difference seems to be due only to the amount of resources the plaintiffs’ bar is expending on whatever securities litigation wave they are riding at the time. But at the same time, there is no sign that their more standard fare is on its way out. Indeed, excluding credit crisis and merger cases, both NERA and Cornerstone’s research shows that securities class action filings actually were down only slightly in 2012, and were up in both 2011 and 2012 compared to 2008-2010.
A final thought. The prevailing wisdom is that the increase in reflexive shareholder suits following mergers has diverted plaintiffs’ resources from securities class action filings. I believe there is little or no relationship between the two metrics. The reason, again, concerns in part the identity of the plaintiffs’ lawyers: the plaintiffs’ lawyers who have driven the high volume of merger and acquisition cases are largely distinct from the specialized lawyers who drive the filing of securities class actions.
I have heard various other theories about why the number of filings was down last year, and some of them are persuasive. But what I am sure of is that this is not the beginning of the end.