Advisen

A more active plaintiffs' bar driving increase in securities class action litigation

By Josh Bradford, Advisen

The total count of new cases tracked by Advisen that may be covered by D&O insurance was down in 2017 from 2016, according to data presented during Advisen’s D&O claims trends end-of-year webinar.

When looking specifically at shareholder risks, which include securities class action suits, merger objection suits, derivative shareholder suits and a variety of other suits brought by shareholders, the number of filings has remained fairly constant over the past four years.

Behind this general consistency in shareholder risks, however, there has been a fair amount of change year-to-year in terms of the different case types.

For example, merger objection cases saw a 28 percent rise in the number of companies sued in 2017 from 2016. Securities class actions (SCA) also rose roughly six percent in 2017. Conversely, the number of companies involved in derivative shareholder action cases went down by 16 percent.

Kevin LaCroix, executive vice president at RT ProExec, a division of RT Specialty and a regular panelist on the webinar, said he didn’t see much driving the increase in SCA litigation other than a more active plaintiffs’ bar. 

“When analyzing the 2017 SCA litigation data, there were a lot of things in the numbers such as a significant amount of litigation against life sciences companies, a lot of activity involving foreign domicile companies, and activities involving IPO companies that weren’t necessarily different from prior years,” said Lacroix.

Machua Millett, managing director and chief innovation officer at Marsh, agreed there was not a lot of difference in terms of drivers but found some similarities in the 2017 numbers compared with 2009.

“If you go back eight years and look at the end of 2008 and into the first quarter of 2009, you had a similar situation where you had a spike in the first quarter,” said Millett. “What do the first quarter of 2009 and the first quarter of 2017 have in common? It’s a new administration, a new president, and some fairly significant changes in terms of federal government policy that I think create some sort of stock market uncertainty.”

Another trend discussed was a distinct migration from state courts to federal courts, both in traditional securities class action suits as well as merger objection suits. According to Advisen, the number of unique companies sued in federal court was 50 percent higher than in 2016.

“These cases [merger objection] have been traditionally brought in state court, particularly Delaware, and we’ve seen this migration [to federal court] but the rate of migration really picked up a lot,” said John McCarrick, partner, White & Williams LLP.

Millet said, “It seems like it is an anomaly moving all these cases to federal court and we may in a few years see them disappear, hopefully for the defense bar and for insurers.”

Another trend discussed was the increase in cases filed against smaller market cap companies. LaCroix attributes this increase to so called “emerging law firms.”

“We use this euphemistic expression ‘emerging law firms,’ but these are active plaintiff firms that want market share and don’t want to have to compete against larger, more established, plaintiff firms because they feel they will lose control of the cases,” said LaCroix. “They’re expanding their target zone and that’s bringing in more small companies.”

LaCroix continued, “I think that’s what’s going on, changes in the plaintiffs’ bar. I don’t think anybody feels there is more real fraud than there was in the past.”

McCarrick had another theory on why there are more cases against smaller companies. “I think larger companies are better at managing their disclosures and managing their stock price down,” he explained. “Smaller companies are just not as good at that.”

Editor Josh Bradford can be reached at jbradford@advisen.com