The statistics on securities class action suits are in for 2013 and, according to NERA, there were some interesting shifts. The total number of cases was more or less stable, at 234. This was a slight increase from 2012 (213 actions) but consistent with the overall number since 2008 (245 in 2008; 207 in 2009; 232 in 2010; 225 in 2011; 213 in 2012).
The interesting thing to note is that the numbers remained stable during a period of significant stock market volatility. Thus, the numbers did not change much whether the market was going up or down. Given the amount of work that must now be done to prepare a securities class action law suit, this potentially indicates a plateau of capacity on the plaintiffs side.
This is also suggested by the mix of cases. Foreign companies were sued 35 times in 2013, with almost half (16) involving Chinese companies. This was down from 62 cases against foreign companies in 2011. Thus, either 2011 had less detectable domestic fraud and 2013 had more--or firms have a capacity to bring a certain number of cases, irrespective of the particular mix.
At the same time, average "ordinary" settlements (excluding, for example, the $2.4 billion settlement by BofA) rose a significant 53% to $55 million, but the median took a substantial dip of 26% to $9.1 million. The difference arose from the number of large settlements (there were 9 that exceeded $100 million). Indeed, 51% of the settlements were below $10 million. Thus, the report described 2013 as "a year in which large settlements got larger and small settlements got smaller."
The study does not separate out the settlements by law firms. Thus, it is unclear whether the industry is dividing itself into firms that bring large suits, something more resource intensive, and firms that bring smaller suits or whether each firm does a balance of large and small cases. There is at least a possibility, therefore, that firms are dividing into the haves and the have nots.
The data also provided some insight into the percentage of cases dismissed on motion since 2000. According to the report, motions to dismiss were filed in 95% of the cases. In 20% of those instances, there was no resolution (cases were settled or withdrawn). Where there was a court determination, however, almost half (48%) of the motions were granted. In addition, 25% were granted in part and only 21% were denied.
Moreover, the dismissal rate has been increasing. As the report stated:
- Dismissal rates have increased from 32%-36% for cases filed in 2000-2002 to 43%-47% for cases filed in 2004-2006. Remembering the caveat above, dismissal rates appear to have continued to increase, given that 44%-51% of cases filed in 2007-2009 have been dismissed.
The increase in dismissals also coincides with a decline in the number of suits that allege both fraud and insider sales. In 2005, allegations of insider sales occurred in 48.6% of the cases, a number that had fallen to 25.2% in 2013. Since insider sales are generally used as evidence of scienter, one possible explanation for the increase in the number of dismissals is that, absent allegations of insider sales, efforts to establish a "strong inference" of scienter is more difficult.
The apparent stability could change. In the past, a precipitous drop in the market had the potential to cause an upswing in the number of suits. That, however, may be less likely. While the financial crisis struck at the end of 2008, securities class actions actually fell in 2009 (to 207). Moreover, the slight increase in suits filed in 2013 occurred in a year when the market was up around 25%.
Change could, however, result for the Supreme Court's determination to revisit fraud in the market. With scienter already substantially harder to allege as a result of the PSLRA, the Supreme Court could effectively do the same thing to the reliance element. If that happens, the number of cases will most likely fall.
The full NERA report is here.