The Decline in Securities Class Action Lawsuits

The statistics are in for the number of securities class actions filed in 2012.  As the Stanford Securities Class Action site reports, the number fell to 149. (Kevin LaCroix reports over at the D&O Diary puts the number at 156).  The decline was apparently a result of a dearth of claims filed in the 4th quarter.  As Kevin noted,  "There were 45, 45 and 41 filings during the first, second and third quarters, respectively. However, in the fourth quarter there were only 25 new securities class action lawsuit filings."

Using the data from the Stanford site, the total number of class action filings is the lowest since 2006 (when the number was reported at 120) and the second lowest in the last 10 years.  Since Stanford has been collecting data (beginning in 1996), only one other year had a lower number of filings than in 2012 when 1996 reported in at 111 filings.   

It would be premature to draw conclusions from a single year's data (indeed, apparently, from a single quarter's data).  As Kevin notes:

The decline in the number of new securities lawsuit filings during the fourth quarter of 2012 is interesting, but at this point it is hard to know what it might mean, and it is far too early to jump to any conclusions about possible permanent shifts in the level of securities suit filings. There have been periods before (for example, at the end of 2006 and the beginning of 2007) when there were lulls in the level of securities suit filings, but at least in the past, the lulls in filing levels have proven to be temporary and relatively short-lived. Indeed, the lull at the end of 2006 and the beginning of 2007 was followed by a surge of new securities filings during following periods, as securities suits related to the subprime meltdown and credit crisis came flooding in.

He lists as possible explanations the absence of any cyclical phenomenon to drive the filings.  In 2011, for example, there was a significant increase in filings against Chinese companies.  In 2001, the IPO Allocation lawsuits drove up the numbers. 

Other possibilities include an increase in the number of individual actions, the efforts by the plaintiffs bar to diversify by bringing other types of lawsuits, and coincidence.  Of course, it could also reflect a continued antagonism toward securities suits in the federal courts. 

The decline could, for example, be a result of the Supreme Court's decison in Morrison.  Thus, as Kevin notes, the number of suits against non-US companies declined from 68 in 2011 to 26 in 2012.  Some of the difference was attributed to a reduction in suits against Chinese companies.  At the same time, however, some of the explanation may be from the Court's decision that Rule 10b-5 lacks extraterritorial application.

Similarly, the Supreme Court's decision in Janus has made it more difficult to file fraud suits against accountants and other third parties with respect to false disclosure by issuers.  According to one report, for example, no accounting firm was named as a defendant in an accounting fraud suit as of November 2012. 

Whether the 4th Quarter of 2012 suggests a trend remains to be seen.  But to the extent the reduction in the number of lawsuits is structural, it could be permanent.