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Volatile stock market could fuel securities class actions


Stock market volatility is among factors that could fuel the filing of securities class action litigation.

New York-based NERA Economic Consulting said in a report last week that federal securities class action cases totaled 234 in 2015, an 8% increase from 2014's 216 and the highest level since 2008.

The securities class actions have increased despite a decline in the number of publicly held companies. For instance, 5,305 companies were listed on major U.S. securities exchanges as of October 2015, down 40% from 8,783 in 1996, according to NERA.

The rise in class action filings also has come despite a decline in the number of initial public offerings. According to London-based Ernst & Young L.L.P., U.S. exchanges saw 139 IPOs raise proceeds of $25.4 billion during the first nine months of 2015, compared with 220 deals with proceeds of $47.9 billion for the same period in 2014.

Concerns about China's economy and cheap oil prices have fueled stock market volatility in recent weeks.

It is unclear how much IPO activity there will be this year because of the stock market uncertainty and, especially, because this is an election year, said Deirdre Finn, a new York-based underwriter at Beazley P.L.C.

Experts say they generally do not expect a significant change in the amount of litigation filed.

The modern era of securities litigation “takes place in a rather narrow band,” with usually around 200 cases filed, “plus or minus 20,” said Joseph P. Monteleone, a partner at Rivkin Radler L.L.P. in Hackensack, New Jersey. “From that perspective, you don't have a very large database to begin with.”

However, higher IPO activity of earlier years probably will contribute to an active level of litigation because there usually is a delay between the IPO date and the time a lawsuit is filed, said Kevin LaCroix, executive vice president of RT ProExec, a division of R-T Specialty L.L.C. in Beachwood, Ohio.

Another trend likely to continue this year is litigation against non-U.S.-domiciled companies, which “has been an important factor over the past several years,” he said.

Several experts also say litigation against smaller entities has increased.

A small group of law firms has been targeting smaller issuers that experienced stock price declines, said Glenn K. Vanzura, a partner at Irell & Manella L.L.P. in Los Angeles. Whether that will continue “remains to be seen” and depends on the law firms' success, he said.

Greater stock market volatility will result in more litigation “because there will be some significant drops” in certain companies' stock prices, said Jacqueline Urban, Chicago-based senior managing director and practice leader of Aon Risk Solutions' financial services group.

Meanwhile, two positive trends for publicly held companies include improved corporate governance and favorable case law, said Steve Boughal, New York-based vice president and chief underwriting officer of Hartford Financial Products, a unit of Hartford Financial Services Group Inc.

For example, the U.S. Supreme Court's 2005 decision in Dura Pharmaceuticals et al. v. Michael Broudo et al., established an improved loss-causation standard for securities fraud plaintiffs.

Barring a new development or tactic by the plaintiffs bar or a financial crisis, “I don't think we will see a spike” in litigation, said Brenda Shelly, New York-based directors and officers product leader at Marsh L.L.C.'s FINPRO practice.

Securities lawsuits “have largely followed the fortunes of the economy,” said Patrick M. Kelly, a partner at Wilson Elser Moskowitz Edelman & Dicker L.L.P. in Los Angeles. “If the economy continues to prosper, we'll probably see a flat year in terms of securities suits.”

However, any dip in securities class action litigation “should not be read as some kind of sign that the D&O liability landscape has gotten less risky,” warned Carl E. Metzger, a partner at Goodwin Procter L.L.P. in Boston. “Overall, that landscape has just as many land mines as it has had in the past. They may just be in different shapes and forms.”