Securities Lawsuit Filings Decline in 2009

What a difference a year makes. Just 12 months ago, the subprime and credit crisis litigation wave was in full spate, and the onslaught of Madoff and other Ponzi scheme lawsuits had just begun to surge. While both of those lawsuit filing trends continued well into 2009, by year’s end, both of those phenomena had largely played out. However, other litigation trends emerged as the year progressed, and in the end, the number of new securities class action lawsuits filed during 2009 — although significantly below the number filed in 2008 — was well within historical norms.

There were 189 new securities class action lawsuits in 2009, which is just below but within range of the 1966-2007 annual average of 192, although 15.6 percent below the 2008 total of 224 new securities lawsuits.

As was the case with the filings in the two preceding years, the 2009 lawsuit filings were largely driven by lawsuits against financially related firms. Of the 189 new securities suits in 2009, 69 were against companies in the 6000 Standard Industrial Classification (SIC) code series (Finance, Insurance, and Real Estate).

In addition, another 39 of the defendant firms targeted in 2009 securities class action lawsuits lacked SIC Codes. Those lawsuit targets lacking SIC code designations included mutual funds, exchange-traded funds (ETFs) and closed-end funds. In general, the defendant entities that lacked SIC codes were all financially related. These two groups — that is, the companies in the 6000 SIC Code group and the firms that lacked SIC Codes — together represented roughly 108 (or 57.1 percent) of the new securities lawsuits filed in 2009.

A significant factor driving the concentration of filings in the financial sector was the number of credit crisis-related lawsuits. There were 62 new credit crisis-related securities lawsuits filed in 2009, bringing to 205 the total number of credit crisis related securities lawsuits that were filed since the litigation wave began in February 2007.

But as 2009 progressed, the number of credit crisis-related filings dropped off. So too did the concentration of filings against financial companies. Thus, while 72.6 percent of the lawsuits in the first half of 2009 were against financially related companies, only 41.3 percent of the filings in the year’s second half involved financial companies.

Although the lawsuits filed against financially related companies declined in the second half of the year, by and large, the rate of lawsuit filings overall did not decline. Thus, there were 95 new securities class action lawsuits in the first half of 2009, and there were 94 in the second half.

Part of the reason that the overall lawsuit filing rate did not decline in the second half of the year even though the credit crisis-related lawsuits trailed off is that two filing trends emerged in the second half that fueled lawsuit filings and took up the slack.

The first trend was the rash of lawsuits filed against leveraged exchange-traded funds. By my count, there were 12 separate securities lawsuits filed against ETFs, all during the second half of 2009. These suits were largely filed against leveraged ETFs drawn from within a single fund family, and all present more or less the same allegations (essentially that investors were not told that the funds would track their target measures or ratios only for very short periods). Because these lawsuits represent more than 6 percent of all new 2009 securities lawsuits, they represent a significant part of the year’s securities litigation activity.

The second trend was the emergence of a significant number of belated lawsuit filings, where the lawsuit filing date came long after the proposed class period cut-off date. These belated filings appear to be the result of a lawsuit backlog that developed while the plaintiffs’ lawyers were preoccupied with the credit crisis-related lawsuit filings.

By my count, 22 of the 94 securities lawsuits filed during the second half of 2009 were filed more than a year after their proposed class period cut-off date. The belated filings continued to arrive right through the end of the year, with several of December’s filings including cases with filing dates more than a year after the proposed class period cutoff date.

Almost all of the backlog cases have been filed against companies outside the financial sector, which accounts in part for the shift in filings away from financial companies in the second half of 2009. It appears that while the plaintiffs’ lawyers were rushing to file credit crisis-related lawsuits during the period mid-2007 through mid-2009, they were also building up a backlog of cases against nonfinancial companies, and now they are working off the backlog.

And so, while more than half of the new securities lawsuits filed in 2009 involved financial companies, by year’s end, the 2009 securities lawsuits overall involved a broader spectrum of kinds of companies. The 2009 securities lawsuits were filed against firms in 90 different SIC Code categories. Outside the financial sector, the SIC code categories with the highest number of lawsuits were SIC Code category 2834 (pharmaceutical preparations), which had five lawsuits, and SIC Code category 2836 (biological products), which had four lawsuits.

[The 2009 securities lawsuits were filed in 38 different federal district courts, but, due to the number of lawsuits against financial companies, the largest number of lawsuits (78, or about 41 percent of all 2009 lawsuits) were filed in the Southern District of New York. The courts with the next highest number of 2009 securities lawsuit filings were Northern District of California (12) and Central District of California (9). There were five different courts — District of New Jersey, Eastern District of New York, Northern District of Illinois, Southern District of Florida, and Southern District of Texas — that had six securities lawsuit filings each. The eight courts with the highest number of 2009 filings together had 128 new lawsuits, or 67.7 percent of all 2009 securities lawsuit filings.]

Twenty-four (or 12.7 percent) of the 2009 securities lawsuit filings involved companies that are domiciled outside the United States. These lawsuits involved companies from 12 different countries. The countries with the highest number of companies suit were the United Kingdom (with 6), Germany (with 5) and Canada (3).

The changing number and mix of securities lawsuits filed in 2009 suggests that the lawsuits filed during 2010 are unlikely to be as concentrated in the financial sector as was the case during 2007-2009.

Although the absolute numbers of lawsuits declined in 2009 relative to the prior year, this decline alone is unlikely to have a material impact on pricing. A single year’s filing levels alone are unlikely to alter the carriers’ perception of the risk. At the same time, however, there is nothing in the 2009 securities lawsuit figures to suggest a turn toward a harder market for directors and officers insurance.