New Securities Class Actions Including M&As Down But SPAC-Related Suits Up

Plaintiffs filed 112 new securities class action lawsuits in federal and state courts in the first half of 2021, down 25% from the second half of 2020.

This was the lowest number of filings since the first half of 2015, according to a report by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse.

The report, Securities Class Action Filings—2021 Midyear Assessment, found that the decline in filing activity was largely driven by a 66% drop in filings related to mergers and acquisitions compared to the second half of 2020. Of the 112 filings in the first half of 2021, only 12 were M&A filings.

Federal and state court class actions alleging claims under the Securities Act of 1933 disclosure rules also declined, continuing the trend observed in 2020.

As initial public offerings (IPO) for special purpose acquisition companies continued to increase in 2020 and earlier this year, filings against SPAC-related entities also increased sharply in the first half of 2021. Despite the substantial decrease in total filings, federal filings related to SPACs doubled in the first half of 2021 compared to all of 2020. There were 14 SPAC filings in the first six months of 2021, with more than half alleging that the potential targets defrauded investors by misrepresenting their product’s viability.

Alexander “Sasha” Aganin, report coauthor and Cornerstone Research senior vice president, said former SPACs have experienced a litigation rate of approximately 14% after completion of their mergers, which is roughly comparable to the cumulative litigation rate experienced by traditional IPOs over the subsequent three years.

The report also found a sharp decline in the number of 1933 Act filings in state rather than federal court, continuing the trend observed in the Securities Class Action Filings—2020 Year in Review. All five 1933 Act claims filed in state court in the first half of 2021 were brought in New York.

“The better the market for investors, the worse the market for class action securities lawyers,” observed Joseph A. Grundfest, director of the Stanford Law School Securities Class Action Clearinghouse, and a former Commissioner of the Securities and Exchange Commission. “Plaintiff lawyers typically rely on sharp price declines for their best cases, and if the market isn’t generating those declines, plaintiffs’ ability to file big ticket securities fraud actions is limited.”

COVID-19 filings began tapering off in the first half of 2021, with six of the 10 pandemic-related filings occurring in January and February and only one filing in May or June. Of these filings, 50% were related to treatments or vaccines that failed to make it to market.

Key Trends

• U.S. Exchange-Listed Companies: Of U.S. exchange-listed companies, 1.9% were the subject of a core filing (those excluding M&A claims) in the first half of 2021. If this trend continues, this would be the lowest exposure since 2015.
• Disclosure Dollar Loss: The DDL Index fell to $80 billion, down 50% from the second half of 2020 and 54% below its all-time high in the first half of 2019. The DDL is the dollar value change in the defendant firm’s market capitalization between the trading day immediately preceding the end of the class period and the trading day immediately following the end of the class period.
• Maximum Dollar Loss: The MDL Index dropped sharply to $361 billion in the first half of the year, down nearly 64% from the second half of 2020. MDL is the dollar value change in the defendant firm’s market capitalization from the trading day with the highest market capitalization during the class period to the trading day immediately following the end of the class period.
• U.S. vs. Non-U.S. Companies: There were 15 federal filings against non-U.S. issuers in the first half of 2021. The annualized total is on track to be significantly less than the record-high 74 filings against non-U.S. issuers in 2020.
• Industries: Plaintiffs targeted the Energy sector with nearly twice as many filings as in the second half of 2020. The Consumer Non-Cyclical sector continued to be the most common sector with 31 filings, 13 of which were in the Biotechnology subsector.
• Federal Circuits: There were 41 core federal filings in the Second Circuit during the first half of 2021, up from 36 in the second half of 2020. The Ninth Circuit saw 28 core filings during the period, down from 43 in the second half of 2020.

Source: Securities Class Action Filings—2020 Year in Review