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Securities Class Action Filings – Cornerstone Research 2021 Year in Review

Securities class action case filings plunged in 2021 compared to the number of similar cases filed in 2020.  According to Cornerstone Research’s 2021 Year in Review report, there were 218 securities class action cases filed in federal and state courts in 2021, which represents a 35% decline from the 333 securities class action cases filed in 2020.  However, the 218 filings in 2021 is approximately 5% less than the average securities class action filings for the years from 1997 to 2020. 

According to the Cornerstone Report, the drop in new cases that were filed was primarily due to reductions in M&A and core Rule 10b-5 filings without Section 11 allegations.[1]  Notwithstanding the increase in the number of IPOs in 2020, federal and state court class actions that alleged claims under the ’33 Act mostly aligned with the number of cases alleging the same cause of action filed in 2020.[2]  However, while the number of 2021 state court filings generally aligned with the number of 2020 filings, such state filings have continued to decline since the March 2020 Delaware Supreme Court ruling in Salzberg v. Sciabacucchi that upheld the validity of federal forum-selection provisions in corporate charters.[3] Commenting on the decrease of 2021 securities class action filings, Professor Joseph Grundfest, a former commissioner of the U.S. Securities and Exchange Commission and director of the Securities Class Action Clearinghouse at Stanford Law School, stated that “In addition to a marked decline in the number of companies sued in 2021, there was a 41% decline in the maximum dollar value of those claims. The decline is attributable largely to a dearth of ‘mega filings’—claims with theoretical damages exceeding $10 billion. The dollars at stake might well be a more informative statistic for investors and plaintiff lawyers than the number of companies sued.”[4]  Professor Grundfest also observed that “The stock market’s strength in 2021 might explain a good bit of the decline in plaintiff activity, measured either in dollars or by the number of complaints filed.”[5]

Among certain trends in 2021 in federal securities class action filings, the Cornerstone Report highlighted the following:

  • M&A Filings
    • Federal filings of “M&A class actions” (i.e., cases involving M&A transactions with Section 14 claims but not any Rule 10b-5, Section 11, or Section 12(a) claims) dropped 82% to their lowest level since 2018.[6]
    • As in past years, these filings had a much higher rate of dismissal than federal cases dealing with other ’33 Act, non-“M&A class actions”.[7]
  • Federal SPAC cases
    • Non-“M&A class actions” containing allegations related to special purpose acquisition companies (“SPACs”) soared in 2021 to 32 case filings compared to five cases filed in 2020 and just one case filed in 2019.[8]
    • 11 of the SPAC filings (34%) were related to the auto industry.[9] 
  • U.S. Issuers
    • The percentage of U.S. exchange-listed companies subject to securities class action filings decreased to 4.2%, its lowest point in seven years but in line with the 1997-2020 average of 4.0%.[10]
    • The percentage of companies subject to “Core” filings (i.e., state ‘33 Act class actions and all federal securities class actions except for “M&A class actions”) decreased to 3.8%, its lowest point in six years.[11]
    • The percentage of companies subject to “M&A class actions” fell to 0.4%, similar to the same level for those years prior to 2016.[12]
  • Non-U.S. Issuers
    • After an all-time high of 74 securities class action filings in 2020, there were only 41 “Core” federal filings in 2021 – a number in line with the average amount of “Core” filings against non-U.S. issuers in the years from 2012-2019.[13]
  • Trend Cases
    • There were 17 COVID-19 related filings in 2021, five that concerned companies that were alleged to have misrepresented temporary increases in demand due to the pandemic and six that involved companies who developed pandemic-related vaccines, tests, masks, or treatments.[14]
    • There were 11 cryptocurrency filings in 2021, including on the issue of the definition of exchanges and securities used in the cryptocurrency industry.[15]
    • There were six cybersecurity filings in 2021 that were in response to reviews from the Cybersecurity Administration of China.[16]
    • There were four cannabis-related filings in 2021 compared to six cannabis-related filings in 2020.[17]
  • Industry Filings
    • The number of filings in the financial, industrial, and utility sectors dropped to 18, 10, and 0 cases, respectively, in 2021 compared to 29, 13, and 3 cases, respectively, in 2020.[18]
    • Consumer non-cyclical companies (primarily composed of pharmaceutical, healthcare, and biotechnology firms) had 10 fewer filings in 2021 compared to the average amount of filings for the years 2016-2020; however, these filings exceeded the 1997-2020 average by over 30%.[19]
    • There were 21 communication filings in 2021, three more filings than in 2020 but significantly below the 37 cases filed in 2019 and well below the 1997-2020 average of 27 cases.[20] 
  • Federal Filings by Circuit
    • The Second Circuit and the Ninth Circuit accounted for 72% of all “Core” federal filings in 2021, which represents the highest combined proportion for any two circuits since 1997.[21]
  • Mega Federal Filings for “Core” Federal Filings
    • Mega Disclosure Dollar Loss (“DDL”) filings have a DDL of at least $5 billion.
      • There were 10 mega DDL filings in 2021 versus 14 mega DDL filings in 2020.[22]
      • Total DDL from such filings in 2021 decreased by $34 billion dollars compared to 2020.[23]
    • Mega Maximum Dollar Loss (“MDL”) filings have an MDL of at least $10 billion.
      • There were 20 mega MDL filings in 2021 compared to 29 mega MDL filings in 2020.[24]
      • Total MDL from such filings in 2021 decreased to $606 billion dollars from $1,319 billion dollars compared to 2020.[25]
    • Internet and software companies comprised 60% of the mega DDL filings and 40% of the mega MDL.[26]
    • 20% of the mega MDL filings in 2021 pertained to energy-related filings (oil & gas and alternative fuel).[27]
    • 15% of the mega MDL filings in 2021 related to leisure travel and retail.[28]
    • 15% of the mega MDL filings in 2021 related to commercial services.[29]
  • Federal Case Status by Plaintiff Counsel
    • Three law firms – The Rosen Law Firm, Pomerantz LLP, and Glancy Prongay & Murray LLC – have filed 61% of the first identified “Core” securities class action complaints in federal courts from 2015 to 2021.[30]
    • “Core” federal filings by these three law firms declined 8% in 2021 compared to a 20% decrease in filings by other plaintiff firms in 2021.[31]
    • From 2015 through 2020, these three law firms had 55% of their “Core” federal class action complaints dismissed versus a dismissal rate of 44% for other plaintiff firms.[32]

For now, it is not possible to discern if securities class action filings in 2022 will continue the steep decline we witnessed in 2021 or if such filings will rebound to the levels we saw in 2020.  Given the heightened regulatory regime at the SEC and the uncertainty in the stock market, 2022 promises to be an interesting year for securities class action litigation.

 

[1] Cornerstone Research, Securities Class Action Filings – 2021 Year in Review, at 1 (the “Report”), available at https://www.cornerstone.com/wp-content/uploads/2022/02/Securities-Class-Action-Filings-2021-Year-in-Review.pdf.

[2] Id. at 1.

[4] Id.

[5] Id.

[6] The Report at 2.

[7] Id. at 2.

[8] Id. at 2.

[9] Id. at 5.

[10] Id. at 14.

[11] Id. at 14.

[12] Id. at 14.

[13] Id. at 2 & 25.

[14] Id. at 5.

[15] Id. at 5.

[16] Id. at 5.

[17] Id. at 5.

[18] Id. at 29.

[19] Id. at 29.

[20] Id. at 29.

[21] Id. at 30.

[22] Id. at 28.

[23] Id. at 28.

[24] Id. at 28.

[25] Id. at 28.

[26] Id. at 28.

[27] Id. at 28.

[28] Id. at 28.

[29] Id. at 28.

[30] Id. at 31.

[31] Id. at 31.

[32] Id. at 31.