Securities class action filings reach high point; are weaker cases being brought?
The number of securities class action filings this year has reached the highest point since the information was first tracked in 1996.
In the first six months of the year, 131 securities class actions were filed in federal court, the Wall Street Journal (sub. req.) reports, citing information from Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse. The firgures don’t include suits challenging mergers and acquisitions.
If merger suits are considered and the current pace continues, 9.5 percent of U.S. exchange-listed companies will be sued for alleged securities violations this year, the highest percentage since 1997.
The article notes a difference in the types of cases being filed. The most lucrative cases are based on alleged misstatements in audited financial statements. But now, smaller law firms are filing suits based on business disruptions or disasters, failed pharmaceutical trials and earnings that don’t meet expectations.
Researchers believe the increase in filings may be driven by “emerging” law firms that file a higher amount of lower-quality cases. Those firms are more likely to settle cases early, for lower amounts. The emerging firms tend to represent individual investors, while more established firms often represent institutional investors such as pension funds with higher losses.
In the early pleading stage, the median settlement is $2.6 million for emerging firms, compared to $8.75 million for more established firms. After a case reaches discovery, the median settlement is $3.1 million for emerging firms, compared to $13.9 million for established firms.
The emerging firms include Pomerantz, the Rosen Law Firm and Glancy Prongay & Murray, according to researchers. Representatives from those firms told the Wall Street Journal that securities laws apply even when the loss is smaller, and targeted smaller companies often have fewer protections in place to prevent wrongdoing.