Securities Litigation Update
Cornerstone Research reports that the aggregate number of all securities class action settlements during 2014 declined to the lowest level in years and there also was a significant decrease in the total and average settlement amount. The number of settlements during 2014 (63) was just about the same as the number in 2013 (66). However the total dollar amount of all securities class action lawsuit settlements during the year was $1.1 billion, compared to $4.8 billion in 2013.i This decrease in settlements reflects in part that the majority of cases related to the financial crisis were previously resolved.
Investors contested 93% of M&A transactions in 2014, a typically high percentage, but brought a smaller number of cases per deal and in fewer jurisdictions with fewer cases in deals valued below $1 billion. The one M&A case which was tried in 2014 resulted in a $76 million damages award.ii
One area of securities litigation appears to be on the rise. In 2014, investors launched 69 accounting class action suits against companies, a 47 percent increase from the year prior. More than one of four of these new complaints cited an SEC probe or enforcement action about the defendant company’s financial reports, the highest level since they began tracking this data in 2010.iii
Accounting restatements have been cited as a reason for the filings. Forty-two percent of filings last year were over errors concerning revenue recognition, the highest such rate in seven years. This spike may be due in part to increasing market sensitivity to restatements. Whereas restated earnings produced an average stock drop of 1 percent in 2010, these grew to an average of 5 percent last year, matching the highest rate over the past decade.iv
Notably, accounting cases comprised about 85 percent of all class action settlements in 2014. Also, in instances where civil suits are filed in conjunction with the disclosure of an SEC probe, by the time such a probe results in an enforcement action, the parallel class action also could be winding down into a settlement. When this happens, Cornerstone research found that civil settlements end up being nearly 30 percent higher than they would have been had the SEC not been involved.v
Supreme Court Roundup
The Supreme Court ends its 2014-2015 term on June 30th. This term the most significant securities case sought to differentiate between an opinion statement that was not actionable versus an untrue statement actionable under Section 11 of the Securities Act of 1933. In Omnicare v Laborers District Council Construction Industry, the Court resolved a split in the circuit courts about whether there is liability for opinions under Section 11 and defined the standard for investors to prove that an opinion was misleading or omitted necessary facts. vi Opinion statements are not wholly immune from liability under §11’s first clause. Every such statement explicitly affirms one fact: that the speaker actually holds the stated belief. Executives’ statements of opinion cannot be actionably untrue simply because they are incorrect, but they can be subject to liability based on the expectations of a “reasonable” investor. Issuers can be liable for omissions if the Section 11 registration statements omit material facts about the knowledge about the opinion and if those facts conflict with the opinion