A periodic journal containing items of interest from the world of Directors and Officers Liability, with occasional commentary.
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Wednesday, January 02, 2008
A Closer Look at the 2007 Securities Lawsuits
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The first of the 2007 year-end securities class action reports has already appeared (refer here), with others soon to follow. As I have noted elsewhere (most recently here), the most important securities trend during 2007 was the return of lawsuit filing activity to historical levels, after a two-year lull. But there were numerous other important securities lawsuit trends in 2007, as discussed below.
First, a word about data. My observations about the 2007 securities lawsuits are based on my own tally of the 172 securities lawsuits, which I derived from publicly available data plus information from readers. My tally differs from the numbers that appeared in NERA Economic Consulting’s 2007 year-end report (here). NERA counted 198 securities lawsuits through mid-December, and projected 207 lawsuits by year-end. The projected number was not borne out, but NERA’s actual year-end number around 200 is materially higher than my own count of 172. NERA undoubtedly has superior data; readers should be aware that I have used my own data for purposes of this post.
The year-end tally of 172 new securities class action lawsuits includes 103 new securities lawsuits that were first filed in the second-half of 2007. This half-year total is virtually identical to the six-month average of 101 that Cornerstone Research noted in its mid-year 2007 securities litigation report (here) for the period from the second half of 1996 through the first half of 2005. In addition, the year-end total of 172 lawsuits represents an increase of 56 cases over the 2006 year-end total of 116, an increase of 48 per cent.
The companies named in securities lawsuits in 2007 represent 80 different Standard Industrial Classification (SIC) Code categories. In a year in which subprime lawsuits were such a significant factor (refer here for my analysis of the 2007 subprime lawsuits), it is hardly surprising that one of the SIC Code categories with the highest number of new lawsuits is SIC Code 6798 (Real Estate Investment Trusts), which had 14 new lawsuits. But SIC Code 2834 (Pharmaceutical Preparations) also had 14 new lawsuits, which is entirely consistent with my frequent observation that while subprime lawsuits are an important part of the 2007 securities lawsuit trends, the subprime lawsuits represent only one of several important trends.
Other SIC Code categories that had significant activity unrelated to the subprime mess include SIC Code category 3674 (Semiconductors), which had seven lawsuits; SIC Code category 3663 (Radio and Telephone Equipment), which had six lawsuits; SIC Code category 7372 (Prepackaged Software), which had five lawsuits; and SIC Code category 4899 (Communications Services) which also had five lawsuits.
26 of the 172 securities lawsuits that were filed in 2007 involved companies domiciled outside the United States. These 26 companies are based in 12 different countries, including China (seven companies); Switzerland (three companies); Bermuda, Canada, France, Hong Kong, Israel and the U.K (each of which had two companies each); and Germany, South Korea, Sweden and Taiwan (each of which had one company each). My detailed analsysis of the securities lawsuits involving Chinese companies can be found here.
Many of the 2007 securities lawsuits involved allegations of misrepresentations in connection with the defendant company’s IPO within twelve months of the lawsuit. 29 of the 172 new lawsuits involved IPO allegations. Interestingly, 20 of the 29 lawsuits against IPO companies were filed in the second-half of 2007, which suggests that an increase in the number of cases involving IPO companies was an important part of the increased level of securities litigation activity in the second-half of 2007. In addition, nine of the 29 IPO company lawsuits involved foreign-domiciled companies, so the level of IPO-related activity and the level of foreign-domiciled company activity appears to be correlated to a certain extent.
The 2007 securities lawsuits were filed in 52 different federal district courts. By far the largest numbers of lawsuits were filed in the Southern District of New York, where a whopping 52 of the 172 lawsuits (or about 30%) were filed. The court with the next highest total, the Central District of California, had only 18. Indeed, if the lawsuits filed in the Central, Southern and Northern Districts of California are combined, the total of 32 cases is still far short of the S.D.N.Y. total.
The high number of filings in the S.D.N.Y. is in part attributable to the number of financial services companies that have been sued in Manhattan as a result of the subprime mess. But another important factor in the number of S.D.N.Y. lawsuits is the significant number of lawsuits against foreign domiciled companies. 21 of the 26 foreign-domiciled companies sued in securities lawsuits in 2007 were sued in the S.D.N.Y.
Other courts that had a significant number of securities lawsuits in 2007 include the Southern District of Florida (10); Eastern District of Pennsylvania (6); Northern District of Texas (5); and the Western District of Washington (5).
I have noted elsewhere (here) the significance of the number of 2007 securities lawsuits. Another important attribute of the 2007 securities lawsuits is their diversity. More specifically, the increase in 2007 securities litigation activity clearly was driven by a number of factors, not just the litigation activity surrounding the subprime meltdown. Indeed, even if the 34 subprime-related lawsuits (listed here) were withdrawn from the 2007 total, the resulting 138 lawsuits would still represent a material increase over the 116 lawsuits that were filed in 2006. The fact that there were significant numbers of cases aggregated in categories completely isolated from subprime-related issues demonstrates that the story of the renewed securities litigation activity involves far more than just the subprime meltdown.
Finally, one of the other many factors contributing to the renewed level of securities lawsuit activity in 2007 is the outbreak of lawsuits arising from busted buyouts, which I discuss at greater lenghth here.