Jan 28 Investors are pursuing more lawsuits
accusing companies of fraud, according to a new study, but
filings may plunge if the U.S. Supreme Court decides soon to
remake the legal landscape.
Plaintiffs filed 166 federal securities lawsuits seeking
class-action status in 2013, up 9 percent from 152 in 2012,
according to data released Tuesday by Cornerstone Research and
the Stanford Law School Securities Class Action Clearinghouse.
Filings nonetheless were the third fewest over the last 15
years. The study attributed this in part to fewer lawsuits over
the financial crisis, mergers and Chinese reverse mergers, and
to a drop in potential targets with the number of U.S.-listed
companies having slid by nearly half since the late 1990s.
The Supreme Court, in a case involving Halliburton Co
to be argued on March 5, could accelerate that decline
as it reexamines a 1988 precedent that made it easier to pursue
class actions against companies.
In that decision, Basic Inc v. Levinson, the court let
shareholders who claimed they were defrauded by false statements
in securities filings rely on a "fraud on the market"
presumption that stock prices reflected those false statements,
and not have to show they relied on actual filings.
A narrowing or overruling of Basic could have "seismic"
implications, said Joseph Grundfest, a Stanford law professor
who works with Cornerstone and a former commissioner of the U.S.
Securities and Exchange Commission, in an interview.
"If the court heightens the showing that plaintiffs must
make to establish reliance, then all bets are off," Grundfest
said. "It could become impractical to certify a large number of
class actions, because it would require a showing that each
individual member of the class relied on misrepresentations."
The Supreme Court is expected to rule before July.
Last term, it voted 6-3 to let Amgen Inc
shareholders sue as a group without first showing that alleged
misstatements were material.
But four justices expressed discomfort with Basic, and the
court has in other cases cut back on class actions were
plaintiffs' claims were dissimilar. Further cutbacks could make
it harder for small investors to pursue claims in court.
"A class is certifiable only if there are common questions
affecting everyone in the same way, but that commonality may
disappear if individual investors relied differently on alleged
misrepresentations," said John Donovan, a partner at Ropes &
Gray in Boston, in an interview.
He said one option is for the Supreme Court to require
investors to prove that misrepresentations had an actual effect
on a stock's price.
SETTLEMENT TOTALS RISE
According to Cornerstone, healthcare and biotechnology
companies accounted for 21 percent of last year's 166 lawsuits.
Financial companies accounted for just 11 percent, and for
the first time in 14 years no targets were in the Standard &
Thirty lawsuits targeted foreign issuers, down from 32 in
2012. And a mere 13 challenged mergers and acquisitions, though
that number excludes state court class actions and "derivative"
actions filed against officers and directors.
Investors challenge "well over" 80 percent of mergers and
acquisitions in court, even when shareholders of takeover
targets receive big premiums, the law firm Gibson, Dunn &
Crutcher said in a report last week.
Earlier this month, NERA Economic Consulting said federal
courts in 2013 approved $6.5 billion of settlements, up from
$3.3 billion in 2012.
The largest settlement to win approval in 2013 was Bank of
America Corp's $2.43 billion settlement of claims over
its Jan. 2009 purchase of Merrill Lynch & Co.
That payout was less than half the record $7.24 billion
related to Enron Corp in 2006, and $6.19 billion related to
WorldCom Inc in 2005.
Grundfest said such settlements could become harder to come
by if the Supreme Court narrowed or overruled Basic. "There
would be a very large push by plaintiffs' lawyers and perhaps
even the SEC to have something done in Congress," he said.