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 (HAL.N) 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 (AMGN.O) 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 & Poor's 500.
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 (BAC.N) $2.43 billion settlement of claims over its January 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.
(Reporting by Jonathan Stempel in New York; Editing by David Gregorio)