Issuers see drop in volume of securities class action lawsuits, study finds
At the mid-year point, the number of securities class action lawsuits filed in federal and state courts is at its lowest level since 2015, according to a report released by Cornerstone Research.
During the first six months of this year, plaintiffs filed 112 new class action securities cases across federal and state courts. This is a 25 percent decrease compared with the same period in 2020, when plaintiffs filed 186 cases.
The decline is largely caused by the sharp drop in M&A filings. There were only 12 filings for the first half of 2021, compared with 65 filings in the first half of 2020. This represents the lowest number of M&A related filings since the second half of 2014.
Another reason for this decline was the drop in federal and state court class actions alleging claims under Federal Section 11 of the Securities Act of 1933, which governs untrue or misleading statements by issuers and other market participants. There were only seven such suits for the first half of this year, compared to 17 in the same period of 2020. The decline is indicative of a broader trend. There were 66 filings for the full year of 2019 and this figure dropped to 36 for the full year of 2020.
Special purpose acquisition company filings on the rise
Despite the decline in filings for new securities class action lawsuits, the report notes that special purpose acquisition company (Spac) filings have increased sharply in the first half of this year.
For the first six months of 2021, there were 14 federal Spac filings, which represents twice the number seen in all of 2020. Of these filings, 57 percent allege that the potential targets defrauded investors by misrepresenting their product’s viability.
‘As Spac IPOs continued to explode in 2020 and earlier this year, filings against Spac-related entities also increased sharply in the first half of 2021,’ says Alexander Aganin, report co-author and Cornerstone Research senior vice president.
‘Former Spacs have experienced a Section 10(b) litigation rate of approximately 14 percent after completion of their mergers, which is roughly comparable to the cumulative litigation rate experienced by traditional IPOs over the subsequent three years.’
Last week, the US attorney’s office in Manhattan accused Nikola founder Trevor Milton of lying about ‘nearly all aspects of the business’ to promote the company’s Spac. Milton faces two counts of securities fraud and one count of wire fraud, while the SEC has filed civil securities fraud charges against him.
The trend of Covid-19 filings continues
As the pandemic continues, so does the trend of Covid-19 lawsuits, with 10 filed during the first six months of this year. They were mostly filed at the start of the year, with nearly two-thirds of fillings occurring in January and February.
Allegations for the Covid-19 related filings included: misrepresentation about Covid-19 treatments, vaccines that failed to make it to the market and the effects of Covid-19 on business operations. Of these filings, 50 percent were related to Covid-19 treatments or vaccines that failed to make it to market.
‘Filings release to Spacs and Covid-19 surged in the second half of 2020 and the first half of 2021 while other trends filing decreased,’ say the authors of the report.