When we write about securities law issues here, we tend to focus on enforcement actions or investor alerts by the Securities and Exchange Commission (SEC). For instance, in our previous blog series “SEC Issues an Investor Alert on Social Media and Investing,” we discussed the SEC investor alert warning investors about fraudsters who attempt to manipulate share prices through social media. In another blog post “Crowdfunding Gone Wrong: Some Points of Caution,” we covered the SEC’s emergency action against Ascenergy LLC, a Nevada limited liability company, which allegedly solicited investors on crowdfunding websites with false and misleading statements. In another blog post “Eureeca: A Cautionary Tale on How Not To Do Crowdfunding,” we covered the SEC’s enforcement action against Eureeca for its misguided attempt to conduct crowdfunding offerings. As we emphasize again and again, the overarching purpose of securities laws is protection of investors, and the SEC takes this mission seriously by pursuing violators vigorously through criminal, civil, and administrative proceedings.
That does not mean, however, that the SEC is the only one going after securities law violators. Individuals aggrieved by securities law violations can sue companies directly and are often quite successful. For example, when the SEC charged in 2009 that the top executives of Bank of America defraud shareholders by failing to reveal the full extent of the huge and growing losses experienced by Merrill Lynch, its acquisition target, it settled the case for $150 million, to be paid to defrauded shareholders, while a private class action on behalf of the same shareholders based on the same allegations was settled for $2.4 billion, or sixteen times the SEC settlement. Although private class actions are not without their criticism, they play an important role in enforcing securities laws in our legal system, especially when the SEC fails to do so.
So what does the first half of 2016 tell us about securities fraud class actions trends? A recent report by Cornerstone Research says, of note:
- Plaintiffs filed 119 new federal class action securities cases—27% above the historical semiannual average of 94 filings observed between 1997 and 2015;
- If the trend holds, 6% of S&P 500 companies will be sued in 2016, which the report says represents a return to a longstanding pattern of larger companies being the most frequent targets;
- On an annualized basis, filings against foreign issuers increased from 2015 levels despite an absence of filings against Chinese companies, the most common foreign companies targeted by class actions in recent years;
- Federal filings of class actions involving merger and acquisition (M&A) transactions increased to 24 in the first half of 2016, compared to a range of five to nine filings per semiannual period from 2012 through 2015; and
- In terms of industry, filings against companies in the financial sector increased to 17, the same as the historical average, and the consumer non-cyclical sector, predominantly composed of biotechnology, pharmaceutical, and healthcare companies, had the most filings with 43.
The full text of the report is available here.
Although the trends show, naturally, that big companies are the most frequent targets of securities fraud class action lawsuits, they should also serve as a reminder that companies of all sizes can be the targets of securities fraud lawsuits. As we mentioned in our previous post on when to seek securities law advice, companies in the process of raising capital or bringing in investors should always be mindful of what they are doing so as not to take a misstep in the complex world of securities regulation.
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This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
Steps have been taken to verify the contents of this article prior to publication. However, readers should not, and may not, rely on this article. Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.
 Jed S. Rakoff, The Cure for Corporate Wrongdoing: Class Actions vs. Individual Prosecutions, The N.Y. Review (Nov. 19, 2015), http://www.nybooks.com/articles/2015/11/19/cure-corporate-wrongdoing-class-actions/.
 Cornerstone Research, Securities Class Action Filings: 2016 midyear Assessment, http://securities.stanford.edu/research-reports/1996-2016/Cornerstone-Research-Securities-Class-Action-Filings-2016-MYA.pdf (last visited Aug. 1, 2016), at 1—2. Unless otherwise specified, all references to the trends are to this citation.