Disguntled investors file record number of class actions

A record number of securities class actions were filed on behalf of disgruntled investors in the U.S. last year, according to a new report from Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse.

The report indicates that 428 securities class actions were filed in both U.S. state and federal courts last year, which is the highest total on record.

Of these, there was a record number of “core” class action filings in 2019, with 268 core cases, and 160 filings involving M&A transactions. Core filings were up by 13% from the previous year.

“This marks a historic high for core filings, surpassing even 2008, when class actions peaked in response to financial market volatility,” the report states. “Market capitalization losses in 2019 eclipsed $1 trillion for the second consecutive year.”

The record level of class action activity was driven by an increase in filings in state courts.

“The significant increase in state actions … indicates plaintiffs are modifying their approach, and we will continue to monitor the trend,” said Alexander Aganin, senior vice president with Cornerstone Research, in a release.

This trend follows a decision from the U.S. Supreme Court in March 2018 allowing plaintiffs to assert claims involving misrepresentation in securities filings in state courts.

“[This] has caused a sharp jump in the cost of [directors and officers] insurance for companies going public,” said Joseph Grundfest, director of the Stanford Law School Securities Class Action Clearinghouse.

“Many IPO issuers have adopted rules that would move this litigation back to federal courts where, these claims have traditionally been resolved,” Grundfest added.

“The enforcability of these provisions, however, has been challenged, and the IPO market is awaiting a decision by the Delaware Supreme Court that will likely define the contours of federal securities fraud litigation for years to come. That decision will likely be handed down before the end of April,” he said.

The report also noted that federal filings against companies based outside the U.S. reached record levels last year, with 57 such cases.

Companies in the cannabis industry are increasingly the target of federal class action filings, the report states. There were 13 filings involving cannabis companies in 2019, up from six in 2019.

There were nine core filings against Canadian firms in 2019, up from six in 2018 (and up from the long-term average of five), the highest level since 1998. Six of the nine cases involved cannabis-related companies.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.