NERA Economic Consulting and Cornerstone Research (in conjunction with the Stanford Securities Class Action Clearinghouse) have released their 2013 annual reports on securities class action filings. As usual, the different methodologies employed by the two organizations have led to different numbers, although they both identify the same general trends.
The findings for 2013 include:
(1) The reports agree that filings have increased by a slight amount. NERA finds that there were 234 filings (compared with 213 filings in 2012), while Cornerstone finds that there were 166 filings (compared with 152 filings in 2012). NERA normally has a higher filings number due to its counting methodology (see footnote 2 of the NERA report).
(2) The reports note that the number of companies listed on U.S. exchanges has declined nearly 50% from 1996 to 2013, but draw different (albeit not contradictory) conclusions from this statistic. NERA states that "the implication of this decline is that an average company listed in the US was 83% more likely to be the target of a securities class action in 2013 than in the first five years after the passage of the PSLRA." Cornerstone, in contrast, points to this decline as "one explanation for the recent relatively low levels of filing activity compared with historical averages."
(3) The Cornerstone report offers a new analysis of class certification trends. It notes that between 2002 and 2010, class certification was denied for reasons based on the merits of the motion (e.g., typicality, predominance, etc.) in less than two dozen cases.
(4) NERA found a sharp increase in the average settlement amount in 2013, reaching a new record of $55 million. The median settlement amount, however, decreased 26% to $9.1 million. NERA concludes that "a few large settlements drove the average up, while many small settlements drove the median down."
If an SEC rule states that certain information does not have to be disclosed in a public filing, does that mean a company cannot act recklessly in failing to disclose that information? In In re Hi-Crush Partners L.P. Sec. Litig., 2013 WL 6233561 (S.D.N.Y. Dec. 2, 2013), the defendants noted that under the SEC's Form 8-K rules, they were not required to disclose that a major customer had terminated its contract with the company because the purported termination was invalid. In support of their argument that the plaintiffs had failed to adequately plead scienter, the defendants cited a different district court, addressing a similar set of facts, which held that "defendants' compliance with [SEC regulations] suggests that Lead Plaintiff has failed to show defendants acted recklessly in omitting such information."
The Hi-Crush court agreed that the Form 8-K rules did not require the disclosure, but disagreed that this meant the defendants had not acted recklessly. First, the court found that even in the absence of an affirmative disclosure obligation, the defendants could have a duty to disclose the information to avoid misleading investors. Second, given that the contract was supposed to generate 18.2% of Hi-Crush's revenue stream, it was "imperative" that investors be told about the threat of termination.
Holding: Motion to dismiss granted in part and denied in part.
The Halliburton case in the U.S. Supreme Court is moving quickly, with oral argument scheduled for March 5, 2014. At issue, at least potentially, is the continued viability of the fraud-on-the-market presumption of reliance. The presumption was judicially created by the Court and is routinely invoked in securities class actions to justify the grant of class certification.
The merits brief for the petitioners (Halliburton and its CEO) and the supporting amicus briefs have been filed with the Court. A listing of the briefs can be found here. The author of The 10b-5 Daily - Lyle Roberts of Cooley LLP - assisted the Washington Legal Foundation (WLF) with the filing of an amicus brief that focuses on the second question presented: Whether, in a case where the plaintiff invokes the presumption of reliance to seek class certification, the defendant may rebut the presumption and prevent class certification by introducing evidence that the alleged misrepresentations did not distort the market price of its stock.
The WLF brief argues that price impact is not dispositive as to either materiality or loss causation for all class members and, as a result, allowing a price impact rebuttal at the class certification stage does not run afoul of the Court's Amgen decision. In addition, the brief points out that allowing a price impact rebuttal would harmonize the Court’s approach to affirmative misstatement and omissions cases and would better protect the rights of individual investors who can demonstrate actual reliance. The WLF brief is available on the Foundation's website.