Search results

The purpose of this paper is to survey the landscape of recent federal securities class actions filed in state court and explore arguments for removal of those cases to federal courts under the Securities Litigation Reform Act (SLUSA) or the Class Action Fairness Act (CAFA).

The paper discusses: US Congressional legislation designed to bring the bulk of securities class actions back into federal courts, including the Private Securities Litigation Reform Act (PSLRA) and SLUSA; CAFA, another law designed to redirect class action litigation away from state courts; recent cases that have tested the limits of SLUSA and CAFA for removal from state to federal courts; and arguments for removal under SLUSA and CAFA.

Legislative history for both SLUSA and CAFA suggests that these statutes should be read as evidence of Congressional intent to return most securities class actions to federal court. Nonetheless, plaintiffs have continued to devise legal schemes to litigate class actions in what they perceive to be friendlier forums in state courts.

Although the arguments discussed in this paper are not exhaustive, they are a starting point for defendants seeking removal once litigation arises.

This paper aims to provide an analysis of securities class action filings in 2017 along with related trends over time and a comprehensive current view of the securities class action landscape.

The paper details 2017 securities class actions and related trends by measures including the number and size of filings; market capitalization losses; litigation likelihood for US versus non-US exchange-listed companies; status and outcomes of filings (settled, dismissed, continuing); core versus merger and acquisition filings; individual versus institutional investors as lead plaintiffs; and concentration of class action activity by industry sector, stock exchange and court circuit.

The number of federal securities class action lawsuits filed in 2017 reached a record high for the second straight year. The jump was spurred by a sharp increase in lawsuits targeting mergers and acquisitions. The 412 securities class action filings in 2017 represented a more than 50 per cent increase from the previous record of 271 filings in 2016.

This paper details analysis by legal and industry experts.

The purpose of this paper is to examine how the filing of a securities class action, and associated corrective actions taken by management, impact the operating performance of sued firms.

A matched sample is formed three years prior to the filing of a class action, as opposed to the traditional one year used in the literature. Match adjusted performance is analyzed from three years prior to the filing to five years after. Further the authors analyze the impact corrective actions have on operating performance.

The results show that operating underperformance happens considerably earlier than had hitherto been believed. Further, there is no evidence that the filing adversely affects performance, rather securities class actions appear to act as a turning point. The findings also indicate that firms that increase leverage post filing, experience subsequent increases in their operating performance.

The results show that rather than leading to a deterioration in performance, as is currently understood, the filing of a securities class actions results in improved operating performance. This improvement is, in part, associated with more optimal use of leverage by management. Overall, class actions appear to be an effective disciplinary mechanism.

To provide an analysis of securities class action filings in 2015 along with related trends over time and a comprehensive current view of the securities class action landscape.

Details 2015 securities class actions and related trends in terms of the number and size of filings; market capitalization losses; the litigation exposure of IPOs; the classification of complaints; litigation likelihood for US exchange-listed companies; resolutions (settlements, dismissals or trial verdict outcomes); timing of dismissals and settlements; filing lags; filings against foreign issuers; number of mega filings; recent rulings related to class certification; and concentration of class action activity by industry sector, stock exchange and court circuit.

The number of filings in 2015 was the largest since 2008. The Disclosure Dollar Loss Index® (DDL Index®), the Maximum Dollar Loss Index® (MDL Index®) and the number of mega filings rose sharply in 2015 after declines in 2014. The Consumer Non-Cyclical sector had the most filings in 2015 while filings against companies in the Financial sector were below historical averages. Dismissal rates appear to be trending down. The median filing lag has never been shorter than in 2015. Filings against foreign issuers remain at high levels. Filings against S&P 500 companies remained below the historical average.

Detailed analysis by legal and industry experts.

This study investigates the relation between lawsuit attributes that support an inference of fraud and the probability and the size of securities lawsuit settlement. A sample of 607 securities lawsuits between 1996 and 2006 is used in the analysis of the probability of settlement and a subsample of 261 lawsuit settlements is used in the analysis of the size of settlement. The empirical results indicate a positive association between the probability of a settlement and accounting irregularity, SEC enforcement action and stock offer. Accounting irregularity and SEC enforcement action are also documented to be positively related to the size of the settlement. The results imply that a stock offer supports a strong inference of fraud and the presence of accounting irregularity and SEC enforcement action in a lawsuit filing strengthens the fraud allegation and increases the likelihood of a settlement. The findings also suggest that the stronger the inference of fraud, the greater the size of the settlement. The results of this study add to our understanding of the determinants of securities lawsuit settlement. Studies using securities litigation as a proxy for fraud can use the results of this study to distinguish between fraud-related and nonfraud-related lawsuits.

The threat of securities class actions haunts every public company. The threat probably is worst for information technology companies. Similarly, Y2K claims may threaten every company, and probably are greatest for those most dependent on information technology. It follows that the combination of these risks ± of securities class actions resulting from any of the countless types of possible Y2K claims ± presents public companies with a formidable problem. This article provides an overview of the implications of Y2K for securities class actions, and identifies some practical steps for minimizing the risks from Y2K‐related securities claims.

The purpose of this paper is to investigate the trading patterns of corporate insiders, both managing and non-managing, around the announcement dates of securities class action lawsuits and related legal settlements.

The authors use market model event study methodology to examine the impact of class action litigation and settlement announcements on the stock prices of sued firms. The authors then determine the extent of abnormal insider trading surrounding such announcements by comparing insider trading activity (volume and transaction counts) to prior insider trading in the same firm, and to a matched sample of firms not experiencing such litigation announcements. A multivariate framework is utilized to provide further insight into the determinants of such abnormal insider trading.

The authors establish that class action litigation and settlement announcements have a significant impact on the stock prices of sued firms, and that foreknowledge of these events appears to be used by insiders to earn abnormal profits. Moreover, results indicate that managing insiders exhibit higher opportunistic abnormal trading activity than non-managing insiders. Multivariate analysis shows that size, prior firm returns, and the implementation of the Sarbanes-Oxley Act are important determinants of such insider trading.

This appears to be the first paper to analyze insider trading surrounding class action settlement announcements, and raises concerns about the ethical conduct of certain insider groups while highlighting the importance of access to private information, even amongst insiders themselves.

Following the Supreme Court’s 1988 decision in Basic, securities class plaintiffs can invoke the “rebuttable presumption of reliance on public, material misrepresentations regarding securities traded in an efficient market” [the “fraud-on-the-market” doctrine] to prove classwide reliance. Although this requires plaintiffs to prove that the security traded in an informationally efficient market throughout the class period, Basic did not identify what constituted adequate proof of efficiency for reliance purposes.

Market efficiency cannot be presumed without proof because even large publicly traded stocks do not always trade in efficient markets, as documented in the economic literature that has grown significantly since Basic. For instance, during the recent global financial crisis, lack of liquidity limited arbitrage (the mechanism that renders markets efficient) and led to significant price distortions in many asset markets. Yet, lower courts following Basic have frequently granted class certification based on a mechanical review of some factors that are considered intuitive “proxies” of market efficiency (albeit incorrectly, according to recent studies and our own analysis). Such factors have little probative value and their review does not constitute the rigorous analysis demanded by the Supreme Court.

Instead, to invoke fraud-on-the-market, plaintiffs must first establish that the security traded in a weak-form efficient market (absent which a security cannot, as a logical matter, trade in a “semi-strong form” efficient market, the standard required for reliance purposes) using well-accepted tests. Only then do event study results, which are commonly used to demonstrate “cause and effect” (i.e., prove that the security’s price reacted quickly to news – a hallmark of a semi-strong form efficient market), have any merit. Even then, to claim classwide reliance, plaintiffs must prove such cause-and-effect relationship throughout the class period, not simply on selected disclosure dates identified in the complaint as plaintiffs often do.

These issues have policy implications because, once a class is certified, defendants frequently settle to avoid the magnified costs and risks associated with a trial, and the merits of the case (including the proper application of legal presumptions) are rarely examined at a trial.

A private right of action is not expressly mentioned in either §10(b) or Rule 10b-5 of the Securities Exchange Act of 1934, and hence such a right must be implied. To justify a reasonable cause of action, the plaintiff must prove: (1) a material omission or misstatement; (2) made by the defendant with “scienter” (defined later); (3) which was the actual and proximate cause of injury to the plaintiff; (4) and was relied upon by the plaintiff.³ To reach the issue of damages, defendants’ liability in terms of satisfying the above four elements must be assumed.

The purpose of this paper is to examine the hypothesis that a period of sustained supernormal firm performance (for up to five years before fraud commission) creates financial pressure on actors/agents so they have a propensity to behave fraudulently to keep the good times (apparently) rolling.

Applying the Fama and French (1993) three-factor model using a range of calendar time portfolio methodologies, the authors measure abnormal drifts in stock performance in periods up to five years before alleged fraud commission dates. The authors examine a sample of 561 US firms subject to enforcement actions initiated by the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) over 1968-2009.

The authors find that sustained firm-specific positive stock price performance for up to five years followed by the almost inevitable adverse shock, which eventually brings the good times to an end, generally precedes corporate fraud. Fraud occurs when firm managers engage in misconduct in a misguided attempt to keep the good times (apparently) rolling despite the negative shock.

The sample is restricted to firms with trading histories on the stock market prior to the misconduct, and to firms contained in the Federal Securities Regulation database of US firms subject to enforcement actions initiated by the SEC and the DOJ over 1968-2009.

The desire to keep the good times rolling appears to be a very important driver of fraudulent behavior, even after controlling for the executive compensation incentive effects and business cycle effects emphasized in prior studies. The robust findings of positive abnormal returns for up to five years preceding initial fraud commission suggest that regulators and investors would be well-advised to scrutinize the behavior of firms that exhibit surprisingly persistent superior performance over an extended period. If the financial results appear too good to be true, a closer examination might just reveal that they indeed are.

While most investors generally like to see the “good times keep rolling” this pressure can create ethical dilemmas for managers.

Unlike most other papers in this area of the literature, which concentrate on the pre-fraud disclosure, the authors investigate the firm’s performance in the pre-fraud commission period. The authors find that the commission of the alleged fraud is preceded by a sustained period of surprisingly good performance of up to five years in length. The authors believe that the paper provides empirical evidence that supports the hypothesis that a period of sustained supernormal firm performance (for up to five years before fraud commission) creates financial pressure on actors/agents so they have a propensity to behave fraudulently to keep the good times (apparently) rolling.