2019 Q3 Update: The Securities Class Action Situation is Not Improving

October 9, 2019

Management Liability/D&O

Securities class action lawsuits tend to be the high-severity risk for public company directors and officers. That’s why Woodruff Sawyer tracks this information closely in our proprietary database, the D&O Databox. The news through the third quarter of 2019 is not good: an unprecedented number of cases have been filed for 2019 through Q3 2019 and there is still a quarter left to go.

We will be discussing data from our Q3 update and more during our Looking Ahead Webinars. Clients and friends of Woodruff Sawyer are welcome to sign up here. Our next one will be coming to you live from Boston on October 11th at 10 am local time. Our last one will be in Seattle on October 25 at 10 am local time.

As we have recently discussed in our 2020 Looking Ahead Guide as well as in our 2019 Mid-Year DataBox Update, we are seeing year-over-year increases in securities class action activity. This, along with some other factors, has put tremendous upward pressure on the price of D&O insurance for public companies.

Through the end of 2018, we have had seven years of increasing activity, and are at more than twice the rate of class action suits being filed compared to a decade ago.

Securities Class Action Lawsuits - 202 so far in 2019

As we highlighted in our 2019 Mid-Year Databox Update, filing activity shows no sign of waning and the latest numbers prove it.

Given that we have seen an average of 22.4 cases filed per month in 2019, and we have seen over the last decade an average of 25% of cases filed in the last quarter of the year, we conservatively estimate that we will see an additional 50 to 70 cases filed in the fourth quarter.

This would bring the total cases filed in 2019 in the range of 250 to 270 cases filed⁠—an increase of 13% to 22% over 2018, breaking the decade record high in 2018 of 222 cases.

SCA Cases filed through Q3 have increased 28% over 2018

Note that the third quarter is typically a slow quarter for filings, but that was not the case this year.

Section 11 Cases–26% of Total Cases Filed

A big component of what is driving the increased filing activity are Section 11 cases. We have seen a steady increase in this type of case being filed since 2015 when the plaintiffs’ bar began their targeted filings against IPO companies in California state courts.

State court filings have occurred in nine different states this year: California, Florida, Illinois, Massachusetts, New Jersey, New York, Pennsylvania, Rhode Island, and Texas–a consequence of the Cyan ruling by the United States Supreme Court in March of 2018. Parallel court filings in both state and federal courts have risen as well as a result of this ruling.

52% of the Section 11 cases were filed in state courts

By Industry–No Noticeable Shifts in Securities Class Actions

There has been no big shifts when it comes to which industries are being targeted by plaintiffs. Specifically, technology and biotechnology companies continue to be the industries most tagged by securities class action suits.

SCAs Filed by Industry - Technology and Biotechnology are the most targeted in 2019, at 35% and 17%, respectively

Securities Class Actions By Market Caps

The largest percentage of suits in the third quarter were filed against companies in the $1 billion to $10 billion market cap range. Larger market cap companies should not, however, feel comfortable. They are always a natural target for plaintiffs because a smaller percentage stock drop is still a good case for plaintiffs due to the fact that the absolute dollar loss will still be large.

SCA By Market Cap - 46% of 2019 of suits in the third quarter were filed against companies in the $1 billion to $10 billion market cap range

Securities Class Action Suits By Foreign Domicile

Non-US companies continue to be targeted by the plaintiffs’ bar.

Securities Class Actions filed Against Foreign Domiciled Companies - 22% of 202 cases in 2019 so far (45 cases in 17 countries)

Number of Years Trading on US Exchanges

Consistent with the uptick in Section 11 suits, we see a rise in the percentage of suits being brought against companies within three years of their IPOs compared to the same period in 2019.

Percent of companies sued by years trading on the U.S. Exchanges - 23% of companies sued in 2019 are within 0-3 years of IPO, compared to 17% in 2018

What to Expect

The bottom line is that the securities litigation environment is getting worse, not better. Clients––both mature public companies and IPOs––are well advised to start their D&O insurance placement process sooner than later.

There is a lot to keep in mind when it comes to preparing for 2020, much of which is laid out in our recently released D&O Looking Ahead Guide.

Taking a strategic approach to how one can build a D&O insurance tower can be helpful as well, as I discussed in this recent article about “Six Ways to Reduce Your D&O Insurance Premiums.

We’ll discuss the data and its impact on the D&O insurance market and more in our live Looking Ahead webinar series. There are only two live webinars left in the series, so reserve your spot now.

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