Class Action

In the first two weeks of July 2018, seven new securities class action lawsuits moved forward against public companies listed in the U.S. market, including a filing on July 10, 2018, against Mercury Systems, Inc. (MRCY:  Nasdaq), one of the companies in the coverage universe of Crystal Equity Research, and another on July 9, 2018 against mining conglomerate Glencore Plc (GLCNF:  OTC/QB or GLEN:  London).  That may seem like a flurry of legal action, but it pales in comparison to the average of 33 lawsuits per month filed in the first six months of the year 2018, according to data supplied by Stanford University’s Securities Class Action Clearinghouse. 

Should investors take a cue from the pace of securities class action lawsuits?  A little perspective might be in order to answer that question. 

According to Stanford Law, the number of federal securities class action lawsuits in 2017, reached yet another new record of 412 new filings.  This is well above the 271 filings in 2016, which was also a record year.  This is the highest level since the enactment of the Private Securities Litigation Reform Act of 1995 (PSLRA). 

Congress took action in the mid 1990s, to bring a halt to the filing of frivolous lawsuits.  PSLRA put new requirements on plaintiffs to provide evidence of wrong doing before a securities fraud case can be brought to federal courts.  Back in the good old days of class action lawsuits, plaintiffs could bring just about any complaint to the courts with a lawsuit and then use pretrial discovery to find the proof of wrong doing.  It was more fishing expedition than legal action against securities fraud.  At the time the law was passed over the veto of President Bill Clinton. 

Apparently investors and the public are finding adequate evidence to move forward with class action against bad players in the public sector.  Filings related to mergers and acquisitions accounting for almost half of federal securities class actions.  Consumer non-cyclical companies are more likely than other industries to be the subject of securities class action suits. Companies listed on the NASDAQ exchange are the targets of securities class action lawsuits more frequently than those listed on the NYSE.  Stanford Law also reports that the growth in filing has coincided with increased activity by three plaintiff law firms in particular:  The Rosen Law Firm, Pomerantz LLP and Glancy, Prongay & Murray LLP.   These three firms serve as lead counsel in about a third of all securities class action lawsuits in the U.S.

About half of securities class action filings are eventually dismissed.  For example, on July 11, 2018, a California federal judge found that a case brought against Gigamon, Inc. (formerly traded as GIMO on NYSE) for securities fraud fell short.   The lawsuit had alleged the network technology company exaggerated projected earnings prior to a report that revealed them to be around $10 million less than guidance.  However, the judge found that the case failed to show intentional misinformation.  The lawsuit may have played a part in management’s acceptance of a buyout offer from a private equity fund completed in January 2018.

The year 2008, is the last year for which all filings have reached a conclusion.  Exactly 50% were dismissed and 50% reach a settlement.  Some lawsuits in all years since are still undecided, making it clear things unfold slowly in the world of securities class action lawsuits. 

Despite the glacial pace of these legal actions, there is much to motivate shareholders and their legal representatives.  For example, in June 2018, coffee vendor Keurig Green Mountain, agreed to pay $36.5 million to settle a securities fraud suit that accused the company and two members of senior management  of misleading shareholders about sales and revenue expectations in 2011.  In March 2016, a group of investors led by JAB Holding Company acquired Keurig for $13.9 billion in cash.

Expert testimony provider, Cornerstone Research, recently reported on class action settlements in a report published in March 2018, Securities Class Action Settlements.  According to Cornerstone over the ten year period between 1995 and 2016, there were a total of 1,616 settlements in securities class action lawsuits, representing $93.2 billion in awards.  The average award was $57.7 million.  In 2017, the number of settlements remained high at 81, but settlement awards dipped to $1.5 billion.  This compares to a record high total settlement awards of $6.1 billion in 2016.  For the patient shareholder the securities class action lawsuit can be a good pay day.  Thus despite the imposition of a higher hurdle of evidence to file a lawsuit, plaintiffs and their legal representatives are moving forward with zeal to pursue wrongdoing.  

Those days may be coming to an end.  The Trump administration is considering new legislation that would make it possible for companies to force shareholders to arbitration. Instead of proceedings in open court and in front of juries, arbitration takes the plaintiff behind closed doors to settle disputes through negotiation.  

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.