{"id":168185,"date":"2021-06-14T17:42:52","date_gmt":"2021-06-14T17:42:52","guid":{"rendered":"https:\/\/dominiclevent.com\/blog\/?p=168185"},"modified":"2021-06-26T08:28:00","modified_gmt":"2021-06-26T08:28:00","slug":"why-event-driven-securities-litigation-has-become-a-thing-and-a-lucrative-one-too-corporate-commer","status":"publish","type":"post","link":"https:\/\/dominiclevent.com\/blog\/why-event-driven-securities-litigation-has-become-a-thing-and-a-lucrative-one-too-corporate-commer\/","title":{"rendered":"Why Event-driven Securities Litigation Has Become A Thing\u2014and A Lucrative One Too – Corporate\/Commer…"},"content":{"rendered":"


\n<\/p>\n

\n

If Matt Levine has a mantra in his “Money Stuff”
\ncolumn on\u00a0Bloomberg<\/em>, it’s this: everything is
\nsecurities fraud. “You know the basic idea,” he often
\nsays in his most acerbic voice,<\/p>\n

\n


\n“A company does something bad, or something bad happens to it.
\nIts stock price goes down, because of the bad thing. Shareholders
\nsue: Doing the bad thing and not immediately telling shareholders
\nabout it, the shareholders say, is securities fraud. Even if the
\ncompany does immediately tell shareholders about the bad thing,
\nwhich is not particularly common, the shareholders might sue,
\nclaiming that the company failed to disclose the conditions and
\nvulnerabilities that allowed the bad thing to happen. And so
\ncontributing to global warming is securities fraud, and sexual
\nharassment by executives is securities fraud, and customer data
\nbreaches are securities fraud, and mistreating killer whales is
\nsecurities fraud, and whatever else you’ve got. Securities
\nfraud is a universal regulatory regime; anything bad that is done
\nby or happens to a public company is also securities fraud, and it
\nis often easier to punish the bad thing as securities fraud than it
\nis to regulate it directly.” (Money Stuff, 6\/26\/19)<\/p>\n<\/div>\n

(See\u00a0
\nthis PubCo post<\/a>.) \u00a0But should everything really be
\nsecurities fraud? An interesting\u00a0new
\npaper<\/a>\u00a0examines the phenomenon.<\/p>\n

Much securities fraud litigation involves allegations of company
\nconduct such as cooking the books or inflating the company’s
\nprospects-conduct that, if true, causes direct harm to
\n\u00a0shareholders.\u00a0 Some securities litigation, however, is
\nbased on events such as oil spills or product defects-conduct that
\ncauses direct injury primarily to a different set of constituents,
\nbut only indirect injury to shareholders. Yet, when the stock drops
\nafter the event, shareholders sometimes sue the company, contending
\nthat the company provided inadequate disclosure about the risks
\nrelated to the event.\u00a0 This type of litigation, often referred
\nto as “event-driven securities litigation,” has become
\nincreasingly common.<\/p>\n

\n

SideBar<\/h3>\n

In 2020, the U.S. Chamber Institute for Legal Reform and the
\nCenter for Capital Markets Competitiveness of the U.S. Chamber of
\nCommerce filed a\u00a0
\nrulemaking petition<\/a>\u00a0asking the SEC to use its authority
\nunder the Private Securities Litigation Reform Act to take on
\nevent-driven securities litigation arising out of the COVID-19
\npandemic. In particular, petitioners asked the SEC “to bar
\nliability for statements about a company’s plans or prospects
\nfor getting back to business, resuming sales or profitability, or
\nother statements about the impacts of COVID-19, whether
\nforward-looking or not-as long as suitable warnings were
\nattached.” Petitioners argued that securities litigation has
\nbeen predicated on “wildfires, oil spills, product recalls, a
\nplane crash, and a dam collapse.” However, Petitioners
\nconsidered these cases to often be of “dubious merit,”
\nfiled to “extract a quick settlement.” They indicated
\nthat securities class actions based on COVID-19 have already been
\nfiled, and predicted that “pandemic-related events will be
\nseized upon as the basis for additional securities
\nlitigation.”<\/p>\n

Petitioners considered the recent increase in securities
\nlitigation to be driven in large part by the growth of event-driven
\nclaims, citing in support Professor John Coffee of Columbia Law
\nSchool:<\/p>\n

\n

“Once, securities class actions were largely about
\nfinancial disclosures (e.g<\/em>., earnings, revenues,
\nliabilities, etc.). In this world, the biggest disaster was an
\naccounting restatement. Now, the biggest disaster may be a literal
\ndisaster: an airplane crash, a major fire, or a medical calamity
\nthat is attributed to your product.. The expectation of major
\nlosses from the disaster sends the issuer’s stock price down,
\nwhich in turn triggers securities litigation that essentially
\nalleges that the issuer failed to disclose its potential
\nvulnerability to such a disaster.”\u00a0<\/p>\n<\/div>\n

In these cases, Coffee argued, plaintiff’s counsel do not
\nspend months building a case to plead scienter with particularity;
\nrather, these cases are filed quickly, and “that may be
\nbecause ‘some plaintiff’s counsel are less concerned about
\nsurviving a motion to dismiss because they expect an early (and
\ncheap) settlement.'” The characteristics of this
\nevent-driven litigation, petitioners argued, are just like the
\nthose that led Congress to pass the PSLRA.\u00a0 Although the
\n“legitimacy of these lawsuits is highly suspect,” the
\nlitigation creates “a large potential exposure. The defense
\ncosts are high, and few companies want to risk the reputational
\ndamage that could result from prolonging the litigation of such
\nclaims.”<\/p>\n<\/div>\n

Is
\nEverything Securities Fraud?<\/a><\/em>, by Emily Strauss, a
\nprofessor at Duke Law School, examines the prevalence and
\nattributes of event-driven securities litigation.\u00a0 The author
\nlooked at approximately 400 securities class actions against public
\ncompanies during the period 2010 to 2015.\u00a0 The author found
\nthat about 16.5% of securities class actions “arise from
\nmisconduct where the most direct victims are not
\nshareholders.”<\/p>\n

In a conclusion that may seem counter-intuitive, the author
\nfound that regular securities cases, where shareholders are the
\nprimary victims, are almost 20 percentage points more likely to be
\ndismissed (55%) than event-driven securities cases (36%).\u00a0
\nWhat’s more, the average shareholder settlement in event-driven
\nsecurities litigation (where the misconduct most directly harms
\nvictims other than shareholders) is $24.3 million compared to $7.2
\nmillion for regular securities litigation where the primary victims
\nare shareholders. The author noted that these correlations
\n“persist even when controlling for firm size, class period
\nduration, court expertise, and indicia of merits of the lawsuit,
\nsuch as institutional investors as lead plaintiffs, earnings
\nrestatements within the class period, and whether the complaint
\ncited an SEC investigation.” In addition, defendant companies
\nin event-driven securities cases are larger on average ($29.6
\nbillion in total assets), compared to regular securities class
\nactions on average ($8 billion in total assets). And, almost 70% of
\nevent-driven securities cases were brought by pension funds and
\nother institutional investors, compared with only 42% of regular
\nsecurities litigation.\u00a0 That’s notable because
\n“institutional investor lead plaintiffs are associated with
\nlower dismissal probability and dramatically higher settlement
\nvalues. They also generally appear to sue much larger
\nfirms.”<\/p>\n

The author concluded that these event-driven securities class
\nactions are “big-ticket cases.” Why is that? According to
\nthe author, probably because, in these cases, the “shareholder
\nplaintiffs almost universally benefit from government
\ninvestigations into the defendant firms’ misconduct against
\nthird parties.” That is, plaintiffs “piggyback” on
\nthe government’s factfinding; work already performed by
\nregulators such as the EPA, the FDA and the NHTSA means that
\n“the bad facts are already public,” making these cases
\nprime vehicles for litigation-or, depending on your point of view,
\npiling on by opportunistic plaintiffs. The author viewed the
\nincidence of government investigations as “the most striking
\ndifference”: although SEC investigations were cited in both
\ntypes of complaints with similar frequency, over 70% of
\nevent-driven securities class actions cited only inquiries or
\nactions by non-SEC regulators, but only 4% of regular securities
\nclass actions cited these types of inquiries. Nearly 90% of
\ncomplaints in event-driven securities lawsuits cited some
\ngovernment investigation.<\/p>\n

But do these cases have merit? \u00a0\u00a0The answer, according
\nto the author, “is that in practice, there is usually
\nextraordinary ambiguity in these cases about whether the
\nshareholders were defrauded.” The author contended that,
\nalthough the characteristic “low dismissal rates, high
\nsettlement values, government investigations and institutional lead
\nplaintiffs” are often considered indicia of merit, with
\nevent-driven securities litigation, that is not necessarily the
\ncase. She argued that the intense pressure to settle these
\ncases-because of the size of the claims, the battle’s being
\nfought on several fronts and uncertainties of success, rather than
\nmerit-could account for the relatively high settlements.\u00a0 In
\naddition, institutional investors, which are often the lead
\nplaintiffs, may “cherry-pick” these cases, “not
\nbecause there was clearly investor fraud, but because, thanks to
\nthe government investigations that accompany the vast majority of
\nthem, bad facts are already public, and the defendants tend to have
\ndeep pockets.” \u00a0Finally, the investigations performed by
\nregulators outside of the SEC may not really provide “hard
\nevidence of investor fraud” as compared with SEC
\ninvestigations: “the fact that non-SEC regulators discover
\nthat something went wrong does not necessarily mean that investors
\nwere defrauded.”<\/p>\n

While the real solution, the author observed, would be for
\ncompanies to adopt better mechanisms to prevent the underlying
\nevent that caused the injury altogether, the author offered what
\nshe considered to be a more doable policy prescription: two
\n“targeted mechanisms that might help shareholders and the
\ngeneral public better monitor firm conduct that externalizes costs
\nto third parties: more specific catastrophic risk disclosures.and
\nmandatory ESG disclosures.” \u00a0(With regard to catastrophic
\nrisk disclosures, some might point out that many companies already
\ninclude in their SEC filings 40- or 50-page risk factor sections
\nthat seek to do just that.)\u00a0 With regard to ESG disclosures,
\nshe argued that the absence of mandatory uniform requirements has
\nmade ESG disclosures\u00a0difficult to evaluate and compare and
\nallowed companies to engage in greenwashing.\u00a0 However, the
\nauthor suggests, if companies “undertake, in measurable terms,
\nto be responsible citizens, there may be less leeway for them to
\nmaintain operational risks that could result in harm to third
\nparties.”\u00a0 Accordingly, she contends, providing better
\ninformation \u00a0about the “measures firms take to be
\nresponsible corporate citizens.would enable shareholders and the
\ngeneral public to better monitor these risks.”<\/p>\n

The content of this article is intended to provide a general
\nguide to the subject matter. Specialist advice should be sought
\nabout your specific circumstances.<\/em><\/p>\n<\/div>\n


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