Editor: Sasha, please tell us about Cornerstone Research.
Aganin: Cornerstone Research is a national firm, providing economic and financial consulting and expert testimony in complex litigation and regulatory proceedings. We work with a broad network of expert witnesses, including faculty and industry practitioners. These resources allow us to provide the specialized expertise required to meet the demands of each assignment. I, and several of my in-house colleagues, also provide expert testimony.
In addition to securities and financial institution cases, we consult on antitrust, intellectual property, accounting, energy, pharmaceuticals and healthcare, as well as other areas and industries.
We have more than 450 staff in Boston, Chicago, Los Angeles, Menlo Park, New York, San Francisco and Washington.
Editor: What was Cornerstone Research’s role in the preparation of “Securities Class Action Filings – 2012 Year in Review”?
Aganin: Together with the Stanford Law School Securities Class Action Clearinghouse (see http://securities.stanford.edu), we have been analyzing class action filings and settlement trends for many years. Every year, we add new insights and analyses to the report to keep up with recent developments. We are a founding sponsor of the Clearinghouse, which is officially known as the “Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research.”
The Clearinghouse maintains a database covering more than 3,500 federal securities class action cases filed since the passage of the Private Securities Litigation Reform Act of 1995. It includes almost 40,000 complaints, briefs, filings and other litigation-related materials. Because it is the most complete source of information regarding federal securities class actions, it is the resource that attorneys, D&O insurance companies and the general public turn to when they need filings information.
We believe that Stanford Law School has the best system for tracking filings versus other data sources. Our colleagues there classify a new lawsuit as a separate filing only if it relates to different underlying economic events. If three law firms filed lawsuits related to the same event, there would be only one entry in the database because those lawsuits would get consolidated eventually into one lawsuit. The database then tracks information about the status of litigation related to that particular set of economic events over time.
Editor: Describe the purpose of this new report.
Aganin: The report is our annual publication that looks back at the past year and asks how securities class action litigation activity compared to prior years and tracks notable developments. We have a sophisticated audience that looks to us to provide new and interesting cuts of the data that may inform their decisions about how to position their businesses and how to think about the risk of securities class action litigation. We present this data in a way that permits readers to make their own assessments regarding future developments and trends.
Editor: I noticed that Joe Grundfest, who is a well-known securities lawyer and a noted economist, was involved in the process.
Aganin: We’ve been very fortunate to have this affiliation with Joe, who is on the faculty at Stanford University and the director of the Clearinghouse. Joe is a former SEC commissioner, and before that he was on the staff of the President’s Council of Economic Advisors. He is one of the most influential lawyers in the country in the area of securities law and a regular speaker on legal and economic issues in securities litigation.
Editor: Tell us about the decline in the number of federal securities class actions filed in 2012.
Aganin: Our data show that there were 152 federal securities class actions filed in 2012.This is well below the 188 filings in 2011 and is at the lowest level since 2006.
Editor: What was the primary cause of the decline?
Aganin: As I previously noted, the number of securities lawsuits hit a low in 2006. This coincided with the lowest levels of volatility in the stock market. Securities lawsuits are typically filed after drops in stock prices. In 2006, the markets were quiet, and the number of lawsuits was low. Then, the credit crisis triggered a surge of securities class actions. By 2010 and 2011, the stock market had calmed down and the number of traditional securities class actions related to stock price drops started declining.
In 2010 and 2011, several M&A objection lawsuits were filed in federal courts. Historically, those cases would typically be filed in state courts with the Delaware Chancery Court being a preferred venue. M&A litigation intensified overall in state and federal courts with M&A objection lawsuits being filed with respect to almost every large merger.
Also, in 2010 and 2011, we saw filings against Chinese companies that acquired exchange listings in the U.S. by reverse mergers into listed U.S. companies that were often shell companies. When these Chinese reverse mergers ran into problems and experienced stock price drops, they resulted in federal securities class actions.
What we observed in 2012 is that the total federal M&A filings and Chinese reverse merger filings declined relative to 2011. Our sense is that the number of filings with respect to Chinese reverse mergers declined because the most vulnerable companies had already been sued in previous years. With respect to the decline of M&A-related lawsuits in federal courts, we saw fewer large mergers in 2012 than in 2011 and 2010, which may have affected the count of federal M&A-related lawsuits. The current trend is for the absolute majority of these cases to be filed in the state courts, just like they were before the spike in federal M&A-related litigation in 2010 and 2011.
Editor: What did the report reveal with respect to particular industry sectors?
Aganin: Filings in 2012 against financial firms were lower than in 2011 and much lower than in 2010. However, companies in the consumer non-cyclical sector are a growing target for a large portion of new securities class action litigation. The targets include healthcare, biotech and pharmaceutical firms that tend to have more volatile stocks due to the nature of their business. There were 49 filings in the consumer non-cyclical sector in 2012 while the next largest sector in terms of the number of filings was the communications sector with only 19 filings.
Editor: The Heat Maps are an interesting presentation in the report. What did they reveal?
Aganin: Our Heat Maps are a visual way to track the likelihood of litigation against companies in the S&P 500 index. The likelihood of an S&P 500 company being sued has fluctuated over the years - as high as 12 percent in 2002 and as low as 3 percent in 2011. In 2012 the likelihood of being sued was still low - less than 3.5 percent.
The Heat Maps also split filings into industry sectors. Historically, financials, healthcare and telecommunication companies had higher likelihoods of being sued than other companies in the index. 2012 was a bit unusual because the companies that were more likely to be sued were generally not in these sectors. The highest likelihoods of being sued in 2012 were in the consumer discretionary, energy and information technology sectors.
Editor: Were any trends revealed that might be helpful to companies seeking to reduce their exposure to federal securities class actions?
Aganin: One thing that we don’t do in our reports is comment on the relative merits of any individual case; we leave that to the readers. Instead we focus on overall trends. If you worked for an S&P 500 company in the year 1999, your employer on average had a 50 percent chance of being subject to at least one securities class action in the next 11 years with such exposure being even greater in some sectors – telecommunications at 62 percent, healthcare at 77 percent and financial at 82 percent.
If we look at newly public companies, a new issuer has only about a ten percent chance of being sued in a securities class action case in the first three years after going public and about a 29 percent chance in the 11 years after going public. Companies that recently went public tend to have more volatile stocks but also are typically smaller, which perhaps explains the lower likelihood of a securities class action relative to large firms such as the companies in the S&P 500. Plaintiffs’ attorneys are compensated in these types of cases on a contingency basis based on the outcomes. It makes business sense for them to focus on suing larger companies, all else being equal.
Editor: What information does the report provide about the Dodd-Frank whistleblower program?
Aganin: The SEC recently released very interesting data on the new whistleblower program authorized in the Dodd-Frank Act. Many of the tips related to alleged financial disclosure deficiencies, alleged offering fraud and alleged market manipulation. What we have found intriguing is that financial fraud cases represented a smaller percentage of SEC enforcement actions in 2012 than the number of whistleblower allegations would suggest we might see. We offer a couple of explanations in the report, including the possibility that we will see an uptick in enforcement actions by the SEC in this area in the future. If this prediction turns out to be correct, then we can also expect to see more SEC enforcement actions accompanied by private securities class actions moving on a parallel track.
Editor: Does the report provide factual information of importance to corporate counsel of a company or its outside counsel?
Aganin: Yes. One example is its value in assessing the adequacy of a company’s D&O coverage. A large company has a very high likelihood of being sued in a securities class action over time. The information provided in the report is important to corporate counsel in evaluating a company’s exposure to securities class action litigation and deciding on the corporate resources to be mobilized to reduce that exposure. It is also of great importance to counsel at insurance companies offering D&O coverage who draft policy language and advise with respect to premiums.
The views expressed in this interview are solely those of the Dr. Aganin, who is responsible for the content, and do not necessarily represent the views of Cornerstone Research.