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08.01.2018

Threat of Securities Class Action Suits Signals Need for D&O Protection

Greg Flood - President of IronPro®

 In 2017, a record number of 8% of all publicly listed companies were subject to a lawsuit against directors and officers, well above the historical annual average of approximately 3%. Last year began with a total of 785 pending cases in the federal court system, a 12% increase over 2016 case inventory.  The recorded pending case count in the federal system alone poses potential investor losses of $900 billion, as reported by the National Economic Research Associates (NERA) 2017 Review.

Data culled from third-party, publicly accessible reports and resources reveal troublesome trends in legal actions against institutions and individuals, driving up already staggering defense costs and award settlements. 

Federal Securities Class Actions (SCA) suits have been increasing in volume over the prior two year period.  New SCA filings averaged 190 per year from 2007 leading up to the year 2017, when actions reached 432.  Such litigation initiatives reflect a 113% over average increase, according to the Cornerstone Research 2017 report.  Despite economic expansion following the most recent financial crisis, last year’s case load was more consistent with market characteristics during a recession year. 

Overall market capitalization has improved significantly; yet initial public offerings have declined amid a backdrop of uncertainties.  While publicly listed companies are less in total number, they were subject to a 280% greater strike suit ratio in 2017, as compared with historical baseline experience.  Notably, three nationally-ranked law firms accounted for 50% of all case filings in the last four years.  That minuscule number of focused plaintiff firms dominating investor-led case actions is a stark contrast to the upwards of hundreds of law firms offering SCA defense services nationwide.  Plaintiff lawyers are thus generating a greater volume of case inventory against fewer listed companies for both mergers and acquisitions and SCA suits.

Increasingly, small to mid-cap companies are aggressively being targeted by an emerging class of plaintiff lawyers that are developing this segment of the public market.  Skilled plaintiff lawyers, more narrowly focused, are motivated to tap into the potential settlement rewards  (do you mean to say awards?) of this typically under-the-radar corporate sector. 

The settlement process relies predominantly on mediation for claims resolution. Mediation experts add another layer of incurred expense, are well-versed in the procedural process and today, preside over the bulk of settlement negotiations.  

Defense costs have risen exponentially.  Defense costs are not aggregated in any public report; however, inflationary pressure on defensive costs is evident.  Similarly, lead indicators of awarded damages have surged materially, as reflected by the last two years of filed claims.

Expert industry sources report that cases filed in the years 2016 and 2017 will result in greater future settlement values than in the two prior years, implying an upwards trajectory.  These comments are all typical lead indicators of a future pricing adjustment to match costs.

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