Over the last couple of years, defense oriented commentators have used the meme “event driven securities litigation” as part of complaining about the increasing volume of class action litigation. From my perspective, there could be merit to some complaints, but the meme is far too broad and all “event driven” cases are not equal. Why? Because the events at issue may range from allegedly causing massive fires to allegedly concealing product liability risks to allegedly failing to disclose accurate facts regarding regulatory interactions with agencies such as FDA to losing verdicts in cases alleging perpetration of massive fraudulent conveyances. Simply put, one size memes do not fit all fact patterns.

That said, the “event driven” meme also came to mind while reading a December 5, 2018 article in LAW360 regarding oral arguments in the Delaware Supreme Court regarding the Fresenius case. There, a would be buyer terminated a corporate m&a deal based on the plummeting value of a target due to regulatory failures, which caused the buyer  to invoke a “material adverse event” clause. The issues went to trial, and a Delaware chancery judge (Lasker) upheld the termination based on adverse outcomes in events prior to the intended closing date for the transaction. In a nutshell, “What mattered was the root of this shortfall. Fresenius claimed that Akorn made misrepresentations when it claimed to be in compliance with Food and Drug Administration regulations and making progress in fixing manufacturing shortfalls. In particular, according to a NYT article of October 2, 2018, Fresenius said that Akorn had been sloppy with — or, worse, fabricated — the data that underlies F.D.A. drug approvals.”

Now, in just three days, the Delaware Supreme Court has affirmed the Fresenius ruling by Judge Lasker, in a brief three page order by Chief Justice Strine. It therefore seems logical to infer that the Delaware Supreme court found it easy to conclude that “event driven” problems could indeed alter the value of an entity so much that the material adverse event clause was properly invoked to terminate the deal. Therefore, one might see merit to at least some “event driven” securities suits.

A detailed data driven study of securities lawsuits before and after Morrison is the subject of a new paper by Professor Davidoff Solomon and colleagues. A summary is online in a November 21, 2018 article at Harvard.edu; the full paper is available for download at SSRN. Part of the summary is pasted below.

“In The Myth of Morrison: Securities Fraud Litigation Against Foreign Issuers, we examine the effect of the Supreme Court’s decision in Morrison v. National Australia Bank. Morrison has been described as a “steamroller,” substantially paring back the ability of private litigants to sue foreign companies for securities fraud. In Morrison, the Supreme Court held that Section 10(b), the general antifraud provision of the Securities Act of 1934, does not apply extraterritorially in a private cause of action brought under Rule 10b-5. Rather, the Court stated that “Section 10(b) reaches the use of a manipulative or deceptive device or contrivance only in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States.” Morrison is widely understood as reducing the litigation risk for foreign issuers, and the decision has been characterized as potentially “encourage[ing] non-U.S. issuers to continue to list their shares on U.S. exchanges and strengthen U.S. capital markets.”

We analyze pre- and post-Morrison litigation empirically and find that the dramatic claims about Morrison’s impact are largely a myth. Morrison did not substantially change the exposure of foreign issuers to federal securities fraud litigation or the types of issuers who face U.S. litigation. Even where the decision had its greatest impact—the composition of the plaintiff class—we find that U.S. exchange trading in defendant firms before Morrison was sufficiently robust that pre-Morrison cases could have pled an investor class that would have satisfied its transactional test. While Morrison may have put an end to the “global class action,” prior to Morrison, such cases were a rarity.

We conduct our analysis by examining a sample of 388 lawsuits alleging a violation of Rule 10b-5 that were filed between 2002 and 2017 against foreign issuers—issuers headquartered outside the United States. The first question we analyze is the impact of Morrison on overall litigation risk against what we call Foreign Listed Firms—foreign firms whose securities traded on at least one non-U.S. exchange. We focus on Foreign Listed Firms because the jurisdictional rule adopted by the MorrisonCourt is most likely to affect litigation against these firms as opposed to foreign-headquartered firms that are listed exclusively in the United States. One of the driving forces behind Morrison was the idea that foreign firms with limited connections to the U.S. were being targeted with burdensome U.S. litigation. For Morrison to address this concern, it should have reduced Foreign Listed Firms’ litigation exposure.

We confirm that class action suits against foreign issuers after Morrison were almost entirely confined to those issuers having a U.S. exchange listing at some point during the class period. Moreover, conditional on a firm having a U.S. exchange listing, Rule 10b-5 cases brought after Morrison consistently defined a class period that fully coincided with the period when the issuer maintained its U.S. listing. However, surprisingly, this focus of filed cases on firms with a U.S. listing did not represent a significant shift from the pre-Morrison era. Ninety percent of pre-Morrison cases were filed against foreign firm with a U.S. exchange listing, and nearly all of them alleged a class period that fully coincided with the period when the issuer maintained its U.S. listing. This result highlights the fact that F-cubed suits (suits brought by foreign investors, against foreign firms who bought on a foreign exchange) were not common prior to Morrison.”

The Myth of Morrison: Securities Fraud Litigation Against Foreign Issuers
UC Berkeley Public Law Research Paper, U of Penn, Inst for Law & Econ Research Paper No. 18-34, 44 Pages Posted: 13 Nov 2018 Last revised: 16 Nov 2018

Various pundits are saying 2019 will include a surge in litigation.  In that vein, it will be interesting to see if adverse financial outcomes for  M&A deals and IPOs result in state court class action securities cases. For  more on that topic, see a November 16, 2018 guest post at D&O Diary, titled: A New Twist in M&A Litigation: Section 11 Cases in State Court.

To continue with a theme regarding the scale of mass tort litigation, this post touches on  the scale of what one can call “securities class action suits.” The numbers are set out in an open access  January 2018 report by NERA, and a related January 29, 2018 commentary at the D&O Diary. Again, one needs to read the full articles to really appreciate the scale, and one needs to recall the class actions do not include myriad smaller scale securities claims filed each year, both in litigation and arbitration.  However, one big picture statistic is set out below from the D&O commentary:

“According to the report, there were 432 securities suit filings in 2017, the highest number of filings since 2001 (when, largely due to a flood of IPO laddering cases, there were 508 suits filed). The 432 filings in 2017 were 84% higher than the trailing five-year average of 235 lawsuit filings.”

Very interesting analysis of securities law cases in related posts of June 24, 2016 at the D&O Diary and June 24, 2016 at the Stanford Securities blog. Motley Rice even breaks into the discussion in a small way; see footnote 2.

The overview introduction is as follows:

“ERA and Cornerstone have recently published annual reports showing that the volume of securities class actions has increased from 2006 to 2015, with a low in 2009 and a steady rise since then. In this blog we use the more detailed data of the SSLA database to dig deeper into this trend and expose some interesting drivers. As we will explain, the increase in case volume has come with a decrease in average case quality, measured a few different ways. In addition, low quality cases appear to have been litigated disproportionately—though not exclusively—by a group of firms that until 2009 had a relatively small share of the federal securities class action market but whose share has increased substantially since then. Much of the data we provide here will be presented in charts, with relatively little text. For a more detailed discussion of the data, please see our post on Kevin LaCroix’s D&O Diary blog.

The ironic saga continues as litigation funders are firmed up for securities suits against Slater & Gordon, a well-known plaintiff’s firm from Australia that used IPO proceeds to expand internationally. The latest update is in a March 23, 2016 article from the Global  Legal Post.  Slater & Gordon’s expansion into the UK  hit a major pothole (or worse); see here for one of several prior posts on the firm and its ups and downs.

What happens when financial regulators are trying to look at and regulate the wrong subject? Even more financial fraud? The point is raised by an new article on the various “benchmark manipulation” cases, such as LIBOR.    The thesis is outline in an August 27, 2104 Blue Sky blog post by Andrew Verstein, and the article itself is on SSRN.  The article

Manipulation is all too common in financial markets. Reports of brazen schemes have rocked the markets for gold, aluminum, foreign currency, and interest rates, to name just a few from the last twelve months. These scandals are surprising in light of substantial scholarship that has long argued that market manipulation is impossible. Perhaps you can bid up the price of an asset by buying a large amount, but the price will fall as you try to sell it. Taking into account of your trading costs, you should not even break even. Regulation of manipulation is unnecessary since it cannot be profitable.

This Article challenges orthodox understandings of manipulation, showing that they reflect an obsolete view of markets. While manipulation skeptics discuss prices, markets focus on benchmarks of price – and so do the manipulators who prey upon them. Benchmarks such as Libor or the S&P 500 summarize market prices, and they have become essential to contemporary markets. They are written directly into industrial contracts, financial derivatives, statues, and regulations, and so their accuracy affects the economy every bit as much as the prices themselves. They are also are much easier to manipulate than underlying prices, because such benchmarks are typically derived from only a small slice of the market. For example benchmarks of exchange rates – the price of Euros and Yen – reflect only trade prices in a single venue, during a two-minute period of trading. If a manipulator can strategically position trades – placing aggressive purchases on that venue and aggressive sales elsewhere – she can bias the benchmark and therefore project influence over the market as a whole.

This theory – that market manipulation is increasingly synonymous with benchmark manipulation – has many important implications. It shows that the recent push by regulators and courts to require fraud in manipulation cases is fundamentally misguided since benchmark manipulation does not depend on anyone being “defrauded.” Likewise, recent proposals to extensively regulate the creation of benchmarks are shown to misunderstand the mechanics of benchmark manipulation.”