November 9, 2018

Class Action Reform: Be Careful What You Wish For. . .

The U.S. Chamber of Commerce recently published this report warning that the US securities class action system is yet again in dire need of reform. The report notes that while M&A litigation has long been the domain of state courts, 87% of M&A lawsuits last year were federal securities class actions.  It also highlights another burgeoning category of claims – the “everything is a securities claim” class action. Here’s an excerpt:

A second variety of securities class actions has also emerged that seeks to capitalize on adverse events in a company’s underlying business, such as a product liability lawsuit, data breach, or similar high-profile, unexpected negative occurrence. The securities class action lawsuit does not seek damages for harm from the underlying event, which is addressed through other lawsuits. Rather, the securities claim asserts that the company defrauded investors by intentionally or recklessly failing to warn that the adverse event might occur, even though these events are—by definition—unexpected.

There’s no doubt that a lot of these claims are meritless, and the Chamber wants Congress to enact legislation to deter them.  But recent events suggest that potential defendants should be careful what they wish for, because reforms may be accompanied by unintended consequences. For instance, an emerging trend among major investors to “opt out” of securities class actions – a trend the Chamber’s advocacy inadvertently helped to create – may represent an even bigger problem for defendants.

Alison Frankel highlighted this emerging problem in a recent blog about a $217 million settlement that Verit reached with some heavy-hitter institutions that opted out of an ongoing class action lawsuit.  She suggests this settlement may have some ominous implications for defendants in securities litigation going forward:

Is this the future for defendants accused of securities fraud: facing a multitude of far-flung suits by well-counseled, well-capitalized investment funds?

If so, the business lobby has only itself to blame. As you know, the U.S. Supreme Court put shareholders on notice in its 2017 ruling in CalPERS v. ANZ Securities that if they want to preserve their right to bring individual securities fraud claims, they have to file their own suits within the three-year statute of repose, even if there’s already a class action under way. The U.S. Chamber of Commerce, the Washington Legal Foundation, the Securities Industry and Financial Markets Association and the Clearing House Association all urged the justices to uphold the strict time limit for individual investor suits.

Alison says that the bottom line for institutions is that in light of ANZ Securities, if there are big bucks on the line, they’re likely to go their own way and opt out of class actions. And as this recent “D&O Diary” blog points out, that’s going to make everybody’s life more complicated.

ESG: SASB Issues First-Ever Sustainability Accounting Standards

Earlier this week, the Sustainability Accounting Standards Board published the first-ever industry-specific sustainability accounting standards.  The standards are designed to enable businesses to identify, manage & communicate financially-material sustainability information to investors. Here’s an excerpt from the press release announcing the standards:

Covering 77 industries, the standards were approved on October 16, 2018, by a vote of the Standards Board after six years of research and extensive market consultation, including engagement with many of the world’s most prominent investors and businesses from all sectors. By addressing the subset of sustainability factors most likely to have financially material impacts on the typical company in an industry, SASB’s industry-specific standards help investors and companies make more informed decisions.

The standards can be downloaded for free at the SASB’s website.

SEC Enforcement: Crypto & Cyber Remain High Priorities

Earlier this month, the SEC’s Division of Enforcement published its annual report.  The report notes that the agency brought 821 actions and obtained more than $3.9 billion in disgorgement & penalties. It also returned $794 million to investors, suspended trading in the securities of 280 companies – and obtained nearly 550 bars and suspensions.

The annual report also says that Enforcement “remains focused” on ICOs & crypto scams  – topics that this Fortune article notes didn’t even merit a mention two years ago.  As this excerpt from the report highlights, cyber issues are also high on the priority list:

Since the formation of the Cyber Unit at the end of FY 2017, the Division’s focus on cyber related misconduct has steadily increased. In FY 2018, the Commission brought 20 stand alone cases, including those cases involving ICOs and digital assets. At the end of the fiscal year, the Division had more than 225 cyber-related investigations ongoing.

Meanwhile, this front-page Sunday NYT article compares enforcement actions filed during the last 20 months of the Obama administration and the first 20 months of the Trump administration and claims that enforcement activity has declined significantly. It contends that the numbers reveal a 62% drop in penalties imposed and illicit profits ordered returned by the SEC under the Trump administration in comparison to the Obama administration. The Times laid out its methodology – with which the SEC disagrees – in a companion piece.

John Jenkins