Trends in Securities Litigation

Transcription

1 Trends in Securities Litigation Dallas Bar Association Securities Section June 25, 2018

2 Presenters Vanessa Salinas Beckstrom PwC Saleema Damji PwC Olivia Howe Vinson & Elkins Kelly Vickers Locke Lord Elizabeth Brandon Barnes & Thornburg 2

3 Number of cases filed in 2017 With 404 class actions filed, 2017 was the fifth consecutive year in which securities litigation increased and the single greatest year-over-year increase (46%) in at least a decade. 3

4 Number of M&A Disclosure Only cases filed in 2017 According to PwC s Deals Year-End Review and 2018 Outlook, through the first 10.5 months of 2017, the volume of M&A activity in both the U.S. and abroad was up, however, deal values were down. While we believe that the volume of deal activity may have played a role in the large influx of M&A Disclosure Only Securities Class Actions, the majority of this increase can be attributed to M&A Disclosure Only class actions moving from state courts to Federal courts. 4

5 Mergers and Acquisitions In 2015 and 2016 there were two key rulings in the Delaware Court of Chancery, where a substantial portion of Disclosure Only cases were filed, that discouraged the filing of Disclosure Only cases in the Delaware Court of Chancery. In Acevedo v. Aeroflex Hldg. Corp., it was noted that the omnipresent litigation undercuts the credibility of the litigation process. In re Trulia, it was noted that disclosure statements are likely to continue to be disfavored unless the disclosures address a material misrepresentation or omission and the subject is only encompassing disclosure claims and fiduciary duty. Following Delaware s rulings, there was a significant shift in the filing of Disclosure Only cases from state to federal courts in Disclosure Only cases represented 82 of the 89 M&A class actions filed in Acevedo v. Aeroflex Hldg. Corp., No VCL, 2015 WL , *65 (Del. Ch. July 8, 2015) In re Trulia, 129 A.3d 884, 898 (Del. Ch. 2016) 5

6 Number of cases filed in 2017 As in 2016, the proliferation of so-called merger and acquisition Disclosure Only ( M&A Disclosure Only ) cases drove the 2017 increase in Securities Class Action filings Other Cases M&A Disclosure Only 6

7 Companies with US federal securities class action lawsuits filed against them More than half of all class actions were brought against small-cap (35%) and micro-cap (29%) companies. Over half of accounting class actions concerned small-cap and micro-cap companies. Much of this can be connected to the 2012 JOBS Act. 7

8 Types of cases filed in 2017 M&A and IPO saw the largest increase in activity from 2016 to Other 5% Improper Activity 9% Accounting 15% Disclosure 15% 2017 IPO 7% M&A 49% 8

9 Accounting-related allegations in % 26% 11% 12% 9% 13% 28% 31% 20% 19% 9

10 IPOs There were 181 IPOs in 2017, which was a 77% increase from the previous year and the most issued since This growth in IPO activity was matched with growth in IPO-related litigation, which increased by 73% from 15 Securities Class Actions in 2016 to 26 in % of these actions reference cryptocurrency and blockchain technology. 10

11 Foreign Issuers In 2017, we observed a 39% increase in Securities Class Actions against foreign issuers. The most frequent targets of actions were China, the UK, Israel, Canada, and Ireland. From 2011 to 2017, a substantial portion of Canadian companies targeted in Securities Class Actions operated in the mining and ore industry. However, we expect a shift to the forestry business, as the imposition of tariffs may result in companies lowering forecasted earnings guidance. China-based companies experienced a 150% increase in Securities Class Actions, with 10 class action filings in 2017, as compared to four in In 2017, 60% of the claims against China-based companies contained accounting-related allegations. 11

12 On average, federal securities class action cases settled for approximately $18 million in 2017 The median settlement value was $5 million 2017 $ % $ % % 12% $ cases 9% 72 cases 28% 69 cases 13% $ % 77 cases 80 cases % 19% $56.8 $0.0 $10.0 $20.0 $30.0 $40.0 $50.0 $60.0 Average Settlement Value (in $ Millions) 12

13 $250,000,000 Cases Settled by Allegation Type $200,000,000 $150,000,000 $100,000,000 $50,000,000 $- Accounting Cases Disclosure Cases IPO Cases Improper Activity Minimum Average Maximum M&A Other 13

14 The Second Circuit takes the lead as the most active venue of federal securities class action filings, followed by the Ninth Circuit. Percentage of US federal securities class action lawsuits filed by circuit, % 11% 26% 12% 9% 13% 28% 31% 20% 19% 14

15 Trends to Watch: FCPA On November 29, 2017, the Deputy Attorney General ( DAG ), Rod Rosenstein, introduced the revised FCPA Corporate Enforcement Policy at the 34th International Conference on the Foreign Corrupt Practices Act. He provided the following remarks: [The policy] will increase the volume of voluntary disclosures, and enhance our ability to identify and punish culpable individuals.the policy therefore specifies what we mean by voluntary disclosure, full cooperation, and timely and appropriate remediation. In 2017, 23 enforcement actions were brought by the DOJ, an 18% decrease from the 28 enforcement actions initiated in The reduction in enforcement actions filed may be the result of organizations taking advantage of voluntary disclosure opportunities and avoiding an action being initiated against them. From an U.S. Securities and Exchange Commission ( SEC ) perspective, in 2017, there were seven FCPA related enforcement actions, a 73% reduction from the enforcement actions. Even though the number of actions decreased, there was a slight increase in the number of FCPA-related Securities Class Actions. There were eight Securities Class Actions in 2017 referencing FCPA violations or investigations compared with six such actions in

16 Trends to Watch: Cybercrime There was an expectation for an increase in the number of securities class actions arising from data breaches in However, this did not come to fruition, as there were only 4 actions filed. In January 2017, a class action was filed against Yahoo! Inc. in the United States District Court for the Northern District of California, alleging that the company had failed to adequately safeguard user data, thereby making its public statements materially false and misleading. In September of 2017, the company issued a press release announcing a cybersecurity incident involving the compromise of user information potentially impacting a substantial number of U.S. consumers. Eight days later, shareholders filed a Securities Class Action claiming the public statements the company made in its 10-K and 10-Q filings surrounding its cybersecurity systems were materially false and misleading. In April 2018, the SEC imposed the first-ever civil penalty for Data Breach Disclosure based on Yahoo s data breach. Yahoo s failure to have controls and procedures in place to assess its cyber-disclosure obligations ended up leaving its investors totally in the dark about a massive data breach. Public companies should have controls and procedures in place to properly evaluate cyber incidents and disclose material information to investors. Jina Choi, Director of the SEC's San Francisco Regional Office Cyber-related threats and misconduct are among the greatest risks facing investors and the securities industry.the Cyber Unit will enhance our ability to detect and investigate cyber threats through increasing expertise in an area of critical national importance. - Stephanie Avakin, Co-Director of the SEC s Enforcement Division 16

17 Trends to Watch: Cryptocurrencies ICOs 2018 In Q4 of 2017, we observed six Securities Class Actions relating to cryptocurrencies. The first tranche of filings (five cases) relate to the organizations launching ICOs. While each Securities Class Action has individual nuances, the driver of each action relates to the company offering and selling unregistered securities. The second category of such Securities Class Actions relates to a publicly traded company that supports the cryptocurrency industry experiencing high volatility in its stock price. With the increase in ICOs, we expect to see an uptick in 2018 Securities Class Actions citing the offer and sale of unregistered securities. As derivative issues, we may see a focus on know your customer (KYC) and antimoney laundering in the cryptocurrency world as well as regulatory inquiries and potential enforcement actions for the companies operating in the cryptocurrency space. Companies should be aware of the risk and regulatory environment and establish policies to help navigate this emerging phenomenon 17

18 Trends to Watch: Local SEC Update On January 11, 2018, the Fort Worth, Texas, Regional Office ( FWRO ) of the U.S. Securities and Exchange Commission ( SEC ) held a first-of-its-kind call to increase transparency. The call was structured into three parts: 1. National & Regional Examinations Compliance Policies and Procedures Anti-Fraud Provisions & the Fiduciary Duty 2. Investor Risk Highlights Abuse and Improper use of ICOs Federal government employee retirement investment scams Failure to disclose potential associated risk and loss of securities-based loans to consumers 3. Question and Answer Session Will the SEC adopt the Department of Labor s Fiduciary rule? What triggers are on-site administration versus a desk administration of an examination? Are exempt Reporting Advisers ( ERAs ) being examined routinely or for cause this year? 18

19 Trends to Watch: Local U.S. Attorney Update In April 2018, the new United States Attorney for the Northern District of Texas, Erin Nealy Cox, spoke at the ABA White Collar Regional Meeting. Priorities for the U.S. Attorney s Office Drug Enforcement and taking down gangs Continued focus on healthcare enforcement Cyber security and protection against cyber crime 19

20 Looking Forward: What this means for you and your clients Tax reform impact on mergers and acquisition Changes enacted as part of tax reform may free up cash flow by allowing companies to 1) repatriate cash held outside of the United States and 2) incur lower federal income taxes. This presents an opportunity for increased M&A activity, which would likely lead to an increase in M&A Disclosure Only Securities Class Actions. Tariffs The new administration s recent treatment of trade and tariffs, specifically with China and the nations of NAFTA, may have a continuing impact on the market for Securities Class Action litigation moving forward. Healthcare Congress and the new administration implemented substantial changes to the healthcare industry during These changes, as well as the uncertainty of changes, impact business decisions and earnings estimates which can drive Securities Class Actions. 20

21 Thank You Vanessa Salinas Beckstrom PwC LLP (214) Saleema Damji PwC LLP (214) Olivia Howe Vinson & Elkins LLP (214) Kelly Vickers Locke Lord LLP (214) Elizabeth Brandon Barnes & (214)