The number of class-action securities filings dropped in the first six months of 2013 compared with the same period last year. The trend continues a downturn in filings of securities suits that started in the second half of 2012.

The semiannual report prepared by the Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research shows that there were 74 class-action filings in the first six months of 2013, down from 88 filings in the first half of 2012, but an increase from the 64 filings observed in the second half of 2012.

According to the study, the slight increase in filings compared with the second half of 2012 is primarily due to a number of case filings brought against technology and energy companies. Out of the 74 filings, 10 involved technology and energy companies, compared with just four and three filings, respectively, in the first and second halves of 2012.

Since 1997, technology companies have observed a semi-annual average of 13 class-action filings, whereas energy companies have observed a semi-annual average of three. “Thus, the increase in technology filings relative to 2012 is a reversion to the historical average,” the study stated.

The increase in energy-related filings, primarily against oil and gas companies, is similar in magnitude to an uptick in energy filings observed in late 2011 and early 2012, before a slowdown in the second half of 2012. The uptick in these filings again in the first half of 2013 is likely a continuation of the elevated level of filings observed starting in the second half of 2011, according to the study.

For the first time this year, the study analyzed the progression and outcome of class actions based on institutional investors as lead plaintiffs. “In prior research, we have found that the presence of an institutional investor as the lead or co-lead plaintiff matters when it comes to settlements,” says John Gould, senior vice president of Cornerstone Research.

According to the study, filings involving institutional investors as lead plaintiffs were less likely to be dismissed and more likely to reach a ruling on summary judgment than filings without an institutional investor as a lead plaintiff. For filings from 1996 through 2010, 35 percent of cases with an institutional investor as a lead or co-lead plaintiff were dismissed, compared with 42 percent without an institutional investor.

The study also observed an increase in the number of case filings dismissed during 2008, 2009, and 2010. For cases that were filed in 2008, 50 percent have already been dismissed, whereas 53 and 56 percent of cases filed in 2009 and 2010, respectively, have been dismissed. “Recent filings do not yet allow us to determine if dismissal rates have continued to increase since 2010,” according to the study.

Other Findings

Case filings related to mergers and acquisitions remain steady from last year's numbers, but have slowed drastically compared to previous years. Seven federal filings associated with mergers and acquisitions took place during the first half of 2013, compared with eight and five in the first and second halves of 2012, respectively. These actions are now being pursued primarily in state courts after the unusual jump in federal M&A filings in 2010 and 2011.

The report also found that Chinese reverse merger filings have essentially ended. Two new cases were filed in the past six months, a substantial decline from the peak of 31 filings in 2011.

The loss of market capitalization associated with filings decreased in the first half of 2013 and remains far below the historical averages observed between 1997 and 2012. The total disclosure dollar loss of $25 billion in the first six months of 2013 was less than half of the semiannual average of $63 billion from 1997 to 2012.

The total maximum dollar loss of $113 billion in the first half of 2013 was 65 percent below the average of $326 billion in the six-month periods between 1997 and 2012.

Looking ahead, Joseph Grundfest, director of the Stanford Law School Securities Class Action Clearinghouse, says the “most significant development” in the securities fraud litigation market likely will be a change in defense litigation strategy.

In Amgen v. Connecticut Retirement Plans and Trust Funds, four justices of the Supreme Court invited arguments over the continued vitality of the “fraud on the market” theory—a legal rule that allows plaintiffs to prosecute class-actions without having to demonstrate that they actually relied on the alleged misrepresentation. “The defense bar is rising to the invitation,” says Grundfest.  

“We are observing class certification challenges on the grounds that the fraud on the market doctrine should not apply,” he says. “If this defense strategy is successful, and if the Supreme Court eventually backs away from the fraud on the market doctrine, then the class-action securities fraud litigation market will likely shrink significantly.”