US Securities Class Actions Bulletin - Q3 2018

Welcome to the first edition of AIG's US Securities Class Action Bulletin, which will be published on a quarterly basis.

The newsletter analyses the latest data on US securities class action filings from Stanford School of Law, and identifies the trends behind the numbers.

The aim is to inform stakeholders at a time when class action lawsuits have hit a record high, giving clients and brokers the most up-to-date information on what is driving the challenging claims environment and, in particular, actions against foreign filers.


Increasing number of claims against Foreign Filers

The annual statistics show a trend that shows no signs of slowing down: the total number of federal securities class actions is rising year-on-year and the proportion of such lawsuits against foreign companies listed on US exchanges is also rising. Plaintiff lawyers are certainly not shying away from bringing foreign companies into US courts. Non-US companies account for approximately 16% of companies on US exchanges but represented 23% of all traditional securities class actions in 2017.

Rate of litigation up as number of listed companies has decreased

While class action litigation is at an all-time high, the overall numbers of US-listed firms is diminishing. There are several reasons for this, including M&A activity, cost of compliance and the relative ease of sourcing funding privately. With a smaller pool of companies for plaintiff lawyers to target and focus on, listed companies have never been at a greater risk of being hit with a securities class action suit. Foreign filers are no exception to this rule. Rightly or wrongly, foreign filers are often viewed as less experienced than their domestic counterparts, with weaker SOX compliance and disclosures. Some plaintiffs’ lawyers pursue these companies in the belief they are more fearful of litigation in US courts and will be more inclined to settle actions earlier, and for higher amounts, than a domestic US company might.

Another trend to note is the US Supreme Court decision in Cyan, Inc v Beaver County Employees Retirement Fund. This has paved the way for more claims under the Securities Act of 1933 to be brought within state court jurisdiction, in addition to federal courts. This is expected to drive up the cost of claims and increase the number of settlements as state courts may be less likely to dismiss cases early on.

Over-the Counter ADRs may be subject to US Securities laws as well

Of particular concern for foreign companies is the prospect that US securities laws will apply to overseas firms not listed on US exchanges. A recent Ninth Circuit Court of Appeals decision allowed plaintiffs to bring a US securities class action lawsuit against Toshiba in the wake of the company's $1.2 billion accounting scandal, despite the fact the claim was based on the purchase of Toshiba’s unsponsored over-the-counter (OTC) American Depositary Receipts (ADRs). This should be a wake-up call to all companies with Level 1 ADRs. The case has significant implications for other unlisted foreign firms that had been somewhat shielded from securities class actions since the US Supreme court’s Morrison ruling in 2010 as it opens the door for similar actions to be taken in the future. 

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