Filings Remain on Track for An All Time High
The number of securities class actions against non-U.S. based companies in the third quarter of 2020 continues to increase and build over the course of the year. There were 19 core class actions against foreign filers out of 59 core filings in Q3, representing 32.2% of the total. 1This is an increase compared to the third quarter of 2019, where we saw 13 core cases against international companies out of a total of 60 core filings. With 3 non-core class actions the total amount of securities class actions brought against non-U.S. companies in Q3 was 22.
If the current data trend continues, we expect the annual total for core federal filings against non-U.S. issuers will be the highest on record. This is despite the fact that total core federal filings have decreased by 9%. At the end of Q3, 2020 has already seen 54 filings — which is almost identical to the 2019 year-end total. Not since 2011 (55), have numbers of filings been this high.
The trend data shows securities litigation exposure is a growing risk for foreign companies across a wide range of industry sectors and geographies. The greater likelihood of lawsuits against non-U.S. businesses may not just be because they are foreign entities, but because they also operate in high-litigation sectors.
The industry sectors subject to litigation in the third quarter of 2020 are more diverse compared to the same period in 2019. The largest industry represented in this quarter is the financial sector, followed by the healthcare, technology, consumer and services sectors.
In terms of geographic spread, the largest number of filings were against companies in Europe (7), and Asia (6). ‘Other’ (6) countries include Israel, Brazil and Bermuda. These numbers illustrate an ever-increasing geographic scope.
Looking back, the first half of 2020 saw a shift away from claims based on the defendant’s financial disclosures to claims based on events in their operations - weak, inadequate or insufficient internal and external controls, especially in relation to financial reporting, as well as anti-corruption, bribery and fraud. Whether this is a lasting trend remains to be seen; it is worth highlighting that there have been fewer of these kinds of cases in Q3. It is important to note these claims can be mitigated by strong corporate governance and robust enterprise risk management.
The 19 core actions related to breaches of open market regulations and IPO liabilities. The remaining two actions were merger objection suits, which we consider to be non-core.
Five cases were brought against issuers trading as American Depository Receipts on either NASDAQ, NYSE or OTC. Eight suits were filed against NASDAQ listed businesses, eight against NYSE listed firms, and three against OTC-BB listed companies. The current risk environment has become even more volatile since the recent U.S. appellate court decision in Stoyas v. Toshiba Corp. held that a foreign issuer could be liable under U.S. securities laws for a sale of securities in the U.S., even if the company was not involved in the sale (e.g. an “unsponsored” ADR).
A similar case against another unsponsored ADR, Glencore was dismissed in July by the District Court of New Jersey. (Church VI v.Glencore PLC et al). The case related to a securities claim alleging that Glencore made false and misleading statements and/or material omissions relating to purported bribe payments in Nigeria, Venezuela and the Democratic Republic of Congo. The plaintiffs alleged that Glencore’s stock fell following announcement of government investigations into the purported bribery scheme. In this instance, the case was dismissed on the grounds of forum non conveniens as the court held that Glencore had no ties to New Jersey and none of the events in the litigation took place there.
Cases were brought in courts across the United States, including New York (10), New Jersey (3), California (2), Delaware (1), Pennsylvania (2) and Oregon (1). This is similar to the distribution of cases in H1 2020.
AIG’s claims team has significant experience assisting international clients in the defence and settlement of securities class actions, providing helpful insight and support when directors and officers need it most.
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1The case against Ecuador is being treated as an outlier and has not been included in the total but is included in the list on page 4.