A generation ago, companies in the United States became the target of a flood of frivolous and unwarranted securities lawsuits. At the time, the claims were often triggered simply by a decline in the price of a company’s stock. Plaintiffs’ lawyers then used the discovery process as a fishing expedition to identify potential fraud. Eventually, Congress took action by passing the Private Securities Litigation Reform Act of 1995 (PSLRA), and the tide of frivolous cases receded.
Today, however, the kinds of abuses that led Congress to act in the 1990s have returned, as a new and rapidly growing segment of the plaintiffs’ bar has found fresh ways to bring lawsuits against businesses, collect fees and reap a disproportionate share of the benefits.
Chubb’s report on the rising volume of securities class action lawsuits, which have more than doubled in the last four years, examines the origin, scope and cost of securities class actions, as well as pragmatic proposals for reform. From Nuisance to Menace: The Rising Tide of Securities Class Action Litigation features proprietary Chubb claims analysis and perspectives from some of the top securities lawyers in the U.S. The data and insights add to growing research about the costs to business and society from meritless securities class actions.
“There is a growing cohort of lawyers filing meritless lawsuits in federal and state courts across the United States every time a merger or acquisition is announced or a corporate misfortune impacts a company’s share price,” said John Keogh, Executive Vice Chairman and Chief Operating Officer of Chubb. “The financial rewards from these lawsuits are accruing not to harmed investors but to lawyers who are bringing cases of dubious merit in order to reap a windfall in legal fees and a disproportionate share of settlement dollars.”
The report also discusses the broader costs of meritless securities class actions. “Rampant securities litigation is one of the reasons why the number of public companies in the U.S. is half of what it was two decades ago,” Mr. Keogh observed. “Fewer public companies mean fewer investment opportunities for the average small investor — and therefore less opportunity to participate in American growth and prosperity. Chubb is committed to sharing our data, insights and resources to raise awareness about this problem and to work on behalf of American business to effect meaningful reform.”
Securities class action lawsuits have a legitimate and important purpose: protecting the interests of shareholders when harm is done.
In the current legal environment, however, the class benefitting most from such litigation is not shareholders. Rather, the real winner is a growing cohort of lawyers who are filing meritless lawsuits in federal and state courts across the United States every time a merger or acquisition is announced or a corporate misfortune impacts a company’s share price.
In 2017 and 2018, the number of securities class action lawsuits (SCAs) filed in federal court broke new records each year, and the volume of suits is now twice the rate of 2014. A fair-minded person might ask: is the rising tide of SCAs an indicator of corporate malfeasance on a grand and growing scale?
The evidence points to a very different, but no less troubling, explanation: the financial rewards are accruing not to harmed investors but to lawyers who are bringing cases of dubious merit in order to reap a windfall in legal fees and a disproportionate share of settlement dollars. In the last five years, half of the nearly $23 billion in securities claims costs have gone to lawyers — both plaintiff and defense. In the case of merger-objection lawsuits, two thirds of the costs have been paid to lawyers. Remarkably, in 85% of settled merger-objection claims, shareholders received not even a dime.
If a cohort of lawyers and law firms are the winners, who is losing? The answer is American business and, ultimately, small investors. Legal fees and settlement costs have become an increasingly unavoidable tax on American business. Last year, for example, about one in 10 S&P 500 companies was the target of an SCA. There are indirect costs as well, including to our national competitiveness. Rampant securities litigation is also one of the reasons why the number of public companies in the U.S. is half of what it was two decades ago. Fewer public companies mean fewer investment opportunities for the average small investor — and therefore less opportunity to participate in American growth and prosperity.
As a global leader in financial lines insurance, which includes directors and officers (D&O) and errors and omissions (E&O) coverage, Chubb has an informed perspective on this trend and on the full costs of SCAs and merger–objection litigation. We are committed to sharing our data, insights and resources to raise awareness about this problem and to work on behalf of American business to effect meaningful reform.
At Chubb, we are not willing to accept this broken system. Instead, we are driving for meaningful reform. Business as usual is simply not acceptable. This means taking a more active role in public policy reform. In this paper, we outline the origin and scope of the problem, and present several pragmatic — and needed — solutions.
We hope you will join us in advocating for reform.
Squeezed by Class-Action Suits, Insurers Are Finally Responding, Bloomberg, 5/15/19
Foreign Firms Face Climbing D&O Insurance Premiums, Wall Street Journal, 4/15/19
Rising tide of lawsuits against company directors hits insurers, Financial Times, 4/1/19
U.S. Chamber says SCOTUS must kill M&A class actions, Reuters, 11/14/18
U.S. Chamber wants Congress to restrict securities class actions, Reuters, 10/24/18
Chubb Panel Seeks Legal Changes to Curb M&A Class-Action Suits, Best's News Service, 6/11/18
Securities Fraud Class Actions Must Be Curtailed, Attys Say, Law360, 6/11/18