Author: Susan Friedman, Esq.
Right off the bat, 109 federal securities class actions were filed by June 30, 2024, according to the Stanford Law School Securities Class Action Clearinghouse.1 Comparatively, during the first half of 2023, 114 filings were made. Nevertheless, the sweet spot for year-end 2024 is projected to be 218 filings versus the 213 federal securities class actions filed in 2023.2
Although every industry sector was fair game, similar to 2023 filings, the plaintiffs' bar favorites remained technology (34% of filings), pharmaceutical/biotechnology (17%) and manufacturing (16%).3 Unlike the prior year, however, plaintiffs threw a curveball by repositioning their sights on a greater number of companies with smaller market capitalization (market cap).1,4
Filings against companies with $250 million to $2 billion in market cap increased, whereas those with over $2 billion in market cap decreased during the first half of 2024. Approximately 60% of the manufacturing companies against which filings were made involved those with over $10 billion in market cap, as compared to technology, for which less than 30% of the companies had a market cap greater than $10 billion.1,4
Notably, although the technology sector ranked Number 1 for largest amount of federal securities class action filings to midyear 2024, it lagged behind with an estimated $2.5 billion in median market cap versus $15.3 billion as the median market cap for manufacturing.1,4
Other noteworthy areas of differentiation with respect to the filings for the first half of 2024 included:
- Five special purpose acquisition company (SPAC)-related securities lawsuits. There were 20 in total for all of 2023, but the midyear number for 2024 is consistent with a lower level of SPAC activity overall as well as challenges for SPACs to find target companies.
- Two de-SPAC merger cases, with exposures similar to companies who undergo an initial public offering (IPO).
- Two merger-objection class action lawsuits, compared to prior years where merger-objection cases represented a large portion of federal securities class action filings — but these cases are now more frequently brought by individuals rather than classes.
- Six IPO-related filings. This total runs parallel with the decrease in IPO activity since 2022; the six companies named completed their IPO one to three years ago (from 2020 to 2023), evidencing that this exposure still exists long after the completed IPO.
- One federal securities class action against a commercial bank versus 12 for all of 2023, when several banks were teetering on collapse.
- A decrease in COVID-19-related securities class actions to seven, which is anticipated as the time and distance from the pandemic increases (there were nine COVID-19-related filings for all of 2023); at this stage, the COVID-19-related filings predominantly target the biotechnology industry.
- Six AI-related filings. These federal securities class actions arise out of statements made pertaining to the use of artificial intelligence (AI), a newly added trending category as of August 1, 2024.
- Sixteen filings against non-US companies, evidencing a broader range of countries that are infrequently in this mix, such as companies from the United Arab Emirates, Singapore and Vietnam.1,5
In terms of allegations, investors stepped up to the plate with their traditional claims that defendants violated the federal securities laws by making materially false and misleading statements and/or failing to disclose material adverse facts about the company's business, operations and/or prospects, which led to shareholders purchasing stock at artificially inflated prices.1
A deeper dive indicates that the filings included 10 for insider trading; five filings each either related to secondary public offerings, generally accepted accounting principles (GAAP) issues, or restated earnings; and 14 environmental, social, and governance (ESG)-related cases.3 The lineup also included cases for "greenwashing" and "AI-washing," both of which translate into a company overstating its capabilities with respect to either its sustainability efforts or artificial intelligence.1
Calling a timeout for settlements
Not only are federal securities class action filings in 2024 forecast to eclipse 2023 by year-end, but settlements of these cases are also expected to outrun those from 2023. Plaintiffs' attorneys knocked it out of the park with 49 settlements (based on final settlement date) during the first half of 2024, with court approval of over $2.67 billion to be paid.3,6 Compare this amount to $3.9 billion in settlement dollars approved for all of 2023.7
Allegations for the largest settlements included issues surrounding anti-trust and anti-competitive behaviors, product demand, glitches in software and cybersecurity, and revenue growth, among others.6,7 Additionally, among the 49 cases settled, 23 were at the class certification filing stage. Further, 47 cases from the last 10-year period were dismissed by June 30, 2024.3
Breaking down settlement amounts further, within the context of cases filed over the past 10 years, for the first half of 2024 the median settlement was $9 million, compared to $15 million and $13 million for cases that settled in 2023 and 2022 respectively.3,7 The settlements greater than $20 million, however, increased during the first half of this year to 44% (from 39% in all of 2023), whereas those settlements under $20 million decreased to 56% (from 61% in all of 2023).3 The median time to settlement for those cases that settled by June 30, 2024, was 3.1 years as compared to 3.7 years in 2023.3,7
The statistics indicate the continued upward swing toward larger settlements. This trend is following the market by shareholders targeting larger companies with larger market caps leading to larger settlements as an offset to the decline in IPO and SPAC activity.
Further, and consistent with related statistics, the technology and manufacturing industry sectors are committed to the largest settlement payments ($1.15 billion and $510 million respectively) for 2024 thus far, which comprises close to 80% of all settlement dollars to be paid.8
The home stretch
The impact of federal securities class actions is the primary driver of the public company directors and officers (D&O) liability insurance market overall. Board directors and C-suite officers are well advised to keep their eye on the ball, as the frequency and severity of these cases increases as anticipated for the second half of 2024. Many factors affecting publicly traded companies — such as the current macroeconomic trends, geopolitical tensions, regulatory environment, securities cases scheduled for the next term of the US Supreme Court, expected uptick in SPAC litigation in the Delaware Chancery Court (for SPACs completed in 2021 and 2022), predicted increase in AI-washing filings and increased interest in demands to inspect books and records — won't appear to come out of left field for those who are prepared to confront and mitigate the risks.
An impactful risk management program plays a critical role in protecting personal assets and the company's balance sheet. Gallagher's D&O insurance specialists form an extensive network and are in a league of their own as formidable insurance brokerage partners to add to your team when you're looking to cover all the bases.
