February 27, 2019

The U.S. Chamber of Commerce-backed Institute for Legal Reform recently proposed ways to address what it calls a “broken securities class action system” marked by a sharp increase in case filings, but there’s little if any consensus about how best to tackle the issue.

The Institute for Legal Reform says the securities class action system is “plainly broken,” allowing investors to file an alarming number of what are referred to as disclosure-only and event-driven lawsuits, according to a paper titled “Containing the Contagion” released Monday evening. But not everyone shares the organization’s alarm.

“I think it’s overblown,” said Kramer Levin Naftalis & Frankel LLP partner Sean Coffey, who represented plaintiffs at Bernstein Litowitz Berger & Grossmann LLP before joining the defense firm.

The past two years have in fact seen the highest number of federal securities class action filings in at least two decades, according to a report released last month by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse. But many of the 403 securities class actions Cornerstone said were filed in federal court last year were later consolidated, making the actual number of securities lawsuits far fewer, Coffey said.

The recent totals have also been inflated by a surge in cases filed in Delaware federal court after the Delaware Chancery Court’s 2016 Trulia ruling took issue with disclosure-only settlements in shareholders’ challenges to mergers or acquisitions. These settlements typically required defendants to make additional disclosures about the deal that critics argued were insignificant.

The bulk of these disclosure-only lawsuits are resolved relatively quickly, said Steven Toll, managing partner at Cohen Milstein Sellers & Toll.

Toll also defended the increase in event-driven litigation. With these types of lawsuits, investors typically allege companies failed to warn them about adverse events such as data breaches or wildfires that caused stock prices to fall when the public learned about them.

The biggest securities class action settlement in a decade resolved a type of event-driven litigation, he said. Brazil’s state-run oil giant Petrobras agreed last year to pay investors almost $3 billion to end allegations that its securities were negatively impacted by a massive corruption scandal.

“There are like dozens of cases that are really good fraud cases that just don’t fit the mold of the old standard accounting restatements, but somehow [the Institute for Legal Reform has] tried to label these things like they're not real frauds,” Toll said. “And that’s just wrong.”

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