Securities litigation is set to have a bumper year in 2017, continuing the upward trend of last year. According to Kevin LaCroix of the D&O Diary, 125 US federal securities class actions were commenced in the first quarter of 2017. At this rate, it is likely that the number of filings will almost certainly exceed the 270 securities class actions filed in 2016 (which, according to Cornerstone Research, itself represented a 44% increase on 2015). Mr. Lacroix also posted recently about the steep rise in collective actions across Europe, referring to this report by the US Chamber of Commerce on the growth of collective redress in the EU; he has described the “rise of collective investor actions outside of the US as one of the most important current developments in the world of directors and officers liability”.
LaCroix considers that key reasons for the increase in securities litigation include: (1) the increase in government investigations (due, in part, to sophisticated software which makes it easier to detect inconsistencies in companies’ financial information); and (2) increase in securities lawsuits arising from M&A transactions where shareholders generally allege that the company and its officers and directors failed to maximise the shareholder’s return at the time of the sale or for misstating elements of the deal. A third reason may be due to the impact of the JOBS Act which was signed into law in 2012 and which was intended to encourage funding of US small businesses by easing various securities regulations. However, the reduced reporting requirements (particularly in IPOs) has seen a rise in Section 11 cases.
If this trend continues, it may be necessary to undertake a wholesale review of litigation risk when underwriting D&O policies.
See our Class Action and Collective Redress microsite for more information.
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