2019 Year-End Securities Litigation Update

The number of securities cases filed in federal court continued at a furious pace for the third year in a row. This year-end update highlights what you most need to know in securities litigation trends and developments for the last half of 2019:

Oral argument in Liu v. SEC, No. 18-1501, is scheduled for March 3, 2020, when the Supreme Court will consider the power of the SEC—and potentially, by extension, other federal agencies—to order "equitable disgorgement" in light of the Supreme Court's prior ruling in Kokesh v. SEC, 137 S. Ct. 1635 (2017). Anticipation for the Supreme Court's decision in Jander—a case expected to examine the intersection of federal securities laws and ERISA—fizzled recently when the Supreme Court vacated and remanded for the Second Circuit to consider issues not resolved by its prior decision. Developments in the Delaware Court of Chancery include continued scrutiny of relationships between directors for purposes of independence analyses, consideration of when a stockholder letter constitutes a formal demand to take corrective actions, and determining whether a buyer is excused from closing on an acquisition when the target discovers that FDA approval of its only product is at risk because of its own officer's fraud. Although no defendant has been found liable as a "disseminator" since the Supreme Court's 2019 decision in Lorenzo, trial courts and the Tenth Circuit have begun to grapple with the case's important implications. We continue to observe Omnicare's falsity of opinions standard developing into a formidable pleading barrier to securities fraud claims, with both the Eleventh and Fifth Circuits recently upholding dismissals at the pleadings stage. Although the federal circuit courts of appeals did not provide any new guidance on "price impact" theories under Halliburton II during the second half of 2019, we expect the Second Circuit will soon reach a decision in Goldman Sachs II, which has been under consideration since June. Finally, New York recently amended the statute of limitations for Martin Act claims, extending it from three years to six years. I. Filing and Settlement Trends

Data from a newly released NERA Economic Consulting ("NERA") study shows that 2019 was a year largely unchanged from 2018. To start, the number of new federal class action cases filed in 2019 was equal to 2018, which buttressed a trend of increased filings that began in 2017.

There has also been a continuation of the shift in the types of cases filed. The number of Rule 10b-5, Section 11 and Section 12 cases increased slightly in 2019, with 31 more filings than in 2018, while the number of merger objection cases fell.

The median settlement values of federal securities cases for 2019—excluding merger-objection cases and cases settling for more than $1 billion or $0 to the class—was roughly equivalent to those in 2018 (at $13 million, up from $12 million in 2018). However, average settlement values were down by more than 50% (at $30 million, down from $71 million in 2018). This discrepancy is due in large part to the settlement of one case in 2018 exceeding $1 billion. Excluding such an outlier, we see only a slight increase in average settlement values compared to the prior two years.

The industry sectors most frequently sued in 2019 continue to be the "Health Technology and Services" and "Electronic Technology and Technology Services" sectors, although 2019 saw the continuation of a downward trend in cases filed against healthcare companies following a spike in 2016.

1. Filing Trends

   Figure 1 below reflects filing rates for 2019 (all charts courtesy of NERA). Four hundred and thirty-three cases were filed this past year, exactly matching the number of cases filed in 2018 and similar to the number of filings in 2017. However, this figure does not include the many class action suits filed in state courts or the rising number of state court derivative suits, including those filed in the Delaware Court of Chancery.

   Figure 1:

2. Mix of Cases Filed in 2019

   1. Filings by Industry Sector

      As seen in Figure 2 below, the split of non-merger objection class actions filed in 2019 across industry sectors is fairly consistent with the distribution observed in 2018, with few indications of significant shifts or increases in particular sectors. As in 2018, the "Health Technology and Services" and the "Electronic Technology and Technology Services" sectors accounted for over 40% of filings, although there was a slight drop in "Health Technology and Services"-related filings (at 21%, down from 25% in 2018). The other two sectors reflecting the largest changes from 2018 are "Process Industries" (at 4%, up from 1% in 2018) and "Consumer and Distribution Services" (at 6%, down from 9% in 2018).

      Figure 2:

   2. Merger Cases

      As shown in Figure 3 below, there were 170 merger objection cases filed in federal court in 2019. Although this is a 15% decrease from the number of such cases filed in 2018, the 170 filings continue the overall trend of a substantial increase in merger objection suits being filed in federal court after 2016, when the Delaware Court of Chancery put an effective end to the practice of disclosure-only settlements in In re Trulia Inc. Stockholder Litigation, 29 A.3d 884 (Del. Ch. 2016).

      Figure 3:

3. Settlement Trends

   As Figure 4 shows below, the average settlement value in 2019 declined by more than 50% from $71 million in 2018 to $30 million, but still remained higher than the average of $26 million in 2017. This decrease in the average settlement value can primarily be attributed to the inclusion of a settlement in 2018 that exceeded $1 billion, thereby skewing the average for that year. If our analysis is limited to cases with settlements under $1 billion, there actually is a slight increase in the average settlement value in 2019 compared to the prior years.

   Figure 4:

   As Figure 5 shows, the median settlement value in 2019 was $13 million, which is similar to the median in 2018 ($12 million) and almost double the median value in 2017 ($7 million).

   Figure 5:

   As shown in Figure 6, the Median NERA-Defined Investor Losses and Median Ratio of Actual Settlement to Investor Losses by Settlement Year remained steady in 2019 at $472 million, following a return in 2018 to a number similar to those recorded during the period 2014 through 2016.

   Figure 6:

   Finally, Figure 7 shows that 2018 saw increases in the percentage of settlements in the $10 to $19.9 million range, $50 to 99.9 million range, and $100+ million range. The perecentage of settlements in the $20 to $49.9 million range returned to virtually the same level that at which it was located in 2017, after experiencing a significant bump in 2018.

   Figure 7:

   2. What to Watch for in the Supreme Court

1. Disgorgement in SEC Enforcement Actions

   On November 1, 2019, the Supreme Court granted certiorari in Charles C. Liu and Xin Wang A/K/A Lisa Wang v. SEC, No. 18-1501, to review a Ninth Circuit decision affirming summary judgment for the Securities and Exchange Commission ("SEC") on a claim of securities fraud under Section 17(a)(2) of the Securities Act and ordering disgorgement of the entire amount that the petitioners had raised from investors.

   Liu and Wang formed and controlled corporate entities presumably to build and operate a proton therapy cancer treatment center in Montebello, California. Liu financed the prospective cancer center with $27 million of international investments raised through the EB-5 Immigrant Investor Program—which allows foreigners to obtain permanent residency in the U.S. by investing at least $500,000 in a "Targeted Employment Area," thereby creating at least 10 full-time jobs for U.S. workers.

   Instead of pursuing proton therapy, Liu funneled over $20 million of investor money to himself, his wife Wang, and marketing companies associated with them. In fact, the bulk of the millions of dollars transferred occurred shortly after the SEC subpoenaed Liu as part of its initial investigation in February 2016. No permit was ever issued for the construction of the treatment center.

   The SEC sought summary judgment on three securities fraud causes of action against the defendants but the district court addressed only the Section 17(a)(2) claim, given that it was a sufficient basis for the remedies sought by the SEC. See SEC v. Liu, 262 F. Supp. 3d 957, 970 (C.D. Cal. 2017). The SEC asked the court to, inter alia, order disgorgement of the total amount raised from the investors ($27 million) less the amount left over and available to be returned ($200,000). On the basis of its broad equitable power to order disgorgement of ill-gotten gains, and further discretion to indicate the amount to be disgorged, the court granted the relief sought by the SEC. See id. at 975.

   On appeal to the Ninth Circuit, defendants argued that the district court's disgorgement order was erroneous. SEC v. Liu, 754 F. App'x 505, 509 (9th Cir. 2018). Relying on Kokesh v. SEC, 137 S. Ct. 1635 (2017), defendants asserted that the district court lacked the power to order the disgorgement. Liu, 754 F. App'x at 509. In Kokesh, the Supreme Court held that disgorgement operates as a penalty, and any claim for disgorgement in an SEC enforcement action must be commenced within five years of the date the claim accrued. See Kokesh, 137 S. Ct. at 1645. Reviewing for abuse of discretion, the Ninth Circuit concluded that Kokesh expressly did not address the issue of whether a court had the equitable power to order disgorgement, thereby distinguishing it from Ninth Circuit precedent on this matter. See Liu, 754 F. App'x at 509.

   In their petition for a writ of certiorari, Liu and Wang specifically questioned the equitable power to award disgorgement in the wake of Kokesh. They argued that circuit courts need guidance after Kokesh, and also challenged the use of what was characterized as "equitable disgorgement" by other agencies, including the FTC and the EPA. The Kokesh Courtin...