Securities and antitrust class action filings have dipped this year due to the coronavirus pandemic, but things look to pick back up, according to Peter Hansen, chairman of Battea Class Action Services. In a webinar by the Council for Institutional Investors (CII), Hansen said the slowdown comes amid a trend of increased class action filings over the past several years, and he expects the overall high filing rate to continue.
The webinar, “State of Securities & Antitrust Class Action Litigation and Impact of Covid-19,” was moderated by Lucy Nussbaum, a CII research analyst.
Class action trends. According to Hansen, class action filings have been trending higher over the last several years. Currently, Battea is seeing around 450 class actions filed per year. In 2020, most cases are coming from the health, technology, electronic services, and financial services sectors, he said.
Hansen pointed to several factors contributing to the increase in filings. Litigation finance services have increased funds available to pursue class actions. In addition, increasingly automated access to information and digital discovery and analysis are making processes more efficient. Against the steady backdrop of a highly competitive business culture, with the ongoing motive to “push the numbers” sometimes crossing the line into actionable wrongdoing, these developments are helping to drive growth in class actions.
However, the courts do a good job of vetting cases and getting rid of frivolous actions, said Hansen. Battea is currently seeing a dismissal rate of around 51 percent. Hansen does not anticipate that either the case filings or dismissal rate will change due to any initiative by the courts.
Another trend has been an increase in international cases and in “mega cases” with large damages, said Hansen. In part this is due to an increase in large financial derivatives antitrust cases, for example cases involving the rigging of foreign exchange (FX) and LIBOR benchmarks. Damages are also on the upswing overall. Hansen noted that the S&P is currently at a very high value, so stock drops are amplified. Damage amounts are larger, and so are the settlements.
Impact of COVID-19. The coronavirus pandemic has caused a slowdown in class actions:
- The number of case filings has dropped in 2020 by about 20 percent.
- Courts have been slower to approve settlements. Battea has had a little over 50 settlements approved so far this year, compared to prior years which had 60 to 80 approved by this time.
- Approval of distributions has also been slower. Battea has had 40 distributions approved, versus 50 to 80 in prior years.
Regarding class actions specifically arising out of the pandemic, Hansen pointed to five:
- Inovio Pharmaceuticals, Inc. The company allegedly claimed to have developed a COVID-19 vaccine, but this was not true, resulting in a stock drop.
- SCWorx Corp. The company allegedly misrepresented orders in production of COVID-19 tests.
- Phoenix Tree Holdings. A Chinese real estate development company said it was not impacted by COVID-19, even though they had many properties in Wuhan, the epicenter of the pandemic in China.
- Zoom. Amid an enormous rise in popularity of the video call provider during the pandemic, the software was discovered to not have anywhere near the level of encryption and security as advertised.
- Norwegian Cruise Lines. Salespeople were allegedly directed to tell customers it was not possible to get COVID-19 in tropical temperatures. “They were selling trips like hotcakes,” said Hansen.
Financial antitrust cases can be challenging because sometimes it takes a long time to emerge that there was an injury, said Hansen. For example, in the benchmark manipulation cases, people didn’t know for sure if pricing and spread were a function of collusion and manipulation. As a result, people didn’t have a recorded loss on the books, as would happen with a big drop in equity position. In addition, there are many discrete financial instruments involved. In the LIBOR case, there were many different swaps issued by many different issuers, at different times, with different durations. There was also a mix of over-the counter and exchange-traded plaintiffs.
As a result, the problem of damage assessment or assertion is too much for many, Hansen said. Custodians have largely given up on following these cases on behalf of their clients, and some of Battea’s competitors have taken some “very costly shortcuts” for their clients. Even with Battea’s investment in systems and expertise, “it really keeps us up at night,” said Hansen. Despite these difficulties, Battea is currently following about 35 cases, of which about half have settled or partially settled, and half are going through the courts. The complexity is definitely a challenge, but there’s a lot of settlement money in these actions, Hansen said.
Hansen has not seen any specific impact on antitrust class actions from the pandemic. Cases are continuing to see movement. For example, a Mexican government bond case had an icebreaker settlement a few weeks ago, and a Fannie Mae case settled for $85 million. There have been several new cases filed recently, including an action against Bank of America for bond suppression.
International class actions. Hansen discussed areas where international class actions differ from domestic class actions, often posing unique challenges.
First, there are differences in jurisdictions in class action structures, said Hansen. For example, in Germany, there is a single model plaintiff and it is possible to put up joint multiple coalitions. In contrast, in the U.K., there is more of a “carbon copy” concept, where 50 to 100 investors can sue together, but they’re really 50 or 100 individual investors in one complaint. Every man is technically for himself, but there is one shared funder and law firm. Denmark also follows this model. In the Dutch jurisdiction, an association foundation can pursue a lawsuit. Individual investors do not sue directly, but instead have a representative organization sue. In addition to the structural differences, there are also differences between jurisdictions in statutes of limitation, capital markets law, and damages provisions.
Another issue is anonymity. Hansen explained that in the U.S., it’s possible to remain anonymous, but in Europe it really is not. The defendant will know who you are, and possibly the public as well. This can cause a crimp in signing up clients. For example, the firm Scott + Scott brought an FX lawsuit in the U.S., but literally could not get anybody to sign up in Europe to sue their counterparts. There has been something of a change on this front in the U.K., however, with a new antitrust law that allows a representative party to represent the class. This might be helpful in terms of people participating, said Hansen.
A further issue is that damages models are not published, said Hansen. Of course, investors want to know what the losses are before they spend a lot of time debating if they should participate. There are a lot of coalitions and its very fee and lawyer-driven, and investors need to try and decipher who to go with. But class action services firms can help distill these choices, and Battea expects a significant growth in international litigation, Hansen said.
Lead plaintiffs and opt-outs. One area that has changed dramatically in the past three years is the competition for lead plaintiff, said Hansen. While it has always been a race for law firms to be appointed as counsel and to find investors with big losses that they can represent, that process has become very automated, with systems developed to track 13F filings and identify large holders.
Increasingly, some law firms, as soon as they lose the race to be appointed lead counsel, will “do a 180 overnight” and propose that claimants should opt out, asserting that the appointed lead counsel will not do a good job. However, some firms that get appointed are very formidable, said Hansen, and investors need to do their own analysis and not be “sweet-talked” into an opt out on short notice.
Looking ahead. Fundamentally, Battea does not anticipate any real changes over the long term but expects to see impacts over the short term. In Hansen’s view, second quarter earnings will likely kick off some real action, and this will continue for the rest of the year. Hansen noted that corporate insiders are facing a sky-high market on one side, but possibly presiding over a massive drop in business on the other side.
“So if you don’t pre-announce your shortcomings while selling insider stock, you’re literally underwriting a case against yourself,” said Hansen.
In response to a question from the audience about financial reporting amid ongoing economic uncertainty, Hansen acknowledged that much of companies’ financial reporting in the next few months will be complete guesses and may take advantage of relaxed application of some of the rules on loan lapses. In that context, it may be harder to claim material representation, as issuers may get the benefit of the doubt on financial valuation estimates.
Hansen thinks we will see a mixed bag in this area, as companies can certainly claim force majeure to some degree. However, if companies are not forthcoming about pre-announcing failing results, or if the current crisis exposes a real weakness in the business, Hansen believes we could see “some earnings surprises and some very solid cases.”