Recent study reveals merger claims to increase securities class actions

A recent study found that securities class-action lawsuits in the U.S. rose 4.8 percent last year, correlated by claims that businesses violated disclosure rules in mergers and acquisitions.

According to Cornerstone Research, which conducted the study with Stanford Law School’s Securities Class Action Clearinghouse, the cases include M&A claims involving companies like Novartis AG and Alcon Inc., BHP Billiton Ltd. and Potash Corp. of Saskatchewan Inc., Sanofi-Aventis SA and Genzyme Corp. Additional cases involved buyouts of J. Crew Group Inc. and Del Monte Foods Co.

Trends are cyclical and often driven by events, said Cornerstone’s senior vice president in Boston. This year, there were no new cases filed over Ponzi schemes or auction-rate securities, and suits deriving from the credit crunch continued to slide, according to the study released today.

“There’s always something new,” the VP said in an interview. Case filings have been driven by the 2001 collapse of Enron Corp. and more recently by the credit crisis or options backdating, he said. “M&A was the big one this year.”

According to the study, the amount of investor lawsuits filed claiming securities law violations in M&A's rose to 40 in 2010 from 7 in 2009.

A 20 percent increase in transactions of mergers and acquisitions is insufficient to explain the nearly six-fold rise in cases, one Stanford Law Professor said during an interview.

“The sharp increase in federal litigation alleging disclosure violations in M&A transactions suggests that plaintiffs’ lawyers are scrambling for new business as traditional fraud cases seem to be on the decline,” the director of the Stanford, California-based Clearinghouse, said in a statement. “That was the only explanation we were able to come up with,” he noted in the interview.

Cases of merger drove the total securities fraud lawsuits filed in U.S. federal courts to 176 last year from 168 in 2009, according to the study. Also according to the study, the 2010 level remains 9.7 percent below the annual average of 195 filings between 1997 and 2009.

"It is interesting to decipher these changing trends with respect to what drives companies to file such claims," stated one St. Louis corporate lawyer.

Traditional securities lawsuits, typically prompted by accounting restatements or stock drops following bad news, continued to fall, dropping to 135 in 2010, from 144 the year before, the researchers said.

According to Cornerstone, lawsuits brought on last year included claims against Toyota Motor Corp., Boston Scientific Corp., Motorola Inc., BP Plc, Pfizer Inc., and Transocean Ltd., to name a few.

The primary rate of these lawsuits is essentially at an all-time low, said a Nashville business lawyer who represents investors. He considered the trend to securities law and regulatory reform.

M&A litigation has a unique function from typical securities fraud claims, He added.

According to the study, investors also filed more securities lawsuits against Chinese companies in 2010, with these types of cases accounting for 43 percent of all filings against foreign issuers.