Securities fraud claims driving up D&O insurance costs
The increased number of securities fraud lawsuits carry a financial impact beyond the mere cost of litigation.
General counsel today are looking at a more than 5% chance that their companies will be sued this year due to a drop in stock price, according to a new report.
The Securities Class Action Filings—2019 Midyear Assessment, released last Thursday by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse, shows that plaintiffs filed 198 new federal securities class actions in the first half of 2019. The number of filings continued this year at a near record level.
“The likelihood of a lawsuit of this type has increased substantially over the last 10 years,” said Sasha Aganin, vice president of Cornerstone Research and co-author of the report. “If you go back to 2010, the likelihood was slightly above 2%. Now it’s above 5%.” And even higher for Standard & Poor’s 500 firms at 6.4%.
Aganin said the increased number of filings carry a financial impact beyond the mere cost of litigation and settlements.
“I’m sure the companies are feeling the pain in terms of higher insurance premiums,” he said, “particularly in cases related to public offerings.”
Insurance impact
Kevin LaCroix, an attorney and executive vice president of RT ProExec, an insurance intermediary that focuses on management liability issues, said, “It is definitely true that director and officer insurance pricing has been going up over the past 12 to 18 months.”
Both he and Aganin said the price increases were driven by the sheer number of suits, plus the increased number of filings in state courts following the U.S. Supreme Court’s Cyan Inc. decision last year.
The data show that state courts dismiss fewer of these claims than do federal courts, making state courts more attractive for filing.
LaCroix said he would advise general counsel “to start working early on your [insurance] renewal, and to be prepared for it not to be so smooth and frictionless as it has in the past.” He predicted the life sciences and technology sectors, along with non-U.S. companies that are listed in the U.S., will likely see the most significant rate increases.
Brian Lutz, a litigation partner in the San Francisco and New York offices of Gibson, Dunn & Crutcher and co-chair the firm’s national securities litigation practice, said several factors are driving the high level of filings.
“First, in a period of significant market volatility, plaintiff’s lawyers are seizing on any movement in a company’s stock price as an opportunity to assert a claim for securities fraud,” Lutz said. “And second, plaintiff’s lawyers are continuing to file lawsuits challenging virtually every public company merger.”
Lutz said if a company’s stock price declines, even modestly, for any reason, general counsel should “know that enterprising plaintiff’s lawyers are paying attention and searching for any basis to assert a securities fraud lawsuit. It’s important to have a response plan in place in order to not be caught off-guard by litigation.”
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