May 25, 2017

Securities Class Action Lawsuits: More Common and More Lucrative

The Dow Jones Index finished 2016 on a wild upward ride, returning 13.4 percent for investors. But that wasn’t enough to stave off a wave of shareholder class action cases.

A new report last month from Cornerstone Research found that shareholder class action settlements jumped to 85 in 2016, which is the highest number since 2010. Additionally, for the first time in a decade, there were multiple securities class action settlements over $1 billion.

Overall, the average 2016 class action settlement nearly doubled from 2015 cases, jumping from $38.4 million to $70.5 million.

These cases impose tremendous pressure on businesses and their investors. A 2014 Institute for Legal Reform (ILR) study found that shareholders lose, collectively, $39 billion in stock value each year upon the announcement of a securities class action lawsuit.

Plaintiffs’ lawyers are sure to celebrate this news. As previous ILR research shows, they are the only group to truly benefits from these massive settlements.

Investors? Not so much. That’s because these suits are really one set of shareholders (i.e. the collective owners of the company) paying another set of shareholders (those members of the class action, i.e. another set of current and/or former stock holders).

The rise of securities class actions is a drag on public companies, their owners, and the future growth of the economy. One consequence may be the slowdown in new public companies via Initial Public Offerings, or IPOs.

In 2016, only 64 new companies came onto the market, the slowest rate in seven years, according to data from Insight. Of those, only 13 were venture capital-backed tech companies.

This is particularly troubling because technology is the driver of our economy. Tech is the sector with the highest annual rate of return in the S&P 500. So far in 2017, just five tech firms — Apple, Alphabet, Facebook, Amazon, and Microsoft — make up a whopping 37 percent of the all gains in the U.S. stock market.

If tech firms are opting out of the broad equities markets, this should concern all investors.

While the reasons for companies deciding against going public are myriad, one thing for sure is that privately held companies aren’t subject to these abusive securities class action lawsuits.

The explosion of securities class action cases is troubling for today’s investor, but it should also concern those who care about future investors. Without a robust market in which to invest, everyone from the mom and pop shareholder to the large pension fund will miss out on future economic growth.

Abusive securities class action litigation is another reason for lawmakers and regulators to take a look at making legal reform happen. 

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