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Securities class-action lawsuits set record in 2017, report finds

The number of federal securities class-action lawsuits filed in 2017 reached a record high for the second straight year, due to a sharp increase in suits targeting mergers and acquisitions, according to a report released Tuesday by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse.

There were 412 securities class actions filed in 2017, up from 271 filings in 2016, according to the report, "Securities Class Action Filings-2017 Year in Review." The 2017 number was more than double the historical average over the previous 20 years, the report said.

Of the 412 cases, 198 filings involved M&A transactions, double the 2016 number.

Other types of filings increased 15%, which the report authors said coincided with activity by three plaintiff law firms that were appointed lead counsel in smaller cases.

"The number of filings has reached unprecedented levels. In 2017, companies on U.S. exchanges were more likely to be the subject of a class action than in any previous year," said John Gould, a Cornerstone Research senior vice president, in a statement. "But unlike previous years with substantial filing activity, these recent increases have occurred during a period of thriving financial markets."

The report also found higher dismissal rates than in previous years, with core filings in 2017 expected to set a record for the highest rate of dismissal within the first year of filing. The report also found that M&A cases filed from 2009 to 2016 have been dismissed at a much higher rate than other federal filings.

The surge in lawsuits likely to be dismissed is troubling, said Joseph A. Grundfest, law professor and director of the Stanford Law School Securities Class Action Clearinghouse. "The (Private Securities Litigation Reform Act of 1995)was designed to deter plaintiffs from filing low-quality complaints, but this surge in complaints that are dismissed with greater frequency suggests that the law is no longer having its intended quality-enhancing effect. Policymakers should, I think, study these data carefully and ask whether the time is nigh for further reform."

One trend noted for 2017 in the report was the filing of cryptocurrency cases against firms issuing initial coin offerings.

The report's Maximum Dollar Loss index showed a 35% drop in losses claimed from 2016 to 2017, returning to the level before the 2008 financial crisis, which the report attributed in part to a year-over-year drop in the number of large filings with an MDL of at least $10 billion.

The year also saw more European issuers targeted than in any previous year, while filings against companies in the financial sector fell to 20 from 22 in 2016. More than 8% of companies listed on U.S. exchanges were the subject of class-action filings, the highest percentage than in any of the previous nine years.

One noticeable downward trend was a sharp decline in Section 11 filings in California state courts alleging inaccurate registration statements, which decreased by nearly two-thirds from the previous year. That coincided with the U.S. Supreme Court accepting the case, Cyan Inc. vs. Beaver County Employees Retirement Fund, addressing the question of whether state courts may be used for adjudicating class actions.