The U.S. Chamber of Commerce in a new paper is calling on Congress to reform securities class-action law, its first legislative foray on the issue since the Private Securities Litigation Reform Act was passed in 1995.
The PSLRA was passed in response to complaints from the Chamber and others after a spike in filings in the 1990s that focused on technology companies. Today, the new report said, "the securities class-action system suffers from abuses eerily similar to those of the 1990s," when companies tended to settle rather than defend claims.
While Congress created a lead-plaintiff process to give institutional investors more of a role in these types of lawsuits, "many institutional investors have remained on the sidelines," while plaintiffs' lawyers and "professional plaintiffs" have stepped up their involvement, said the report, "A Rising Threat: The New Class-Action Racket that Harms Investors and the Economy."
In 2018, more than 8% of all public companies — one out of 12 — will be sued in a securities class action, according to the report. While the previous trend was stock-drop lawsuits, the report states "the trigger today is merger and acquisition deals valued over $100 million," with 85% of those deals resulting in a lawsuit. The bulk of those lawsuits, 87%, now wind up in federal courts, following a Delaware state court ruling in 2016 that limited settlements in such cases, the report said.
Another trend noted in the report is "event-driven" lawsuits triggered by consumer lawsuits on product liability or in data breaches, followed by investor lawsuits alleging companies should have known the potential impact on share values.
Annual filings of securities class-action lawsuits averaged 190 per year from 2008 through 2016. In 2017, filings increased 122% to 412, and are expected to stay at that level in 2018, the report said.
“Securities class-action lawsuits are spiraling out of control: Plaintiffs' lawyers are filing more meritless lawsuits than ever before," Lisa A. Rickard, president of the U.S. Chamber Institute for Legal Reform, said in a statement.
“This litigation racket inflicts serious harm on investors, companies and capital markets. Congress should enact reforms that deter the filing of meritless claims and ensure that securities cases actually benefit genuinely injured investors rather than the lawyers who bring the lawsuits.”