January 23, 2013 5:01 am

Federal class action lawsuits fall sharply

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There was a sharp drop in the number of federal class action lawsuits filed in the US last year, as plaintiffs pursued fewer cases in areas such as mergers and acquisitions and the financial services sector.

However, as regulators stepped up their crackdown on insider trading, there was a rise in the proportion of class action lawsuits filed based on allegations of insider trading, according to a report published on Wednesday.

A review of last year’s federal securities fraud class action activity by the Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research, a consulting firm, also showed an increase in the proportion of filings based on false forward-looking statements.

In total, there were 152 class action filings last year, down 19 per cent from the previous year, according to Cornerstone’s separate Class Action Filings Index. This was the second-lowest level in 16 years.

Class action filings against foreign companies listed in the US remained high even though the number of filings against Chinese companies listed in the US via reverse mergers tailed off.

The number of filings against foreign issuers were a fifth of total filings in 2012, compared with 32 per cent the previous year.

Filing activity last year was most prevalent against companies in non-cyclical consumer industries, of which the majority were in the healthcare, biotechnology, and pharmaceutical industries.

“Historically, there’s a lot of volatility in the biotech and pharma sector,” said Joseph Grundfest, founder of the Stanford centre. “Drugs will fail, and when they do, it’s often easy for plaintiffs to claim that the company falsely touted the promise of the new therapy.”

However, the flurry of class action lawsuits relating to the financial crisis appears to have dried up, as last year was the first with no credit crunch-related filings, compared with three in the previous year.

A possible explanation is that federal statutes of limitation – typically requiring cases to be filed within three years of an event – have run their course for a majority of mortgage-backed security cases.

M&A filings also tailed off last year, reflecting both a shift in litigation strategy and a drop in dealmaking during the downturn.

Financial companies were defendants in 15 class action lawsuits, amounting to 10 per cent of all filings, compared to 13 per cent the previous year, and 24 per cent in 2010.

“Usually financial services firms get their fair share of suits,” said Mark Holland, a securities litigation partner at Goodwin Proctor in New York. “The IPO market has been quiet, with the exception of Facebook; and with fewer IPOs, you’ll see investment bankers sued less often.”

The number of class action lawsuits filed against Chinese companies listed in the US through reverse mergers fell from 31 in 2011 to only 10 last year.

Mr Holland pointed to two such cases that his firm is working on, though he said that while it was “seeing more activity in that space a couple years ago ... the number of those mergers has gone way down”.

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