(Reuters) - Remember back in mid-March, when the stock market was gyrating and businesses were just beginning to reckon with COVID-19 lockdowns? Corporate defense firms warned that opportunistic shareholders’ lawyers were poised to pounce. Plaintiffs’ lawyers said at the time that they were in no rush to bring class actions against companies that failed to anticipate the impact of the coronavirus or to disclose exposure to the ill effects of pandemic shutdowns. But Kent Schmidt at Dorsey & Whitney, who started tracking COVID-19 cases in March, told me in April that COVID-19 shareholder class actions might tick up in the second quarter of the year as anxious companies looked for good news to report.
Early data indicates that COVID-19 continues to be more noise than signal in shareholder litigation – except, perhaps, to the extent that the virus has slowed the pace of new securities class actions. The consulting firm NERA recently came out with its mid-year report on securities class actions, including M&A shareholder suits. The big headline, as Kevin LaCroix reported Monday at the D&O Diary, is that the number of shareholder class actions filed in the first half of 2020 is down in comparison to the last several years. NERA counted 175 securities class actions from January to June of this year, down 15% from the last three years.
I also checked the numbers at the Stanford/Cornerstone database, which reported 176 shareholder class action filings in the first half of 2020, plus another 19 so far this month. If these trends hold for the second half of 2020, this year will see the fewest new securities class actions in federal court since 2016, when plaintiffs lawyers began shifting M&A class actions from Delaware to federal court. According to the NERA report, 70 of the 175 class actions filed in the first half of 2020 were M&A challenges, a percentage similar to that of the last few years.
COVID-19 itself has not been much of a factor in private securities filings so far. NERA counted 11 shareholder class actions related to the coronavirus. Stanford has identified 12, including one shareholder class action, against the private prison real estate investment trust Goes Group, filed in July. There have been coronavirus-based shareholder suits against two cruise ship companies, Norwegian and Carnival, but otherwise, the COVID-19 shareholders suits have been against relatively small corporations.
In other words, if plaintiffs’ lawyers have plans to target big companies for defrauding shareholders in their response to COVID-19, they’re biding their time.
And that might be! I talked to plaintiffs’ lawyer Jason Leviton of Block & Leviton about the NERA numbers. He cautioned that it’s too soon to know whether COVID-19 will lead to a boom in shareholder class actions. “We won’t know the impact for a couple of quarters,” he said. Leviton, whose firm filed one of the first COVID-19 shareholders’ suits but was not appointed lead counsel in the case, against a pharma company that allegedly misrepresented its prospects of developing a vaccine, said he’s not surprised that the plaintiffs’ bar hasn’t rushed to allege fraud against companies that merely missed their projections for the first or second quarters. But that could change, he said, if those businesses promise better prospects and don’t deliver.
“It’s going to be interesting to talk in a year and a half,” he said.
The pipeline for big securities fraud cases, though, could be drier than usual for the plaintiffs’ bar. Regulators, as Gibson Dunn & Crutcher noted in its mid-year report on securities enforcement, have had to divert resources to policing for COVID-19 related fraud. It has brought several enforcement actions in April, May and June against publicly-traded companies (or, in a couple of instances, investors) that made allegedly misleading statements about coronavirus products or business deals. But Gibson’s Mark Schonfeld, who co-authored the enforcement analysis, said the SEC’s COVID-19 enforcement actions, which have mostly targeted small companies, “are not necessarily likely to generate follow-on private litigation.”
The virus does seem to have slowed the progress of pending securities cases. Only 36 shareholder class actions settled in the first half of this year, according to NERA - probably because lawyers and courts took a while to adjust to virtual litigation. For now, though, COVID-19 looks more a ripple than a wave in securities litigation.