Earlier this month, Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse released a report analyzing 2022 securities class action filings.[1] The report indicates that overall securities class action filings declined slightly by 5%, falling from 218 filings in 2021 to 208 filings in 2022.[2] This number is 43% lower than the previous five-year average of 362 filings and far below a recent peak of 427 filings in 2019.[3] Despite the relatively low number of filings, the size of core filings increased substantially, with the total Disclosure Dollar Loss (“DDL”) and Maximum Dollar Loss (“MDL”) increasing by 138% and 100% respectively.[4]

Filing Allegation Trends

The total decrease in filings was attributable to a 61% decline in M&A filings, which were at their lowest level since tracking began in 2009.[5] The total number of core filings (i.e. non-M&A filings) hardly changed, but there were changes in the types of core filings.[6] Core filings related to special purpose acquisition companies (“SPACs”) decreased by 27% from 33 filings in 2021 to 24 filings in 2022, which Cornerstone attributed to a slowdown in SPAC IPOs in the second half of 2022.[7] Meanwhile, federal Section 11 and state 1933 Act filings increased by 43%, which Cornerstone attributed to a surge of IPOs in 2021 and subsequent stock market declines.[8]

Cryptocurrency-related filings more than doubled from 11 filings in 2021 to a record 23 filings in 2022.[9] Seven of the cryptocurrency-related filings were filed in December 2022 and four had parallel SEC cryptocurrency-related enforcement actions in 2022.[10] The report also tracked the trends of COVID-19-related filings, which increased from 17 to 20, Cybersecurity filings, which decreased from 7 to 4, and Cannabis filings, which decreased from 4 to 1.[11]

The percentage of U.S. exchange-listed companies subject to filings decreased for the third year in a row, falling to 3.1%. This decrease was “partly driven by a 21% increase in the number of U.S. exchange-listed companies as of the start of 2022 relative to the start of 2021,” many of which are “SPACS that have not yet announced a De-SPAC Transaction.”[12]

Filing Size Trends

DDL increased from $297 billion in 2021 to $593 billion in 2022, the highest number on record, and MDL increased from $1.022 trillion in 2021 to $2.433 trillion in 2022, the highest since the tech crash in 2002.[13] The increases were driven by an increase in the number and size of mega filings—18 DDL filings accounted for 86% of total DDL and 28 mega MDL filings accounted for 88% of total MDL.[14] Communications companies made up 33% of mega DDL filings and 29% of mega MDL filings.[15]

Case Resolution Trends

Cryptocurrency-related filings filed in 2020 and 2021 experienced higher dismissal rates of 69% and 27% than all other filings, which experienced dismissal rates of 48% and 21% respectively.[16] Similarly, COVID-19-related filings filed in 2021 experienced dismissal rates of 41%, more than double the 19% dismissal rate of all other filings filed in 2021.[17] In contrast, “the resolution rate of core federal SPAC cases between 2019 and 2021 was less than a quarter of the resolution rate for other core federal filings.”[18] SPAC filings filed between 2019-2020, in the first half of 2021, and in the second half of 2021, experienced significantly lower dismissal rates of 33%, 7%, and 5% as compared to all other filings, which experienced dismissal rates of 50%, 36%, and 13% respectively.[19]

Three law firms—Rosen, Pomerantz, and Glancy—are “responsible for 60% of first identified core securities class action complaints in federal courts from 2016 to 2021.”[20] Filings by these three law firms have generally had higher dismissal rates and lower settlement rates than all other law firms.[21]

2022 Legal Developments

Below is a list of noteworthy cases and holdings from 2022:

• Menora Mivtachim Insurance Ltd. et al. v. Frutarom Industries Ltd.: On September 30, 2022, the Second Circuit held that “purchasers of a security of an acquiring company do not have standing under Section 10(b) to sue the target company for alleged misstatements the target made about itself prior to the merger of the two companies.”[22]
• Slack Technologies Inc. v. Pirani: On December 13, 2022, the Supreme Court agreed to hear Slack’s appeal of a Ninth Circuit en banc decision affirming the denial of Slack’s motion to dismiss plaintiff Fiyyaz Pirani’s claims brought under Sections 11 and 12(a)(2) of the Securities Act. Slack argues that the Securities Act requires a plaintiff to show that (s)he purchased registered shares in order to bring a claim that a registration statement was false and misleading. Because Pirani purchased his shares of Slack in a direct listing wherein registered and unregistered shares were commingled, making it impossible to determine whether his shares were registered, Slack argues Pirani’s claims must be dismissed.[23]
• Goldman Sachs Group v. Arkansas Teacher Retirement System: On September 21, 2022, the Second Circuit heard oral argument in Goldman Sachs’ appeal of a district court’s decision to grant class certification. Goldman Sachs argues that “the district court . . . incorrectly applied the U.S. Supreme Court’s instruction to consider the degree of mismatch between purported misstatements that are generic and specific alleged corrective disclosures.” A decision is expected later this year.[24]
• Legal and regulatory scrutiny of cryptocurrency increased throughout 2022. Although 2022 began with cryptocurrency prices at all-time highs, by the end of the year, several cryptocurrency companies including FTX and BlockFi had collapsed. The SEC brought 30 enforcement actions against cryptocurrency-related entities, four of which had parallel securities class action filings. Cornerstone expects the number of cryptocurrency-related securities class action filings to continue at elevated rates over the next year.[25]

Takeaways and Predictions for 2023

In sum, 2022 saw only a slight change in the total number of class action filings, but saw large changes in the types of filings. M&A-related and SPAC-related filings decreased significantly, whereas federal Section 11 and state 1933 Act filings and cryptocurrency-related filings increased significantly. The size of 2022 core filings also increased substantially, driven in large part by mega filings. Looking ahead to 2023, we expect to see a continued decrease in the number of SPAC-related filings and increase in the number of cryptocurrency-related class action filings due to heightened scrutiny of cryptocurrency-related entities.