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Merger Claims Drive Rise in Securities Class Actions, Study Says

Merger Claims Drive Rise in Securities Class Actions, Study
The lawsuits include M&A claims involving BHP Billiton Ltd. and Potash Corp. of Saskatchewan Inc., according to Cornerstone Research. Photographer: Geoff Howe/Bloomberg

Securities class-action lawsuits in the U.S. rose 4.8 percent last year, led by claims that companies violated disclosure rules in mergers and acquisitions, a study found.

The lawsuits include M&A claims involving Novartis AG and Alcon Inc.; BHP Billiton Ltd. and Potash Corp. of Saskatchewan Inc.; Sanofi-Aventis SA and Genzyme Corp.; and buyouts involving J. Crew Group Inc. and Del Monte Foods Co., according to Cornerstone Research, which conducted the study with Stanford Law School’s Securities Class Action Clearinghouse.

Trends are cyclical and often driven by events, said John Gould, Cornerstone’s senior vice president in Boston. This year, there were no new suits filed over Ponzi schemes or auction-rate securities, and lawsuits stemming from the credit crunch continued to slide, according to the study released today.

“There’s always something new,” Gould said in an interview. Filings have been driven by the 2001 collapse of Enron Corp. and more recently by the credit crisis or options backdating, he said. “M&A was the big one this year.”

The number of investor lawsuits filed claiming securities law violations in mergers and acquisitions climbed to 40 in 2010 from 7 in 2009, according to the study.

A 20 percent increase in M&A transactions is “insufficient” to explain the almost six-fold rise in cases, Stanford Law Professor Joseph Grundfest said in an interview.

‘Sharp Increase’

“The sharp increase in federal litigation alleging disclosure violations in M&A transactions suggests that plaintiffs’ lawyers are scrambling for new business as traditional fraud cases seem to be on the decline,” Grundfest, director of the Stanford, California-based Clearinghouse, said in a statement. “That was the only explanation we were able to come up with,” he said in the interview.

The merger cases pushed the total securities fraud cases filed in U.S. federal courts to 176 last year from 168 in 2009, according to the study. The 2010 level remains 9.7 percent below the annual average of 195 filings between 1997 and 2009, according to the study, which is based on an examination of federal court cases. Securities class actions are cases in which plaintiffs proceed on behalf of a group of similarly situated investors.

Traditional securities cases, often spurred by accounting restatements or stock drops following bad news, continued to decline, falling to 135 in 2010, from 144 the year before, the researchers said.

BP, Toyota

Suits brought last year included claims against Toyota Motor Corp., Boston Scientific Corp., Motorola Inc., BP Plc, Pfizer Inc., Johnson & Johnson and Transocean Ltd., according to Cornerstone.

“The core rate of these cases is pretty much at an all-time low,” said Thomas A. Dubbs, an attorney at Labaton Sucharow LLP in New York who represents investors in securities suits. He attributed the trend to securities law and regulatory reform, including the Dodd-Frank Act, which revised laws governing the U.S. financial industry.

Merger litigation has a “different function” from the typical securities fraud claim, Dubbs said.

“The purpose of the traditional case is to get money back for a defrauded investor,” he said. “The M&A case triggers a process to get a judge involved to ensure that management is acting in the best interest of the shareholders.”

Investors also filed more securities claims against Chinese companies in 2010, with these suits accounting for 43 percent of all filings against foreign issuers, according to the study.

That reflects an “adjustment process,” in part, as Chinese companies conform to the different regulatory framework in the U.S., Grundfest said. “In others, there is outright fraud.”

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