Chinese Issuer, M&A Claims Boost Securities Lawsuits

Securities class-action lawsuits in the U.S. increased 6.8 percent last year, led by claims against companies involved in mergers and acquisitions and Chinese companies listed on U.S. exchanges through reverse mergers, a study found.

The lawsuits include M&A claims involving Verizon Communications Inc. and Terremark Worldwide Inc., Smurfit-Stone Container Corp. and Rock-Tenn Co., and Exelon Corp. and Constellation Energy Group Inc., according to Stanford Law School’s Securities Class Action Clearinghouse, which conducted the study with Cornerstone Research.

M&A-related cases constituted almost 23 percent of the 188 total federal securities class actions filed in 2011, Cornerstone Research said. That’s unchanged from 2010, when 176 total class actions were filed, according to the study. Overall, the number of class actions filed last year was 3 percent below the annual average of 194 filings from 1997 to 2010, the report’s authors said.

“It’s only the growth of merger-related litigation, which has historically been brought in state courts, that inflates the aggregate statistics so that they even approach historic norms,” Joseph Grundfest, director of the Stanford clearinghouse, said in an e-mailed statement.

Chinese Issuers

Lawsuits alleging violations of accounting rules and financial restatements by Chinese issuers comprised more than 17 percent of all federal securities class actions, according to the report. Twenty-four of the 33 lawsuits against Chinese firms were filed in the first half of 2011, which Grundfest said may mean that this type of litigation is subsiding.

“The rapid run-up and subsequent decline of litigation against Chinese issuers that entered the U.S. market through reverse mergers suggest that this form of litigation may be close to having run its course,” Grundfest said.

Lawsuits against Chinese issuers involved China MediaExpress Holdings Inc., Sino Clean Energy Inc. and Deer Consumer Products Inc., according to Stanford’s clearinghouse.

The cases against Chinese companies account for an increase last year in class-action lawsuit filings against foreign issuers. Such filings rose to 36 percent in 2011, compared with an average of 13 percent of total filings from 2008 to 2010, Cornerstone Research said.

Financial Crisis

Only three class actions related to the financial crisis were filed last year, and overall filings against financial companies comprised 13 percent of 2011’s total, compared with 24 percent in 2010. There were no filings related to auction rate securities or Ponzi schemes last year.

About one of every 31 companies in the Standard & Poor’s 500 Index at the beginning of 2011 was a defendant in a class action filed during the year compared with an average of about one in 16 from 2000 to 2010, according to the report.

“The two historically most active sectors of the S&P 500, financial and health care, had the fewest number of new filings compared with any year between 2000 and 2010,” John Gould, senior vice president of San Francisco-based Cornerstone Research, said in an e-mailed statement.

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