Chubb charts rise in investor lawsuits in US and questions merit

The number of securities class action lawsuits has more than doubled in the past four years, but according to insurer Chubb, the beneficiaries of the payouts are not “harmed investors” but instead its lawyers bringing cases of “dubious merit”.

Chubb, a global provider of financial lines insurance, including coverage for directors and officers who are targets of such litigation, examined the origin, scope and cost of such lawsuits in its report ‘From nuisance to menace: the rising tide of securities class action litigation’.

Data highlighted in the report, from NERA Economic Consulting, showed that in 2017 and 2018, the number of securities class actions filed in federal court broke new records each year, and the volume has doubled since 2014. While in 2018, Cornerstone Research found that an average of one in 12 public companies was the target of a securities class action. The likelihood of being hit by such a lawsuit if you are an S&P 500 company was one in 10.

John Keogh, executive vice chairman and chief operating officer of Chubb, said: "There is a growing cohort of lawyers filing meritless lawsuits in federal and state courts across the United States every time a merger or acquisition is announced or a corporate misfortune impacts a company's share price.

“The financial rewards from these lawsuits are accruing not to harmed investors but to lawyers who are bringing cases of dubious merit in order to reap a windfall in legal fees and a disproportionate share of settlement dollars."

The insurer’s analysis of merger-objection lawsuits, which can be filed when two companies enter into a merger or acquisition, found that 61 percent of the total costs of the litigation was pocketed by lawyers. In contrast, shareholders received the smaller portion - just 39 percent.

Given the rise in M&A activity and the fact that is expected to continue, it might concern insurers providing financial and D&O cover that in 2018, 85 percent of M&A transactions were challenged with a merger-objection lawsuit.

Chubb analysts also looked at broader costs associated with meritless securities class actions. "Rampant securities litigation is one of the reasons why the number of public companies in the US is half of what it was two decades ago," Keogh said. "Fewer public companies mean fewer investment opportunities for the average small investor - and therefore less opportunity to participate in American growth and prosperity. Chubb is committed to sharing our data, insights and resources to raise awareness about this problem and to work on behalf of American business to effect meaningful reform."

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