United States: 2022 Securities Litigation Year In Review

INTRODUCTION

During 2022, the third year of the COVID-19 pandemic, securi ties class action cases fell for the fourth consecutive year, with 205 new cases filed this year compared with 210 cases filed in 2021.¹ The number of federal court securities suits filed in 2022 was 10% below the 1996–2020 annual average of 228.² The 2022 filings were nearly 53% below the 431 filings in 2018, the recent peak year for federal securities-suit filings.³

These numbers were impacted by the continuing decline in class action merger objection lawsuit filings. In 2022, only eight federal court merger objection class actions were filed com pared with 15 in 2021 and in sharp contrast with the 205 merger objection suits filed in 2017 alone.⁴ Plaintiffs continue to file merger objection lawsuits but are increasingly filing them as individual actions rather than class actions.⁵

As has been the case for the last 11 years, suits alleging Rule 10b-5 claims were the vast majority of all new case filings in 2022. Suits against defendants in the health technology and electronic technology services sector were the most common, with each accounting for 27% of total filed cases in 2022.⁶

Notably, securities lawsuits relating to special purpose acquisi tion companies ("SPACs"), COVID-19, and cryptocurrency and other digital assets totaled 51 cases last year, representing moreAs intermittent disruption of federal and state courthouses as a result of COVID-19 subsided, the number of settlements of securities cases rose substantially in 2022, with 104 approved class action settlements compared with 82 in 2021.⁷ Likewise, total settlement amounts more than doubled in 2022, increas ing to $4 billion from $1.9 billion.⁸ The average settlement value was $38 million, an increase of more than 70% over the $22 million average settlement in 2021.⁹ than 26% of all federal securities class action filings. We analyze noteworthy developments in each of those sectors in more detail below.

Settlements in 2022 included ¹⁰ mega-settlements in excess of $100 million, topped by the $809 million settlement in the Twitter case.10 The Twitter settlement ranks as the 19th larg est settlement since enactment of the Private Securities Litigation Reform Act ("PSLRA"). The 10 mega-settlements in 2022 constituted 7% of all settlements but 51% of total settlement amounts.¹¹ All of the cases on the 2022 top 10 list settled after years of litigation, and some, including Twitter, settled on the eve of trial.¹² Three of the top five settlements in 2022 involved non-U.S. companies: Teva Pharmaceutical ($420 million), Luckin Coffee ($175 million), and NovaStar Mortgage ($165 million). Nine of the top 10 settlements were in cases filed in federal courts. Five of the top 10 settlements occurred in the Southern District of New York or the Northern District of California.¹³ The only top 10 settlement resolved in a state court was the $100 million settlement in the NCI Building Systems case in Delaware Chancery Court.¹⁴

Our 2022 Securities Litigation Year in Review focuses on signif icant securities-related decisions from the U.S. Supreme Court and the federal appellate courts. We discuss the Supreme Court's grant of certiorari in Pirani v. Slack Technologies, Inc. to resolve a circuit split as to whether plaintiffs must plead and prove that they bought shares registered under the regis tration statement they claim is misleading.¹⁵ As we discussed in last year's Review, a sharply divided panel of the Ninth Circuit affirmed a district court's decision that a purchaser of shares in a direct listing who could not conclusively determine whether he had purchased registered or unregistered shares nevertheless had standing to sue under Sections 11 and 12 of the Securities Act of 1933 ("Securities Act").¹⁶ While relatively few companies have gone public using a direct listing rather than a traditional initial public offering, a Supreme Court deci sion affirming the reasoning of the Ninth Circuit would have implications for litigation relating to IPOs more broadly.¹⁷

We also discuss the latest developments in the long-running Goldman Sachs securities case following the Supreme Court's ruling last year vacating class certification and remanding the case based on its conclusion that it was unclear whether the Second Circuit had properly considered the generic nature of Goldman's alleged misrepresentations in reviewing the trial court's price impact determination. In 2022, the district court once again granted class certification and found that even applying the Supreme Court's updated guidance as to gener icness, the defendants had failed to show that the alleged misrepresentations had no price impact.¹⁸ The Second Circuit heard oral argument last fall, and a decision in this closely watched case is expected later this year.

In this year's Review, we analyze 12 decisions from the fed eral appellate courts addressing the pleading requirement for securities fraud cases under Section 10(b) of the Securities Exchange Act ("Exchange Act") and Rule 10b-5. The cases arise from a variety of factual contexts, including failed merg ers, data breaches, disappointing clinical drug trials, post acquisition difficulties, and pending regulatory investigations, among others. The courts consistently emphasized the high burdens facing plaintiffs under the PSLRA and Rule 9(b) of the Federal Rules of Civil Procedure and affirmed dismissal of the complaints in all but two of the decisions. We explain the key takeaways for companies' disclosure policies from those two decisions permitting the plaintiffs to avoid dismissal.¹⁹

There was continued activity related to forum-selection provi sions in 2022. As we explained in our 2020 Review, after the Supreme Court decision in Cyan v. Beaver County Employees Retirement Fund holding that state courts have concurrent jurisdiction over Securities Act lawsuits and that such lawsuits cannot be removed to federal court, plaintiffs increasingly brought Securities Act claims in state courts, sometimes forcing companies to defend duplicative suits in federal and state courts.²⁰ In response, some companies incorporated in Delaware began adopting federal forum-selection provisions ("FFPs") in their charters or bylaws, requiring Securities Act claims to be brought exclusively in federal court. Delaware became the first state to uphold FFPs as valid under state law and consistent with federal and state public policy.²¹

Last year, we reported that a New York appellate court approved FFPs under that state's law and federal law.²² In 2022, an appellate court in California rejected an array of chal lenges to FFPs under California and federal law, and California thereby became the third state to uphold the provisions.²³ An appellate court in Utah is poised to become the fourth state appellate court to weigh in on the validity and enforceability of FFPs after hearing argument in a case in December 2022. A pair of conflicting decisions from the Seventh and Ninth Circuits issued last year addressed forum-selection clauses adopted by Delaware companies that required derivative claims to be brought exclusively in Delaware Chancery Court. A divided Seventh Circuit panel held that a forum-selection bylaw could not be applied to a derivative Section 14(a) claim, while a unanimous panel of the Ninth Circuit concluded that an identical forum-selection bylaw was enforceable. The Ninth Circuit granted en banc review and heard oral argument in December 2022.²⁴ If the Ninth Circuit reaches the same result as the original panel, Supreme Court review may be necessary to resolve the Circuit split.

Finally, in one of the few securities fraud suits to be resolved at trial, shortly before publication of this Review, a federal jury in San Francisco returned a verdict in favor of Tesla CEO Elon Musk over his 2018 tweets that he had "funding secured" to take the company private, rejecting investor claims that they were owed $12 billion for losses incurred from the allegedly false tweets. The verdict was returned after just hours of delib erations and was notable because the judge overseeing the case had previously found that the evidence showed that no concrete financing was in place at the time of the tweets. The judge had also found that Musk had acted recklessly, but left the jury to decide whether the tweets were material to the plaintiffs' investment decisions and led to their financial losses. In September 2018, Musk agreed to step down as Tesla's chairman and pay a $20 million fine as a part of a settlement with the SEC, and the company agreed to pay a $20 million fine as well. In September 2022, Musk acquired Twitter in a $44 billion take-private deal.

COVID-19

The steady pace of securities suits related to the COVID-19 pandemic continued in 2022. There were 24 COVID-related securities cases filed in 2022 compared with 20 such filings in 2021 and 33 in 2020.²⁵ Just as the impact of the pandemic has evolved as variants have emerged and ebbed, the focus of COVID-related cases has likewise changed over time. The first wave of cases were filed against companies that experi enced outbreaks in their facilities such as cruise ship lines and private prison operators, while later cases targeted companies poised to profit from the pandemic such as diagnostic test and vaccine developers.²⁶ As the pandemic persisted, plaintiffs sued companies whose financial results were negatively impacted by the pandemic.²⁷

As we discussed in last year's Review, the results have been mixed, with dismissal motions granted in a number of COVID related cases.²⁸ In 2022, plaintiffs had some success in opposing motions to dismiss or achieving settlements in cases against companies involved in developing COVID-19 vaccines. In Sinnathurai v. Novavax, the complaint alleged that the company made misleading statements about its manufacturing capabilities and downplayed issues that would have impacted ts timeline for regulatory approval. In December 2022, the dis trict court denied the motion to dismiss in part, finding that a number of the alleged misstatements were actionable and that the plaintiffs had adequately pled scienter.²⁹ In August 2022, substantial settlements were announced in two securities suits against COVID-19 vaccine manufacturers that included similar claims to those alleged in Novavax and where the dis trict court had denied the defendants' motions to dismiss.³⁰ Given these results and the continuing need for development of vaccines in response to the evolving strains of COVID-19, we expect to see continued filings involving pharmaceutical manufacturers; companies in that space should carefully con sider disclosures relating to capacity, potential obstacles, and timelines for regulatory approval.

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Footnotes

1. Janeen McIntosh & Svetlana Starykh, NERA Economic Consulting, Recent Trends in Securities Class Action Litigation: 2022 Full-Year Review (Jan. 24, 2023).

2. Id.

3. Id.

4. Id.

5. Matthew Bultman, "Individual Merger Suits Replacing Class Action Suits in Strategy Shift," BLOOMBERG LAW, (Oct. 13, 2022).

6. Securities Class Action Clearinghouse, "Current Trends in Securities Class Action Filings."

7. McIntosh & Starykh, supra note 1.

8. Id.

9. Id.

10. INSTITUTIONAL S'HOLDER SERVS., The Largest Securities Class Action Settlements of 2022 (Jan. 3, 2023). A "mega-settlement" is defined as total settlement funds equal to or greater than $100 million.

11. McIntosh & Starykh, supra note 1.

12. Id.

13. Id.

14. Id.

15. See infra at 30–31.

16. Jones Day, 2021 Securities Litigation Year in Review at 37-38 (Feb. 2021).

17. PWC, Global IPO Watch (Jan. 2023).

18. See infra at 22–23.

19. See infra at 7–8, 15–16.

20. Cyan, Inc. v. Beaver Cnty. Emps. Ret. Fund, 138 S. Ct. 1061 (2018); Jones Day, 2020 Securities Litigation Year in Review at 13-14 (Feb. 2020).

21. Salzberg v. Blue Apron Holdings, Inc., No. 346,2019, 2020 WL 1280785 (Del. Mar. 18, 2020); Jones Day, 2020 Securities Litigation Year in Review at 13-14 (Feb. 2020).

22. Matter of Sundial Growers, Inc. Sec. Litig., 191 A.D. 3d 543, 138 N.Y.S.3d 330 (First Dep't. 2021); Jones Day, 2021 Securities Litigation Year in Review at 35-36 (Feb. 2021).

23. See infra at 26–27.

24. See infra at 29–30.

25. McIntosh & Starykh, supra note 1.

26. Not. of Voluntary Dismissal, City of Riviera Beach General Employees Retirement System v. Royal Caribbean Cruises LTD, No. 1:20-cv-24111 (S.D. Fla. Feb. 25, 2021), ECF No. 44.

27. See, e.g., Berg v. Velocity Financial, Inc., No. 2:20-CV-06780-RGK (C.D. Cal. Jan. 21, 2021) (granting motion to dismiss suit against real estate finance company that allegedly failed to disclose actual and poten tial implications of the ongoing COVID-19 pandemic on its financial performance and outlook).

28. Jones Day, 2021 Securities Litigation Year in Review, at 2.

29. No. TDC-21-2910 (D. Md. Dec. 12, 2022).

30. McDermid v. Inovivo Pharmaceuticals, Inc., No. 2:20-cv-01402-GJP (E.D. Pa. August 2, 2022) (announcing agreement to settle COVID related securities suit for $44 million); In re Vaxart, Inc. Securities Litigation, No. 3:20-CV-05949-VC (N.D. Cal. August 19, 2022) (announc ing settlement of COVID-related securities suit for $12 million).

2022 Securities Litigation Year In Review

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