Innovation in predictive data analytics of securities litigation enhances data-driven underwriting to deliver better risk transfer solutions to mitigate loss severity from adverse corporate events affecting issuers, directors, and officers.

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As the softening rate environment engulfs the public company D&O market and "securities class action severity remains high," company-specific, near-real time data of adverse corporate events that may trigger securities and corporate governance litigation becomes mission-critical data for carriers and insureds.

Recent Ninth Circuit rulings show that Twitter is ill-suited for validating potential class action liability, as not only do corporate disclosure standards for social media disqualify the platform, but also potential claims of fraud on the market don't hold up when the alleged harm was not common to all shareholders.

In 2021, directors and officers were exposed to potential liability on about 21% of private securities fraud suits that alleged fraud on the market based on research funded by activist short-sellers and their backers who aim to drive down the stock price of the target companies.

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Our data and analysis indicate that plaintiffs; short-seller piggybacking scheme creates measurable litigation exposure for directors and officers and burdens insurance carriers with defense and cost containment expenses, in addition to settlement losses that erode directors and officers liability insurance profitability.

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With market volatility on deck for U.S. equities in 2022, plaintiffs' continued reliance on short-seller research may catalyze frequency and compound severity of fraud-on-the-market suits.

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Long-term profitability in the public company directors and officers ("D&O") industry will depend on effective securities class action ("SCA") loss mitigation due to three forces that are shaping the contours of the market.  First, D&O profitability driven by a shifting positive rate environment may likely level out in the short term.  Second, ample capacity during record-setting U.S. equity markets and three-year low in stock-drop SCA frequency presents favorable working conditions to mitigate unfavorable loss reserve developments from SCAs filed between 2018 - 2021.  Third, potential Exchange Act and Securities Act litigation exposure stemming from environmental, social, governance ("ESG") risks is still too nascent to quantify in the aggregate until investors and regulators flush out the necessary disclosure and compliance requirements in accordance with the salient regulatory frameworks.  In conclusion, targeted SCA loss mitigation is critical for carriers to limit long-term D&O profitability erosion from long-tail claims filed during the last three years.

Private enforcement of the federal securities laws is mission-critical to sustain the transparency of America's capital markets and uphold the rules of engagement between public corporations and shareholders that trust directors and officers to lead these institutions on their behalf.

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According to our data and analyses - which are derived from proactive, independent, claim-specific, single-firm event study analyses - the second quarter of 2021 is tied with the second quarter of 2020, with roughly two of every five, or 39%, alleged stock drops claimed against U.S. issuers exhibiting an absence of back-end, or indirect, price impact.

In anticipation of a U.S. Supreme Court decision in Goldman Sachs Group, Inc. v. Arkansas Retirement System, tempered filing frequency and lower severity of fraud-on-the-market claims against directors, officers, and their respective U.S.-listed corporations led to a material decrease in Rule 10b-5 private securities fraud litigation exposure during the first quarter of 2021.

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Based on our monitoring of securities class actions, we posit that three factors have contributed to U.S. issuers' and non-U.S. issuers' lowest exposure since 2018 to securities class action that allege violations of the federal securities laws under Section 10(b) and 20(a) of the Securities Exchange Act, and SEC Rule 10b-5 promulgated thereunder.

In 2018, Columbia Law School professor John C. Coffee Jr. indicated that the "scope of 'event-driven' litigation could expand rapidly," which it has, and led to successful recoveries for public equity investors in BP PLC in 2017, Petrobras in 2018, Signet Jewelers Ltd. in 2019 and Equifax Inc. in 2020, among others.

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As 2021 quicks off and investors frolic on the peaks of public equity valuations, the sustained frequency of securities class actions since 2017 continues to layer on new long-tail claims on insurers' bloated inventories.  The growth and evolution of Rule 10(b)-5 private securities fraud litigation has been manna from heaven for the trial bar.  This has not been the case for insurers in the professional liability insurance industry.

On September 25, 2019 District Judge Honorable Loretta A. Preska of the Southern District of New York dismissed the securities class action against the U.S.-listed Chinese company TAL Education Group because "there is no material misrepresentation here so there can be no scienter."  On, November 25, 2020, the 2nd Circuit Court of Appeals reversed the district court's ruling and remanded the case back for further proceedings.  According to the amended class action complaint, the alleged fraud hinges on a single alleged corrective disclosure from a third party disseminator - Muddy Waters Research - a well-established short-seller...

Two factors in the securities class action arena are exacerbating the potential for conflicts of interest according to an expert analysis by Nessim Mezrahi in Law360.  According to Nessim's analysis, the sue of and reliance on activist short-seller reports as a basis to initiate securities class action claims, and privileged third-party litigation funding (TPLF) agreements have increased the chances of conflicts of interest in securities class actions.

Two factors in the securities class action arena are exacerbating the potential for conflicts of interest: the use of and reliance on activist short-seller reports as a basis to initiate securities class action claims, and privileged third-party litigation funding agreements.

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These two seemingly distinct factors are related due to their potential to breed systemic conflicts of interest that inhibit the effective private enforcement of our federal securities laws if they are left to proliferate without warranted judicial scrutiny.

In their working legal paper, law professors Jill E. Fisch and Jonah B. Gelbach posit: "Federal judges are poorly positioned to weigh the policy considerations reflected by the tradeoff between confidence level and power" in single-firm event studies that are used and relied upon to evaluate market efficiency, price impact, and loss causation in securities class actions that allege violations of the federal securities laws under Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the U.S. Securities and Exchange Commission. 

Transparency is paramount in the securities class action arena. Directors and officers, as well as institutional investors, rely on the rule of law and the duty of candor of their lawyers to seek and attain justice through the judiciary process.

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Amid the current pandemic-driven economic correction, U.S. publicly traded corporations - and their insurers - are in pole position to showcase the resiliency of the American economy.  On March 26, Thomson Reuters reported that "there are plaintiffs' lawyers who will try to take advantage of the [COVID-19] crisis, just as there are defense lawyers and companies who will do the same."

According to a recent article in the Harvard Law School Forum on Corporate Governance, the board of directors of a U.S. publicly traded corporation "has a fiduciary duty to promote the best interests of the corporation, and in fulfilling that duty, directors must exercise their business judgement in considering and reconciling the interests of various stake holders and their impact on the business of the corporation.

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Another says that this new era of corporate governance prompts "greater director engagement in risk oversight and monitoring activity, renewed emphasis on management-to-board reporting and increased director sensitivity to recognizing possible 'red flags.'"

The class period interval in securities class actions that allege violations of the federal securities laws under Section 10(b) and 20(a) of the Securities Exchange Act of 1934 is the second most fundamental determinant of the magnitude of potential aggregate - or classwide - damages.

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Undoubtedly, the first is the number of shares of common stock sold by participants in the market in response to an alleged corrective disclosure that is alleged to be related to a specific misstatement or omission disseminated by directors and officers.

The Supreme Court decision in Cyan Inc. v. Beaver County Employees Retirement Fund "swings the doors of state courts wide open to actions asserting '33 Act claims against issuers, officers, directors, underwriters, and others involved in the securities offering process."  The decision has birthed ramifications that deepen the knowledge gap between business entrepreneurs that aim to take a company public in the U.S., and the professionals that will work to protect them once the bell rings.

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According to a June 18, 2019, article titled "D&O Insurance Costs Soar as Investors Run to Court Over IPOS," the premiums that corporations incur to protect their directors and officers against alleged violations of the Securities Act of 1933 have "increased as much as 200% in the last three years."  Securities Act claims that are litigated in a state forum inhibit transparency in the securities class action arena.  There are well-documented effects of Cyan that are contributing to global skepticism of the "American-style entrepreneurial litigation" system.

Since the event-driven securities class action lawsuit against PG&E Corporation was filed one year ago, plaintiffs counsel have filed 211 securities class action complaints that allege violations of the federal securities laws under Section 10(b) and 20(a) of the Securities Exchange Act of 1934 against U.S.-based public corporations.  During the preceding 12 months, 59 of the 211 class action complaints that allege violations of Rule 10b-5 have been filed against a defendant company that had already been sued for similar allegations of fraud on the market.

A price impact analysis of the 152 first-identified securities class action complaints against directors and officers of U.S.-based corporations, indicates that a total of 264 alleged stock price declines are related with corrective disclosures that claim to be rectifying the corresponding alleged misstatements or omissions.  Of the 264 alleged corrective disclosures presented in 152 securities class action complaints, damages claimed by shareholders of common stock on 41 stock price declines do not meet the threshold of indirect price impact to warrant class action treatment according to the U.S. District Court for the Northern District of Texas' 2015 ruling in Erica P. John Fund Inc. v. Halliburton Co. 

Crude measures of exposure to securities class actions that allege violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 take the "change in target companies' market capitalization over the class period."  This measure of securities class action exposure to allegations of fraud-on-the-market exposure misses the mark.

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A more accurate measure of such exposure accumulates the decline in market capitalization of the defendant corporation only during trading sessions that correspond with the timing of the alleged corrective disclosures.  An even more accurate measure of exposure accumulates the decline in market capitalization of the defendant corporation only during trading sessions that correspond with statistically significant stock price impacts in response to information corrective alleged misstatements of omissions.