INSIGHT: Navigating the Coming Tsunami of Investment Securities Litigation

Aug. 31, 2020, 8:01 AM

A tsunami of litigation is coming as a result of the coronavirus pandemic, and the first waves are beginning to crash in the financial services, life sciences, and real estate industries. Financial institutions, brokers, and investment advisers are starting to see claims that bring back memories of the Great Recession, when disputes surged through FINRA, the U.S.’s largest forum for resolving investment disputes.

Additionally, biotech companies, real estate developers, and other businesses have found themselves targets of securities class actions, including over how they have—or haven’t—disclosed the impacts of Covid-19 on their business.

Just as a tsunami is not a single wave but a series of waves, companies are likely to face evolving litigation risks as the pandemic unfolds. There are steps they can take now to prepare, including reconsidering the use of arbitration and mediation. Many businesses are finding those types of alternative dispute resolution more attractive, in part to avoid growing backlogs in the court system.

Investment Disputes

A chart of the stock market’s performance this year tells you all you need to know about how many claims are coming against financial institutions, brokers, and investment advisers—volatility breeds litigation.

These claims are most often arbitrated through FINRA. As a result of the financial crisis, there were more than 7,000 FINRA arbitrations initiated in 2009. By comparison, in 2019 there were roughly half as many. Given that history, claims are likely to surge, and some categories already are.

FINRA reports that through June, “intra-industry” disputes are up 25% compared to the year before. Disputes involving suitability, failing to pay money owed on promissory notes, and libel or slander on termination forms (U-5s) are up in particular. In the realm of customer disputes, claims involving manipulation and errors regarding fees or charges are up. However, customer disputes overall are fairly flat through June compared to a year ago, so this is an area to watch going forward.

To prepare for the next wave of claims, particularly customer claims, heightened attention to regulatory requirements and meticulous documentation of any communications with respect to investments and returns are key.

Securities Litigation

Public companies are already facing lawsuits tied to how they disclose the impact and potential impacts of the pandemic in their securities filings. This is an especially important risk for businesses to manage, as many of these lawsuits are class actions with the potential for large verdicts and awards of attorney’s fees.

Life sciences companies in particular have been targets. For example, a class action filed in Pennsylvania alleges Inovia Pharmaceuticals misrepresented its development of a Covid-19 vaccine, thereby inflating the stock price. And a class action in New York alleges Chembio Diagnostics made false statements about its Covid-19 antibody development.

In addition to allegations of affirmative misrepresentations, there have also been cases of omission. A holding company that leases and manages apartments in China, for example, faces a class action alleging failure to disclose the material impact of Covid-19 on the business. The complaint says the company was “uniquely exposed to fallout from the worsening coronavirus pandemic.” Other real estate companies are likely to face similar claims depending on their disclosures.

Before public companies make public disclosures or affirmative statements concerning the impact of the pandemic, they should pause to work through how a plaintiffs’ lawyer would dissect it. How could the disclosure be misconstrued? What could potential arguments be around omissions? Experienced securities counsel are valuable partners in this exercise.

Alternative Dispute Resolution

Companies navigating the coming tsunami may find that arbitration, mediation, and other forms of alternative dispute resolution are an attractive lifeline. Because uncertainty is bad for business—and there is an overwhelming amount of it right now—many companies eager for faster resolutions are turning to these alternatives.

Methods of alternative dispute resolution are designed to move quicker than court cases even in the best of times. That speed gap is larger now because of backlogs in the Carolinas and many other states that paused court proceedings in the early days of the pandemic. As courts work through those backlogs, they are often giving priority to criminal cases, so civil claims that businesses face are taking a back seat.

There is also the question of when jury trials will happen again? Judges are going to be very reluctant to call 100 people together for voir dire, as many courts cannot accommodate social distancing with those numbers. (As a practical matter, most jury boxes can’t either.)

Meanwhile, arbitration and mediation have continued, with many forums adapting for remote proceedings. Businesses should keep in mind that just because a case is already pending in court doesn’t necessarily mean it’s too late to move to arbitration. Courts have welcomed consent orders to move cases when the parties have been in agreement. There are also unique alternatives in different states, including North Carolina Rule 11 on Mediation and Settlement Procedures that sets up a neutral evaluator and an abbreviated presentation of facts.

Companies should examine their options for lawsuits that are already underway. They should also consider whether to adjust contract language going forward to include whatever means of alternative dispute resolution makes the most business sense for their particular circumstances. These adjustments could be particularly valuable if the pandemic worsens in the winter, causing new shutdowns and forcing courts to hit pause again.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Melanie Dubis is a partner in the Raleigh, N.C., office of Parker Poe.

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