A recent report showing that 2024 was the second consecutive year of increased securities class-action filings will likely attract the attention of directors and officers liability underwriters, but the rise is unlikely to affect pricing, experts say.
The report by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse said 225 securities class actions were filed last year, up from 215 in 2023 and 208 in 2022.
Although filings increased, the report does not weight whether the allegations will survive a motion to dismiss, said Maurice Pesso, New York-based financial lines insurance coverage partner at Kennedys Law LLP.
The number of cases usually hovers around 200 annually, and any impact from the increase in the number of cases won't be felt for two to three years, he said.
While the 4.6% increase in the number of cases filed may not seem like a lot, the composition of the cases is changing, said Alexander Aganin, Menlo Park, California-based coauthor of the report and a Cornerstone Research senior vice president.
The decline to 21 from 34 in cases brought under the Securities Act of 1933 -- which involve investors who allege they were defrauded when they purchased securities in public offerings -- is likely the result of fewer initial public offerings and a rising market, he said.
"A high tide lifts all boats, so you are less likely to have stock prices of new publicly traded companies falling below their IPO prices," he said.
Claims related to special purpose acquisition companies decreased more than 50% compared with 2023, down from 27 to 11. There were also only two cybersecurity-related filings in 2024, down from three in 2023, the report said.
"I continue to think that cyber-related events are going to be up and that they're going to be bigger and more material. If you have a cyber event that's material, it likely leads to a stock drop, which leads to a securities class-action filing," Mr. Pesso said.
Conversely, class actions related to artificial intelligence more than doubled to 15, up from seven in 2023.
The spike in AI-related filings reflects the explosive growth and use of the technology, said Boston-based Geoffrey Fehling, an insurance recovery partner at Hunton Andrews Kurth LLP.
"AI-related securities claims are focused not only on companies expressly in the business of AI but also on companies with a less direct connection to AI, like those implementing AI technology in products or marketing," he said.
Mr. Aganin said he sees the potential for more AI-related lawsuits, not because he believes there is fraudulent activity in the AI sector but "because of the reality that this sector has really high investor expectations and that there will inevitably be disappointments over time, and at least some disappointments tend to trigger securities litigation."
The overall number of securities class-action cases could continue to increase this year, he said.
"Whenever there is market volatility related to disappointments, the likelihood of litigation increases. I am seeing some predicates for increases in litigation because the market is particularly high right now," Mr. Aganin said.
While the change in presidential administrations likely will not significantly affect the number of securities class actions filed this year, enforcement actions by the U.S. Securities and Exchange Commission could decrease because the Trump administration is likely to be less aggressive about enforcement of securities laws that are in the "gray zone," said Priya Huskins, senior vice president, management liability, at Woodruff Sawyer & Co.
The Biden administration was emboldened to go after issues in areas that are unsettled in the law, she said.
"I don't expect the plaintiffs bar to change unless the administration makes it a priority to enact securities litigation reform, but given its other priorities, it doesn't seem like securities litigation reform is going to get a lot of attention," she said.
Experts say the rise in filings is also not likely to impact the D&O market.
"The most significant factor in D&O insurance pricing is the law of supply and demand, and the current supply level as measured by insurance capacity is ample," said Kevin M. LaCroix, Beachwood, Ohio-based executive vice president of RT ProExec, a division of RT Specialty LLC.
Mr. LaCroix said he expects the D&O insurance marketplace to remain competitive this year.