Investors Targeted Lawsuits at Cannabis Companies in 2019, Report Finds
According to NERA Economic Consulting's annual report, released on Tuesday, six lawsuits alleged securities fraud against cannabis companies. There was only one in 2018.
January 21, 2020 at 05:15 PM
3 minute read
A new target emerged in 2019 for shareholder lawsuits: the cannabis industry.
According to NERA Economic Consulting's annual report, "Recent Trends in Securities Class Action Litigation: 2019 Full-Year Review," released on Tuesday, six lawsuits alleged securities fraud against cannabis companies, including Aurora Cannabis Inc. and CannTrust Holdings Inc. There was only one in 2018.
"That's definitely an area we want to keep an eye on," said Janeen McIntosh, a consultant at NERA. "It's not like they're all alleging the same claims or the same violation. It's really spread out. It should be interesting to see how it shakes out."
Other big targets were companies disclosing data breaches, with three lawsuits filed within six months, compared with three cases filed over two years in 2017 and 2018.
In total, there were 433 federal securities filings in 2019, about the same as in 2018 and the third year in a row to exceed 400 new cases. The health technology and services sector continued to have the largest share of them.
"We didn't see any more growing in the filings," McIntosh said. "They came in exactly at the same level as the prior year, and we don't think we expect to see any drastic change in levels in the upcoming year."
The most common reason for the lawsuits was missed earnings, which made up 32% of the filings, an uptick from previous years. Some of the cannabis lawsuits, such as the one against Aurora, alleged the company failed to disclose weak demand or a decline in revenues.
Settlements, and the attorney fees tied to them, were down last year, largely because there was no mega-settlement such as the $3 billion deal with Petrobras in 2018, according to the report. The number of settlements dipped below 100 for the first time since 2012, and the average settlement was $31 million, among the lowest values in the past decade, causing attorney fees to fall by more than 50%, when compared with 2018, to a total of $629 million.
But the median settlement was $12.4 million, the highest since 2012, reflecting a rise in a "middle range" of values, McIntosh said.
"As of today, it's possible the average settlement value for 2020 might go back up, because there are a couple big tentative settlements that haven't gotten approval yet, and those might be outlier cases," she said.
Those include a $1.03 billion settlement over the real estate investment trust American Realty Capital Properties, now known as Vereit Inc., and a $1.21 billion deal with Bausch Health Cos., previously known as Valeant Pharmaceuticals.
The top settlements in 2019 were Cobalt International Energy Inc.'s $398.6 million deal, and a $250 million agreement with Alibaba Group Holding Ltd.
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