In February 2021, the Stanford Law School in collaboration with Cornerstone Research published the Class Action Filings, 2020 Year in Review, Report which detailed a wide range of statistics related to class action filings and upcoming trends. In particular, the increase in Initial Public Offerings (IPOs) for Operating Companies and Special Purpose Acquisition Companies (SPACs) has grown substantially during 2020 when compared to recent periods which portends an increase in class action lawsuits related to IPOs.
During 2020, Operating Company IPOs increased from 112 in the previous year to 165 for a 47% increase in class action filings compared to 2019, the highest level since 2013. Historically, SPACs have represented a small portion of total IPOs. However, during 2020 the number of SPAC IPOs has grown from 59 in the previous year to 248 for a nearly 400% increase in class action filings. According to the Cornerstone Research, “The boom of SPACs in 2020 may lead to substantial future litigation.”
The Stanford Law School Cornerstone Research Report details the stock market performance of the IPOs for the years 2018-2019 and compares the relative performance of 380 IPOs during this period. As of December 31, 2020, 51 of the 380 IPOs are the subject of a State or Federal Class Action Lawsuit. By this time, 195 IPO Share Prices traded above the IPO Offering Price and 173 IPO Share Prices traded at or below the IPO Offering Price. These facts point to the speculative nature of investment in IPOs. The popularity of SPACs during the COVID Pandemic and the disproportionate amount of SPAC IPOs relative to Operating Company IPOs which have more substantial earnings history, brings into focus the likelihood of greater class action lawsuits for IPOs, especially SPACs.
While a class action lawsuit may help a group of investors with smaller losses, the larger an individual investor’s losses, the more likely a securities arbitration claim filed with the Financial Industry Regulatory Authority (FINRA) would result in a greater investment loss recovery. Generally speaking, as investment losses increase securities arbitration is a better path to recover investment losses for individual investors.
Securities Arbitration Sales Practice Violations
Securities arbitration is frequently a better option to recover your investment losses. Securities arbitration is an expeditious, low-cost litigation process that focuses on the unique set of facts related to an individual investor’s brokerage account, known as sales practice violations. The sales practice violations may include,
- Unsuitable Advice,
- Breach of Fiduciary Duty,
- Conflicts of Interest,
- Failure to Supervise,
- Misrepresentation and Omission of Material Facts,
- Margin Abuse,
- Securities Concentration,
- Variable Annuity Switching,
- Unauthorized Trading,
- Excessive Trading Churning, and
- Elder Abuse.
Investment losses that can be attributed to FINRA sales practice violations are considered causes of action which may lead to a meritorious claim for damages.
Securities Arbitration Case Facts May Be More Favorable
An individual securities arbitration claim would look at the facts specific to the individual investor and would take into consideration all the investments held with the brokerage firm and elsewhere. The arbitration claim would also look at multiple factors including the investor’s investment objectives, time horizon, and risk tolerance, amongst others. Investors’ claims for damages may include losses over longer periods than class actions, prior investment history, losses from entire portfolio and multiple sales practice violations, which can lead to greater investment loss recovery.
FINRA is the regulatory organization responsible for the regulation and resolution of disputes between investors and their brokerage firm and financial advisor. FINRA has established sales practice rules and regulations which govern duties and responsibilities for financial advisors and brokerage firms when acting as a financial advisor to investors. FINRA arbitration claims can be filed when there is a violation of a FINRA rule or standard by a FINRA member and/or in the case of misconduct by a FINRA registered representative.
KlaymanToskes has the experience to advise investors about the options available and whether to participate in a class action and/or pursue an individual securities arbitration claim to recover investment losses. There are advantages to both options however, depending on your personal case facts, a careful review is required to advise our clients regarding which path would result in the most favorable outcome. KlaymanToskes is dedicated to investor advocacy which combines legal strategies with sophisticated financial theories of financial damage designed to maximize investment recovery outcomes. To learn more about the differences between Class Action and Securities Arbitration download, Special Investor Report: Class Action vs. Securities Arbitration.