Tracking COVID-related securities litigation: 4 reasons cases may be on the rise

When COVID-19 hit in March 2020, many in the insurance industry anticipated a wave of litigation that would mirror the influx of lawsuits after the 2008 recession. During that year, investors trying to recuperate lost funds filed more than 200 new cases, increasing securities litigation by nearly 20 percent from 2007. So far, however, this prediction has not played out—at least not yet.

In fact, courts have experienced a slowdown in securities-related lawsuits since the beginning of the pandemic, with only 29 cases filed  since the initial shutdown. But some experts believe a surge of COVID-19-related litigation is on the horizon. In this article, we’ll explore what we know based on the COVID-19 securities cases that have been filed so far, and why there could be a rise in legal activity and related directors and officers (D&O) claims. 

Unlike other events that precipitate stock market crashes, the pandemic has had a unique impact on the economic and legal landscape—in large part because it’s unlike any other financial crisis we’ve experienced. Despite the uniqueness of the situation, however, it’s possible to identify several reasons why the pandemic hasn’t sparked the same rise in securities litigation that we saw in 2008.

Importantly, this time the government quickly provided aid to help offset the pandemic’s impact on the stock market. On top of that, many companies went above and beyond to share information with stakeholders following the Securities and Exchange Commission’s (SEC) guidance from April 2020 to “disclose as much information as is practicable regarding [your company’s] financial and operating status(…).” These factors, plus the widespread belief that COVID-19 was just a temporary setback, likely kept many investors out of the courtroom.

Even with the litigation slowdown, however, there are a few cases currently working their way through the courts. The following is a breakdown of the three main types of COVID-19-related securities lawsuits experts have observed so far

1. Outbreak-related cases

A few cases have been filed against companies that experienced outbreaks in their facilities. For example, some cruise-ship companies, prisons, and long-term care facilities are facing securities litigation.

2. Cases against false financial claims 

Companies that claimed to be able to profit from the pandemic are also facing litigation. For example, shareholders at some vaccine development companies recently sued over false claims around the development of a COVID-19 vaccine.

3. Cases in heavily impacted industries

Finally, shareholders with investments in companies most disrupted by the pandemic have started to file suits. Heavily impacted industries include real estate investment trusts (REITs) and businesses in the entertainment and travel industries.

With so few cases in court today, why could there be a rise in COVID-19-related securities litigation and D&O claims? Here, we review four factors that could make an impact.

Since March 2020, the stock market has been volatile, and it will likely continue that pattern for months, or even years. Because of this, reductions in stock prices will take time to develop. Many shareholders may wait until the market levels off to litigate in order to have a clearer picture of long-term impact 

According to news outlets, the new administration is signaling a tougher regulatory stance than its predecessor. If the SEC tightens restrictions and enforces stricter disclosures for publicly held companies, this may benefit future plaintiffs.

As noted above, there have only been a few securities lawsuits to date around COVID-19 losses, and most of the cases are still working their way through the court system. Without precedent to use as a guide, only time will tell if cases survive motions to dismiss and the percentage that are in favor of plaintiffs. If more plaintiffs pursue cases and are successful, it could whet the appetite for more suits.

Like the stock market, economic change is slow-moving. Many companies will still feel the economic impact of COVID-19 for years to come, particularly in industries that were the hardest hit, like retail, travel, and entertainment. The expiration of government stimulus loans along with a potential increase in borrowing costs could lead to an uptick in bankruptcy filings. Because of these uncertainties, shareholders may wait to see the full impact of the pandemic before bringing cases to court.

The jury is still out on COVID-19-era securities lawsuits—both figuratively and literally. With an uncertain future for COVID-19 securities litigation, we will continue watching these trends and their impact on the D&O insurance space.

As an experienced partner in management liability insurance, we can help your business navigate an uncertain economic and legal landscape. Find out more here.