THE HOT TOPIC IN US SECURITIES CLAIMS TRENDS IN 2024

2024 may end up having the highest number of securities class action claims in 4 years - what are the issues driving this?​

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The Stats

(figures courtesy of Stanford Law School in collaboration with Cornerstone Research):

The total number of securities class action filings to 30th September 2024: 165, which if annualised would reach 220.

 

How are the recent trends faring when set against the last few years?

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Some notable indicators at this point 

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1. The resurgence of Covid-19 as a driver for claims, which no one, including me, predicted. This trend seems to be gaining pace so the annualised figure above may even turn out to be low!

2. The growing trend in AI related claims. This trend is also accelerating, so the annualised figure may also turn out to be low. This is undoubtedly the hot topic of 2024.

3. SPAC securities litigation is plummeting with the trend ever slowing.

4. Cyber remains steady but not at all spectacular, again defying predictions (including by me).

5. Both crypto and cannabis are continuing to decline as drivers for securities claims.

6. The US banking crisis is over as a driver for securities claims.

 

Finally, if the annualised number for the total number of class actions, 220, turns out to be correct, 2024 will be narrowly the highest year since 2020 (317), ahead of 2021 (212) and 2023 (213).  There has been a decline and “levelling off” going on since the most recent height of 2017 (411). Nevertheless, to put into context, 220 would still make 2024 the 11th highest year in the last 30.

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Not in the table, but also notable is that filings against non-US issuers are down both in number and as a percentage of total filings for non-M&A related securities claims, continuing a downward trend since 2020. 

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Artificial Intelligence (“AI”) is undoubtedly the Hot Topic of 2024

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Even though we are only three-quarters of the way through the year it is safe to predict AI is the year’s hot topic. There were of course AI related filings in previous years, but the trend has accelerated this year and by all accounts is continuing to accelerate. It will be interesting to see how far into 2025 and beyond this continues.

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Companies have been eager to highlight their AI credentials in order to gain a competitive advantage in the marketplace. However, sometimes this may be exaggerated, or what the SEC has described as “AI-washing”, borrowing an expression originally used in relation to companies overstating their “green” credentials (“green-washing”).  The class action litigation has also included claims against firms who have not disclosed enough about the financial and operational risks associated with their adoption of AI.

 

As time goes on we are likely to also see claims against directors for breach of fiduciary duty by companies, liquidators, or shareholders on behalf of the company (remember 47% of securities class actions settled between 2017 and 2023 had a parallel derivative claim) relating to any of the following:

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• failures in implementation or integration of AI;

• failing to embrace AI quickly enough;

• adopting AI too quickly;

• failing to exploit opportunities; or

• allowing the company to be outmanoeuvred by competitors.

 

A word about regulatory impact on AI

 

Regulators have been getting busy on AI.

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In the US, the SEC has made it clear it will go after financial institutions that overstate their AI credentials in investment modelling to clients or potential clients. SEC Chief Gary Gensler said in March this year:

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“Investment advisers or broker dealers should not mislead the public by saying they are using an AI model when they're not, nor say that they're using an AI model in a particular way, but not do so”.

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There have reportedly been three enforcement actions against such firms so far this year.

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We have yet to see an enforcement action against a public company based on statements made to the market.  But it’s probably only a matter of time. SEC chief Gary Gensler also said this year:

 

“Public companies should make sure they have a reasonable basis for the claims they make and yes, the particular risks they face about their AI use, and investors should be told that basis.”

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The UK’s FCA and Bank of England/PRA issued “updates” on their approach to AI in regulated firms on 22nd April 2024.  There are no new rules, regulations or statutes for the time being, but a reminder that the rules will be enforced regardless of the technology. In the meantime, they are making clear that firms will need to understand and be prepared to explain to regulators how AI is being used in their business, including by their service providers, be aware of how AI impacts on their existing legal responsibilities, to ensure existing data protection laws are not being broken, and embed AI as a topic in the firm’s governance processes.

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By contrast to the UK, the EU has been passing laws. The AI Act is now in force. It will become effective in stages over the next couple of years, starting in February 2025 with a list of banned uses.  It applies directly to all EU member states, all other EEA states, and to any other business doing business in the EEA or where outputs from an AI system are usable in the EEA.  This will include providers, importers, distributors and deployers/users of AI. In this way it will have an impact on most global businesses.  Enforcement authorities will be able to impose fines of up to EUR 35m or 7% of worldwide turnover (whichever is higher).

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We can expect to hear a lot more about AI enforcement in the future given its massive potential to touch all aspects of business life.