There are many useful analytical tools at the disposal of those tracking exposures in the area of D&O liability and insurance. Among the most prominent and well-regarded is NERA’s annual report on trends in securities litigation. This year’s report was released on Dec. 14, 2011, and is entitled Recent Trends in Securities Class Action Litigation: 2011 Year-End Review. The report can be accessed and downloaded from NERA’s website at http://www.nera.com

NERA and other notable experts release these types of studies and reports at both year-end and mid-year intervals. Although the studies are somewhat consistent in their findings, it never ceases to amaze me how many in the insurance industry attempt to divine significant and long-term trends that the studies themselves do not support. Although NERA correctly concludes that the frequency of new filings has been relatively steady over the past three years. In fact, if one examines the years since the passage of the Private Securities Litigation Reform Act at the end of 1995, most years have somewhere between 200 to 250 companies sued each year in securities fraud class action litigation. The 2011 projected total will be 232 filings, according to NERA, compared with 241 in 2010.

NERA correctly finds consistency in these year-to-year results, but I am sure we will probably see many commentators heralding a significant downturn in securities litigation. Anyone who makes business decisions based upon any misperceived long-term downturn does so at their peril, as proven over and over again in the last 15 years and longer.

What may be changing, however, is what goes into the mix of filings. This past year evidences a remarkable number of actions related to merger and acquisition activity, as well as to “reverse mergers” involving U.S. subsidiaries of Chinese companies.

NERA does observe that the frequency of filings against Chinese companies appears to be decreasing in the second half of 2011. They do not comment on the fact that some of the earlier filings in this area have met with successful motions to dismiss. Also, somewhat of a wild card is the extent to which these companies have significant amounts of D&O insurance and/or U.S. directors who are deep pockets in their own right. It’s too early for any firm conclusions, but lack of success at the motion stage coupled with questionable assets from which to seek recovery may put a damper on significant new filings against Chinese companies in the United States in the near short-term. That being said, however, the long-term outlook in my opinion is that we will see a growth in Chinese subsidiaries in the United States and higher levels of D&O insurance purchased by them. If nothing else, this should make these companies as amenable to securities fraud suits as wholly U.S. risks.

Merger and acquisition activity has picked up in recent years as at least some sectors of the economy have improved. Oftentimes, this litigation is short-lived, but the activity can be intense and costly during its pendency. It is not unusual for defense expenses to range upwards of $10 million in a year‘s time, even if the litigation concludes with a dismissal or non-monetary settlement.

The NERA report should be read in its entirety as it covers much more than discussed in this post and presents some very interesting and useful data.