CHAPTER § 11.01 Introduction

• Jurisdiction: United States

§ 11.01 Introduction

The risk of being sued under the federal securities laws is a fact of life for public companies and their executives and directors. Between 1997 and 2017, on average, nearly 200 lawsuits alleging such claims were filed each year.¹ Since 2013, pharmaceutical, medical-device, and health-services companies have been the target in roughly 20-25 percent of such filings.²

The potential exposure can be severe. In 2016, the United States Securities and Exchange Commission ("SEC") announced that Teva Pharmaceuticals Industries Ltd. had paid $519 million to settle parallel civil and criminal charges brought by the United States Department of Justice and the SEC.³ Settlement of private class-action claims alleging that the company and its top executives issued materially false and misleading statements concerning the company's financial condition and the prospects for approval of the company's developmental cancer drug, Erbitux, accounted for $300 million of the total amount paid.⁴ Three of the 10 largest securities class-action settlements of 2017 involved pharmaceutical companies.⁵ In the top settlement of 2017, Salix Pharmaceuticals, Ltd., paid $210 million to settle a securities class action alleging that it had misled investors about deteriorating demand for its top-selling antibiotic drug, Xifaxan, and about wholesale inventory levels of Salix drugs.⁶ In the fourth-largest settlement of 2017, Clovis Oncology, Inc., paid $142 million to settle claims that it misrepresented certain facts related to the New Drug Application it submitted to the FDA for its proprietary cancer drug, rociletinib.⁷

The eye-popping damages claimed in private securities-fraud class actions represent the most significant source of private liability under the federal securities laws. The fear of such massive verdicts is one reason why these cases are rarely tried to a verdict at all. And in addition to potential liability exposure in the hundreds of millions, or even billions, of dollars, the distraction and enormous expense entailed just in the discovery phase of securities class actions presents additional incentives for targeted companies to settle.

Recognizing the potential for abuse and undue costs that such lawsuits can impose on companies and individuals who are guilty of no wrongdoing, Congress passed legislation designed to contain abusive securities litigation and its harmful consequences. The law, known as the Private Securities Litigation Reform Act of...