Securities class action lawsuits have recently gained a larger foothold in Canada, according to a new report from NERA Economic Consulting.

NERA’s report found that a record nine securities class actions were filed in 2008, up from four that were filed in each of the previous three years. It suggests that the recent increase in filings may reflect recent legislative changes to various provincial Securities Acts. Between 2005 and 2008, four provinces (Ontario, Alberta, Québec, and British Columbia) have introduced civil liability for continuous disclosure and a right of action for investors harmed by misrepresentations or failures to make timely disclosure.

The report notes that while these filing numbers are miniscule in comparison to similar filings in the US, even controlling for the smaller size of Canada’s financial markets, this “rise in securities class action filings is an indication that plaintiffs’ counsel are prepared to test the new provisions of the legislation,” says NERA senior vice president and report co-author Mark Berenblut.

The firm reports that allegations in Canadian securities class actions mainly focus on improper accounting, misleading earnings guidance, insider trading, product/operational defects, and customer/vendor issues. It notes that the first Canadian securities class action filings related to the global credit crisis were filed in 2008, as were the first class actions involving options backdating allegations in Canada. And it suggests that options manipulation cases may become a larger component of Canadian class action filings in the future, as the report notes that plaintiffs’ counsel have identified and threatened to bring actions against as many as 50 TSX-listed companies suspected of having manipulated stock options between 1987 and 2005.

Nearly one-quarter of Canadian cases involve companies in the financial sector, it adds. “Of these, the largest group — including an ongoing market timing matter — have mutual funds as the defendant issuer,” it says, adding that another three financial sector cases relate to subprime mortgage loans.

Since class action legislation was first enacted in Canada, 20 securities class action cases have been settled, the firm reports. The average settlement for cross-border cases is $322 million, whereas the average settlement for Canadian domestic shareholder class actions is $73 million.

Of the cases that have settled and for which complete data are available, the average settlement value as a percent of the amount claimed (excluding punitive damages) is approximately 16%, NERA says. For cross-border cases, the average settlement rate is 13.7% of the amount claimed and tends to be higher for cases with larger claim amounts. The median settlement rate is 11.2%. For domestic cases, the average settlement rate is 18.0% of the claimed amount, although this is heavily influenced by the high settlement rates in a couple of cases. The median settlement rate is 7.2%.

IE