Increasing Securities Litigation Risks for Public Firms in 2025
Understanding the Current Landscape of Securities Litigation Risks
The landscape for U.S. public companies is shifting dramatically as new reports highlight a surge in securities litigation risks. According to a recently published study by SAR, a specialized data analytics company, the frequency and severity of corporate disclosures have intensified, leading to a notable increase in litigation risk.
Significant Increases in Corporate Disclosures
The findings reveal that corporate disclosures, which are based on public statements and SEC filings, have seen a 6.0% increase in frequency and a 7.0% increase in severity as compared to preceding years. This surge has raised significant concerns over the implications for securities litigation going forward. From the examination of a two-year data set, SAR identified over 10,500 high-risk adverse corporate events affecting U.S. public companies.
Market Capitalization Losses Overview
These adverse events are staggering, with market capitalization losses climbing to around $10 trillion, marking an increase of $1.1 trillion from the previous two-year period. The Information Technology sector faces the brunt of this impact, with losses approximating $2.8 trillion. Other affected sectors include Consumer Discretionary and Health Care, recording losses of $1.6 trillion and $1.4 trillion, respectively.
Why Are These Changes Occurring?
According to Nessim Mezrahi, Co-Founder and CEO of SAR, the combination of increased adverse events and complex risk disclosure requirements creates a ripe environment for litigation. Companies now face heightened scrutiny, which can lead to significant financial repercussions if proper disclosures are not made. This situation is expected to exacerbate litigation risks in 2025, particularly in light of recent judicial decisions.
Implications for Different Sectors
The report outlines that the Information Technology sector displayed the most significant change in its litigation risk footprint. Following closely are sectors such as Communication Services and Financials. The research quantifies these risks by assessing the economic impact of adverse corporate events against market capitalization changes.
Key Takeaways from the Report
As of December 2024, the sector that faced the highest market capitalization losses as a percentage of its sector-specific capitalization was Consumer Discretionary at 19.18%. In comparison, Health Care and Industrials registered rates of 19.15% and 17.63%, respectively. What's striking is the per-event losses that Information Technology companies incurred, averaging around $1.73 billion for each high-risk adverse event.
Risk Assessment Scores by Sector
Looking into the SAR Risk Scores, the Health Care sector currently reports the highest median score at 29.11%, suggesting greater vulnerability compared to other sectors. The risk scores for Information Technology and Consumer Discretionary follow, standing at 25.44% and 24.21% respectively.
SAR Platform's Contribution
SAR provides valuable tools through its platform, allowing users to monitor real-time securities litigation risk. The transparency at the corporate disclosure level helps public companies actively manage and mitigate potential litigation threats.
Frequently Asked Questions
What causes the surge in securities litigation risks?
The increase results from more frequent and severe corporate disclosures, combined with a challenging legal environment and complex risk factor requirements.
Which sector has faced the highest losses?
As per recent findings, the Information Technology sector has experienced the most significant losses, totaling approximately $2.8 trillion.
How can public companies mitigate these litigation risks?
Companies can work closely with legal and compliance teams to ensure accurate and timely disclosures that comply with SEC standards and safeguard against potential litigation.
What is the SAR Risk Score?
The SAR Risk Score is a measure of the exposure and vulnerability of a sector to securities litigation based on their corporate disclosures and market capitalization changes.
When is the next report expected?
The report is typically published semi-annually, with the next update anticipated later in the current year, offering insights into ongoing risk trends.
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