CALIFORNIA: An Introduction to Litigation: Securities

Securities Class Actions in California – Trends to Watch in 2025–2026

California, now the fourth-largest economy in the world, continues to be a key center of securities class action litigation, and likely will remain so for 2025–2026. Historically, the overwhelming number of cases are filed in the Ninth and Second Circuits. In keeping with California’s role in technology, we expect the rise of artificial intelligence (AI) to reinforce the state’s role as a prominent arena for securities class action litigation. We expect that parties will continue to rely on motions to dismiss and urge judges to use their power to weed out frivolous cases before they result in expensive and distracting discovery. We also expect to see more expert-driven litigation surrounding the issue of class certification.

What Did We Learn in 2024?

According to data compiled by Cornerstone Research, the median settlement amount decreased in 2024 by 10% to USD14 million, and the average settlement amount by 13% to USD42.4 million compared to 2023. Seven mega-settlements (those over USD100 million) accounted for 54% of total settlement dollars, down from nine in 2023. The largest settlement was USD490 million in 2024, versus USD1 billion in 2023. Seventeen settlements were related to Special Purpose Acquisition Companies (SPACs), up from the six SPAC-related settlements in the previous six years (2017–2023).

AI Cases Will Likely Continue to Increase

According to Cornerstone Research, the number of securities class actions filed in state and federal courts nationwide rose modestly, from 225 in 2024, versus 221 in 2023. This is still higher than the 1997–2023 historical average of 193. However, the composition of those cases is shifting. The number of AI-related filings more than doubled from 2023.

We think this trend will only continue and indeed accelerate, as AI plays a more prominent role in California’s economy. We expect these cases to include allegations that companies failed to disclose that they were not implementing AI but their competitors were. Similarly, some cases are likely to claim that the company’s AI was not deployed properly, and that this was not disclosed. Other cases are likely to allege that companies touted their AI capabilities when those capabilities added little or no value – sometimes called AI washing.

We are also looking for more cryptocurrency cases, as the SEC moves its resources elsewhere, giving private plaintiffs more potential targets. We expect SPAC litigation to increase again as SPAC activity shows signs of reviving, albeit on less aggressive terms than in the last SPAC wave.

Judges’ Role in Policing Class Actions

Trial judges continue to play a crucial role in determining which of these trends takes hold. In this regard, plaintiffs have shown a tendency to try to turn every major issue faced by a company into a disclosure claim forming the basis for a securities class action. Judges should consider how granting more motions to dismiss marginal cases will be useful in weeding out more frivolous cases and discouraging those filings in the first place.

For example, given the turmoil surrounding tariffs, plaintiffs likely will allege that companies adversely impacted by those tariffs should have changed their disclosures. This, however, is simply the latest iteration of fraud by hindsight, a concept that the Private Securities Litigation Reform Act tried to eliminate from securities litigation.

Class Certification

The Ninth Circuit will likely continue to clarify its case law on class certification. This once relatively obscure area of the law has become a hotly contested issue in securities class action litigation. This is particularly true now that judges are looking more skeptically at the propriety of certifying a class, and without a certified class, most cases do not present the amount of damage that would incentivize a plaintiff’s class action firm to sue. Defendants are also expected to continue to refine their damages models and hone their price impact defenses. These defenses often involve expert witnesses, testifying about complex statistical and economic issues, placing a premium on experienced counsel familiar with these concepts and able to explain them clearly to generalist judges.

Vigilance in Times of Volatility

While these issues are being worked out, given the current economic volatility, it would not be surprising to see an increase in the number of cases, an increase in the amount at issue both in the median case, and in the aggregate, an increase in the number of cases surviving a motion to dismiss, the number of settlements, and the aggregate value of those settlements.

This level of uncertainty reinforces the need to select class action defense counsel carefully, to vet their experience, and to assess the pros and cons of any proposed strategy and tactics on a continuing basis.

Key Developments in the Ninth Circuit

In Lucid Motors, the Ninth Circuit definitively adopted the Second Circuit’s bright-line rule from Menora Mivtachim Ins. Ltd. v Frutarom Indus. Ltd., 54 F.4th 82 (2d Cir. 2022), holding that plaintiffs lack standing under Section 10(b) unless they purchased or sold the specific securities “about which a misstatement was made” (In re: CCIV / Lucid Motors Sec. Litig., 110 F.4th 1181 (9th Cir. 2024)). While the full effect remains to be seen, the Ninth Circuit’s decision in Lucid Motors, applying Frutarom, is quickly becoming a crucial defense in M&A and de-SPAC cases, as it significantly limits the ability of investors in acquiring companies to sue over alleged misstatements made by target companies (and their directors and officers) made prior to a merger or de-SPAC. The Ninth Circuit's alignment with the Second Circuit's stance in Frutarom is also likely to deter new lawsuits where plaintiffs attempt to extend liability across entities in merger and de-SPAC scenarios.

The Ninth Circuit also continues to express skepticism towards cases premised on stock drops following short-seller reports. In Espy v J2 Glob., Inc., 99 F.4th 527 (9th Cir. 2024), the court affirmed dismissal of a Section 10(b) claim that alleged that investors had learned of the alleged misconduct in two short-seller reports. The court concluded that the reports did not constitute corrective disclosures because they were based entirely on publicly available information and did not present new, verifiable facts. This decision reaffirms the Ninth Circuit’s rigorous standards for pleading loss causation where short-seller reports are involved, closely following its earlier holding in In re Nektar Therapeutics Securities Litigation, 34 F.4th 828 (9th Cir. 2022).