New securities class action filings have dropped precipitously, according to a midyear report by the Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research.
The report, released Monday, identifies 87 federal securities class actions filed in the first half of 2009, a 22.3 percent decline from the 112 filings in the first half of 2008 (there were also 112 filings in the second half of last year). Of the 87 filings, just 35 occurred in the second quarter, the lowest quarterly number since Q1 2007.
The value of alleged losses due to the stock drop following a disclosure of negative information also fell. This year's report put that number at a total of $48 billion, well below the semiannual average of $69 billion.
What's contributing to these declines? For one thing, most of the financial services industry's biggest players were sued in 2007 and 2008, during the global financial crisis, says Sullivan & Cromwell litigation partner Robert Giuffra Jr. Coming into 2009, "the pipeline was fairly full of cases against financial institutions," he says. "Virtually every firm was sued multiple times already."
Those suits -- many related to the collapse of the subprime mortgage market -- prompted a surge in filings in 2008. Giuffra says plaintiffs firms have filed amended complaints in many of the 2007 and 2008 cases his firm is handling, adding defendants and new allegations as more information has surfaced in the market.
Another factor, according to Giuffra and plaintiffs litigator Darren Robbins of Coughlin Stoia Geller Rudman & Robbins, is the cyclical nature of the stock market. Typically, securities class action filings are triggered by major stock drops. But the current market has been mostly on the rebound since the new administration took over in Washington. "A strong market performance hides a lot of fraud," says Robbins.
Not surprisingly, the Stanford study found that two-thirds of the filings this year have targeted financial services firms, up from half in 2008. Among the largest actions filed is a multibillion-dollar suit brought by Wolf Popper on behalf of shareholders against Bank of America over its alleged misrepresentation of Merrill Lynch's fourth quarter losses prior to a shareholder vote on its December merger with the troubled bank.
Ponzi schemes account for 15 of the 87 filings so far this year; of the 15, 11 were actions brought on behalf of investors in feeder funds or other intermediaries that invested client money with Bernard Madoff.
As a testament to the increasingly global nature of the markets, the number of foreign companies targeted continues to rise. Some 20.7 percent of the actions so far this year name a foreign entity, up from 13.8 percent last year. Three-quarters of the foreign defendants were financial firms, the report notes. This uptick "can be viewed as a side effect of the larger trend to sue financial services firms, wherever they are headquartered," says Joseph Grundfest, director of the Clearinghouse. "The key question for the plaintiffs is whether they can get jurisdiction in the U.S. courts."
This article first appeared on The Am Law Daily blog on AmericanLawyer.com.
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