Securities Class Actions May Have Hit Their Peak

After three years of significant growth, federal securities class actions dropped off in 2009, according to figures from two consulting and research firms -- a sign that the flurry of activity spurred by the credit crisis has died down. Credit crisis-related filings were almost twice as common during the first half of the year than during the second, providing further evidence that those types of actions are on the way out.

Karen Sloan

The National Law Journal

2009-12-22 12:00:00 AM

After three years of significant growth, federal securities class actions dropped off slightly in 2009 -- a sign that the flurry of activity spurred by the credit crisis has died down.

NERA Economic Consulting has predicted that federal securities class action filings will top out at 235 in 2009, down by 7 percent from the 253 filed in 2008. Another securities class action tracker, the Stanford Securities Class Action Clearinghouse and Cornerstone Research, does not release its annual report until the year is over, but its tally showed 169 filings as of mid-December, compared to 223 filings for all of 2008. That would represent a 24 percent decrease.

"It looks like the credit crisis cases are not disappearing, but they are slowing down," said Stephanie Plancich, a senior consultant with NERA, or National Economic Research Associates. "It looks like they are winding down, and I would expect to see fewer in 2010."

The credit crisis, which hit in 2007, has been the biggest factor fueling the recent increase in federal securities class actions, according to the NERA report. For example, NERA reported only 130 filings in 2006, or slightly more than half as many as in 2008.

Cases relating to the credit crisis made up 40 percent of the securities class actions that NERA tracked in 2008. That percentage fell to 30 percent in 2009. Credit crisis-related filings were almost twice as common during the first half of the year than during the second, providing further evidence that those types of actions are on the way out.

The year saw a significant decline in the number of auction-rate securities cases, which spiked in 2008 with 22 filings. NERA predicted just seven such filings in 2009. Auction-rate securities are investments that involve long-term bonds or preferred stock on which the interest rates are periodically reset.

Earlier this year, researchers at the Stanford Clearinghouse concluded that filings had fallen off in part because most of the major financial services firms involved in the economic meltdown already had been sued in 2008. NERA reported that 53 percent of the class actions filed in 2009 named a defendant in the financial sector, up slightly compared with the previous year.

Litigation related to alleged Ponzi schemes was one area of securities class action growth in 2009. According to NERA, those filings rose to 39, compared to 10 in 2008. The increase was due primarily to the Bernard Madoff investment fraud case, which was revealed in late 2008. Several other high-profile fraud cases came to light in 2009, including those allegedly perpetrated by Allen Stanford, Arthur Nadel and Scott Rothstein.

Plancich said that because Ponzi schemes often unravel during volatile times, it's likely that there will be fewer Ponzi-related securities class action filings in 2010 if the economy continues to improve.

Even so, Plancich predicted that overall securities class action activity will be on par with 2009. A new type of litigation that arose during the second half on 2009 may well carry over into 2010: Between August and November, 13 class actions were filed on behalf of investors in exchange-traded funds, which are similar to stocks or mutual funds. Those filings tend to involve investor claims that they weren't informed of risks and potential losses.