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Securities fraud class actions increased by a whopping 31 percent in 2002, providing the latest footnote to a year marked by corporate accounting scandals and record-breaking write-offs. The total number of investor lawsuits last year was the second highest of any year since Congress passed legislation aimed at curbing the suits, according to a study released Thursday by the Stanford Law School Class Action Clearinghouse in cooperation with Cornerstone Research. The study, which looks at securities fraud claims in the nation’s federal courts, found that investors filed 224 class action suits against companies in 2002 compared to 171 the year before. The companies that were sued in 2002 lost a combined market capitalization of $1.9 trillion. “Not all of that decline is going to be attributable to fraud,” said Stanford Law School Professor Joseph Grundfest, who worked on the study. “The thing that’s important to recognize is that some of these complaints have merit; some of these complaints will be dismissed in the pleading stage.” According to the study, New York’s Second Circuit U.S. Court of Appeals overtook the Ninth Circuit as the most popular forum for securities class action litigation, accounting for 53, or about 24 percent, of the year’s filings. And while technology companies once drew a large share of the nation’s securities class actions, only about 9 percent of last year’s suits were in the technology industry. Communications, consumer products and financial companies were the most likely to be at the other end of a securities fraud suit in 2002. The study’s findings of increased filings didn’t come as a huge surprise to some attorneys. “We have been busier than ever handling securities cases,” said Seth Aronson, the chair of the securities litigation group at O’Melveny & Myers. Aronson attributed the increase to a variety of factors, including a plaintiffs bar emboldened by a shift in the public’s attitude. “A lot of it also has to do with the fact that we’re seeing more accounting restatements,” he said. “Even though a restatement does not by itself indicate that anything was done wrongfully, the plaintiffs view a restatement as an invitation to file a lawsuit.” Denis Rice, a name partner at Howard, Rice, Nemerovski, Canady, Falk & Rabkin, said the increase in securities fraud cases was a result of the sheer number of failed deals and failed public offerings along with the staggering loss of market capitalization. “When stocks go down, people get sued,” said Rice. The study also identified a new type of securities class action in which financial analysts are sued for producing overly favorable reports on the companies they cover. The first such suit was filed against Morgan Stanley Dean Witter and its Internet stock analyst Mary Meeker last year. But the Stanford study did not include these so-called analyst cases, as they represent a one-time anomaly that doesn’t accurately describe the underlying trend in litigation activity. In the same vein, the study left out the 312 “IPO allocation” class actions, alleging fraud in the IPO underwriting process, that proliferated in 2001. The total number of federal class actions in 2002 was the highest since 1998, when 238 such suits were filed. In 1995 Congress passed the Private Securities Litigation Reform Act in hopes of reining in what many corporations claimed were frivolous lawsuits. The effect of the PSLRA is still highly debated, said Grundfest. “On the one hand the plaintiffs lawyers will claim that the PSLRA made it more difficult for them to go about their business and that therefore fraud became more prevalent. Supporters of the PSLRA will claim that obviously the door is not shut.”

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