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Securities class action filings have dropped 38 percent, from 178 filings in 2005 to 110 in 2006, according to an annual report released by a think tank affiliated with Stanford Law School. That marked the lowest point since the adoption of the Private Securities Litigation Reform Act in 1995, according to the report put out by the law school’s Securities Class Action Clearinghouse. The drop-off would have been steeper, the report said, if not for a spate of lawsuits filed in the past year that include allegations of stock option backdating. The clearinghouse counted 20 option backdating suits filed in 2006. (The report compiled cases filed through mid-December.) The study, authored in part by clearinghouse founder and former SEC commissioner Joseph Grundfest, cites three main factors to explain the drop in securities class actions: increased pressure from federal regulators that may be reducing the amount of fraud in the market; a strong stock market combined with lower stock price volatility; and prior resolutions of lawsuits filed in the late 1990s and early 2000s. Lerach Coughlin Stoia Geller Rudman & Robbins’ Patrick Coughlin was skeptical of the idea that fraud is on a decline, but agreed that the stronger stock market has had a dampening effect on filings. Still, firms like his are keeping busy, he said. “The cases [now] are so big and take so much resources and money to litigate,” he added. “The litigation has gotten more costly and expensive.” The Stanford report does not discuss whether the numbers may have been affected by the May 2006 federal indictment of Milberg Weiss Bershad & Schulman, a leading plaintiff firm. But one defense-side lawyer said that might have been another factor. “It’s certainly possible that when you have the federal government pursuing a prominent securities plaintiff firm, it would have at least some effect,” said Jordan Eth, a partner at Morrison & Foerster. Eth also questioned the idea that a drop in class action filings is evidence of less fraud. “You can have fraud with no lawsuits. You can have fraud with lots of lawsuits,” he said. Eth said it’s obvious that class action filings drop when the market is strong, but he suggested researchers look at another indicator. “One possibility I haven’t seen explored would be the reduced number of IPOs [initial public offerings]. There’s a pretty well-known reverse correlation between the age of a company and the likelihood that it’s going to get sued.” This article originally appeared in The Recorder , a publication of ALM.

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