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January 5, 2010 3:42 PM

Latest Securities Study Shows Drop in Class Actions as Credit Crisis Dwindles

Posted by Brian Baxter

An annual report released on Tuesday by Stanford Law School's Class Action Clearinghouse and Cornerstone Research found that securities class action suits fell 24 percent in 2009 as litigation related to the credit crunch and the subprime crisis began to slow.

The Stanford study follows a similar report released last month by NERA Economic Consulting, which also showed that the surge in securities class actions may have peaked.

"That pig has moved through the python," Stanford Law professor, Clearinghouse founder, and former SEC commissioner Joseph Grundfest told Bloomberg. "All of the major cases that were profitable have already been filed. The pool is in effect fished out."

Clearinghouse researchers previously concluded in a midyear assessment that class action filings had fallen off because most major financial institutions linked to the precipitous economic downturn had already been hit with suits in 2008.

According to the year-end Stanford study, the number of companies sued on stock fraud claims dropped from 223 in 2008 to 169 last year, compared with an annual average of 197 over the previous decade.

The study also found that 2009 filings were also marked by an unusually long delay between allegations of wrongdoing and ensuing legal action. The study suggests that the lag time is a result of law firms revisiting old cases, particularly in the second half of the year, when the median lag time of 100 days tripled its historic average. More than 60 percent of claims with a lag time longer than six months were filed by renowned plaintiffs firm Coughlin Stoia Geller Rudman & Robbins. (Click here for a post by D&O Diary's Kevin LaCroix on the backlog in securities class actions.)

Some other tidbits from the Stanford report: only 53 securities class action filings in 2009 involved the subprime/liquidity crisis, a sharp drop from the 100 such suits filed in 2008; the percentage of filings against foreign issuers declined for the second straight year to 12.4 percent, compared to a high of 16.4 percent in 2007; and 4.6 percent of companies in the S&P 500 index were sued in a securities class action last year, compared with 9.2 percent in 2008.

Last month The National Law Journal's Karen Sloan cited year-end NERA data predicting that securities class action filings would top out at 235 in 2009, down 7 percent from the 253 filed the year before--and just slightly above the actual count reported in the Stanford study.

"It looks like the credit crisis cases are not disappearing, but they are slowing down," NERA senior consultant Stephanie Plancich told Sloan. "It looks like they are winding down, and I would expect to see fewer in 2010."

One area in which NERA's data did detect growth last year was litigation related to Ponzi schemes. NERA chalked the increase up to the mammoth amount of litigation generated by the collapse of Bernard L. Madoff Investment Securities, though other high-profile Ponzi cases also came to light in 2009 as a result of allegations against Texan/Antiguan financier R. Allen Stanford, Florida hedge fund manager Arthur Nadel, and Fort Lauderdale lawyer Scott Rothstein.

The Associated Press reported last week that the number of Ponzi schemes that collapsed in 2009 nearly quadrupled the number of such scams that fell apart in 2008. The AP analyzed scams in all 50 states, and didn't include Madoff, who was arrested in December 2008 and counted toward that year's total.

Since Ponzi-related securities class action filings usually emerge when the economy tanks--one lawyer once told us to imagine emptying a lake filled with the rusted hulks of stolen cars--it stands to reason that if the economy continues to improve then the number of filings will decrease.

Then again, plaintiffs' lawyers are always looking for the next big thing. NERA's Plancich told Sloan that overall securities class action activity in 2010 will likely remain on par with 2009 due to the emergence of class actions filed on behalf of investors in exchange-traded funds--similar in nature to stock and mutual funds--throughout the second half of last year.

Investors in those cases claim that they weren't adequately informed of the risks and potential losses pertaining to their investments. ETF litigation, anyone?

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