Livid Investors Launch A Volley Of Lawsuits
Professor Joseph A. Grundfest is quoted in The Washington Post in an article that points out the huge rise in securities class action litigation since the start of the financial crisis. The Washington Post writes:
Some angry investors -- both average Americans and giant pension funds -- are not taking their massive losses quietly. Holding portfolios that have imploded from a barrage of financial time bombs, they are turning to the courts for compensation.
Investors are claiming they have lost up to $856 billion, according to an annual report by the Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research. That's a 27 percent increase over the previous year. Like NERA, Stanford also reported a significant increase in the number of class-action lawsuits filed in 2008.
... Joseph Grundfest, director of the Stanford clearinghouse, said he has not seen so much litigation against a single industry in more than a decade. Nearly a third of all financial firms were named as a defendant in a securities class action filed in 2008, the Stanford study found. The firms named as defendants represented more than half of the sector's total market capitalization. Among them: New Century Financial, Countrywide Financial, IndyMac Mortgage, Washington Mutual and American International Group.
The cases allege some sort of securities fraud. Grundfest said there are three main categories of cases against the financial services sector. Some plaintiffs are claiming that companies lied about the value of securities in their portfolios. Others are claiming that they lied about their underwriting practices. Still others are filing suits against firms that sold auction-rate securities, which are bonds with interest rates reset by periodic bidding, as often as every week. The market for those bonds dried up last year, leaving investors unable to access their money.
Whatever the outcomes of these cases, Grundfest argues that class-action lawsuits do not fulfill one of their missions: to deter securities fraud. Others argue that such lawsuits drain cash and manpower from already beleaguered companies, thus hurting existing shareholders and investors.
"It's important to stop securities fraud. I'm the first person to say that," he said. "By the same token, we also need to keep an open mind and ask whether the multibillion-dollar securities fraud industry has been effective in achieving that result. Or has it been more effective at generating revenue for lawyers on the defendant and plaintiff side?"