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Securities Lawsuits Soar In 2007

Publication Date: 
January 04, 2008
San Jose Mercury News
Mark Schwanhausser

San Jose Mercury News covered the recently released 2007 Stanford Securities Class Action Clearinghouse report, which indicates a spike in securities lawsuits, and quoted Professor Joseph A. Grundfest:

The number of federal class-action lawsuits alleging securities fraud spiked 43 percent in 2007 as the subprime-mortgage mess unfolded, ending a two-year decline, according to research released Thursday by...Stanford Law School.

But underlying that statistical nugget is a debate over the meaning of the increase. Is the surge an anomaly that belies a permanent reduction in fraud? Or does the increase suggest that these suits rise and fall depending upon the stock market's performance?

The annual report by the law school's Securities Class Action Clearinghouse and Cornerstone Research in Boston found that plaintiffs filed 166 suits last year, up from 116 in 2006. They filed 100 suits in the second half of the year alone.

The plaintiffs' main target in 2007 was the financial industry. All told, they sued 47 financial companies, more than quadruple the 11 cases in 2006. Twenty-five of those cases were tied to the subprime mortgage meltdown.


Professor Joseph Grundfest, who directs the clearinghouse, takes the view that fraud is down because corporations have changed their behavior in the wake of scandals at Enron and Worldcom, tighter regulations and tougher enforcement. If you exclude the suits tied to presumably one-time events such as the subprime-mortgage mess in 2007 and stock-option backdating in 2006, the "core rate of litigation" remains below the 10-year average. As he sees it, it's reasonable to expect a core rate of about 100 to 120 lawsuits a year, plus occasional bumps from unpredictable events like backdating or the subprime mess.

"What the total litigation rate will be requires a Ouija board much better than mine," he said.