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Securities-Fraud Suits Plunge To Pre-Crisis Levels

Publication Date: 
July 28, 2010
Source: 
Forbes.com - On The Docket
Author: 
Daniel Fisher

The Securities Class-Action Clearinghouse is mentioned in this article on decline in the number of filings in securities class-action litigation. Daniel Fisher of Forbes filed this story:

The amazing relationship between financial fraud and stock-market volatility -- fraud mysteriously declines when stock prices don't move as much -- held in the first half of this year as securities-fraud class actions fell to their lowest level since 1997. A midyear assessment by the Stanford Law School Securities Class Action Clearninghouse and Cornerstone Research found that new class-action filings fell 16% to 71 in the first six months of this year. That was also down significantly from the average of 97 filings in six-month periods from 1997 to 2010.

Stanford and Cornerstone attributed the decline to fewer lawsuits pegged to the credit crisis and the end of Madoff-related litigation. Only eight financial-crisis cases were filed this year, compared with 38 in the first half of last year. Suits against financial companies in general still targeted 5% of the companies in the S&P Financials sector, however, representing 18% of market capitalization.

... The Stanford/Cornerstone report dryly notes the volatility conundrum as well, however. "Securities litigation activity continues to echo stock market volatility," the report says. Filings surged to 60 in the fourth quarter of 2008 from 52 the preceding quarter as the Chicago Board Options Volatility Index, or VIX doubled to 60. Since then filings have returned to historical levels of 30 or 40 per month.

A handy "heat map" of securities-fraud loci shows energy, financials and healthcare is where the most claims were filed, representing 5-7% of the companies in those S&P sectors. Technology, where the fraudsters supposedly hung their hats during the volatile days of the tech boom and bust, only drew cases against 1.2% of the companies. There were no cases filed against information technology companies.

If class action filings continue at their current pace 2010 is likely to have 143 suits, the lowest total since 1997. The estimated dollar losses of the fraud-stricken shareholders was $53 billion in the first half, up from $49 billion in the first half of 2009 but down significantly from $129 billion in the second half of 2008. After that much activity, the fraudsters who lurk inside so many publicly traded U.S. corporations were entitled to a break.