A law school study released today contained encouraging news for directors and officers liability insurers with a finding that securities class actions alleging management misconduct hit a record low last year.
Suits alleging securities fraud dropped 38 percent compared with 2005, according to the report, "Securities Class Action Filings: 2006 Year in Review."
The study was prepared by the Stanford Law School Securities Class Action Clearinghouse, a joint project between Stanford Law School and Cornerstone Research.
With the number of filings coming in at 110--down from 178 filings in 2005--the 2006 figure is nearly 43 percent lower than the 10-year historical average of 193, the report said.
It also noted that the figure is the lowest ever reported in a calendar year since 1995, when the Federal Private Securities Litigation Reform Act was passed.
The Private Securities Litigation Reform Act raised pleading standards and procedural hurdles for bringing securities class actions to federal court in an attempt to end the so-called "race to the courthouse" in which plaintiffs lawyers brought allegedly frivolous lawsuits as soon as stock prices fell in the late 1990s.
The report noted that the decline is even more striking when filings alleging options backdating are excluded. To date, the report said there have been 22 securities class actions filed related to options backdating allegations, 20 of which were filed in 2006.
Excluding the options backdating cases from the sample suggests that "core" securities class action litigation in 2006 was only 90 cases, a decline of 53 percent from the historic norm.
The study attributes the record low numbers of securities fraud class action filings in 2006 to a strengthened federal enforcement environment and a strong stock market, among other factors.
The strengthened federal enforcement environment reflected in pressure that the Securities & Exchange Commission and the Department of Justice now bring to bear on corporations to conduct internal investigations that implicate the individual executives responsible for the fraud may be reducing the amount of fraud in the market, the report suggests.
In a statement announcing the report, Stanford Law School Professor Joseph Grundfest, director of the Securities Class Action Clearinghouse, offered the opinion that the unprecedented numbers may mean that corporations "are engaging in less activity that gives plaintiffs an excuse to file a complaint alleging fraud."
"The federal government is a much more aggressive adversary than the private bar, and the feds can force a level of compliance that private class action lawyers could never touch. I think we are seeing the effects of a tougher and smarter campaign against white collar fraud by the SEC and Department of Justice," he said.
The study also reports filing trends by type of allegation, industry and circuit.
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