THE GOOD NEWS

The Stanford/Cornerstone report on “2009 Filings: A Year In Review,” tallied 169 securities class actions for 2009, representing a 24 percent drop from 223 class-action filings in 2008.

The 2009 tally also represented a 14 percent decline from the average of 197 actions filed between 1997 and 2008, according to the report.

The researchers noted that litigation activity related to the credit crisis was nearly cut in half, highlighting this as one key driver of the downward trend in filings overall. According to the report, filings related to the credit crisis totaled 100 in 2008, but only 53 in 2009–with only 17 of those 53 filings occurring in the second half of 2009.

Figures contained in the report analyzing filings by sector and by class date reveal that plaintiffs' law firms are generally paying less attention to financial firms–last year's litigation hot spot–but more attention to securities frauds allegedly perpetrated in the distant past.

Contained in the report is a “Litigation Heat Map”–a graphic that portrays the intensity of litigation activity within each industry over time. The map shows that nearly one-third, or 32.6 percent, of all financial firms included in the S&P 500 Index were named as defendants in securities class actions filed in 2008, but the figure dropped to just 11.5 percent in 2009.

The financial sector still garnered roughly half of all 2009 securities class-action filings, however, with 84 in total.

WHAT IT MEANS

“Plaintiffs simply ran out of financial firms to sue, and the rising stock market made it harder for plaintiffs to assert claims,” said Professor Joseph Grundfest, director of the Stanford Law School Securities Class-Action Clearinghouse, commenting on the report in a statement.

“The remarkable increase in old claims filed during 2009 suggests that plaintiffs are trying to fill the litigation pipeline by bringing older lawsuits that weren't attractive enough to file while the firms were busy pursuing financial sector claims,” he continued.

The report revealed the increase in “older lawsuits” by measuring the lag between the filing date and the end-of-class period. Historically, the median lag was 28 days, but it reached 100 days in the second half of 2009, the researchers estimated.

In addition, the percentage of filings with more than a year's lag time was 18 percent in 2009, compared to just 5 percent in 2005.

An NU article published in March 2009 anticipated this trend, quoting experts–including plaintiffs' attorney Samuel Rudman, a partner with Coughlin Stoia Geller Rudman & Robbins in New York–who predicted a rash of 2007 stock-drop cases would be filed later in 2009.

The attorney reasoned that without a major re-inflation of the stock market, there would be no potential for stock-drop cases going forward, leading law firms to reach dip back into pools of potential cases from the past. (See the story at http://bit.ly/4srrx9.)

Prof. Grundfest, commenting on the trend in conjunction with Stanford's report, took note of a disproportionate number of delayed filings from Mr. Rudman's firm, chalking the overall spike up to “factors idiosyncratic to one plaintiff firm's strategy [having] little to do with larger market forces.”

The professor also said that “if history is a guide, these lawsuits are more likely to be dismissed and can therefore be characterized as lower quality claims,” referring to a finding that 55 percent of filings with more than a year lag have historically been dismissed (over the time period from 1996 to 2006). This compares to a 36 percent historical dismissal rate for claims with six-month or shorter lags.

MORE NUMBERS

The overall trends revealed in the Stanford/Cornerstone analysis mirror those separately reported by two other researchers, although actual counts of securities filings in 2009 and earlier years differed from one report to the next.

Kevin LaCroix, author of the “D&O Diary” blog, reported in his Jan. 4 blog entry that he tallied 189 securities class-action lawsuits for 2009 and 224 for 2008.

While Mr. LaCroix's description of his method of counting appears to be similar to the Stanford/Cornerstone method–consolidating multiple filings related to the same allegations against the same company–the Stanford/Cornerstone analysis did not include class actions filed in the last two weeks of 2009.

(Editor's Note: A bar graph on the Stanford Securities Class-Action Clearinghouse Web site–http://securities.stanford.edu/–depicting federal securities class-action filings for each year going back to 1997, now shows the 2009 total to be 178 filings, rather than the 169 originally cited in the report–”Securities Class Action Filings–2009: A Year in Review.”)

NERA Economic Consulting in New York reported much higher figures for all years, but overall declines nonetheless. NERA, in a Dec. 15, 2009 report on “Recent Trends in Securities Class-Action Litigation: 2009 Year-End Update,” anticipated 235 cases for the full-year 2009 compared to 253 in 2008.

The reports from NERA and Mr. LaCroix, which also contained different counts of filings related to the credit crisis, highlighted an additional trend–a rash of filings on behalf of investors in exchange-traded funds–occurring in the second half of 2009. NERA counted 13 such cases and Mr. LaCroix, who is a partner for Oakbridge Insurance Services, a Beachwood, Ohio-based insurance brokerage, counted a dozen.

NERA, in its analysis, also tracks settlement values, reporting that the 2009 median value (excluding some outliers) was comparable to 2007 and 2008.

THE BAD NEWS

Advisen, in addition to counting 234 securities class actions for 2009, included the following amounts in its total tally of 910 securities suits for the year:

• Securities fraud (regulatory) actions, such as lawsuits or proceedings by the U.S. Securities and Exchange Commission, which totaled 340 in 2009, representing 37 percent of the total.
• Securities cases that allege breaches of fiduciary duty, accounting for 216 filing in 2009, or 24 percent of the total.
• Derivative actions, which are brought by shareholders on behalf of the company, naming directors and officers as defendants, accounting for 65, or 7 percent, of the 907 filings in 2009.
• The 55 remaining securities suits consisted of collective actions (similar to U.S. class actions, but brought in non-U.S. courts against U.S. and non-U.S. companies), as well as cases related to Ponzi schemes and other miscellaneous filings.

Reviewing the distribution of cases among the categories, Advisen said that class actions filed by private plaintiffs have been steadily shrinking as a percentage of all securities suits for quite some time. Indeed, such class actions represented half of all securities suits in 2004, but the level fell to 30 percent in 2008 and just about one-quarter of all suits in 2009.

On the other hand, the cases brought by regulators have been steadily climbing, Advisen reported, noting that the 340-case total for 2009 represented a hefty 22 percent jump over 2008, following a 12 percent increase over 2007.