The Corporate Counsel Net blog, July 11, 2007:
The latest study from Stanford’s Securities Class Action Clearinghouse and Cornerstone Research finds that securities class action filings remain at historically low levels in the first six months of 2007, with only 59 filings made in courts nationwide. We have posted a copy of this study, along with other securities litigation studies, in our "Securities Litigation" Practice Area.
While the study notes that filing activity was up slightly compared to 53 filings in the same period last year, the overall trend for the past two years has been surprisingly low filing rates when compared to historical averages. The types of allegations made in the filings for the first half of 2007 remained relatively steady, with 92% of cases alleging misrepresentations in financial documents (unchanged from 2006), and a slight drop-off in the number of cases alleging false forward looking statements at 64% of all cases (down from 72% in 2006). Among the new developments noted in the study is that there have been at least 3 filings so far this year with allegations relating to the meltdown in the subprime mortgage market.
The obvious question is: are we living in a brave new world where directors and executive officers of public companies have less to fear from securities class action lawsuits? The Securities Class Action Clearinghouse/Cornerstone Research study examines two possible hypotheses for explaining the recent trends, citing the stepped-up SEC and Justice Department as deterring fraud and the overall strength and low volatility of the stock market as providing little reason to sue. Professor Joseph Grundfest of Stanford states his opinion that “increased enforcement activity and a heightened awareness among corporate insiders may have led to a permanent shift in the incidence of securities fraud litigation.” On the other hand, John Gould of Cornerstone Research notes in the study that he “would not be surprised to see filings move back to the 200 per year level if the stock market were to weaken.” I suspect that the market hypothesis may be the stronger of the two for explaining the most recent trends – any observer of the federal securities laws could attest to the fact that the regulatory zeal of the government and the litigiousness of investors each swing with the overall strength or weakness of the markets and the broader economy.
Further, class actions only tell part of the story. As noted in this recent PricewaterhouseCoopers 2006 Securities Litigation Study, the recent options backdating scandal demonstrates that even when federal securities class actions may not be attractive because there is little in the way of potential damages to recover, shareholders still opt to express their disapproval in court by filing state derivative actions. Further, while the number of securities class action cases remains relatively low, the PwC study notes that settlement costs remained high at a whopping $6.17 billion in 2006, which was down 20% from $7.67 billion in 2005.
Is There a Milberg Weiss Effect?
In the Securities Class Action Clearinghouse/Cornerstone Research study, Professor Grundfest rejects the notion that the recent downtick in securities class action filings is attributable to a chilling effect from the indictment of legendary plaintiffs’ firm Milberg Weiss & Bershad. I guess that remains to be seen, as the controversy around the practices of Milberg Weiss and its principals continues to play out. Earlier this week, the US Attorney for the Central District of California announced that name partner David Bershad agreed to plead guilty to a federal conspiracy charge. Under the plea deal, Bershad will forfeit $7.75 million, pay a fine of $250,000 and cooperate with the government’s efforts to prosecute the other participants in the alleged conspiracy. Along with Bershad, one of the former Milberg Weiss named plaintiffs Steven Cooperman also agreed to plead guilty to a conspiracy charge.