Securities fraud class action litigation for 2007 drops slightly despite subprime, says a report

The number of companies sued in US securities fraud class action litigation rose 43% between 2006 and 2007, from 116 to 166, according to a report.

However, litigation activity for 2007 as a whole was 14 % below the ten-year historical average (covering 1997–2006) of 194 companies sued per year.

Activity jumped in the second half of the year as the subprime crisis unfolded and stock market price volatility increased. One hundred companies were sued in the second half of the year, a litigation rate that reversed a trend of eight consecutive quarters with below average litigation activity.

But this increase may not signal a longer-term trend, said Stanford Law School who conducted the study with Cornerstone Research.

Professor Joseph Grundfest, director of the Stanford Law School Securities Class

Action Clearinghouse said: “For the past two years, securities fraud class action litigation has been driven by market-wide events, such as the 2006 backdating scandals and the 2007 subprime crisis. If these systemic shocks are excluded from consideration, the ‘core’ litigation rate continues to be remarkably low.’

The report's additional significant findings include:

Stock market volatility and the number of filings are correlated. In 2007 the number of companies sued jumped from 66 in the first two quarters to 100 in the last two, just as stock market volatility rose dramatically from historically low levels, partly due to events related to the subprime crisis.

The finance sector led the way in securities class action activity with 47 companies sued in 2007, more than quadrupling 2006’s 11 filings. The subprime fallout accounted for this spike, with 25 of the finance sector filings associated with subprime market disclosure issues.

Maximum dollar losses rose from $293bn in 2006 to $669bn in 2007.

New York had the most securities class action filings in 2007 with 58, followed by California with 39, and Florida/Georgia/Alabama with 18.

Of the 2,218 securities class action cases filed since 1996, 19 % remain unresolved.

Among the 81 % of cases that have been resolved, 41 % were dismissed and 59 % settled.