Securities Lawsuits "Down Sharply" According to 2009 Cornerstone Report

Posted on January 5, 2010 by Kevin LaCroix

Securities class action lawsuit filings were "down sharply" according to the annual study of securities class action litigation released jointly today by the Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research. The full report can be found here and the January 5, 2010 press release accompanying the report can be found here.

 

According to the study, which found that there were a total of 169 securities class action lawsuit filings through December 21, 2009, the 2009 filings were both 24% below the 223 filings in 2008 and 14% below the annual average of 197 filings during the years 1997 through 2008.

 

The Stanford study reports a lower lawsuit count than previously published studies of the 2009 securities lawsuit filings, including the prior report of NERA Economic Consulting (refer here) as well as my own prior analysis (refer here). I discuss these differences below.

 

The relative decline in the number of lawsuit filings in 2009 compared to prior years, according to the Stanford report, is attributable in part to the decline in subprime and credit crisis related filings. Among other things, the report notes that there were only 17 subprime and credit crisis related lawsuits in the second half of 2009.

 

The press release accompanying the report also quotes Dr. John Gould of Cornerstone Research as saying that the observed decline is consistent with the decline in stock market volatility during 2009, noting that after increasing during the preceding two years, volatility declined both in the first and second halves of 2009.

 

The study also details the large number of filings that were characterized by "a substantial lag between the end of the class period and the filing" date, a phenomenon about which I written extensively in the past (most recently here). The report notes that the percentage of filings with a lag of more than a year has increased steadily from 5% in 2005 to a historical high of 18% in 2009.

 

According to the study, historically, class action lawsuit with longer filing lags "have been dismissed at a higher rate than class actions with shorter filings lags," at a rate of 55% for the one-year lag filings versus 42% for filings with a lag between one year and six months, and 36% with a lag of less than six months.

 

The study also notes that the lag filings are largely the work of the Coughlin Stoia law firm, which was "involved in 63% of the filings with lags longer than six months and 58% of filings with lags longer than a year." This activity levels compares to the firms involvement in 39% of all filings and 29 percent of filings with lags shorter than six months.

 

The press release quotes Stanford Law Professor Joseph Grundfest as saying, with respect to the lag filings, that the belated filings suggest 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," adding that "these lawsuits are more likely to be dismissed and can therefore be characterized as lower quality claims" and that the filings may "reflect factors idiosyncratic to one large plaintiff firm’s strategy, and have little to do with larger market forces."

 

In addition to tracking the overall number of filings, the report also notes the number of lawsuits filed against unique issuers, which declined even more sharply than the overall number of filings. Thus, while the report found that overall filings declined by 24% between 2008 and 2009, the total number of unique issuers involved in securities lawsuits decreased by 32 percent. The difference in the attributable to the number of multiple filings against the same target, as well as the relatively large number of filings against private companies and other non-exchange traded entities.

 

The report further notes that of all exchange traded companies, 1.8 percent were defendants in federal securities class action lawsuits filed in 2009 compared to 2.6% in 2008 and compared to a 2.4% annual average for the 12 years ending December 2008.

 

The number of lawsuits against foreign issuers also declined in 2009, according to the study. After peaking at 16.4% of all filings in 2007, the percentage of filings against foreign issuers declined to 12.4% in 2009. The study attributes the relative decline to the falling off of the credit crisis lawsuits, because so many of the suits against foreign companies were related to the subprime and credit crisis.

 

Finally, the decline in 2009 credit crisis filings was also associated with a decline in market capitalization losses in 2009. The disclosure dollar loss attributable to 2009 class actions was $83 billion, a 62 percent decrease from 2008.

 

Some Thoughts about the Numbers: As noted above, the Stanford study’s 2009 lawsuit count varies from previously published figures, including my own. NERA reported 235 filings in 2009, and I reported 189 (I discuss the difference between my count and NERA’s in my prior post, here), compared to the 169 reported by Stanford.

 

I know that part of the explanation lies in the fact that the Stanford report cutoff at December 21, 2009, which meant that the Stanford study missed at least three more lawsuits filed before year end.

 

The Stanford study also counts multiple filings related to the same allegation against the same companies only once. This provides a partial explanation for the differences between the Stanford study and the NERA study, which separately counts separate actions in separate circuits unless and until the lawsuits are later consolidated.

 

Another difference between the studies may be the fact that the NERA study reported a projected year end number, as the result of an extrapolation from filings through mid-December. Though the Stanford study ended prior to year end, it did not incorporate any extrapolation for cases filed after the cutoff date and before year end.

 

All of these factors clearly are relevant but even collectively they don’t seem sufficient to explain the entire difference. Of course, another factor may simply be differences in information, but given that the plaintiffs’ lawyers put out press releases when they file lawsuits, the information differences likely account for only a small part of the differences in lawsuit counts.

 

All of this underscores a point that I made at length in connection with my own study of the 2009 filings, which is that readers would benefit enormously from knowing more about what protocols the various study publishers use when the are deciding what "counts."

 

The Stanford analysis is certainly easier to decode in this respect that other reports since the Stanford Clearinghouse publishes its list of lawsuits on its website — for free, which is a tremendous public service for which all of us should be grateful. But merely knowing which cases were put on the list does not tell us why those cases were included, nor does it tell us what other cases might have been omitted and why. (Indeed, the reason I continue to do my own count and analysis every year, even though Stanford publishes its own list for free on the web, is the uncertainty about what the list does and does not include.)

 

The Stanford report also gets high marks for stating right on its cover what it is included in its "research sample," which is very helpful and very commendable. But even taking this very explicit information into account, it still seems like there must be more going on that would explain the differences between the various reports.

 

Here are some illustrations of questions that would be helpful to know: Are securities lawsuits filed in state courts included? Are merger objection suits included? Are proxy solicitation misrepresentation cases included? How about lawsuits filed separately on behalf of equity shareholders and bondholders – one lawsuit or two? How about lawsuits that only allege state securities law violations? What kinds of cases are omitted from the count? What other sorting criteria are used?

 

The more of this type of information that readers are provided, the more helpful the published reports would be for readers. The approach that would be most helpful to readers would be for the reports to identify the way that their counting protocols differ from those used by other studies, in order to help readers understand the differences.

 

Tags: , , , ,

Cornerstone Releases Year-End 2007 Securities Litigation Report

Posted on January 3, 2008 by Kevin LaCroix
As the latest of the year-end 2007 securities lawsuit reports (including my own, here), Cornerstone Research has released (here) its 2007 report on securities class action filings. Cornerstone's January 3, 2008 press release describing the report can be found here. The numbers in the Cornerstone report differ from those in the previously released year-end report of NERA Economic Consulting (here), but the numbers are directionally consistent. The Cornerstone report does make some additional observations about the 2007 securities lawsuit filings, and also adds some interesting analysis.

The Cornerstone report notes the following findings:

1. Cornerstone reports that there were 166 securities class action lawsuit filings in 2007, which represents a 43% increase over the 116 filings in 2006. The 2007 yearly total is, however, 14 percent below the average for the ten-year period ending in December 2006.
2. Stock market volatility is important in explaining the number of filings. The increase in filings in the second half of 2007 coincided with an increase in volatility in the U.S. stock market from the historically low levels that prevailed in 2006 and the first half of 2007.
3. Securities lawsuit filings as a percentage of the total number of publicly traded companies increased in 2007. 2.19% of publicly traded companies were sued in securities lawsuits in 207, compared to only 1.57% in 2006, and by contrast to the 2.27% ten-year average from 1997-2006.
4. For cases filed in 2007, the drop in market capitalization both from the beginning to the end of the class period and from the class period high to the end of the class period increased, largely driven by several large case filings in the fourth quarter of 2007.
5. Of the 2,646 cases in Cornerstone's database, 81 percent have been resolved. Of the resolved cases, 41 percent were dismissed and 59 percent settled. For the cases filed from 1996 to 2001, almost all of which have been resolved, the median time to resolution is 33 months. The median time to dismissal is 25 months, and the median time to settlement is 36 months. Cases with larger shareholder losses are likely to take longer to resolve.
6. The Finance sector had the largest amount of litigation activity, with 47 Finance cases in 2007, driven by the subprime crisis.
7. The top three Circuits in terms of the number of 2007 filings were the Second Circuit, with 58 filings; the Ninth Circuit, with 39 filings; and the Eleventh Circuit, with 18 filings.
8. Cornerstone counted 32 cases attributable to the subprime crisis (by contrast to my own count of 34 cases, here). The report notes that the subprime filings reflect a shift in emphasis from allegations related to traditional income statement line items to allegations related to balance sheet components.

In attempting to discern the significance of the 2007 filing levels, the Cornerstone report revisits the analytic framework Cornerstone first postulated in its mid-year 2007 report (here). The mid-year report raised two alternative theories for the lull in litigation activity from mid-2005 to mid-2007, the "less fraud" hypothesis and the "lower volatility" hypothesis. The "less fraud" theory, associated with Stanford Law Professor Joseph Grundfest, involved the theory that as a result of corporate reforms, there is less fraud and hence less litigation. (Professor Grundfest went further and speculated that perhaps, as a result of the reforms, there had been a "permanent shift" to a lower litigation level.) The "lower volatility" theory noted that the period of lower litigation activity coincided with historically low stock market volatility, and speculated that litigation activity might return to historical norms if volatility returned.

The year-end Cornerstone report expressly attributes the increased litigation activity in the second-half of 2007 to the heightened level of stock market volatility during that period. Nevertheless, the report also states that "the 'less fraud' theory suggests a significant and permanent shift in the class action landscape" that is "not inconsistent with the recent increase in filing." The report finds this possibility because of the significant amount of 2007 litigation activity that was directly associated with the subprime crisis, which the Cornerstone report describes as "a likely 'one time' event," that "may not be indicative of future filing activity."

To support this analysis, the report suggests that there is an identifiable "core litigation rate," which is a statistical construct based on historical filings from which "one time events" like "backdating, subprime cases [and] IPO Allocation filings are excluded." Using this construct, the report finds that "litigation activity remains well below historical norms." Professor Grundfest describes this "core litigation rate" as "the litigation rate observed net of one-time systemic shocks."

I cannot disagree with the report's overall conclusion that more data is needed before the "less fraud" hypothesis can be conclusively rejected. Indeed, only time will tell. But for a number of reasons, I disagree with the Cornerstone Report's analysis of the 2007 filings, and in particular with the report's conclusions about the significance of the 2007 filing activity.

First, the Cornerstone report treats the 2007 subprime litigation activity as if it consists of a single, uniform phenomenon, limited in scope and duration. But my own view is that even though the subprime meltdown is still relatively recent, the litigation activity has already evolved into a highly diverse set of circumstances, lawsuits and litigants. As I detail at greater length here, the subprime litigation wave already involves a wide variety of kinds of companies and allegations. Moreover, it is likely to continue to evolve in the months ahead. To isolate the subprime cases as if they represent a narrow or contained phenomenon minimizes the potential of the ongoing subprime litigation wave to drive litigation activity for months and perhaps years to come, and disregards the very real possibility that the wave will expand to encompass a far wider variety of litigants and allegations.

Second, even if the subprime litigation wave can fairly be characterized as a "one-time" event, that is hardly sufficient to marginalize its continuing significance. The fact is the world of D & O liability has experienced a steady progression of "one time events" in recent years -- the bursting of the Internet bubble, the telecom crash, the IPO Allocation cases, the corporate scandals, the options backdating cases, and now the subprime crisis. Indeed, the joke among D & O insurance industry professionals at the recent PLUS International Conference was that subprime is "just a one time event" - the joke being that in the D & O industry, there is a one time event every year, and that results are driven by the constant recurrence of supposed "one time events." When one time events become the norm, they are not extraneous, they are the very essence of the risk exposure.

The reality is that the claims experience in the D & O arena is characterized by a succession of one time events. Indeed, no D & O insurance manager who wished to retain his credibility with senior insurance company management would attempt to try to marginalize the subprime litigation wave by describing it as a one time event, simply because there have been too many supposed one time events in recent years for the phrase to retain any meaning. D & O claims are and for years have been driven by these kinds of events. There perhaps may be a statistical construct by which to postulate a "core litigation rate," but the construct would be disregarded by insurance professionals as lacking credibility and unlikely to provide adequate predictive power to describe likely future events. The practical reality is that it must be assumed that there will always be one time events - not as unusual occurrences, but in the ordinary course.

Finally, as I have documented elsewhere (here and here), subprime litigation is only one of a number of important factors driving the recently increased litigation activity. Even without the subprime cases, the uptick in litigation activity is significant.

To be sure, only time will tell whether the increased litigation activity in the second-half of 2007 is indicative of future activity levels. But as I previously stated (here), I think there is already a sufficient basis upon which to declare that the two-year lull in securities lawsuit filings is over, and to state that there does not appear to have been a "permanent shift" to lower securities lawsuit filing levels.
Tags: , , , , , , , , ,