According to a December 29, 2006 Bloomberg.com article entitled “Stock Fraud Suits at 10-Year Low” (here), the 120 companies sued in securities fraud lawsuits in 2006 represented the lowest annual total since 1996. The article cites data from the Stanford Law School Class Action Clearinghouse. The total of 120 companies sued represents a drop of more that a third from the 2005 total of 181, and represents only slightly more than half of the 2004 total of 233. The article attributes the decline to “a rising stock market, increased corporate controls and the indictment of one of the top investor law firms on charges it paid illegal kickbacks to clients.”
The article quotes Columbia Law School Professor John Coffee as saying that after Enron and the other corporate scandals, there aren’t “going to be as many high profile scandals.” The article also quotes Professor Coffee as saying that the indictment of the Milberg Weiss firm has “probably paralyzed, or at least constrained, the ability of the firm to bring new class actions.” He also said that the firm’s prosecution may have discouraged other firms from using “professional plaintiffs” to bring cases. The article also quotes former federal prosecutor Robert Mintz as saying that Sarbanes-Oxley is having an impact: “The one-two punch of Sarbanes Oxley and the flurry of high profile prosecutions has certainly changed the way corporations do business” which is “reflected in the decreased number of these class action suits.”
The article mentions the options backdating scandal, noting that “at least 193 companies have announced internal investigations or government probes” of their options practices. The article does not mention that among the 120 companies sued in securities fraud lawsuits in 2006 were 21 companies that were named in securities lawsuits raising options backdating allegations. In addition, as of December 30, 2006, 127 companies had been named as nominal defendants in shareholders’ derivative lawsuits raising options timing allegations. The D & O Diary’s running tally of the options backdating related litigation may be found here.
The D & O Diary’s prior discussion of the declining number of securities lawsuits may be found here and here. The D & O Diary’s prior discussion of the possible impact of the Milberg Weiss indictment may be found here and here. Among the best discussions of the declining number of securities suits is a brief article by D & O maven Dan Bailey; his article may be found here.
What’s Coming in 2007?: The White Collar Crime Prof Blog has some interesting predictions, here.
How Did Some Companies Avoid Options Backdating Problems? One possible place to look is the attitude at the top. In a January 1, 2007 San Jose Mercury News article entitled “McNealy is One Reason Sun Never Backdated” (here), Sun Microsystems Chairman and former CEO Scott McNealy is quoted as saying “They never taught me in school that you are supposed to put the date that you signed it . . . It was kind of intuitively obvious to me that you didn’t backdate.”
Now This: Charlie Munger, the Vice Chairman of Berkshire Hathaway and Chairman of Wesco Financial Corporation, has his own explanation on why there are recurring problems with executive compensation and other abuses: “In my opinion, not enough executives have gone to jail.” The entire January 1, 2007 Los Angeles Times interview of Munger can be found here.