On January 2, 2007, the Stanford Law School Securities Class Action Clearinghouse , in conjunction with Cornerstone Research, released its year-end study entitled “Securities Class Action Case Filings 2006: A Year in Review” (here), as well as a press release (here) detailing the report’s filings. As The D & O Diary noted yesterday (here), the study finds that the number of securities fraud class action lawsuits in 2006 is “the lowest ever recorded in a calendar year since the adoption of the Private Securities Litigation Reform Act (PSLRA) of 1995.” The study reports that the 110 suits filed in 2006 represents a decline of 38 percent from 2005, and is 43 percent lower than the historical average of 193.
The report noted that the decline is even more striking when the options backdating cases are excluded. As The D & O Diary has noted in its running tally of options backdating lawsuits (here), there have been 22 securities fraud lawsuits containing options backdating allegations. Of these, 20 were filed in 2006. The Stanford study suggests that these lawsuits represent a “one-time event that will not recur in the future” and if the options lawsuits are excluded from the 2006 total, the total “core” 2006 securities lawsuits (omitting the backdating lawsuits) of only 90 cases represents a decline of 53% from historic norms.
The study also examines the number of lawsuits relative to the number of public companies. This is an important consideration because the number of public companies listed on the major U.S. exchanges has declined by 25% since 1996, and so it is not enough simply to compare the number of lawsuits across years. The study examined the ratio of the number of lawsuits to the number of public companies, and found that the 1.5% frequency rate is the lowest level since 1997, and significantly below the 2.2% annual average during the period 1996-2005.
The study also found that the losses in total market capitalization associated with the 2006 filings also declined substantially from already reduced levels observed in 2005, and there was a “sharp decline in the incidence of large dollar value claims.” According to one measure used in the study, the purported investor losses declined by 44 percent from 2005 to 2006.
The study attributes the decline to three causes: first, the “strengthened federal enforcement activity…may be reducing the amount of fraud in the market”; second, a strong stock market accompanied by reduced stock price volatility is reducing sharp stock price drops that attract shareholder lawsuits; and third, the huge flood of shareholder lawsuits that swept through the system following the boom and bust cycle of the late 1990s and early 2000s have largely passed through the system.
The study discounts the impact of the Milberg Weiss indictment on the number of securities filings, noting that “[b]ecause there are no material barriers to entry in the plaintiff class action sector, and because there is a large supply of firms and lawyers with the ability and incentive to pursue class action securities fraud litigation, this indictment does not appear to explain the decline in class action securities fraud litigation.”
In yesterday’s post (here), The D & O Diary noted commentary from others who expressed a view that the Milberg Weiss indictment and the elimination of the plaintiffs’ bar’s ability to rely on professional plaintiffs may be a factor in the reducted number of lawsuits. The D & O Diary’s comments on the potential impact of the Milberg Weiss indictment can be found here and here. The D & O Diary’s prior comments on the possible causes of the declining number of lawsuits can be found here and here.
A January 2, 2007 Wall Street Journal article discussing the study can be found here.