According to a press release, the study found securities fraud class actions decreased by 38% since 2005, falling from 178 filings to just 110 – nearly 43% lower than the ten-year historical average of 193. Researchers found the decline to be even more dramatic when filings alleging options backdating are excluded.
Excluding the options backdating cases from the sample, “core” securities class action litigation in 2006 was only 90 cases, a decline of 53% from the historic norm, the release said. There have been 22 securities class actions filed related to options backdating allegations, 20 of which were filed in 2006 (See SEC: More Charges to Come in Stock Option Probe ).
John Gould, Vice President of Cornerstone Research and a contributor to the study, noted the decrease in securities class action activity in 2006 is more marked when measured by the associated market capitalization losses. In 2006 the total Disclosure Dollar Loss (market capitalization losses at the end of the class period, typically the time of the disclosure of the alleged fraud), as measured by the Stanford Law School Securities Class Action Clearinghouse’s DDL Index, sank 44% from $93 billion in 2005 to only $52 billion in 2006. The total DDL is now 58% below its historic average of $124 billion.
The total Maximum Dollar Loss in 2006 (shareholder losses measured by the largest capitalization decline experienced during the class period), tracked by the Clearinghouse’s MDL Index, fell from $362 billion in 2005 to $294 billion in 2006. The total MDL is now 57% below the historic average of $680 billion per year.
The MDL for the 90 cases not including stock options backdating charges is $198 billion (71% below the historic average) and the DDL for these cases is $42 billion (66% below the historic average), according to the study.
The study attributed the record low numbers of securities fraud class action filings in 2006 to:
- The strengthened federal enforcement environment reflected in the pressure that the Securities and Exchange Commission (SEC) and Department of Justice now bring to bear on corporations to conduct internal investigations that implicate the individual executives responsible for the fraud may be reducing the amount of fraud in the market,
- A strong stock market combined with lower stock price volatility typically reduces the number of cases filed, and
- The overwhelming majority of securities fraud class actions that were filed in the late 1990s to the early 2000s are now over.
In addition, Stanford Law School Professor Joseph Grundfest, Director of the Securities Class Action Clearinghouse, co-Director of the Rock Center on Corporate Governance, and former Commissioner of the SEC, said in the release, “These are unprecedented numbers, and my bet is that the private securities fraud litigation market is shrinking because corporations are engaging in less activity that gives plaintiffs an excuse to file a complaint alleging fraud.”
'06 Fraud Allegation Trends
According to the Securities Class Action Filings 2006 Year in Review report , there were more allegations of specific accounting irregularities in the complaints filed in 2006 compared to 2005. There was a more than 70% spike in the percentage of cases involving "other" accounting allegations, from 37% of accounting allegations in 2005 to 63% in 2006, and almost half of the "other" accounting allegations were related to stock options issuances.
The press release said the Consumer Non-Cyclical sector (including commercial services, biotechnology, food, pharmaceuticals, etc.) proved to be the major source of securities class action litigation in 2006, the same as in 2005, accounting for 33% of the total number of filings and the highest DDL. In addition, five of the top 10 MDL cases were filed against companies in the Consumer Cyclical and Technology sectors, accounting for almost 50% of the MDL.
The Second Circuit (which includes New York) again received the highest number of filings (31), followed by the Ninth Circuit (which includes California) with 25 filings, 11 of which were options backdating cases. The highest levels of DDL in 2006 were recorded in the Second Circuit ($26 billion), followed by the Eleventh Circuit (Florida/Georgia/Alabama) at $8 billion, and Ninth Circuit at $7 billion.
While 2006 saw the lowest-level of securities class action filings, the number of securities class action settlements reached a record high in 2005 (See 2005 Saw Highest Levels of Securities Class-Action Settlements ).