Study: Class Action Securities on the Decline

July 27, 2006 ( - The number of securities fraud cases granted class action status is declining, according to a new study.

A news release from the Stanford Law School Securities Class Action Clearinghouse of Palo Alto, California, reported that its study found there were fewer such suits during the first half of 2006 than during any similar period since the end of 1996, Business Insurance reported.

The annualized estimate of 123 filings for 2006 – based on 61 new filings during the first six months – represents a 36% drop from the historical average of 194 filings from 1996 through 2005.

The study found that the impact of the alleged illegal backdating of stock options for executives at more than 60 publicly traded companies has not been significant. Only eight federal class actions alleging that illegal backdating have been filed this year, bringing the total number of such cases to 10 (See Options Backdating Net Snares More Suspect Firms ).

Stanford Law Professor Joseph Grundfest, director of the clearinghouse and former commissioner of the US Securities and Exchange Commission, suggested that the backdating issue has not led to significant litigation for several reasons, including that many of the backdating disclosures were not followed by statistically significant drops in stock prices. He also said that in some situations, the uncertainties of the appropriate accounting principles for backdating options may have caused potential plaintiffs to fear they would have problems alleging intentional fraud.

The study found a large reduction in the market capitalization losses at issue in the lawsuits filed so far this year. The so-called disclosure-dollar loss – or the market capitalization loss that investors sustained the day after an organization announced it had misrepresented its financial reports – dropped 55% on an annualized basis to $45 billion in 2006 from $100 billion in 2005.

For the first six months, the actual disclosure-dollar loss was about $22 billion, according to the report. The maximum-dollar loss fell 44% on an annualized basis to $255 million in 2006 from $456 billion in 2005. During the first six months, the study found that the actual maximum-dollar loss was $127 billion.

The report is here .