Bloomberg News

Securities Suits Drop as Credit-Crunch Cases Dry Up, Study Says

January 05, 2010

Securities-fraud class-action lawsuits fell 24 percent in 2009 as litigation related to the credit crunch, and especially subprime-mortgage losses, began to dry up, according to a study.

“That pig has moved through the python,” Stanford Law School Professor Joseph Grundfest said of the financial traumas that helped trigger the recession. “All of the major cases that were profitable have already been filed,” he said. “The pool is in effect fished out.”

The number of companies sued on stock-fraud claims dropped to 169 from 223 in 2008, compared with an annual average of 197 cases over the previous decade, according to the study, released today by Stanford Law School’s Securities Class Action Clearinghouse and Cornerstone Research.

Almost half of the decline stems from the lack of new grounds for suits related to credit losses, the researchers found. A drop in stock-market volatility was also a significant reason that the number of stock-fraud suits was relatively low in 2009, the study said.

The companies sued for alleged securities fraud in 2009 on behalf of groups of investors include UBS AG (UBSN), American Express Co. (AXP:US), General Electric Co. (GE:US), Citigroup Inc. (C:US), Moody’s Investors Service Inc., Genzyme Corp., Boeing Co. (BA:US), State Street Corp. (STT:US), Royal Bank of Scotland Plc and Chesapeake Energy Corp. (CHK:US), according to the Stanford group’s Web site. All such cases must be filed in federal court.

Accounting Scandal

Stock-fraud suits hit a record 266 in 2002 after an accounting scandal forced Enron Corp. to file what was then the biggest bankruptcy in U.S. history. The 2001 collapse of the energy trader led in part to passage of the Sarbanes-Oxley Act, which imposed stricter accounting rules.

Filings related to the credit crisis fell from 100 in 2008 to 53 last year. Still, almost half of all the 2009 class-action cases named financial industry companies as defendants. Cases related to the fraud committed by Bernard L. Madoff and to other alleged Ponzi schemes accounted for 18 filings.

The study found there was a longer delay from the time of the fraud, as alleged in complaints, to the filing of suits. More than 60 percent of claims with such a time-lag of more than six months were filed by San Diego-based firm Coughlin Stoia Geller Rudman & Robbins LLP, according to the study.

‘Old Claims’

“The remarkable increase in old claims filed during 2009 suggests that plaintiffs are trying to fill the litigation pipeline by bringing lawsuits that were previously sitting in inventory,” Grundfest said in a statement. Until more lucrative financial sector suits dried up, he said, “they didn’t seem attractive enough to file.”

Securities-fraud suits typically involve claims by investors that companies hid negative information to keep their stock prices artificially high. One or more investors then sue for the loss in share value that follows when the information becomes public. The plaintiffs usually seek to represent the interests of all company investors in a class action, to increase their leverage and force more favorable settlements.

Law firms often jockey to represent the lead plaintiffs in securities class actions. They direct the course of the litigation and get the largest share of any verdict or settlement, thus resulting in more legal fees.

“No firm has had more success standing up for victimized investors, so Coughlin Stoia will stay busy as long as greedy corporations continue to commit fraud,” the firm said in a statement.

Class Actions

Fewer class actions may lead to a drop in claims for insurers such as Travelers Cos. (TRV:US) and Chubb Corp. (CB:US) that sell coverage for lawsuit costs tied to management errors or negligence, said Mark Dwelle, an analyst at RBC Capital Markets in Richmond, Virginia.

“The fewer suits there are, the fewer chances there are for losses,” Dwelle said in a phone interview. “The other side of the equation, though, is when the risk level declines, the degree to which you are able to charge high premiums to cover that risk also reduces.”

Directors and officers insurers may curb price increases or lower rates next year, Aon Corp. (AON:US), the Chicago-based insurance brokerage, said in a Dec. 18 statement. Prices paid by financial firms for such insurance rose 3.2 percent in the three months ended Sept. 30, after climbing at least 10 percent in each of the four prior quarters, Aon said.

New directors and officers claims at Warren, New Jersey-based Chubb dropped 5 percent in the third quarter, the insurer’s chief operating officer, John Degnan, said in October.

“The worst fears were probably over-exaggerated around this time a year ago,” Dwelle said. “It’s taken a while for reality to catch up with the facts. Recall this time a year ago we were concerned that basically every financial institution in America was going to go under.”

To contact the reporters on this story: Bob Van Voris in New York at rvanvoris@bloomberg.net and; Jamie McGee in New York at jmcgee8@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.


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