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38 Brief 56 (2008-2009)
Understanding Current Trends in U.S. Securities Class Actions

handle is hein.journals/tbrief38 and id is 126 raw text is: n the United States, a record 242 securities class action ..... lawsuits were filed in 1998.1 Since that time, however, the number of securities class action filings declined, reaching a ten-year low of 116 in 2006.2 The National Association of Securities Dealers and the New York Stock Exchange issued $111 million in fines in 2006, down from $184 million in 2005.' Likewise, the penalties imposed by the Securi- ties Exchange Commission (SEC) fell to $507 million in 2007, down from $975 million in 2006 and $1.5 billion in 2005.4 The decline led some commentators to believe that the heady era of securi- ties fraud class actions passed.''5 Reasons offered for the drop-off included rulings by conserva- tive judges against shareholders, Congress's passage of the Private Securities Litigation Reform Act of 1995 (PSLRA)6 and the Public Company Accounting Reform and Investor Protection Act of 20021 (also known as the Sarbanes-Oxley Act or Sarbanes-Oxley), tougher enforcement by the SEC and the Department of Justice (DOJ), increased corporate controls, and the indictment of one of the top investor law firms (Milberg Weiss) on charges that it paid illegal kick- backs to its investor clients.' While the number of securi- ties class action filings decreased, the total value of securities case settlements reached an all-time high in 2006, totaling $17.618 billion.9 As of September 2007, the top ten securities class action settlements1 were Enron $7.2 billion WorldCom $6.156 billion Tyco International $3.2 billion1' Cendant $3.186 billion2 AOL Time Warner $2.5 billion IPO Allocation $1.425 billion Litigation Nortel Networks I $1.143 billion Royal Ahold, NV $1.1 billion Nortel Networks II $1.074 billion McKesson HBOC $1.042 billion The next largest securities class action settlements include the Lucent Technologies matter for $673.4 million and Bristol-Myers Squibb for $574 million.13 Since the beginning of the subprime mortgage lending debacle and the turmoil in the credit mar, ket, it appears that the decline in securities class action filings may be reversing itself. In fact, the recent lull in filings came to an end in the second half of 2007. Between August 1, 2007, and November 30, 2007, 81 securities lawsuits were filed, representing the highest volume of filings in a four-month period since 2004.4 A total of 173 securities class action lawsuits were filed in 2007.i With the current economic crisis, we may well see an even greater increase in securities class action lawsuits going forward. The 116 class action filings in 2006 represent the smallest number of filings in a calendar year since the adoption of the PSLRA. By compari- son, there were 178 filings in 2005 and the ten-year historical average between 1996 and 2005 was 194.1' This sharp decline in the number of class action securities filings began in the second half of 2005 and continued to some degree through 2007. There were 173 filings in 2007, which represents the third lowest level of filings since adoption of the PSL A.'7 Although 2007 experi- enced an increase in filings from 2006, the activity is below the aver- age rate for the previous ten years.8 However, the number of securities class action filings appears to be on the rise again, with 110 lawsuits filed in the first half of 2008, as compared to 107 for the same period in 2007.1 Thirty-eight of the shareholder class actions filed in 2007 were related to the subprime lending crisis.2 The number of securities class action fll- ings is likely to continue to increase in light of the current global eco- nomic crisis. The decline in litigation activ- ity that began in the second half of 2005 was attributed to a combina- tion of two factors. The first was an increase in regulatory law enforce- ment activity. The SEC and DOJ have increased their enforcement actixvity, resulting in an increase in the probability of detection. This, combined with heightened sensi- tivity following high-publicity fil- ings and settlements such as Enron and WorldCom and the indictment of the Milberg Weiss law firm, along with the passage of the Sar- banes-Oxley Act, may have caused corporations to engage in less risky behavior, thereby resulting in a decline in the incidence of fraud. Second, there has been increased market stability. U.S. stock prices generally increased and volatility remained low in 2005 and early 2006. Since volatility is an impor- tant determinant of the likelihood of securities litigation, lower vola- tility tends to be associated with a lower number of filings. Despite the decline in the number of securities class action filings, the average settlement of a securities class action increased to $71.1 million in 2005, up from $27.8 million in 2004. The aver- age settlement amounts were $57.5 million and $56.3 million in 2006 and 2007, respectivey. The overall upward trend continued i> 2006 whnen more than $17.6 billion in settlement funds were finalized, up THE BRIEF m WINTER 2009 56