Uptick in Class Action Securities Suits Gains Strength

The number of shareholder class action filings this year is on track to hit a level not seen since the aftermath of the dot-com boom in 2002, according to a report released this week by NERA Economic Consulting. Based on the 139 suits filed in the first six months of 2008, the firm projects a total of 278 federal filings for the year. That would be a 42 percent increase over last year, and more than double the 2006 tally of 131 cases.

In large part, the report confirms the findings of a mid-year assessment of the class action securities litigation scene published earlier this week by Cornerstone Research in cooperation with Stanford Law School's Securities Class Action Clearinghouse. The Cornerstone update puts the number of filings somewhat lower, at 110. But the two studies emphatically agree on the direction of the trend -- sharply upwards.

Fueling the uptick is the increasing number of cases related to the subprime mortgage mess and the credit crisis. "The class action securities fraud litigation market today is dominated by credit crunch litigation," says Joseph Grundfest, professor of law and business at Stanford and co-director of the Rock Center on Corporate Governance. "It is more than 50 percent of the caseload that's being filed with the courts, and it's clearly the large part of the dollar exposure that's at issue in these lawsuits."

The equity markets' wild gyrations haven't helped, either. NERA Economic Consulting took a close look at the correlation between market volatility and shareholder class action filings within quarters, according to Svetlana Starykh, New York City-based consultant with the firm, and found "a significant positive relationship," she says. "However, it is not extremely strong, because only around 30 percent of the variation in the filings is explained by this relationship."

Any sign of the rate of filings easing up in the near future? Starykh doesn't think so. "The story is not over yet," she says. "I don't know if we have passed the peak of this wave, but I am absolutely certain that we will still see in the upcoming months more cases that are caused by, or can be related to, the subprime meltdown, the credit crisis, and auction rate securities."

Grundfest points out that with 63 new cases so far this year, the financial sector has borne the brunt of the litigation, and "as a practical matter, just about every major financial institution that can be sued because of credit crunch issues has already been sued. So if you define 'easing up' as a reduction in the number of new companies being sued, the answer is yes. But that's not because the credit crunch is over -- it's because the plaintiffs are running out of people to sue."

Click here for the NERA Economic Consulting's 2008 Mid-Year Update and here for the Securities Class Action Filings 2008 Mid-Year Assessment, from Cornerstone Research and the Stanford Law School Class Action Clearing House.