Shareholder Class Action Filings To Highest Level in 6 Years

The ongoing credit crisis and turmoil in the financial sector have fueled a major surge in securities class action litigation in 2008, according to a new study from NERA Economic Consulting. Filings are projected to reach 267 by year’s end, which would represent a 37% increase over 2007 and the largest annual total since 2002. Excluding atypical cases (related to the IPO securities litigation, analyst cases, and mutual fund market timing), filings in 2008 are on pace to reach a 10-year high.

According to NERA’s study, 2008 Trends in Securities Class Actions, the credit crisis is the most significant factor contributing to the increase, continuing a trend that began in 2007. Of the 255 cases filed as of December 14, 2008, 43% or 110 are related to the credit crisis, nearly tripling from 40 in 2007.

Settlement Values Remaining Steady—For Now

While filings have steadily increased from 2006 through 2008, median settlement values have remained relatively stable. The 2008 median settlement resolved for $7.5 million, below the 2007 median of $9.4 million, and above the 2006 median settlement of $7.0 million.

Although it is too early to tell what impact the surge in credit crisis filings may have on future settlement values, there are two intriguing hypothetical outcomes, according to study co-author Dr. Stephanie Plancich. Historically, large investor losses have been positively correlated with a larger settlement size, and the median investor loss for a credit crisis case in 2008 is almost $3.5 billion—approximately nine times the median amount of a non-credit crisis case filed this year ($387 million). This suggests that average and median settlement sizes could grow in the future as these cases begin to be resolved.

“On the other hand,” says Dr. Plancich, “defendants with ‘deep pockets’ are the ones who can afford big settlements. However, the credit crisis has dramatically shrunk the size of many defendants’ pockets. The financial distress faced by defendant companies could therefore pull median settlement values down.”

Other Notable Findings of the Study Include:

• Nearly 50% of all filings in 2008 named a company in the finance sector as the primary defendant.
• Auction-rate securities cases peaked in the first half of 2008, following the massive failure of auctions in late February. The pace of these filings has since slowed, but they have not disappeared.
• The concentration of filings in the Second and Ninth Circuits remains a continuing trend, with a particular spike in the Second Circuit in 2008 due to a clustering of credit crisis cases in this Circuit.

Many of us thought that the implosion of class action law firm Milberg Weiss and its progeny, along with a law passed in 2005 to limit the ability to bring these cases, would reduce the number of cases. Maybe even with this increase there would have been an even greater rise in cases, but who knows.

The involvement of the financial sector in the new cases is telling. One wonders if the New York Times is right: that “Wall Street” as a concept is basically kaput.

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