A significant index is the total decline in the market capitalization of the defendant firms from
the trading day just before the end of the class period to the trading day
immediately after the end of the class period, i.e., the "Disclosure Dollar
Loss (DDL)," nearly tripled from $58 billion in 2003 to $169 billion for
cases filed in 2004.
Only eight filings produced this 192 percent increase in the DDL index; each defendant firm experienced disclosure dollar losses
in excess of $5.0 billion. During all of 2003, there had only been one filing with a DDL in excess of $5.0 billion.
"It is remarkable that we have consistently seen around 200 filings a year
for the past eight years," said Dr. John Gould, vice president of
Cornerstone Research and contributor to the study. "In addition, it is
surprising that the Dollar Disclosure Loss for this period tripled to
approach the levels seen after the dramatic market decline in 2000."
The number of lawsuits alleging violations of Generally Accepted Accounting
Principles (GAAP) remained relatively constant in 2004, declining slightly to 102
(48%) in 2004 from 107 (59%) in 2003. "In addition, the order of the three
most-frequently mentioned specific accounting allegations changed from 2003 to 2004. In
2004, the four most-commonly mentioned accounting allegations were revenue recognition
(61 cases or 60 percent), overstatement of accounts receivable (17 cases or 17 percent), and
overstatement of other assets or understatement of liabilites (15 cases or 15 percent each).
In 2003, the most frequently-mentioned specific accounting allegation was overstatement of
accounts receivable (60 cases or 56 percent), followed by revenue recognition (49 cases or
46 percent), and overstatement of other assets (24 or 22 percent) ."
"Typically, a class action securities fraud lawsuit arises from allegations
that the issuer lied about its financial performance," explained Professor
Joseph Grundfest of Stanford Law School, a former Commissioner of the
Securities and Exchange Commission. "This year, however, allegations
relating to insurance industry sales practices at companies such as American
International Group and Marsh & McLennan, and concerns about the safety of
COX-2 inhibitors marketed by Merck and by Pfizer triggered some of the
year's largest lawsuits. These lawsuits do not allege the traditional form
of misrepresentation yet they account for approximately 35 percent of 2004's
Dollar Disclosure Losses."
Previous experience is continued with the median 2004 maximum dollar loss and disclosure
dollar loss for NYSE and Amex firms being significantly higher than the
medians for NASDAQ firms. This finding is not surprising since the firms
listed on the NYSE are typically larger than the firms listed on the NASDAQ.
The top three industry sectors in 2004 in terms of number of issuers sued
were Consumer Non-Cyclical, Technology, and Communications. The number of
issuers sued in the technology sector nearly doubled over 2003 (19 versus 37
in 2004, a 95 percent increase). Energy sector filings almost tripled,
increasing from three to eight. Of note, while the Communications sector
was one of the three most-frequently sued in 2004, maximum dollar losses in
the industry dropped nearly 80 percent from $240 million in 2003 to $51
million in 2004 reflecting a lower market capitalization decrease for the
average communication company sued in 2004.
The report also finds that the most active federal circuits as measured by
the number of issuers sued in 2004 were: the Ninth Circuit (including
California) with 64 filings, an 83 percent increase over 2003; the Second
Circuit (including New York) with 45 filings; and the Eleventh Circuit
(Alabama, Florida, and Georgia) with 20 filings.
A full *.pdf copy of this report can be downloaded at 2004: A Year in Review. Additionally, Professor Grundfest and Dr. Gould are available for interviews and speaking engagements.
.GIF){kind=small}
.JPEG)
