According to the report, the number of filings in the first half of 2006 is
at the lowest level for any six month period since 1996, and on an
annualized basis is 36 percent below the 1996-2005 historical average of
194. The study also compared the number of filings over the first six
months of 2006 to the average number of filings over all semi-annual periods
beginning in January 1997. A t-test indicates that the number of filings
over the first six months of 2006 is lower than the average during 1997 to
2005 and the difference is statistically significant at a 5% confidence
level.
The mid-year study also finds a large decline in market capitalization
losses related to all securities fraud class action lawsuits filed so far in
2006. The Disclosure Dollar Loss (DDL) decreased 55 percent on an
annualized basis from $100 billion in 2005 to $22 billion ($45 billion on an
annualized basis) in the first half of 2006. The maximum dollar loss (MDL)
decreased 44 percent on an annualized basis from $456 billion in 2005 to
$127 billion ($255 billion on an annualized basis) in the first half of
2006.* The decreases in total DDL and MDL are reflective of the lower
number of filings and lower market capitalization losses associated with the
average/median filing.
"We're halfway through 2006 and already we're witnessing evidence consistent
with a slowdown in the volume of federal class action litigation activity"
said Stanford Law School Professor Joseph Grundfest, Director of the
Securities Class Action Clearinghouse and former Commissioner of the
Securities and Exchange Commission. "While we lack the data necessary to
determine the precise cause of the slowdown, the most intriguing hypothesis
is that extensive and expensive corporate efforts to improve governance and
accounting have reduced plaintiffs' ability to allege fraud."
Dr. John Gould, vice president of Cornerstone Research and major contributor
to the study, suggests caution in interpreting the recent slowdown in
filings: "Although there is no doubt that there has been a considerably
lower level of filing activity over the last year, it is still too early to
tell whether this represents a permanent shift."
Despite the recent wave of public attention surrounding the alleged
backdating of options at more than sixty publicly traded companies, the
impact of the scandal has not been as large as some might expect.
In fact, only eight federal class actions had been identified alleging
illegal backdating behavior by June 30, 2006 (Comverse Technology, Inc.;
Vitesse Semiconductor Corporation; UnitedHealth Group, Inc.; American Tower
Corporation; Brooks Automation, Inc.; KLA-Tencor Corporation; Brocade
Communication Systems, Inc.; and Mercury Interactive Corporation). Since
the close of the report's sample period, two more issuers have been named in
backdating class actions (Juniper Networks, Inc. and Rambus, Inc.) bringing
the total number of backdating related class actions to ten.
Professor Grundfest notes several reasons why class action complaints in
backdating situations are not more common.
1. Many disclosures relating to allegations of backdating are not
accompanied by statistically significant stock price declines.
2. The alleged options backdating activities occurred so long ago that the
statute of limitations defense may be effective.
3. In some situations, the uncertainties associated with the application of
appropriate accounting principles may cause potential plaintiffs to
recognize that they will have difficulty alleging that there was an
intention to commit fraud.
4. Most of the litigation is being filed in state court through derivative
actions because these actions do not, as a practical matter, require
significant stock drops as a predicate to filing, and it may be easier to
allege a violation of a fiduciary duty in many of these cases than to
demonstrate a willful fraud.
Professor Grundfest and Dr. Gould are available to speak to the media about
the report. The full text of the 2006 mid-year report can be found 2006 Mid-Year Assessment: Securities Class Action Case Filings
Stanford Law School's
Securities Class Action Clearinghouse is an authoritative source of data
and analysis regarding the financial and economic characteristics of federal
securities fraud class action litigation.
Cornerstone Research is a national consulting firm providing financial and economic analysis in civil litigation and regulatory proceedings, and concentrates in securities, antitrust, intellectual property, energy, accounting, and financial institutions litigation. Cornerstone Research cosponsors the Stanford Law School Securities Class Action Clearinghouse and maintains offices in Boston, Los Angeles, Menlo Park, New York, San Francisco, and Washington.
.GIF){kind=small}
.JPEG)
