John Gould, Ph.D. Vice President Cornerstone Research

The Maximum Dollar Loss (MDL) attributable to all 2008 claims is $856 billion, a 27 percent increase over comparable 2007 data and a 23 percent increase over the $698 billion average observed between 1997 and 2007. [ ii ] Financial services firms represented 46 percent of MDL in 2008. The Clearinghouse’s newly introduced Litigation Heat Map™, a graphic that portrays the intensity of litigation activity within each industry over time, shows that nearly a third of all large financial firms were a named defendant in a securities class action filed in 2008. The financial firms named as defendants in 2008 represented more than half of the sector’s total market capitalization.

Joseph A. Grundfest, Esq. Professor, Law and Business Stanford Law School

Commentary

Professor Joseph Grundfest, Director of the Stanford Law School Securities Class Action Clearinghouse:

“This level of litigation intensity against a single industry [financial services] is unprecedented since the passage of the 1995 Reform Act.”

“The data suggests an intriguing possibility that the pool of major financial services defendants might be getting fished out. Many major financial services firms have already been sued and plaintiffs may be choosing to focus on filing amendments to existing complaints rather than initiating new ones.”

“Litigation activity against the financial sector may decline next year because the supply of new defendants might be drying up, not necessarily because plaintiffs believe there is less fraud. It's the first time this phenomenon has been observed in the securities litigation market.”

Dr. John Gould, Vice President at Cornerstone Research:

“A new dynamic may be at work in the litigation marketplace because the complaints filed did not display the sharp spike in the second half of the year that one might have expected given the extraordinary level of stock market volatility.”

“One possible explanation is that market volatility has been so large that plaintiffs found it difficult to isolate company-specific stock movements from the broader noise generated by the volatile market. It will be interesting to see whether the historical relation between stock market volatility and the number of class action filings will re-emerge in 2009.”

Key Findings

   Of the companies included in the S&P 500 index, 9 percent were sued in a federal securities class action in 2008, compared to only 5 percent in 2007.

   The subprime/liquidity crisis was associated with 97 federal securities class actions, with 21 of these filed on behalf of holders or purchasers of auction rate securities.

   Disclosure Dollar Losses (DDL) increased 48 percent from 2007 and were 75 percent higher than the annual average for 1997–2007. Totaling $227 billion, these losses were the second highest ever recorded and fell just short of the 2000 level.

   In 2008, DDL for subprime/liquidity crisis securities class actions totaled $92 billion, or 41 percent of the total, and MDL for those class actions totaled $456 billion, or 53 percent of the total.

   There were 12 “mega” DDL complaints — complaints associated with a DDL of $5 billion or more — filed in 2008, the largest number of mega DDL filings for any year in the database. These mega DDL complaints alone accounted for 72 percent of total DDL in 2008 ($163 billion).

   There were 26 “mega” MDL complaints — complaints associated with an MDL of $10 billion of more — filed in 2008. This is the second highest number of mega MDL filings ever, accounting for 80 percent of total MDL in 2008 ($682 billion).

   The consumer non-cyclical and industrial sectors had the second and third highest levels of litigation activity with 37 and 17 complaints filed, respectively.

   Many more companies listed on the NYSE and Amex exchanges were sued than firms listed on the NASDAQ in 2008, breaking from the historical pattern. In 2008, 111 class actions were filed against firms listed on the NYSE/Amex compared to 68 against firms listed on NASDAQ.

   The Second Circuit (which includes New York) had the most securities class action complaints filed in 2008 with 92, followed by the Ninth Circuit (which includes California) with 28, and the Eleventh Circuit (Florida/Georgia/Alabama) with 17. These three circuits were also the most active in 2007 for securities class action litigation.

   Class actions filed in the last two years tend to have more Section 11 and 12(2) allegations, fewer Section 10-b claims, and more frequently name underwriters as defendants compared to previous years. In complaints alleging specific accounting violations, there has been a shift in emphasis from allegations related to traditional income statement line items to allegations related to balance sheet components.

Professor Grundfest and Dr. Gould are available to speak to the media about Securities Class Action Filings — 2008: A Year in Review. The full text of the report is available at the Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research websites.

The Securities Class Action Clearinghouse is an authoritative source of data and analysis on the financial and economic characteristics of federal securities fraud class action litigation.

Cornerstone Research provides financial and economic analysis in litigation and regulatory proceedings, with a focus on litigation related to securities, antitrust, intellectual property, energy, accounting, and financial institutions. Cornerstone Research cosponsors the Stanford Law School Securities Class Action Clearinghouse. For additional information, please visit: http://www.cornerstone.com.

^{[ i ]} 2008 filings include class actions identified as of 12/15/2008. Typically few class actions are filed during the last two weeks of the year. All other years include filings through 12/31. Our “filings” counts consolidate multiple filings related to the same allegations against the same company or companies and are therefore counts of unique disputes.

^{[ ii ]} Maximum Dollar Loss and Disclosure Dollar Loss are defined in the “Market Capitalization Losses” section of the report.

— Disclosure Dollar Loss is the dollar value decrease in the defendant firm’s market capitalization at the end of the class period (usually the time of the disclosure of the alleged fraud).
— Maximum Dollar Loss is the dollar value decrease in the defendant firm’s market capitalization from the trading day on which the defendant firm’s market capitalization reached its maximum during the class period to the trading day immediately following the end of the class period.

John Gould, Ph.D. Vice President — Boston Office Cornerstone Research 360 Newbury Street Boston, MA 02115 617.927.1500 Email: John Gould, Ph.D. jgould@cornerstone.com URL: http://www.cornerstone.com

Joseph A. Grundfest, Esq. William A. Franke Professor of Law and Economics Stanford Law School Crown Quadrangle 559 Nathan Abbott Way Stanford, CA 94305-8610 650.723.2465 Email: Joseph A. Grundfest, Esq.grundfest@stanford.edu URL: http://lawschool.stanford.edu/

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URL: http://www.businessforum.com/Cornerstone_08.html
Revised: January 6, 2009 TAF

© Copyright 2009 John Gould and Joseph A. Grundfest. / Cornerstone Research, All Rights Reserved