Stanford Law School and Cornerstone Research Release Annual Securities Fraud Class Action Filings Report Indicating That Recent Increase in Litigation Activity is Due to the Subprime Crisis and Stock Market Volatility

Business Wire, Jan 3, 2008

2007 Activity Remains Below Historical Averages

BOSTON & PALO ALTO, Calif. -- The number of companies sued in securities fraud class action litigation rose 43 percent between 2006 and 2007, from 116 to 166. Although litigation activity for 2007 as a whole was 14 percent below the ten-year historical average (covering 1997-2006) of 194 companies sued per year, activity jumped in the second half of the year as the subprime mortgage crisis unfolded and stock market price volatility increased. One hundred companies were sued in the second half of the year, a litigation rate that reversed a trend of eight consecutive quarters with below average litigation activity. But this increase may not signal a longer-term trend.

Professor Joseph Grundfest, Director of the Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research, observes that, "For the past two years, securities fraud class action litigation has been driven by market-wide events, such as the 2006 backdating scandals and the 2007 subprime crisis. If these systemic shocks are excluded from consideration, the 'core' litigation rate continues to be remarkably low. When litigation related to the subprime crisis is excluded from the calculation--on the assumption that the subprime crisis is a nonrecurring event--the resulting core litigation rate remains well below historical norms. Measured as a core litigation rate, 126 companies were sued in the full calendar year, compared with the average core litigation rate from 1997 through 2006 of 192."

John Gould, Vice President at Cornerstone Research and contributor to the report, believes that the increase in filings in the second half of 2007 raises as many questions as answers. He notes, "Just a few months ago we were trying to pin down the cause of the two-year lull in class action activity that began in mid-2005. Unfortunately, the increase in filing activity in 2007 does not provide much insight into why filings were down in the preceding years. While it is likely that both the subprime crisis and the increase in stock market volatility contributed to the increase in filings in the second half of the year, it is not possible, as a technical matter, to separate these two effects."

This past year also saw defendants prevailing in the JDS Uniphase securities class action, a rare example of such litigation reaching trial. Professor Grundfest commented that "the JDS trial is an important landmark in modern securities litigation. These cases rarely go to trial, and for the defendants to win a total victory in a case that claimed $20 billion in damages demonstrates that not every case that makes it past summary judgment has merit. The interesting question is how and whether this trial result might cause plaintiffs to modulate their settlement demands or embolden defendants to take cases to trial."

Findings

The report's additional significant findings include:

* Stock Market Volatility and the Subprime Crisis Directly Correlate with Filing Activity--Stock market volatility and the number of filings are correlated. On average, a 10 point increase in the quarterly average S&P 500 Implied Volatility Index (VIX) is associated with 12 additional litigations per quarter. In 2007, for instance, the number of companies sued jumped from 66 in the first two quarters to 100 in the last two, just as stock market volatility rose dramatically from historically low levels, partly due to events related to the subprime crisis.

* Subprime Fallout Skyrockets Finance Filings--The Finance sector led the way in securities class action activity with 47 companies sued in 2007, more than quadrupling 2006's 11 filings. The subprime fallout accounted for this spike, with 25 of the Finance sector filings associated with subprime market disclosure issues. The Consumer Non-Cyclical and Communications sectors had the second and third highest levels of litigation activity with 36 and 33 companies sued, respectively.

* Market Capitalization Losses Increase--Disclosure Dollar Losses (DDLs)* increased 190 percent from 2006, from $52 billion to $151 billion. Also substantial is the 128 percent increase in Maximum Dollar Losses (MDLs) , which rose from $293 billion in 2006 to $669 billion in 2007.

Incidences of "mega" DDL filings--cases associated with disclosure losses of $5 billion or more--were much higher, with nine mega filings in 2007 compared with only one in 2006.

* Nasdaq and NYSE/Amex Firms Sued Almost As Often--Somewhat departing from historical trends, in 2007 there were almost the same number of securities class action filings against companies listed on Nasdaq (77 filings) as against those on NYSE/Amex (73 filings). Both figures are higher than in 2006, which saw 60 filings for Nasdaq and 49 for NYSE/Amex. Consistent with other findings in the report, the 2007 filing rate was well below the historical average of 99 filings a year against Nasdaq firms, but in line with the historical average of 74 filings a year against NYSE/Amex firms.