Securities Class Actions Up 31 Percent

NU Online News Service, March 13, 3:10 p.m.EST?Directors and officers liability insurers can nowpoint to reliable proof of what their claim files have been tellingthem for the past two years.

Federal securities class action litigation suits increased by 31percent between 2001 and 2002, rising from 171 to 224 filings,according to Stanford University's Securities Class ActionClearinghouse in Palo Alto, Calif.

The report notes that companies sued in 2002 lost more than $1.9trillion in market capitalization during the class action periods,a 24 percent increase over the comparable figure for companies suedin 2001.

These comparisons do not include the 312 "IPO Allocation"securities class action filings in 2001 alleging fraud in the IPOunderwriting process, or the more recent "Analyst" class actionsnaming securities analysts and investment banks as defendants,which are categorized separately by the Clearinghouse.

"From a measurement perspective, it makes sense to treat the IPOAllocation and Analyst allegations as extraordinary events that donot most accurately describe the underlying trend in litigationactivity," explained Professor Joseph Grundfest of Stanford LawSchool, who was formerly a Commissioner of the Securities andExchange Commission.

The average market cap loss of $9.3 billion for companies suedin 2002 is similar to the $9.7 billion average loss in 2001.

"This multibillion-dollar average is a result of 40 'mega'filings in 2002 where the defendant companies each lost more than$10 billion in market capitalization," said John Gould, vicepresident of Cornerstone Research in Boston and the principalauthor of the study. "These cases alone account for 82 percent ofthe total market cap loss reflected in the 224 filings."

The study found that the suits filed in 2002 cut a broad swathacross industries. The communications, including Internet-relatedcompanies, consumer products and financial services industries,were especially hard-hit.

The Clearinghouse also found that 85 percent of the filingscharge defendants with 10b-5 violations (such as affirmative fraudor failures to disclose material information).

More than 80 percent of the complaints cite misrepresentationsin financial documents. Almost 60 percent allege GAAP violations,and half of those contain allegations related to revenuerecognition. Insider trading is alleged in 26 percent of thecomplaints.

"The focus on financial misrepresentations and GAAP violationsreflects the current securities class action environment," notedProfessor Grundfest.