Delivering bad news for directors and officers liabilityinsurers who cover defendants in securities suits, studies show thenumber of class actions jumped 19 percent in 2008, and that largefinancial firms were a litigation hot spot.

Various researchers, however, are offering different opinionsabout what the latest counts may reveal about litigation trends for2009.

According to an annual report prepared by the Stanford LawSchool Securities Class Action Clearinghouse in California andCornerstone Research in Boston, 103 of the 210 federal securitiesclass actions filed in 2008 involved firms in the financialsector.

New to the report this year is a “Litigation Heat Map”–a graphicthat portrays the intensity of litigation activity within eachindustry over time. The map shows that nearly one-third of allfinancial firms included in the S&P 500 Index were named asdefendants in securities class actions filed in 2008. A relatedheat map reveals that financial firms named as defendants in 2008represented more than half of the sector's total marketcapitalization–54.8 percent.

“This level of litigation intensity against a single industry isunprecedented since the passage of the 1995 Reform Act,” JosephGrundfest, director of the Stanford Law School Securities ClassAction Clearinghouse, said in a statement.

A review of the information on the maps suggests the last sectorto feel the heat of litigation to a similar extent–with a highpercentage of filings representing a high proportion of thesector's overall market cap–was the utilities sector in 2002 (with34 percent of firms sued, representing 42 percent of the overallmarket cap).

The report notes, however, that a small number of utilitiesincluded in the S&P index as well as allegations related toenergy trades with Enron and other counterparties explain thefigures.

In addition, in that year, several other sectors(communications, energy and financial) were also identified eitheras warm spots because 15-to-25 percent of the firms in the sectorwere sued, or as hot spots because firms sued represented more than25 percent of the sector's overall market cap (communications andfinancial).

In 2008, class-action filings beyond the financial sector appearto be spread out with no other identifiable hot spots.

The high level of litigation activity targeting the financialsector in 2008 may produce a necessary decline in suits againstfinancial firms in 2009, Mr. Grundfest observed–simply “because thesupply of new defendants might be drying up, not necessarilybecause plaintiffs believe there is less fraud.”

The Stanford/Cornerstone report only tallies class actionsthrough Dec. 15. The researchers said there are typically few classactions filed during the last two weeks of the year.

Providing historical perspective, however, the report includesinformation on filings through Dec. 31 for all other years, notingthat the 210-filing total for 2008 was a 9 percent jump over theaverage of 192 such class actions between 1997 and 2007.

The report also notes that its totals consolidate multiplefilings related to the same allegations against the same company orcompanies.

Offering a different count in a separate report released inmid-December, New York-based NERA Economic Consulting tallied 255class actions as of Dec. 14, 2008 and projected 267 by year-end–a37 percent increase over NERA's 2007 count of 195.

While the totals are different, NERA, like Stanford/Cornerstone,noted that a high percentage of the total–43 percent, or 110cases–related to the subprime/credit crisis. The 210 filingsidentified in the Stanford/Cornerstone report for 2008 include 97(or 46 percent) associated with the crisis.

Without the last two weeks figuring into either NERA's 255-casetotal or Stanford/Cornerstone's 210-case total, NERA reportednearly equal numbers of filings in the first and second halves of2008–127 and 128, respectively.

In contrast, Stanford/Cornerstone researchers noted there was adecline in filing activity in the second half of the year–counting111 filings for the first half and 99 in the second.

Observing that this dip came despite “a dramatic drop in stockmarket value and an unprecedented spike in market volatility,” saidJohn Gould, vice president at Cornerstone Research, in suggestingone possible explanation.

It could be that “market volatility has been so large thatplaintiffs found it difficult to isolate company-specific stockmovements from the broader noise generated by the volatile market,”he added.

Unlike NERA or Stanford/Cornerstone researchers, Kevin LaCroix,an attorney who authors “The D&O Diary,” an Internet blog sitewith information on litigation trends and directors and officersliability insurance, believes that securities class-action filingsactually rose in the second half of 2008.

In a blog entry at www.dandodiary.com, Mr. LaCroix–a partner forOakbridge Insurance Services, a Beachwood, Ohio-based insurancebrokerage–noted that 13 filings made in the last two weeks of 2008actually changed the picture, bringing his full-year total to224.

While December usually is a slower month for new filings, theDecember influx in 2008 was “largely but not exclusively due to [a]flood of Madoff-related litigation,” he wrote, referring tolitigation spawned by the collapse of a multibilllion-dollar Ponzischeme masterminded by investment manager Bernard Madoff.

In contrast to Stanford's Professor Grundfest, who seemed tosuggest a possible decline in overall litigation activity next yearbecause there are no more large financial firms to sue, Mr. LaCroixbelieves the addition of 30 new cases for all types of firms in theentire month of December–a record for the past five years–isevidence of a continuing surge in litigation.

“The credit crisis litigation wave long ago ceased to just aboutthe large financial institutions,” he continued, highlightingremarks made on his blog and to National Underwriter about casesagainst non-financial firms with exposure to now bankrupt LehmanBrothers. (See NU, Nov. 3, page 12.)

The NERA report, “2008 Trends in Securities Class Actions,”which also analyzes trends in settlement values, notes that whilefilings have steadily increased from 2006 through 2008, a similarpattern has not been observed in median settlement values. Mediansettlements were below $10 million in all three years–$7.5 millionin 2008, $9.4 million in 2007 and $7.0 million in 2006.

Speculating on future settlement values, the report said theinflux of credit crisis-related filings suggest two opposingforces.

“On one hand, the investor losses associated with credit crisiscases filed in 2008 are very large,” with the median investor lossfor such a case coming in at $3.5 billion, compared to only $387million for a non-credit crisis case.

“On the other hand, defendants with 'deep pockets' are the oneswho can afford big settlements, and the credit crisis hasdramatically shrunk the size of many defendants' pockets,” NERAsaid.