Researchers delivered good news to directors and officersliability insurers who cover defendants in securities lawsuits thisyear, revealing that the number of securities class actionsplummeted in 2009, with one outfit putting the drop at over 20percent.

The most recent of four reports to come out of the subject,however, revealed a surge in other types of securities actions lastyear–most notably lawsuits filed by regulators and law enforcementagencies alleging violations of securities fraud laws.

The latest, more downbeat report came from New York-basedAdvisen, titled, “Securities Suits Abound In A Harsh 2009,” whichtracks six categories of securities suits in addition to classactions. Advisen not only reported that class actions were aboutlevel in 2009 and 2008–coming in at 234 and 239 for the twoyears–but also said that the totals for all seven securitiessuit-types climbed 13 percent to 910 cases.

However, three other reports,tracking class actions only, all reported 2009 drops–ranging from 7percent to 24 percent–with the most favorable numbers coming fromStanford Law School Securities Class-Action Clearinghouse inCalifornia and Cornerstone Research in Boston.

THE GOOD NEWS

The Stanford/Cornerstone report on “2009 Filings: A Year InReview,” tallied 169 securities class actions for 2009,representing a 24 percent drop from 223 class-action filings in2008.

The 2009 tally also represented a 14 percent decline from theaverage of 197 actions filed between 1997 and 2008, according tothe report.

The researchers noted that litigation activity related to thecredit crisis was nearly cut in half, highlighting this as one keydriver of the downward trend in filings overall. According to thereport, filings related to the credit crisis totaled 100 in 2008,but only 53 in 2009–with only 17 of those 53 filings occurring inthe second half of 2009.

Figures contained in the report analyzing filings by sector andby class date reveal that plaintiffs' law firms are generallypaying less attention to financial firms–last year's litigation hotspot–but more attention to securities frauds allegedly perpetratedin the distant past.

Contained in the report is a “Litigation Heat Map”–a graphicthat portrays the intensity of litigation activity within eachindustry over time. The map shows that nearly one-third, or 32.6percent, of all financial firms included in the S&P 500 Indexwere named as defendants in securities class actions filed in 2008,but the figure dropped to just 11.5 percent in 2009.

The financial sector still garnered roughly half of all 2009securities class-action filings, however, with 84 in total.

WHAT IT MEANS

“Plaintiffs simply ran out of financial firms to sue, and therising stock market made it harder for plaintiffs to assertclaims,” said Professor Joseph Grundfest, director of the StanfordLaw School Securities Class-Action Clearinghouse, commenting on thereport in a statement.

“The remarkable increase in old claims filed during 2009suggests that plaintiffs are trying to fill the litigation pipelineby bringing older lawsuits that weren't attractive enough to filewhile the firms were busy pursuing financial sector claims,” hecontinued.

The report revealed the increase in “older lawsuits” bymeasuring the lag between the filing date and the end-of-classperiod. Historically, the median lag was 28 days, but it reached100 days in the second half of 2009, the researchers estimated.

In addition, the percentage of filings with more than a year'slag time was 18 percent in 2009, compared to just 5 percent in2005.

An NU article published in March 2009 anticipated thistrend, quoting experts–including plaintiffs' attorney SamuelRudman, a partner with Coughlin Stoia Geller Rudman & Robbinsin New York–who predicted a rash of 2007 stock-drop cases would befiled later in 2009.

The attorney reasoned that without a major re-inflation of thestock market, there would be no potential for stock-drop casesgoing forward, leading law firms to reach dip back into pools ofpotential cases from the past. (See the story at http://bit.ly/4srrx9.)

Prof. Grundfest, commenting on the trend in conjunction withStanford's report, took note of a disproportionate number ofdelayed filings from Mr. Rudman's firm, chalking the overall spikeup to “factors idiosyncratic to one plaintiff firm's strategy[having] little to do with larger market forces.”

The professor also said that “if history is a guide, theselawsuits are more likely to be dismissed and can therefore becharacterized as lower quality claims,” referring to a finding that55 percent of filings with more than a year lag have historicallybeen dismissed (over the time period from 1996 to 2006). Thiscompares to a 36 percent historical dismissal rate for claims withsix-month or shorter lags.

MORE NUMBERS

The overall trends revealed in the Stanford/Cornerstone analysismirror those separately reported by two other researchers, althoughactual counts of securities filings in 2009 and earlier yearsdiffered from one report to the next.

Kevin LaCroix, author of the “D&O Diary” blog, reported inhis Jan. 4 blog entry that he tallied 189 securities class-actionlawsuits for 2009 and 224 for 2008.

While Mr. LaCroix's description of his method of countingappears to be similar to the Stanford/Cornerstonemethod–consolidating multiple filings related to the sameallegations against the same company–the Stanford/Cornerstoneanalysis did not include class actions filed in the last two weeksof 2009.

(Editor's Note: A bar graph on the Stanford SecuritiesClass-Action Clearinghouse Web site–http://securities.stanford.edu/–depictingfederal securities class-action filings for each year going back to1997, now shows the 2009 total to be 178 filings, rather than the169 originally cited in the report–”Securities Class ActionFilings–2009: A Year in Review.”)

NERA Economic Consulting in New York reported much higherfigures for all years, but overall declines nonetheless. NERA, in aDec. 15, 2009 report on “Recent Trends in Securities Class-ActionLitigation: 2009 Year-End Update,” anticipated 235 cases for thefull-year 2009 compared to 253 in 2008.

The reports from NERA and Mr. LaCroix, which also containeddifferent counts of filings related to the credit crisis,highlighted an additional trend–a rash of filings on behalf ofinvestors in exchange-traded funds–occurring in the second half of2009. NERA counted 13 such cases and Mr. LaCroix, who is a partnerfor Oakbridge Insurance Services, a Beachwood, Ohio-based insurancebrokerage, counted a dozen.

NERA, in its analysis, also tracks settlement values, reportingthat the 2009 median value (excluding some outliers) was comparableto 2007 and 2008.

THE BAD NEWS

Advisen, in addition to counting 234 securities class actionsfor 2009, included the following amounts in its total tally of 910securities suits for the year:

• Securities fraud (regulatory) actions, such as lawsuits orproceedings by the U.S. Securities and Exchange Commission, whichtotaled 340 in 2009, representing 37 percent of the total.
• Securities cases that allege breaches of fiduciary duty,accounting for 216 filing in 2009, or 24 percent of the total.
• Derivative actions, which are brought by shareholders on behalfof the company, naming directors and officers as defendants,accounting for 65, or 7 percent, of the 907 filings in 2009.
• The 55 remaining securities suits consisted of collectiveactions (similar to U.S. class actions, but brought in non-U.S.courts against U.S. and non-U.S. companies), as well as casesrelated to Ponzi schemes and other miscellaneous filings.

Reviewing the distribution of cases among the categories,Advisen said that class actions filed by private plaintiffs havebeen steadily shrinking as a percentage of all securities suits forquite some time. Indeed, such class actions represented half of allsecurities suits in 2004, but the level fell to 30 percent in 2008and just about one-quarter of all suits in 2009.

On the other hand, the cases brought by regulators have beensteadily climbing, Advisen reported, noting that the 340-case totalfor 2009 represented a hefty 22 percent jump over 2008, following a12 percent increase over 2007.