A report on trends in federal securities class actions–including a dip in the number of suits below 200 for the first time since 1997–is giving directors and officers liability insurers reason to celebrate.

The study, released jointly by the Stanford Law School Securities Class Action Clearinghouse in Palo Alto, Calif., and Boston-based Cornerstone Research, found that the number of securities fraud class actions filed in 2005 decreased more than 17 percent compared to 2004 levels–to 176 from 213 filings a year earlier.

A review of year-by-year statistics posted on Stanford Law School's securities class action Web site (http://securities.stanford.edu) revealed that the number of suits has exceeded 200 for seven straight years prior to 2005, with lows of 110 and 175 in 1996 and 1997, respectively.

According to the report, the average number of cases since the passage of the Private Securities Litigation Reform Act in 1995 was 195. This was derived by averaging the number of traditional cases from 1996 through 2004. Traditional cases exclude more than 300 cases related to IPO allocations filed in 2001, as well as cases related to mutual fund market timing in more recent years.

The Private Securities Litigation Reform Act raised pleading standards and procedural hurdles for bringing securities class actions to federal court in an attempt to end the so-called “race to the courthouse” in which plaintiffs lawyers brought allegedly frivolous lawsuits as soon as stock prices fell in the late 1990s.

But in the years immediately following the act, neither the number of cases nor the dollar value of settlements declined. In fact, settlements involving Enron, WorldCom and Cendant all topped the $3 billion mark.

The new Stanford/Cornerstone study, however, found that investor losses related to lawsuits filed in 2005 decreased dramatically. The Clearinghouse's Disclosure Dollar Loss Index, which measures the decline in the defendant firm's market capitalization at the end of the class period, plummeted 33 percent, falling to $99 billion from $147 billion in 2004.

Stanford Law School Professor Joseph Grundfest, director of the Securities Class Action Clearinghouse and former commissioner of the Securities and Exchange Commission, said, “Lawsuits arising from the dramatic boom and bust of U.S. equities in the late 1990s and early 2000s are now largely behind us.”

A second factor that may explain the report results, he speculated, is that “improved governance in the wake of the Enron and WorldCom frauds may have reduced the actual incidence of fraud.”

Dr. John Gould, vice president of Cornerstone Research, added that the decline in stock market volatility in 2005 may be a reason for the lower intensity of securities class action filings.

Summarizing results by industry, the study found the consumer noncyclical sector (including biotechnology, commercial services, cosmetics/personal care, food, health care-products, health care-services, pharmaceuticals) now gives rise to the most litigation, while filings fell more than 30 percent in the technology and communications sectors.

Special Reports /

Securities Class Actions Dip Below 200

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