In a finding that impacts directors and officers liability insurers, researchers reported today that securities class actions jumped 19 percent last year and financial firms were prime targets for legal action.

According to an annual report prepared by the Stanford Law School Securities Class Action Clearinghouse in California and Cornerstone Research in Boston, 103 of the 210 federal securities class actions filed in 2008 involved firms in the financial sector.

New to the report this year is a "Litigation Heat Map," a graphic that portrays the intensity of litigation activity within each industry over time. The map, displaying the financial sector in red to reveal a litigation hot spot, shows that nearly one-third, or 32.6 percent, of all financial firms included in the S&P 500 Index were named as defendants in a securities class actions filed in 2008.

A related heat map reveals that financial firms named as defendants in 2008 represented more than half of the sector's total market capitalization, or 54.8 percent.

"This level of litigation intensity against a single industry is unprecedented since the passage of the 1995 Reform Act," Professor Joseph Grundfest, director of the Stanford Law School Securities Class Action Clearinghouse, said in a statement.

A review of the information on the heat maps suggests that the last sector to feel the heat of litigation to a similar extent--with a high percentage of filings representing a high proportion of the sector's overall market cap--was the utilities sector in 2002 (with 34 percent of firms sued, representing 42 percent of the overall market cap).

The report notes, however, that a small number of utilities included in the S&P index and allegations related to energy trades with Enron and other counterparties explain the 2002 figures.

As for 2008, Mr. Grundfest believes the high level of litigation targeting financial firms last year may mean a necessary decline in suits against them in 2009--simply "because the supply of new defendants might be drying up."

Stanford/Cornerstone researchers also noted a decline in filing activity in the second half of the year--counting 111 filings for the first half and 99 in the second.

Observing that this dip came despite "a dramatic drop in stock market value and an unprecedented spike in market volatility," John Gould, vice president at Cornerstone Research, suggested one possible explanation. It could be that "market volatility has been so large that plaintiffs found it difficult to isolate company-specific stock movements from the broader noise [of the] volatile market," he said.

Kevin LaCroix, an attorney who authors The D&O Diary, an Internet blog site, believes securities class-action filings actually increased in the second half of 2008. Noting that the Stanford/Cornerstone report only tallies class actions through Dec. 15, Mr. LaCroix, who is a partner for Oakbridge Insurance Services, a Beachwood, Ohio-based insurance brokerage, said that 13 filings made in the last two weeks of 2008 actually changed the picture.

In a blog entry today (at www.dandodiary.com), he said he agreed with the Stanford/Cornerstone researchers that there are typically few class actions filed during the last two weeks of the year.

The December influx in 2008, he said, was "largely but not exclusively due to [a] flood of Madoff-related litigation," he wrote, referring to litigation spawned by the collapse of a multibillion-dollar Ponzi scheme masterminded by investment manager Bernard Madoff.

Special Reports /

Financial Firms Are Securities Class-Action Hot Spot

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