Delivering bad news for directors and officers liability insurers who cover defendants in securities suits, studies show the number of class actions jumped 19 percent in 2008, and that large financial firms were a litigation hot spot.

Various researchers, however, are offering different opinions about what the latest counts may reveal about litigation trends for 2009.

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 shows that nearly one-third of all financial firms included in the S&P 500 Index were named as defendants in 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–54.8 percent.

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

A review of the information on the maps suggests 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 as well as allegations related to energy trades with Enron and other counterparties explain the figures.

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

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

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

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

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

The report also notes that its totals consolidate multiple filings related to the same allegations against the same company or companies.

Offering a different count in a separate report released in mid-December, New York-based NERA Economic Consulting tallied 255 class actions as of Dec. 14, 2008 and projected 267 by year-end–a 37 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 110 cases–related to the subprime/credit crisis. The 210 filings identified 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-case total or Stanford/Cornerstone's 210-case total, NERA reported nearly equal numbers of filings in the first and second halves of 2008–127 and 128, respectively.

In contrast, Stanford/Cornerstone researchers noted there was 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,” said John Gould, vice president at Cornerstone Research, in suggesting 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 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 site with information on litigation trends and directors and officers liability insurance, believes that securities class-action filings actually rose in the second half of 2008.

In a blog entry at www.dandodiary.com, Mr. LaCroix–a partner for Oakbridge Insurance Services, a Beachwood, Ohio-based insurance brokerage–noted that 13 filings made in the last two weeks of 2008 actually changed the picture, bringing his full-year total to 224.

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

In contrast to Stanford's Professor Grundfest, who seemed to suggest a possible decline in overall litigation activity next year because there are no more large financial firms to sue, Mr. LaCroix believes the addition of 30 new cases for all types of firms in the entire month of December–a record for the past five years–is evidence of a continuing surge in litigation.

“The credit crisis litigation wave long ago ceased to just about the large financial institutions,” he continued, highlighting remarks made on his blog and to National Underwriter about cases against non-financial firms with exposure to now bankrupt Lehman Brothers. (See NU, Nov. 3, page 12.)

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

Speculating on future settlement values, the report said the influx of credit crisis-related filings suggest two opposing forces.

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

“On the other hand, defendants with 'deep pockets' are the ones who can afford big settlements, and the credit crisis has dramatically shrunk the size of many defendants' pockets,” NERA said.

Special Reports /

Financial Firms Targeted As Hot Spots For Securities Class-Action Litigation

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