Federal securities class-action cases filed this year could be leveling off after recent years of declining, according to separate databases of two groups that follow corporate legal issues.
The Sarbanes-Oxley Public Company Accounting Reform and Investor Protection Act of 2002 “may be the reason things are improving,” said Salvatore J. Graziano, partner, Bernstein Litowitz Berger & Grossmann LLP a New York-based law firm that represents plaintiffs in securities litigation.
The corporate reform law raised standards and accountability for corporate boards and management and public accounting firms.
But Adam Savett, vice president and product and market segment manager at Securities Class Action Services, a unit of Institutional Shareholder Services Inc., Rockville, Md.,attributed the change primarily to stock market gains. Rising stock prices impair investors’ abilities to see damages, he said.
Among other trends, Securities Class Action Services found that state and international filings are growing, although they are only a tiny fraction of the federal cases, while the amount of outstanding settlements for claims was down slightly from its peak.
Pension funds have played a key role in winning settlements. “In the 10 top class-action recoveries (of all time), the vast majority, if not all, have had pension funds as lead plaintiffs,” Mr. Graziano said.
Pension funds have gained from the settlements. The $247.1 billion California Public Employees’ Retirement System, Sacramento, for example, received for this year, through mid-May, $109 million in claims from settlements, according to Clark McKinley, information officer. That compares with $15 million in 2006 and $205 million in 2005, the year of the WorldCom Inc. settlement,
“These are not systematic,” Mr. McKinley said of the uneven recoveries. “You get bunches of these things at times.”
So far in 2007, Stanford’s Securities Class Action Clearinghouse reported 62 federal cases filed though June 22, based on data it collects. Cornerstone Research, Menlo Park, Calif., helps the clearinghouse analyze the data. The clearinghouse was scheduled to issue a semiannual report this week, with data through June 30, said Alexander Aganin, Cornerstone principal.
In all of 2006, 118 federal cases were filed, down from 182 cases in 2005 and 234 cases in 2004, according to the clearinghouse.
There has been a 76% decline in federal cases filed though 2006 since filings peaked at 497 in 2001, according to the clearinghouse, which cites data from 1995.
Securities Class Action Services showed a similar trend, although its numbers differ. The firm counted 70 federal cases filed for six months through June 30, said Mr. Savett. For calendar year 2006, 120 federal cases were filed, down from 174 cases in 2005 and 245 cases in 2004.
Sarbanes-Oxley could have had some impact on reduced cases alleging corporate fraud, Mr. Savett said. “I think it helped shake out some fraud and other problems.” But Mr. Savett attributed the drop mainly to “generally positive stock market in the last few years.”
“You want to have a loss,” which is necessary to pursue a federal case, he said. “But generally a positive stock market hides a lot of problems. When the stock market falls, securities litigation cases go up.” Shareholders find it difficult to file a case for corporate fraud when a stock has gone up, although just not gone up enough, he said.
Mr. Savett said it’s hard to tell the trend in the number of filings for 2007 because previous years show no pattern in filings during any particular month.
Besides the number of cases filed, amounts of settlements are also down, although only slightly from their peak, based on Securities Class Action Services data.
The securities class action settlement pipeline — a service offered by Securities Class Action Services dating to 2004 that measures final and tentative settlements where the filing deadline has not passed — was at $20.3 billion as of June 25, the SCAS data show. The peak was reached Aug. 5, 2005, when it totaled $21.8 billion.
The biggest settlement, preliminary or final, issued this year involved the Tyco International Ltd. class action, totaling $2.975 billion, in connection with allegations involving financial reporting, according to SCAS. It ranks as the fourth largest all-time federal settlement. And although the Tyco settlement is tentative, amounts tend not to change after final court approval, Mr. Savett said.
“The Tyco settlement can still grow, because all defendants haven’t settled,” Mr. Savett said.
The Tyco settlement was followed in size this year by a tentative settlement involving Cardinal Health Inc. for $600 million, and by final settlements of HealthSouth Corp. for $445 million; Williams Cos. for $311 million; and El Paso Corp. for $285 million. All the cases involved allegations of financial reporting.
The pipeline includes all settlements involving Enron Corp., which total $7.2 billion. The latest Enron settlements — one for $72 million and another for $13.5 million — were issued this year. The claims-filing deadline for the Enron settlements is still pending. The Enron total could grow as not all defendants have settled, Mr. Savett said. The Enron total settlement is the largest securities class-action settlement ever, he added.
Both Messrs. Graziano and Savett believe the Tellabs Inc. decision issued June 21 by the U.S. Supreme Court would have little impact on securities class-action cases, even though it toughened standard for filings by plaintiffs.
The court ruled the plaintiffs in a securities class action must show an intent to “deceive, manipulate or defraud” that is “more than merely plausible or reasonable — it must be cogent and at least as compelling as any opposing inference of non-fraudulent intent.”
“It is not a drastic change,” said Mr. Graziano.
Mr. Savett said: “It probably will have a small effect. It will probably be a gatekeeper for less meritorious cases.”
