Just over 5% of S&P 500 companies were defendants in federal securities class actions filed in 2010, but those companies named as defendants accounted for 11.4% of the S&P 500's market capitalization, according to a report Thursday from Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research.
The 5.4% in 2010 is more than the 4.8% S&P 500 companies, accounting for 8.6% of the index's market cap, that were defendants in 2009 but a drop from an annual average of 6.5%, accounting for 11.8% of the market cap, between 2000 and 2009, according to the report, “Securities Class Action Filings: 2010 Year in Review.”
In terms of cumulative litigation exposure, at the end of 2010, all S&P 500 companies as of year-end 1999 had a 49.9% chance of being subject to at least one federal securities class action in the following 11 years, the report said. That percentage dropped to 47.3% at the end of 2009 for the 10 years starting in 2000.
Among all companies publicly traded in U.S. markets, federal court securities class-action filings in 2010 totaled 176, up 4.7% from 2009 but 9.7% below the annual average of 195 filings between 1997 and 2009, the report said.
Filings totaled 104 in the second half of last year, rising from 72 in the first six months of 2010.
Filings related to the credit crisis fell in the full year 2010 to 13, a 76.4% decrease from 2009 and an 87% decrease from 2008.
“As the wave of credit-crisis filings subsided, filings in the financial sector decreased, as financial companies were defendants in 24.4% of 2010 filings compared with 47% in 2009,” the 39-page report said.
Among financial companies in S&P 500 last year, 10.3% were named defendants in a federal securities class action, down from 13.1% in 2009 and down from a 10-year historical average through 2009 of 11.8%. Those companies subjected to filings in 2010 accounted for 31.8% of the index's financial sector market cap, down from 38.3% in 2009. (The market capitalization is based on the final day of trading in the previous year).
The health-care sector had the largest concentration of filings among S&P 500 companies in 2010, at 15.4%, up from 3.7% in 2009. Those companies subjected to filings in 2010 accounted for 33.7% of the sector's market cap, up from only 1.7% in 2009.
In 2010, there were no filings against S&P 500 companies in the consumer staples, industrial, telecommunication services and utilities sectors.
For 2010, a total of $474 billion of defendant firms' market value was lost from the trading day with the highest market capitalization during the class-action period to the trading day immediately following the end of the class-action period, the report shows. That's down from $550 billion in 2009.
By another measure, the report shows a total $72 billion loss in the defendant firms' market value from the trading day immediately preceding the end of the class-action period and the trading day immediately following it. That's down from $84 billion in 2009.
The broader range measure of a decline in market capitalization generally includes factors unrelated to the allegations in the securities litigation, such as industry and market dynamics, while the one-day measure tends to focus the market-capitalization loss on the class-action allegations, generally revealed to the investor public, often in the form of earnings restatements or missed earnings forecast, on what becomes the last day of the class period, said John Gould, senior vice president of Cornerstone Research, Boston, in an interview.