Significantly, the study also finds that investor losses related to these lawsuits
decreased dramatically in 2005. The Clearinghouse’s Disclosure Dollar Loss Index
(DDL Index™) measures the decline in the defendant firm’s market capitalization at
the end of the class period (usually the time of the disclosure of the alleged fraud).
The DDL decreased 33 percent, from $147 billion in 2004 to $99 billion in 2005.
Compared to 2001 and 2002, the DDL was off by more than 49 percent and 51
percent, respectively.
The pig may have moved through the python," said Stanford Law School Professor
Joseph Grundfest, Director of the Securities Class Action Clearinghouse and former
Commissioner of the Securities and Exchange Commission. "Two factors are likely
responsible for the decline. First, lawsuits arising from the dramatic boom and bust
of U.S. equities in the late 1990s and early 2000s are now largely behind us. Second,
improved governance in the wake of the Enron and WorldCom frauds may have
reduced the actual incidence of fraud."
The decline in stock market volatility in 2005 may be yet another reason for the
lower intensity of securities class action filings. "Our observations over the past
decade indicate that lower market volatility tends to be associated with a lower
number of filings," explained Dr. John Gould, vice president of Cornerstone
Research and contributor to the study.
"Only time will tell whether this decline in litigation activity is transient or the start
of a longer-term trend," Grundfest added.
Lawsuits filed in 2005 also tended to allege misrepresentations in financial reporting
and false forward-looking statements more frequently than in the past. The
percentage of filings alleging misrepresentations in financial documents increased
from 78 percent in 2004 to 89 percent in 2005, and the percentage of filings alleging
false forward looking statements increased from 67 percent in 2004 to 82 percent in
2005. The percentage of filings alleging GAAP violations and insider trading
remained relatively stable.
"This trend suggests that the securities litigation market is now even more focused on
the validity of financial results and forecasts presented in financial documents, such
as SEC filings and press releases," said Gould.
As for filings by industry, the study found that the technology and communications
sectors — with filings down more than 32 percent from 2004 levels and 36 percent
from historic averages — were no longer the major driver of securities fraud litigation
in 2005. Instead, the consumer non-cyclical sector (e.g., biotechnology, commercial
services, cosmetics/personal care, food, healthcare-products, healthcare-services
pharmaceuticals, etc.) now gives rise to the most litigation.
The report also found that the most active federal circuits in 2005, as measured by the
number of issuers sued, were: the Second Circuit (New York) with 44 filings, the
Ninth Circuit (California) with 38 filings, and the Third Circuit
(Delaware/Pennsylvania) with 18 filings. When ranked by disclosure dollar loss, the
top three circuits in 2005 were: the Second Circuit with $38 billion, the First Circuit
(Massachusetts) with $17 billion and the Third Circuit with $10 billion. These data
reflect a dramatic 41 percent decline from 2004 in the number of securities fraud
lawsuits filed in the Ninth Circuit, a trend that it is correlated with the decline in
litigation against high-technology firms that tend to be based in California.
The Securities Class Action Clearinghouse is an authoritative source of data and analysis regarding the financial and economic characteristics of federal securities
fraud class action litigation. See: http://securities.stanford.edu. A full *.pdf copy of this report can be downloaded at 2005: A Year in Review. Additionally, Professor Grundfest and Dr. Gould are available for interviews and speaking engagements.
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