US Securities Fraud Class Actions At An All Time Low In 2006

by Glen Shapiro, LawAndTax-News.com, New York

04 January 2007

According to a report published on Wednesday by the Stanford Law School Securities Class Action Clearinghouse, the number of securities fraud class actions filed in 2006 was the lowest ever recorded in a calendar year since the adoption of the Public Securities Litigation Reform Act (PSLRA) of 1995.

The Securities Class Action Filings 2006 Year in Review report was a joint project between Stanford Law School and Cornerstone Research. The study revealed that securities fraud class actions have decreased by 38% since 2005, plunging from 178 filings to just 110, making the 2006 numbers nearly 43% lower than the ten-year historical average of 193.

Additional indices tracked by the Clearinghouse confirmed the significant decline.

John Gould, Vice President of Cornerstone Research and a contributor to the study, noted that the decrease in securities class action activity in 2006 was even more dramatic when measured by the associated market capitalization losses.

The study attributed the record low numbers of securities fraud class action filings in 2006 to three primary factors.

First, the strengthened federal enforcement environment reflected in the pressure that the SEC and Department of Justice now bring to bear on corporations to conduct internal investigations that implicate the individual executives responsible for the fraud, may be reducing the amount of fraud in the market.

Second, a strong stock market combined with lower stock price volatility typically reduces the number of cases filed.

Third, the overwhelming majority of securities fraud class actions that were filed in the late 1990s to the early 2000s have now been resolved.

“These are unprecedented numbers, and my bet is that the private securities fraud litigation market is shrinking because corporations are engaging in less activity that gives plaintiffs an excuse to file a complaint alleging fraud,” suggested Stanford Law School Professor Joseph Grundfest, Director of the Securities Class Action Clearinghouse, co-Director of the Rock Center on Corporate Governance, and former Commissioner with the Securities and Exchange Commission.

He continued:

“The federal government is a much more aggressive adversary than the private bar, and the feds can force a level of compliance that private class action lawyers could never touch. I think we are seeing the effects of a tougher and smarter campaign against white collar fraud by the SEC and Department of Justice.”

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