Securities lawsuits, a major driver of the directors & officers (D&O) liability insurance market, are down for the first part of 2006 according to a new, mid-year report released today by the Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research (see here and here).
- The annualized number of “traditional” securities fraud class actions filed from January through June 2006 decreased 31 percent compared to 2005 levels
- The number of filings in the first half of 2006 is at the lowest level for any six month period since 1996, & on an annualized basis is 36 percent below the 1996-2005 historical average of 194.
- The study also finds a large decline in market capitalization losses related to all securities fraud class action lawsuits filed so far in 2006. The Disclosure Dollar Loss (DDL) decreased 55 percent on an annualized basis from $100 billion in 2005 to $22 billion ($45 billion on an annualized basis) in the first half of 2006.
The study also looked at the problems with options backdating and concluded:
- Despite the recent wave of public attention surrounding the alleged backdating of options at more than sixty publicly traded companies, the impact of the scandal has not been as large as some might expect.
- Only eight federal class actions had been identified alleging illegal backdating behavior by June 30, 2006. (Since the close of the report’s sample period, two more issuers have been named in backdating class actions)
Stanford Law School Professor Joseph Grundfest, Director of the Securities Class Action Clearinghouse and former Commissioner of the Securities and Exchange Commission notes several reasons why class action complaints in [options] backdating situations are not more common.
- Many disclosures relating to allegations of backdating are not accompanied by statistically significant stock price declines.
- The alleged options backdating activities occurred so long ago that the statute of limitations defense may be effective.
- In some situations, the uncertainties associated with the application of appropriate accounting principles may cause potential plaintiffs to recognize that they will have difficulty alleging that there was an intention to commit fraud.
- Most of the litigation is being filed in state court through derivative actions because these actions do not, as a practical matter, require significant stock drops as a predicate to filing, and it may be easier to allege a violation of a fiduciary duty in many of these cases than to demonstrate a willful fraud.
Professor Grundfest also noted that “while we lack the data necessary to determine the precise cause of the slowdown, the most intriguing hypothesis is that extensive and expensive corporate efforts to improve governance and accounting have reduced plaintiffs’ ability to allege fraud.”
Risk management works, as does a strong stock market.
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