Securities class-action suits fell in 2011

Securities class-action lawsuits, long a booming area of the law, dropped substantially in 2011, hitting a decade low, according to a study released Wednesday by Stanford University Law School and Cornerstone Research, a consulting and litigation-support firm.

The number of securities class-action settlements in 2011 dipped 25 percent, to 65, down from 86 the preceding year, the study says.

"The really big bucks were not in the class-action securities fraud market in 2011," said Joseph Grundfest, director of the Stanford law school's Securities Class Action Clearinghouse, which tracks trends in securities litigation. "The class-action securities fraud market is a business, just like any other, and the 2011 settlements data indicate plaintiffs and their counsel are coming off a weak year."

Securities fraud has been a robust practice area, both for Philadelphia plaintiffs lawyers who specialize in filing such lawsuits and for the corporate firms that defend against them.

But the Stanford study suggests that the trend, at least in the medium term, has been toward far fewer cases and smaller settlements. The total of 65 securities class actions settled last year was 35 percent below the 10 year average of 105, according to the study. The total value of the settlements, $1.4 billion, was 58 percent below the value for 2010, and substantially below the decade high of $19.1 billion in 2006, when shareholder lawsuits against WorldCom, Enron, and Tyco International - companies whose misdeeds emerged during the tumult of the market collapse in 2001 and 2002 - were settled.

Sherrie Savett, chair of the substantial-securities litigation practice at Berger & Montague P.C. in Philadelphia, said a flurry of securities lawsuits initiated against banks, mortgage lenders, and investment banks after the financial market collapse of 2008 and 2009 have mostly worked their way through the system. Also, she said, Supreme Court rulings have made it more difficult for plaintiffs to survive motions to dismiss and to win discovery.

"Securities litigation will always be there," Savett said. "There will always be fraud, and there will always be cases powerful enough to survive the very high level of pleading that is required."

Laura E. Simmons, an author of the report, said the lower numbers reflect the relatively anemic performance of the market since 2006, making it difficult to establish losses in cases where investors allege that a company had been mismanaged or that damaging information had been concealed. In a typical securities lawsuit, investors allege they lost money because of material misrepresentations or omissions by company officials in corporate documents.

Simmons said there were suggestions that the downward direction in securities class-action settlements might be reversed because the Securities and Exchange Commission recently has picked up the pace of its own enforcement actions. Plaintiffs class actions against financial firms often proceed in tandem with federal enforcement efforts, she said.

"This suggests that, all else equal, the number of class actions with corresponding SEC actions will likely increase," Simmons said.

The study found that by far the most litigation took place in the U.S. Court of Appeals for the Second Circuit, based in New York, followed by San Francisco. Courts composing the Third Circuit, based in Philadelphia, had only three of the 65 settled cases in 2011. Overall, defendants were most commonly financial-services firms, followed by telecommunications companies and pharmaceutical manufacturers.

Contact Chris Mondics at 215-854-5957 or cmondics@phillynews.com.