Class action suits surge in wake of credit crisis

The subprime mortgage crisis helped push the number of federal securities class actions up 19% in 2008 from a year earlier, according to a report last week by the Stanford Law School Securities Class Action Clearinghouse.

The 210 securities class actions was the highest number since 2004's 215 filings and considerably above the 1997-2007 average of 192. Nearly half of the filings against the publicly traded companies involved financial services companies, according to the study.

"Evidently, litigation against the firms closest to the ongoing subprime/liquidity crisis was the dominant force in federal class action securities litigation in 2008," according to the report. The "level of litigation against firms in a specific sector is unprecedented" since enactment of the Private Securities Litigation Reform Act of 1995, the report said.

But it also noted that overall securities litigation fell during the second half of 2008 "despite a dramatic drop in stock market value and an unprecedented spike in market volatility."

Noting that "high volatility has historically been correlated with an increased level of litigation activity," the report suggested that market unpredictability has been "so large that plaintiffs found it difficult to isolate company-specific stock movements that could be alleged to be the result of fraudulent activity from the broader noise generated by a market that could swing 5% in a single day."

One of the study's co-authors said the intensity of the litigation came as somewhat of a surprise.

"I think there's a sense that everybody understood that here was great deal of litigation against the financial services industry, but no one has previously documented that the intensity of this litigation was unprecedented," said Joseph Grundfest, professor of law and business at Stanford Law School and co-director of the Palo Alto, Calif.-based Rock Center for Corporate Governance at Stanford, in an interview.

The number of new class action suits against large financial services companies could wane, though, said Mr. Grundfest, a former commissioner of the Securities and Exchange Commission.

"So many financial services companies have been sued already that there are few major firms left to sue," Mr. Grundfest said. "Even if the credit crunch gets worse," it's unlikely that many additional major financial services companies will be named in suits "because they're simply not there. Complaints will be amended and damage claims may grow, but the list of major defendants is already set," he said.

"If there's going to be an expansion, it's going to be among the midsize or smaller cap firms," he said.

Securities Class Action Filings, 2008: A Year in Review was prepared by the Stanford Law School in cooperation with Boston-based Cornerstone Research.

The full report is available at http://securities.stanford.edu.

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