Class action securities suits drop to 10-year low

Though midyear 2006, fewer securities fraud class-action suits were filed than during any six-month period since the end of 1996, according to a study by the Stanford Law School Securities Class Action Clearinghouse of Palo Alto, Calif., in cooperation with Cornerstone Research of Boston.

The annualized estimate of 123 filings for 2006--based on the 61 new filings during the first six months of the year--represents a 36% drop from the historical average of 194 filings a year from 1996 through 2005, the study reports.

Since then, the frequency rate has dropped further, according to the researchers. Through the third week of October, 97 cases had been filed, which is fewer than 119 cases on an annualized basis.

The frequency of filings also dropped in 2005 to 176 from 213 in 2004, according to the clearinghouse and Cornerstone.

Tempering that positive news is climbing claim severity, which has continued unabated for a decade since the enactment of the Private Securities Litigation Reform Act, which was designed to prevent frivolous litigation.

The severity of settlements, however, depends on who is measuring them and which extraordinary cases they exclude from their figures to craft what they consider a true picture of claim severity.

For example, according to the Stanford Clearinghouse and Cornerstone, settlements on average last year spiked 15.9% to $28.5 million from $24.6 million in 2004. But, according to PricewaterhouseCoopers L.L.P. of New York, the average settlement was much worse--ballooning 156% to $71.1 million from $27.8 million a year earlier.

The two organizations are a little closer on their measurements of the median average, or the value at which an equal number of cases settled for more or for less. Stanford Clearinghouse and Cornerstone estimate that figure at $7.5 million in 2005, which is a 25% increase from $6 million in 2004. PwC estimates the 2005 median average at $9.25 million, which is a 37% jump from $6.75 million in 2004.