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Securities Fraud Lawsuits Slide As Credit Crisis Eases

By | January 5, 2010

U.S. securities fraud lawsuits slid in 2009 as stocks rose and the credit crisis eased.

Investors filed 169 prospective securities class-action lawsuits in 2009, down 24 percent from 223 in the prior year, according to a study set for release Tuesday by Stanford Law School and Cornerstone Research.

The lawsuits allege a maximum $634 billion of damages, down 24 percent from $839 billion a year earlier.

Financial companies were targeted in half of all cases, the same as in 2008, but the scope of alleged losses from the credit crisis declined as the year wore on.

“Just about every major financial firm that can be sued has been, so we’ve run out of inventory,” said Joseph Grundfest, a former U.S. Securities and Exchange Commission commissioner who oversees Stanford Law’s Securities Class Action Clearinghouse.

Experts said credit crisis claims are more likely to succeed when plaintiffs show that companies intended to defraud or deceive them, not simply that they guessed wrong about the economy or marketplace.

“The general notion that there are no legal damages because ‘the whole system fell apart’ is being shown to be false,” said Thomas Dubbs, a senior partner at Labaton Sucharow LLP in New York who represents pension funds in securities fraud cases.

Filings in 2009 were 14 percent below the annual average of 197 for the 1997-2008 period. Just 12 complaints alleged more than $10 billion of damages, down from 25 in 2008.

Credit crisis filings alleged $287 billion of damages, down nearly 38 percent from $459 billion in 2008 and just above the $276 billion in 2007, when the crisis began, the study says.

Claims related to alleged Ponzi schemes also declined over the course of the year.

DOWNWARD TREND

Last year was also quiet for big class-action settlements.

The largest, insurer UnitedHealth Group Inc.’s $925.5 million accord over stock options backdating, ranks 10th all-time, NERA Economic Consulting said. Energy company Enron Corp.’s $7.2 billion of settlements tops that list.

In 2010, senior NERA consultant Stephanie Plancich plans to monitor whether a recent pickup in cases over alleged failure to disclose risks in exchange-traded funds persists.

While the powerful stock market rally that began in March has reduced losses for many investors, that may not be true for those who sold when stock or bond prices were low.

“A rising stock market does not help investors who sold after a fraud was disclosed, and locked in their losses,” Dubbs said.

Experts expect the downward trend in new case filings to continue. “Given the trends in the second half of the year, it seems the level of litigation is likely to be down,” Grundfest said, “unless there is another shock to the system.”

FILING DELAYS

One unusual finding in the Cornerstone study is that it is taking longer for some lawsuits to be filed.

While firms typically file lawsuits four weeks after the market realizes fraud might have taken place, the average lag was 100 days, or about 14 weeks, in the second half of 2009.

Experts said this may have occurred because as law firms pursued financial sector claims in 2008 and early 2009, some may have delayed potentially weaker claims that are more likely to be dismissed or settled for lower amounts.

Law firm Coughlin Stoia Geller Rudman & Robbins LLP filed more than half the lawsuits with the longest lags, Cornerstone said. That firm did not return a request for comment.

(Reporting by Jonathan Stempel, editing by Matthew Lewis)

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