A joint study conducted by the Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research recently concluded that there were 166 securities class action lawsuits filed in federal courts nationwide last year. This is a 43% increase from 2006. The study attributes this large increase—which came after a two-year decline in the filing of securities class actions — directly to the subprime mortgage crisis.
The Second Circuit was a hotbed for securities class action filings, leading the nation for the second straight year with an increase in filings of 87% from 2006 and outpacing the annual average recorded over the past decade by almost 50%. The study found that the flurry of activity increased dramatically in the second half of 2007 as the subprime crisis began to unfold, causing volatility in the stock market. Thirty-two of the 166 securities class action filings were related to the subprime crisis; 23 were filed after June 30.
The study indicates that subprime mortgage actions have largely replaced what was the main source of new class action-related litigation in 2006, stock options backdating actions. According to the survey, only eight stock options backdating actions were filed in 200, compared to 24 in 2006.
The study further found that of the 2,218 securities class action lawsuits filed since 1996, 19% remain unresolved and, of the 81% that have been resolved, 41% were dismissed and 59% settled. Among the lawsuits that were dismissed, 73% occurred after the first ruling on a motion to dismiss but prior to a ruling on summary judgment, as did 60% of the settled cases.
In addition to the subprime crisis, the study identified other events in 2007 that will likely impact the class action market in 2008 and beyond:
- The Supreme Court's decision in Tellabs v. Makor Issues & Rights, 127 S.Ct. 2499 (2007), in which the court found that a complaint will survive only if "a reasonable person would deem the inference of [wrongful intent]…at least as compelling as any opposing inference one could draw from the facts alleged."
- The guilty plea entered in October by plaintiff's securities attorney William Lerach in connection with an alleged scheme to "bribe" potential plaintiffs in securities class-action suits.
- The Northern District of New York's decision in favor of the defendants in the JDS Uniphase class action, in which the plaintiffs were seeking more than $20 billion in damages as a result of alleged wrongdoing by the defendant company and its former executives.
Another recent development not identified in the report that may impact class action filings is the Supreme Court's decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., No. 06-43 (U.S. 2007), decided last week. The Supreme Court in Stoneridge upheld the dismissal of a securities class action lawsuit brought by the shareholders of Charter Communications, Inc. against two of Charter's suppliers, Motorola, Inc. and Scientific-Atlanta, Inc. under Section 10(b) of the Securities Exchange Act of 1934, finding that the plaintiffs failed to establish reliance on statements made by the defendants. For a copy of the Stoneridge decision, please click here. For our blog entry on the Stoneridge case, posted last week, please click here.