Compliance May 4, 2009

Madoff-Related Suits Main Cause of Litigation Surge

Securities suits filed in the first quarter of 2009 were up significantly from the year before, with Bernard Madoff-related suits counting for a large chunk of them.
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Securities cases tracked in Advisen’s Master Significant Case and Action Database (MSCAd) in the first quarter of 2009 reached 169 filings, up from 125 in fourth quarter of 2008 and 134 in first quarter of 2008.

An Advisen report said that on an annualized basis, securities suits filed in the first quarter of 2009 were at 676 cases, representing an increase of 38% from 490 cases filed in 2008. Securities class action suits (SCAS) led the pack with 67 cases filed in the first quarter of 2009, up from 53 cases the quarter before and 56 cases a year earlier.

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Madoff-related cases were responsible for 30% of all securities cases in the first quarter (see “Union Sues Over Madoff Pension Losses’), and the sub-prime/credit crisis directly resulted in 26% of securities cases (see “Minn. Firm Slaps State Street with Subprime Mortgage Suit’).

After SCAS cases, securities fraud accounted for 34 suits filed, followed by breach of fiduciary duties (26); collective actions in non-US courts (20); derivative shareholder actions and other derivative cases (14); and others (8), the report said.

Financial services firms were by far more likely to have a securities lawsuit filed against them in the first quarter of 2009 than firms from any other sector. Out of the 169 securities suits filed in the first quarter, 108, or 64%, of them named financial services firms. If insurance companies are included, the number of suits filed against financial services firms rises to 117 suits, or 69%.

Advisen said the reason for the preponderance of suits filed against financial services firms is due to four types of related cases: the Madoff Ponzi scheme (50); subprime/credit crisis (44); specialist improper trading (11); and the Stanford Ponzi scheme (6).

Settlements Down in Q109

According to the Advisen report, in the first quarter of 2009, 76 cases were settled or awarded. The average settled/awarded amount for the quarter was $27.9 million, down significantly from $60.6 million in the fourth quarter of 2008 (see “Securities Class Action Settlements Lower in 2008’).

However, Advisen noted that the fourth quarter of 2008 was strongly influenced by two large SCAS settlements: one for $925.5 million against UnitedHealth Group (see “Court Gives Preliminary OK to UnitedHealth $900M Options Settlement’) and the other for $303 million against GMAC.

By type of suit, SCAS cases settled/awarded had an average amount of $12.1 million in the first quarter of 2009; derivative shareholder actions and other derivative cases were $10.2 million, and securities fraud had the highest average of $43.4 million.

The Advisen report is available here.

Products May 4, 2009

Diversified Releases Plan Review Document

Diversified Investment Advisors unveiled a plan review document to help plan sponsors keep track of their plans' effectiveness.

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A news release said the new offering includes a more detailed look at basic plan metrics, such as participation and average deferral rates, which may “highlight improvement opportunities.”

The document also provides specific measures allowing a plan sponsor to evaluate the success of a particular effort—for example, a targeted communications and education campaign to increase the contribution rate of a specific employee age group.

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While a typical plan review document might indicate that a plan’s average contribution rate is below the industry average, Diversified said its offering delves further into the data to see which employee population (i.e. gender, age, job classification) might fall short of a properly funded retirement.

“The new plan review is modular and can be prepared any time during the year, making it a flexible, diagnostic tool that allows Diversified’s account executives to collaborate with plan sponsors and their advisers in developing prescriptive, customized solutions for their plan,” said Peter Zummo, senior vice president, client relationship development, in the announcement.

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