Securities Class Actions Plummet Through Mid-2009

The number of federal securities class action cases filed in the first six months of 2009 dropped by 22.3% over a year earlier, according to the latest data in an annual survey of the topic.

A news release about Securities Class Action Filings—2009: Mid-Year Assessment said the study found 87 such cases filed between January and June 2009, compared to 112 for the same period in 2008. Only 35 filings were observed in the second quarter, the lowest quarterly total since the first quarter of 2007. The study, co-sponsored by the Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research, said that if the filing rate for the first half of the year continues, then 174 securities class actions will be filed this year, a 22.3% decrease from 2008 and an 11.7% decrease from the annual average for the 12 year period ending December 2008.

About half of the filings so far in 2009 were driven by the credit crisis, with 42 filings in the first half of the year containing allegations related to the credit crisis. There were 15 filings related to Ponzi schemes thus far in 2009. The majority of these lawsuits, 11 filings, were on behalf of investors in Madoff funds, with most suits targeting so-called feeder funds, hedge funds, and other financial intermediaries that invested their clients’ money with Madoff.

“Securities litigation activity continues to be driven by claims against financial services firms, but all the large firms in the industry have already been sued,” Joseph Grundfest, director of the Stanford Law School Securities Class Action Clearinghouse, said in a statement. “Plaintiffs are therefore filing claims against the smaller number of smaller financial services firms yet to be sued.”

According to the announcement, financial services firms are defendants in 66.7% of the suits, an increase over the 50% share of all filings in 2008.

So far in 2009, 18 lawsuits have been filed against foreign-domiciled firms, representing 20.7% of the total. Filings against foreign firms are concentrated in the financial sector, as 41.9% of the filings in 2008 and 77.7% of the filings in the first half of 2009 were against financial firms.

According to the study, Disclosure Dollar Losses (DDL) totaled only $48 billion, well below the semi-annual average of $69 billion. Two-thirds of these losses are generated by two mega-DDL cases with DDLs in excess of $5 billion each.

Maximum Dollar Losses (MDL), however, totaled $429 billion, a 22.2% increase from the second half of 2008 and 20.5% above the semi-annual average. The median MDL was also 80.3% higher than the semi-annual average. There were seven mega MDL filings—lawsuits with an MDL of $10 billion or more—that accounted for $376 billion of MDL in the first half of 2009 and represent 87.6% of MDL in the first half of 2009, the largest share in the prior 12 years.

The dramatic decline in the number of class action filings is happening at the same time as a 43.7% decline from the fourth quarter of 2008 to the second quarter of 2009 in stock market volatility as measured by the Chicago Board Options Exchange Volatility Index (VIX).

The full report is available here.