Number of securities fraud suits rises slightly: study

The number of U.S. federal securities fraud class action lawsuits filed in 2004 rose 17%, but the loss in stock market capitalization for defendant firms shot up almost triple 2003 levels, according to a new study by the Stanford Law School and Cornerstone Research.
Last year saw 212 such suits filed, compared to 181 in 2003, but the “dollar disclosure loss” (the decline in market capitalization for defendant firms) grew to US$169 billion from US$58 over the same period.
Most of this rise in so-called DDL is attributable to just eight filings, in which each defendant saw losses in excess of US$5 billion. The overall level of DDL approached levels not seen since the stock market meltdown of 2000.
Many of 2004’s lawsuits stemmed from product market developments, while the number associated with accounting (GAAP) violations remained relatively stable, the study notes.
“Typically, a class action securities fraud lawsuit arises from allegations that the issuer lied about its financial performance,” says Prof. Joseph Grundfest of Stanford Law School. “This year, however, allegations relating to insurance industry sales practices at companies such as American International Group and Marsh & McLennan, and concerns about the safety of COX-2 inhibitors marketed by Merck and by Pfizer triggered some of the year’s largest lawsuits. These lawsuits do not allege the traditional form of misrepresentation yet they account for approximately 35% of 2004’s DDLs.”