It is no surprise that federal securities class action filings increased in 2008 over the previous year’s levels given the upheaval in the financial markets last year. But the enormity of the hit the financial services sector took in terms of filings is notable and may have implications for future litigation, according to Securities Class Action Filings–2008: A Year in Review, an annual report by Stanford Law School Securities Class Action Clearinghouse, with Cornerstone Research.
Almost a whopping third of all large financial firms were a named defendant in securities class actions filed in 2008, the survey found. The financial firms named as defendants during the year represented more than half of the sector’s total market capitalization.
A total of 210 federal securities class actions were filed in 2008, a 19% increase over the 176 actions filed in 2007. Almost half of the 2008 litigation activity, or 103 actions, involved firms in the financial services sector. The subprime/liquidity crisis was associated with 97 federal securities class actions.
The maximum dollar loss (MDL) for 2008 claims was $856 billion, 27% higher than the year before. Financial services firms represented 46% of MDL in 2008.
Are You Next?
One of the most interesting points gleaned from this activity is not the number of filings itself, but a possible turn to new defendants. “The data suggests an intriguing possibility that the pool of major financial services defendants might be getting fished out. Many major financial services firms have already been sued and plaintiffs may be choosing to focus on filing amendments to existing complaints rather than initiating new ones,” remarked Professor Joseph Grundfest, director of the Stanford Law School’s clearinghouse, and a former SEC Commissioner, in prepared commentary on the report.
Grundfest hypothesized in comments to Investment Advisor that since there are very few large-cap firms left to go after, “if there is going to be activity this year, it is going to be against the smaller-cap firms.”
Another possibility is that “litigation activity against the financial sector may decline [this] year because the supply of new defendants might be drying up, not necessarily because plaintiffs believe there is less fraud.”
Grundfest’s partner in the study, Dr. John Gould, a VP at Cornerstone Research, which has offices in Boston, Washington, and elsewhere, notes a change from tradition–complaints did not spike in the second half of 2008 despite the exponential increase in market volatility
However, Gould offers a one-time explanation “that market volatility has been so large that plaintiffs found it difficult to isolate company-specific stock movements from the broader noise generated by the volatile market,” according to prepared comments on the report.