Class-action federal securities fraud cases on the rise

Federal securities fraud class-action cases rose in the second half of 2010, according to a report prepared by the Stanford Law School in cooperation with Cornerstone Research. The report shows 104 class-action cases alleging federal securities fraud were filed in the second half of the year, up from 72 filings in the first six months of the year. For the full year, there were 176 filings, a 4.8% increase from 168 filings in 2009, but 9.7% below the annual average of 195 filings between 1997 and 2009. The number of lawsuits alleging disclosure violations in merger-and-acquisition transactions increased to 40 filings in 2010 from seven in 2009, a six-fold increase. “The sharp increase in federal litigation alleging disclosure violations in M&A transactions suggests that plaintiff lawyers are scrambling for new business as traditional fraud cases seem to be on the decline,” said Professor Joseph Grundfest, director of the Stanford Law School Securities Class Action Clearinghouse. Filing activity also spiked against Chinese companies. In 2010, Chinese issuers were named in 12 filings, or 42.9% of all filings against foreign issuers. Filings against foreign issuers accounted for 15.9% of all filings, among the highest rate ever observed. “The spike in litigation against Chinese issuers presents an interesting challenge for investors and regulators alike. It’s impossible to deny China’s ascending importance as a global market force, but tensions may well arise as some Chinese issuers struggle to conform to Western market norms and others might engage in outright fraud,” the report said. President Obama and Chinese President Hu Jintao met this week to discuss friction points, including economic and business issues. Filings related to the credit crisis were sharply lower with just 13 such filings in 2010, a 76.4% decrease from 55 in 2009. Credit-crisis filings in 2010 represented just 7.4% of all filings compared with 32.7% in 2009. Settlement rates have been lower for credit-crisis filings compared with noncredit-crisis filings, while the dismissal rates are similar between the two are similar. Filings against financial companies also declined. Standard & Poor’s data show that 10.3% of S&P 500 companies in the financials sector were named defendants in a class action in 2010 compared with the 10-year historical average of 11.8%. Write to Kerry Curry. Follow her on Twitter @communicatorKLC.

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