- The Washington Times - Monday, August 6, 2007

Shareholders are showing their happiness with the stock market’s strong performance over the past two years by suing corporations less in class-action lawsuits, according to a new Stanford Law School study.

Only 59 securities class-action lawsuits were filed in the first half of the year, compared with an average of 101 by midyear from 1996 through 2005.

Class actions are single lawsuits that join the claims of large numbers of people into one.

Corporate lawyers say fraud by executives, and investors’ frustration over losing their money are the most common reasons for the securities class-action lawsuits.

With the New York Stock Exchange near its record high in early July of 14,000, their frustration appears lower than normal … at least for now.

“If the market goes south, I would not be surprised to see the number of filings move back to the 200-per-year level,” said John Gould, vice president of Cornerstone Research, an economic analysis firm that contributed to the Stanford study.

Last year, securities class-actions lawsuits totaled 116. They peaked in the past 10 years with 240 in 1998, which some legal authorities blamed on lax anti-fraud enforcement until a government crackdown five years ago, after massive corporate fraud by major corporations such as Enron Corp. and WorldCom Inc.

“With increased enforcement activity by the [Securities and Exchange Commission] and Department of Justice, we have seen an increase in both the probability of detection and associated penalties,” said Joseph Grundfest, a Stanford Law School professor.

In its latest effort, the SEC said last week it is joining the enforcement branches for the New York Stock Exchange and the National Association of Securities Dealers, to avoid duplicating each other.

Although the number of big securities lawsuits is down, the total number of class actions is about the same, corporate lawyers said.

Of the30 blue-chip companies in the Dow Jones Industrial Average, 21 were sued in class-actions lawsuits in the past 10 years, according to a study by Kenneth Lehn, a University of Pittsburgh finance professor. The companies included Procter & Gamble, Johnson & Johnson and Intel.

Corporate lawyers say a drop in the number of securities lawsuits this year does not necessarily mean payouts are smaller.

The cost of the U.S. personal liability system increased by an average rate of 50 percent in each of the past 50 years, compared with 10 percent among European countries, according to econometric studies sponsored by Swiss Re, one of the world’s largest reinsurance companies.

Part of the incentive for large numbers of lawsuits or class actions appears to be the reward lawyers receive, said Richard Murray, chief claims strategist for the U.S. division of Swiss Re.

More than half of the compensation from U.S. lawsuits finances the plaintiffs’ legal expenses, compared with 15 percent among European Union countries, he said.

“That is simply an elephant in the living room that cannot be ignored,” Mr. Murray said.

Money from the biggest class-action settlement in history is just starting to be distributed to about 1.5 million investors who lost money when former Houston energy giant Enron declared bankruptcy in 2001. They claimed $40 billion in losses, but Enron and its bankers agreed to pay $7.2 billion to settle the class-action lawsuit. Other claims are still pending.

The second-largest class action settlement was $6.1 billion, approved by a federal judge in 2005 against WorldCom, a telecommunications company accused of accounting fraud, according to the Securities Class Action Clearinghouse at Stanford University.



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