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PwC Study Shows Lull in Securities Class-Action Filings

Melissa Klein Aguilar | April 6, 2010

Companies faced fewer federal securities class action lawsuits in 2009, but they shouldn't necessarily expect that trend to continue in the year ahead.

That's one of the takeaways from a report by PricewaterhouseCoopers detailing securities class-action lawsuit filings and settlements for 2009.

Overall, the total number of federal securities class-action lawsuits filed fell to 155 in 2009, down from 210 in 2008. That's principally due to the decline in financial crisis-related filings, which fell by almost half, from 99 in 2008 to 51 last year, says Grace Lamont, author of the report and leader of PwC's U.S. securities litigation and investigations practice.

In 2008, crisis-related filings were steady each quarter, but in 2009, they declined in each quarter, starting at 25 in the first quarter, and decreasing to two in Q4, which may suggest that 2008 was the high water mark for those filings, according to the 2009 PwC Securities Litigation Study.

However, the study cautions companies not to get too excited about the drop. "The decline may simply be a lull as the plaintiffs' bar refocuses following two years of intense financial-crisis-related filings," the report states. As the economy and the financial sector, in particular, return to stability, other sectors may find themselves targeted by the plaintiffs' bar.

"We should prepare for more aggressive enforcement, a heightened focus on individuals, and a potential widening of the liability net in 2010," Lamont says.

For the second straight year, and only the second time since the passage of the 1995 Private Securities Litigation Reform Act, financial services companies were by far the most frequently sued sector, accounting for about 41 percent of total filings in 2009, down from 48 percent a year earlier.

While disclosure-related cases continued to increase, the percentage of accounting-related cases fell to a post-PSLRA low of 37, compared with 41 percent of filings in 2008, and well below the average of 59 percent of filings since the passage of PSLRA.

Lamont says one possible reason for the decline may be the impact of the 2008 Supreme Court decision in Stoneridge Investment Partners v Scientific Atlanta, which made it more difficult to bring cases.

Still, in dollar terms, the average accounting-related settlements outpaced non-accounting-related settlements in 2009 by 69 percent. Those settlements totaled $2.3 billion or about 74 percent of the year's total settlement value, and seven of the Top 10 settlements were accounting-related cases.

lamontLamont says the "place to watch in the coming year and years" is settlements of non-accounting related cases, particularly crisis-related cases, because of the magnitude of the losses claimed. She predicts "more equilibrium, if not a reversal" between the settlement values in accounting and non-accounting related case settlements.

The 93 total settlements in 2009 had a combined value of $3.1 billion, compared to $3.9 billion total for the 95 settlements in 2008, a decrease of 21 percent. The average settlement value in 2009 was 20 percent lower than in 2008, but was still higher than the average over the last 10 years.

Meanwhile, institutional investors' involvement as lead plaintiffs in filings, which rose to a high of 60 percent (101 filings) of total cases filed in 2005, continued its slow but steady decline, dropping to 48 percent of total filings in 2009, down from 50 percent in 2008, and below the 52 percent average recorded since 2002. Lamont says one possible reason is that some institutional investors might be opting out of class actions to try to get greater settlements on their own.

Directors and officers continued to be named in the majority of filings during 2009, however, filings against the offices of chief executive officer, chief financial officer, and chairman decreased for the second consecutive year.

Still, Lamont notes that new SEC litigation approaches in some cases in 2009, such as the civil action filed against former CSK Auto Corp. CEO Maynard Jenkins, and a settled action against Nature's Sunshine CEO and former CFO cases, focus on directors' and officers' individual responsibility. "That's an area where directors and officers have to watch out," she says.

The study also notes that the Department of Justice reported 189 major corporate fraud investigations in process by the end of 2009, 18 of which have losses of more than $1 billion, and the SEC said it opened 54 more investigations than in 2008.

The full report will be available here.