US Securities Class Action Lawsuits Increase in 2013

Disgruntled investors filed a total of 166 federal class-action securities lawsuits last year – a 9% increase on the figure of 152 suits in 2012, according to a joint study by financial and economic consulting firm Cornerstone Research and Stanford Law School.

Securities class-action lawsuits are filed on behalf of a large group of investors accusing a public company of making false and misleading statements, a violation of securities laws. To avoid such suits, US companies typically emphasise in their financial statements that ‘forward-looking statements’ are liable to change based on market conditions and various other factors.

Despite the increase in 2013, the number of suits was still 13% lower than the historical average of 191 filings annually since 1997. In addition, the amount of money at stake was sharply lower. Cornerstone estimated that in 2013 all of the suits combined could award as much as US$279bn to plaintiffs. The estimated total is the lowest level since 1998 and marks a 31% reduction from 2012 levels, and a 57% decline from the historical average.

Cornerstone’s research also reveals the extent of US securities fraud litigation in recent years. From1997 to 2013, investors filed more than 3,000 securities litigation cases, resulting in more than US$73bn in judgments and settlements and nearly US$17bn in fees.

A report by the
New York Times
suggested that the lower level of litigation could reflect no more than the declining number of companies publicly listed on the New York Stock Exchange (NYSE) and NASDAQ. A decrease of 46% since 1998 means that there are fewer constituents than at any time since at least the early 1990s, and also a greater proportion of smaller businesses as more major companies remove their shares via buybacks.

Another possible contributing factor was the relatively good performance of the US stock market last year. The Standard & Poor’s (S&P) 500-stock index closed 2013 up 29.6%, its best advance since 1997, and the Dow Jones industrial average added 26.5% over the year, its strongest performance since 1996, while the Nasdaq composite gained 38.3%.

“In a rising market, you simply don’t have losses that are as large,” said Joe Grundfest, a Stanford professor.

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