For months, securities industry lawyers have been saying they’ve got a lot on their plate. Now a new report confirms it.
The report released by Cornerstone Research and Stanford Law’s Securities Class Action Clearinghouse quantifies a significant rise in litigation. In the first six months of 2008, the financial services sector produced 63 class action filings, more than the total number from all of last year. The overwhelming majority stem from subprime issues, and filings in the securities sector are currently outpacing all other types of class actions combined.
“Pretty much all of the big players have been sued,” says Stanford law professor Joe Grundfest. His advise to lawyers: “Tool up on your knowledge of credit markets.”
The uptick isn’t just in quantity. The report also tracks the market cap losses that sparked the suits, finding that the median loss associated with suits filed since the beginning of the year reached $243 million. To put
that in perspective, the report notes that losses haven’t been so high since the flurry of class actions between 2000 and 2002.
But the current wave of litigation should play out differently from those before it. For one, the bar to winning a class action is higher following a Supreme Court decision last year. Tellabs v. Makor Issues & Rights, authored by Justice Ruth Bader Ginsburg, raised the standard for a securities complaint to survive a motion to dismiss.
Grundfest downplays the significance of the ruling to the current crop of suits “If you have a strong case that would have survived in the past, it would have survived today,” he says but concedes that the recent behavior of the overall market may aide defense attorneys. Given that financial institutions tanked in quick succession, plaintiffs will have more trouble demonstrating that losses were the result of deception.
“These losses were marketwide phenomena,” Grundfest says. “The fact that a lot of people did not understand the risks they were taking will be used to argue that mistakes were made but fraud was not committed.”