Good news for public companies: Securities-related lawsuits are down.
They can thank stock market gains and the improving economy for the slowing pace of lawsuits.
Lawyers say that plaintiffs, meanwhile, are focusing their energy on bigger targets.
“I sense the big class action litigation houses going after bigger fish,” said Tom Crane, a partner of Costa Mesa law firm Rutan & Tucker LLP. “With all the big scandals like Enron and Adelphia, (law firms’) workload is up, so they can’t afford the staff to go after smaller fish.”
The number of class action securities fraud suits filed in federal court fell 19% to 216 in 2003, versus a year earlier, according to a report from the Stanford Law School Securities Class Action Clearinghouse and Menlo Park-based Cornerstone Research Inc.
This year, 171 suits have been filed through Sept. 15. That projects to activity that’s in line with last year.
Part of the reason for the falloff in activity is that stock markets posted solid gains last year, with the S & P; 500 index up 26%. That was a turnaround from a year earlier, when the S & P; fell 23%.
Not surprisingly, lawsuits tend to rise and fall inversely to the markets. When markets are buoyant, investors have less reason to complain. Many class-action suits are filed after big market losses and often are linked to accounting issues.
In general, class action suits are filed by one or several people on behalf of a larger group. Related to securities, the suits are filed by investors who say they were victimized by alleged fraud committed in connection with buying or selling stock.
Companies sued in 2003 lost more than $540 billion in market value during the period cited in the lawsuits. That’s down 72% from 2002’s record $1.9 trillion in losses, according to the report. (The dollar loss figures exclude suits that didn’t target companies specifically. Those include cases filed because of Wall Street analyst recommendations or mutual fund market timing.)
This year, as in past years, financial results remain a key driver of suits.
“Earnings restatements are still by far and away the biggest litigation trigger,” said Todd Gordinier, partner at Newport Beach-based law firm Stradling, Yocca, Carlson & Rauth LLP.
Orange County companies have faced their share of securities litigation. Database management software maker Quest Software Inc. is fighting a pair of shareholder lawsuits, while Foothill Ranch-based Wet Seal Inc. and San Clemente-based BioLase Technology Inc. also are targets.
Quest’s suits stem from this year’s restatement of 2003 financial results after the company discovered an error in the way foreign currency accounts were translated into U.S. dollars.
The suits allege that Quest officers and directors violated provisions of the Securities Exchange Act of 1934. The company is based in Irvine, but is moving to Aliso Viejo. Company officials said they plan to fight the claims.
“We are continuing to vigorously defend these claims; however, it is not possible for us to quantify the extent of our potential liability,” Quest said in a recent quarterly filing.
Revenue recognition is a common catalyst for securities litigation, said Bill Grenner, a partner at Seattle-based Preston, Gates & Ellis LLP’s Irvine office.
Misguided sales projections also can be fodder for class-action lawsuits, Grenner said.
“A lot of cases start where companies have inflated revenue projections,” he said. Investors typically flock to companies that raise their sales outlook.
Plaintiffs claim struggling clothing retailer Wet Seal overstated revenue projections earlier this year, as does a class action suit against dental laser maker BioLase.
While Wet Seal and BioLase are fairly small targets, Stradling’s Gordinier said more law firms are going after big companies.
“(Suits) against companies with a relatively low capitalization or relatively small profile,and relatively standard earnings disappointment announcements,are not being filed,” Gordinier said. “The cases that are being filed tend to be bigger problems and tend to involve a lot of complaints directed at the same thing.”
One reason: Large institutional investors are driving lawsuits, said Paul Konovalov, an associate at Latham & Watkins LLP in Costa Mesa.
“The presumption is that plaintiffs who suffered the largest economic damages are the best plaintiffs,” Konovalov said. “There are fewer cases where an individual would sue a company than 10 years ago. Instead you have large institutional firms and pension funds that are bringing the cases, and those cases tend to result in higher settlement values.”
While the total value of all class action settlements fell 20% to $2 billion in 2003, the average settlement was higher at $6.2 million.
About 5% of settlements last year were for more than $100 million.
“That’s a large number by any standard,” Konovalov said.
And plaintiff settlement demands for cases settled in 2003 averaged $1.5 billion, compared to $954 million in 2002.
“The dramatic increase in plaintiff-style damage calculations is almost certainly caused by the broad-based stock market decline that began in 2000,” according to Joseph Grundfest, Stanford Law School professor and a former commissioner of the Securities and Exchange Commission. Many cases that were filed in the wake of the 2000 stock market sell-off were settled last year.
One other notable finding from the Stanford-Cornerstone study: 53% of all settlements last year had New York-based law firm Milberg Weiss Bershad Hynes & Lerach LLP as lead or co-lead counsel for the plaintiffs. The firm subsequently split into New York’s Milberg Weiss Bershad & Schulman LLP and San Diego’s Lerach Coughlin Stoia Geller Rudman & Robbins LLP.
None of the next nine most active law firms was involved in more than 10% of class action cases.
