U.S. Securities Suits Fall Even With Boost in Chinese Company, M&A Cases
Securities-fraud class-action lawsuits dropped the first six months of this year from the latter half of 2010, even with a boost from a wave of new cases targeting Chinese reverse mergers, according to a study.
The number of firms sued in securities-fraud suits fell to 94 from 104 in the previous six months, according to the study, released today by Stanford Law School’s Securities Class Action Clearinghouse and Cornerstone Research.
The tally was bolstered by suits involving mergers and acquisitions and claims against Chinese companies that acquired U.S. shell companies for the purpose of trading on U.S. stock exchanges. Together, those complaints accounted for almost half the filings, the study said.
“Basically we’re looking at a low level of fraud claims based on cooked books or financial statements,” Stanford Law School Professor Joseph Grundfest, who directs the clearinghouse, said today in a phone interview. Such claims make up the majority of securities-fraud suits filed since the Private Securities Litigation Reform Act of 1995, according to data collected by the Stanford clearinghouse.
Securities-fraud claims against big companies, as a share of the total, also declined, according to the study. The percentage of complaints filed against companies in the Standard & Poor’s 500 Index fell to 8.5 percent of the total, down from 15.4 percent the previous six months, it said.
Market Cap Lost
The amount of money allegedly lost in the securities frauds, as measured by the amount of lost market capitalization during the time periods claimed in the suits, has also remained low, according to the study.
“Filings are going down if you take out the Chinese companies,” said Daniel Tyukody, a partner in the Los Angeles office of Goodwin Procter LLP who defends companies in securities fraud suits.
Tyukody said laws including the Sarbanes-Oxley Act of 2002 and the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act may have influenced companies to be more careful in their public filings and statements.
Securities-fraud suits typically involve claims by investors that companies hid negative information to keep their stock prices artificially high. One or more investors then sue for the loss in share value that follows when the information becomes public. The plaintiffs usually seek to represent the interests of all company investors in a class action, to increase their leverage and force more favorable settlements. All such cases must be filed in federal court.
2002 Record
Stock-fraud suits hit a record 266 in 2002 after an accounting scandal forced Enron Corp. to file what was then the biggest bankruptcy in U.S. history. The 2001 collapse of the energy trader led in part to passage of Sarbanes-Oxley, which imposed stricter accounting rules. Dodd-Frank, motivated in part by the financial crisis of the late 2000s, imposed new requirements on the financial services industry.
It may be difficult to win recoveries against the Chinese companies, which may not have assets in the U.S., several lawyers said.
“The plaintiffs may have an excellent case in theory, but there’s probably nothing to collect against,” said Tyukody.
U.S. companies targeted in the first six months of 2011 included Coinstar Inc., Bank of America Corp., Cisco Systems Inc., Office Depot Inc. and California Pizza Kitchen Inc., according to the Stanford group’s Web site.
Thomas Dubbs, a partner in the New York firm Labaton Sucharow LLP, said the Cornerstone study overstates the number of filings by counting the suits against the Chinese companies and a separate group of suits targeting mergers and acquisitions. The M&A claims should be considered as adjuncts to suits challenging the transactions in Delaware Chancery Court, said Dubbs, whose firm represents institutional investors in securities-fraud suits.
To contact the reporter on this story: Bob Van Voris in New York at rvanvoris@bloomberg.net.
To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.
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