Securities Class-Action Suits Up Slightly in 2013

Angry investors filed more federal class-action securities lawsuits last year than in 2012. But investors have been angrier.

Plaintiffs filed 166 suits in 2013, up 9 percent when compared with the 152 suits filed in 2012, according to a new study from Cornerstone Research, a financial and economic consulting firm, and Stanford Law School. But that’s still 13 percent lower than the historical average of 191 filings annually since 1997.

One possible explanation? Fewer companies on the New York Stock Exchange and the NASDAQ mean fewer companies to target, researchers suggest. Companies on both exchanges have decreased by 46 percent since 1998.

But not everyone agrees with the theory.

“If there’s fraud, if you see stocks drop precipitously, there’ll be cases,” said Jacob Zamansky, a plaintiffs’ securities lawyer. “So I don’t think the number of listings makes any difference.”

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. It’s one reason financial statements include heavily lawyered warnings about how “forward-looking statements” are often subject to change based on market conditions and other factors.

While the amount of cases increases slightly last year, the amount of money at stake shrank drastically. In 2013, Cornerstone estimated that all the suits combined could award as much as $279 billion to plaintiffs, the lowest level since 1998. That represents a 31 percent drop from 2012 levels, and a 57 percent drop from the historical average.

The decrease could have had something to do with the fact that stock prices were up significantly in 2013. The Standard & Poor’s 500-stock index closed 2013 up 29.6 percent, its best advance since 1997, and the Dow Jones industrial average added 26.5 percent for the year, its strongest since 1996. The Nasdaq composite gained 38.3 percent.

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

But investor accusations in suits have pretty much mirrored the claims of years past. Nearly every complaint accused the company in question of misrepresenting financial documents. More than half said that firms issued false forward-looking statements, according to the report.

Securities fraud litigation has been a big business over the years. Between 1997 to 2013, investors filed more than 3,000 securities litigation cases, resulting in more than $73 billion in judgments and settlements and nearly $17 billion in fees, according to Cornerstone’s research.