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Securities Fraud Litigation by the Numbers

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Washington, DCIt's not the record of 2002 when the Enron scandal drove the number of stock fraud lawsuits to 267 for just the second year in the New Millennium. However, 2007 looks like it's going to be a banner year just the same, and given the sub prime mess, it would surprise no one if 2008 appeared to be on track for securities arbitration.

Indeed, securities fraud class action lawsuits had dropped to a ten-year low in the US for 2006, according to a recent study conducted by the Stanford Law School Securities Class Action clearinghouse, and Cornerstone Research.

However, last year weighed in with 166 lawsuits against companies claiming stock fraud. That's above the 116 filed the previous year, which represents an increase of 43 per cent.

Stock NumbersPart of that rise is attributed to the sub prime mortgage implosion, which is not likely to be repeated in future years. Of the 166 claims filed for 2007, at least 32 were directly tied to the credit crisis, and the sub prime mortgage meltdown.

In total, there have been more than 2000 securities fraud lawsuits filed since 1996—that's when Congress passed legislation intended to curb securities fraud litigation. That law was undoubtedly fuelled by the 1993 Prudential settlement which, at the time, was expected to cost the insurer $371 million up front and potentially more down the road to settle claims surrounding the sale of limited partnerships to hundreds of thousands of investors back in the 1980s. After reaching the settlement with the Securities Exchange Commission and state securities regulators, the latter set up a hotline for investors. Over the course of three days the hotline was flooded with more then 11,100 calls from concerned and intrigued investors.

Of course, that story pales in comparison to the Enron saga. A total of $7.2 billion was recovered for frustrated investors, and the case led to the establishment of Sarbanes-Oxley, which imposes more stringent accounting practices.

The theme for 2006, as it turned out, was the issue of options backdating, the practice of retroactively setting low prices for stock options in an effort to increase their value to company executives when those stock options are exercised.

And, of course, 2007 will be known as the sub prime year. The sub prime claims are not expected to emerge in future years, but will certainly remain a factor for 2007.

According to the Stanford study, 100 companies were sued in the remaining six months of the year, versus 66 for January to June, suggesting again that the sub prime fallout was driving the litigation in the second half of the year.

According to RiskMetrics Group, only 17 securities fraud cases have actually gone to trial, out of the more than 2000 suits filed since 1996. That's because at the end of the day companies prefer to settle, rather than risking billions of dollars awarded at a single trial, for a single case.

The Stanford study found that amongst all suits filed over a five-year period from 1996 to 2001, 64 per cent were settled, with 35 per cent dismissed by the courts. Median time for resolution was about 33 months

Securities fraud cases typically involve allegations that negative performance information is hidden by companies in an effort to prop up stock prices. Once the rubber hits the road and the truth comes out, the artificially inflated stock drops in value, incurring losses for the investor.

This may prove to be the issue in numerous sub prime cases for 2007, as some companies are alleged to have hidden their exposure to sub prime mortgages, once it was obvious that the bloom was off the rose.

With so many companies, corporations and lenders spinning the sub prime wheel in the game of mortgage roulette, investors, shareholders and owners of 401(k) plans felt their losses when the sub prime bubble burst.

While company executives making those decisions will continue to be paid enormous salaries, many investors saving for retirement and incurring huge losses in the process will be irreparably set back in their retirement planning.

To further add salt to the wound, many poor-performing executives are jettisoned with lucrative golden handshakes.

Charles Prince, ex of Citigroup, is reported to have left with $29 million in severance.

And Stan O'Neal was ousted from Merrill Lynch, but not before collecting a reported $161 million.


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