Industry Hit by Class Actions

Fewer Nasdaq Firms Sued

Another instance where trends were bucked is that a larger number of companies listed on the NYSE and Amex exchanges were sued in 2008 than those listed on the Nasdaq. In 2008, 111 class actions were filed against firms listed on the NYSE/Amex compared to 68 against firms listed on Nasdaq.

Another finding rising from the fact that longstanding heavyweights were involved in 2008 litigation was that, of the companies included in the S&P 500 index, 9% were sued in a federal securities class action in 2008, compared to only 5% in 2007.

Of note is another possible trend–class actions filed in the last two years tend to have more claims under Section 11 of the Securities Act of 1933–underwriters as defendants, for example–but fewer under Section 10(b). Moreover, in complaints alleging specific accounting violations, there has been a shift in emphasis from allegations related to traditional income statement line items to those related to balance sheet components.

While at least one securities lawyer has suggested the increase in Section 11 claims is due to the landmark 2005 WorldCom decision, Grundfest told Investment Advisor he doesn't think this was the case. Instead, plaintiffs usually have an easier time with Section 11 claims, Grundfest avers.

Under securities law, Section 10(b) involves using any manipulative or deceptive device or contrivance in contravention of such rules and regulations. Section 11 involves the ability to sue every person who signed the registration statement; every person who was a director or partner in the issuer at the time of the filing of the part of the registration statement, is being or about to become a director, person performing similar functions, or partner; every accountant, engineer, or appraiser, or any person whose profession gives authority and consent in the registration statement; and every underwriter involved in the security's development.

David Michaels of the UCLA Law School published a paper on November 29, 2008, for the Rutgers Law Journal, relating the results of an empirical study analyzing whether and to what extent In re WorldCom, Inc. Securities Litigation impacted class action litigation brought under Section 11.

The study tests his hypothesis that WorldCom would encourage plaintiffs to increasingly turn to Section 11 "as a means to obtain settlement awards in securities class action cases." He argues that the WorldCom decision "made it virtually impossible for outside directors to successfully assert Section 11′s 'due diligence' defense–an affirmative defense."

Michaels believes that plaintiffs would in the future likely assert more Section 11 class actions relative to Rule 10b-5 (fraud) actions, and that is what appeared to happen in the past two years, according to the Stanford research.