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Crisis-Related Lawsuits Show a Decline

Posted on 28 Jul 2010

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A decline in lawsuits related to the credit crisis has pushed the volume of new federal securities cases toward pre-turmoil lows, according to two reports.

"The tide is going out...the securities fraud litigation wave stimulated by the credit crisis now appears to be history," said Joseph Grundfest, professor at Stanford Law School, which issued one of the reports jointly with Cornerstone Research on Tuesday.

Plaintiffs filed a total of 71 lawsuits seeking class-action status in federal courts during the first half of the year, of which eight were related to the crisis. That compares with 84 filings during the same period last year, which included 37 crisis-related complaints.

If this pace continues, there will be about 143 lawsuits by December, the lowest level since 2006, the year before the crisis hit.

While the flood of litigation is receding, it likely will be years before many cases get resolved. In recent years, securities lawsuits, typically brought against companies by investors alleging fraud that led to stock losses, have taken an average of three to four years to settle.

"Two-thirds of all credit-crisis-related cases are still pending," said Jordan Milev, senior consultant at NERA Economic Consulting, which on Tuesday produced another study that found the overall volume of lawsuits down to 2007 levels.

As long as the current pace continues, the NERA study projects plaintiffs will file about 202 federal securities class-action cases by the end of the year, of which about 34 are expected to be related to the crisis compared with 57 last year and 103 in 2008, the recent peak year for such lawsuits, according to its study.

Declines in crisis litigation were partly offset, the study said, by growth in other types of lawsuits, including those stemming from the Gulf of Mexico oil spill.

Recent judicial and legislative developments, including a Supreme Court ruling limiting the reach of U.S. securities laws, could have a greater role in shaping securities litigation in the future, according to the report.

The average securities class-action settlement in the first half of 2010 was $209 million, higher than in any prior year, according to the NERA study, but that was largely influenced by a $7.2 billion Enron settlement that was finalized in February. Excluding the Enron settlement, the average settlement was $24 million, compared with the $42 million average in 2009 and slightly lower than the 2003-2010 average settlement of $28.7 million.

Plaintiffs' attorneys earned a total of $902 million in fees and expenses, including fees in connection with the Enron settlement, during the first half of the year, the study said.