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Ponzi Schemes Prompt Commercial Insurance Industry Securities Litigation

Source: IFA

Posted on 08 May 2009

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Fueled by two large-scale Ponzi schemes, securities litigation in the commercial insurance industry is "surging," according to an analysis of first quarter activity, which showed an increase of 44 cases from the fourth quarter.

The first quarter saw 169 cases entered in the Master Significant Case and Action Database operated by Advisen, a market information provider to the commercial insurance industry.

In the fourth quarter of last year, 125 cases were entered, while one year ago, the first quarter saw 134 suit entered into the database.

If the pace continues, this year would see 676 securities cases, an increase of 38% over 2008. However, Advisen notes that cases related to New York financier Bernard Madoff and Stanford Financial Group were responsible for 30% of all securities cases in the first quarter, so the brisk pace of filings will likely abate through 2009.

“The Ponzi schemes – Madoff and Stanford – were the big drivers of securities suits filed in the first quarter,” said David K. Bradford, executive vice president and co-founder of Advisen, in a statement. “Those suits, along with a large number of sub-prime and credit crisis suits filed in the quarter, continue to pound the financial institution sector, much as was the case in 2008. It’s shaping up to be another tough year for financial institution D&O and E&O underwriters.”

Exactly 67 securities class-action suits were filed in the first quarter, an increase from the 53 cases the quarter before and 56 suits filed in the first quarter of 2008.

This activity translates to an annualized first quarter figure of 268 cases filed, which would surpass the relatively litigious year of 2004 with 263 suits and 23% higher than the 218 suits filed in 2008.

After securities class-action suits, securities fraud accounted for 34 suits filed in the first quarter, up from 19 in the last quarter of last year, but lower than the 54 reported in the third quarter of 2008. On an annualized basis, securities fraud cases filed in first quarter of this year represented 136 cases, flat with 2008 but down from 175 in 2007. Other types of cases filed in Q1 2009 were: breach of fiduciary duties (26), collective actions in non-US courts (20), derivative shareholder actions and other derivative cases (14), and others (8).

Advisen’s Bradford said in the past, securities class actions were the most common type of securities suit, but with the increase in breach of fiduciary liability, shareholder derivative and securities fraud suits, securities class action suits now represent less than 40% of filings.”

”We also are seeing a significant up-tick in the number of securities suits filed outside the US, many of which were triggered by the Madoff scandal,” he said.

The average securities settlement/award in the first quarter was similar to recent year averages, but the quarter was unusual in that the largest awards all were securities fraud suits. Securities fraud cases typically are filed by regulatory agencies such as the US Securities and Exchange Commission.

In the first quarter of this year, there were 76 cases settled or awarded at an average amount of $27.9 million, which is up slightly from the 2008 average of $25.5 million,” said John Molka III, senior industry analyst and author of the report. “Securities fraud cases represented the largest five events totaling $951.8 million including one case awarding $406.5 million to STMicroelectronics from Credit Suisse in an auction-rate securities case.”