“Sea Change” In Securities Class Action Litigation

Federal securities class action filings saw a moderate decline in the first half of 2011 as a drop in traditional claims and credit-crisis filings was countered by a rise in Chinese reverse mergers and M&A litigation.

According to the mid-year report from Stanford Law School and Cornerstone Research, a total of 94 federal securities fraud class actions were filed in the first half of the year, down 9.6 percent from the 104 filings in the second half of 2010.

Professor Joseph Grundfest, director of the Stanford Law School Securities Class Action Clearinghouse said there appears to be a sea change in the structure of the class action securities fraud litigation business:

“The traditional claims that U.S.-based companies have been cooking their books or hyping their stocks are in sharp decline.

“The new kid on the block is the claim alleging that Chinese-based issuers have made false financial statements. The question remains as to whether or not this litigation will lead to meaningful recovery for plaintiffs.”

There were just two credit-crisis filings in the first half of 2011. Meanwhile, Chinese reverse mergers and traditional M&A filings together accounted for 47.9 percent of all securities fraud class action complaints filed during the first six months of 2011, up from 32.7 percent in the last six months of 2010.

A key takeaway of the mid-year report is that only 8.5 percent of filings named companies in the S&P 500 Index, down from 15.4 percent in the second half of 2010.

Only one company in the S&P Financials sector, representing 1.2 percent of the sector, was named as a defendant in a class action in the first half of 2011, compared with the historical average of 11.7 percent of Financials sector firms for the 11 years ending December 2010.

Check out the D&O Diary Blog for in-depth analysis of the report.

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