Wednesday, October 31, 2007

OK to Say it Now: The Two-Year Securities Filing Lull is Over

In an earlier post (here), I questioned whether the two-year lull in securities class action filings had ended. I posed the question then because of the uptick in securities class action filings between August 1, 2007 and September 30, 2007. But with continued active filing levels during October 2007, the statement no longer has to put in the form of a question. It can be now be declared: the two-year lull is over.

According to my count, there were 24 new securities class action lawsuits filed in October 2007. That makes 61 companies sued for the first time between August 1, 2007 and October 31, 2007. If that three month filing rate were projected over a 12-month period, it would annualize to 244 filings (compared to the average of 202 annual filings during the period 1994 to 2004, according to Cornerstone Research). In other words, for the three solid months, the filings have been coming in at (or even arguably above) historical filing levels.

The final three days of October saw a particularly concentrated burst of new lawsuits, with eight companies sued for the first time in those three days alone:

Part of the increased activity is attributable to the subprime mortgage meltdown, but by no means all of it. For example, only two of the 24 October lawsuits (E*Trade and Merrill Lynch) clearly relate directly to the subprime mess. There are others that relate more generally to the strained real estate marketplace, but most of the October lawsuits have no apparent connection to subprime lending.

The 24 companies sued in October are in some ways a very diverse mix. Among the 24 companies, 21 different SIC Codes are represented. No SIC Code group had more than two companies represented. There are large companies (Merrill Lynch, Novartis) and small companies (Micrus Endovascular, Smart Online). It is interesting to note that five of the 24 companies are domiciled outside the United States, including three from China. Of the 19 remaining U.S. domiciled companies, four are based in Florida, four are based in California, two are from Connecticut and two are from New York.

Two of the three Chinese companies (LDK Solar and China Sunergy) are solar panel manufactures who launched their U.S IPOs to great fanfare earlier this year (about which refer here). Their fate (whether deserved or not) is not likely to help attract additional Chinese companies to offer their shares on U.S. exchanges. At least five of the new lawsuits (including the two against the Chinese solar panel manufacturers) contain allegations relating to the named companies’ recent IPOs.

While the view was expressed earlier this year (refer here), in light of the two-year stretch of reduced securities lawsuit filings, that perhaps there had been a "permanent shift" to a lower class action activity level, it now seems clear that there was nothing permanent about the lower filing levels that prevailed from mid-2005 to mid-2007. Recent turbulence in the financial markets, among other factors, clearly has led to renewed litigation activity at or even above historical levels. The likelihood of continued financial marketplace instability suggests that litigation levels may remain elevated for some time to come.

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