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A Look Back at 2007 Trends
After an 18-month lull, federal securities class-action filings rebounded in 2007--thanks in part to a flood of subprime-related lawsuits by investors in the second half of the year. According to a new report by NERA Economic Consulting, an estimated 207 new securities cases were filed in 2007, up 58 percent from 131 in 2006--the lowest total in a decade. (NERA based its year-end estimate on new case filings as of Dec. 15). The 2007 total is comparable to the 205 lawsuits filed in 2005, but it still trails the historical average of 234 between 1998 and 2004. Analysts at Cornerstone Research found a similar upward trend, but they report lower numbers. Cornerstone tracked 166 new federal cases in 2007, a 43 percent increase from 2006. The Cornerstone report (which was prepared with the Stanford Law School) can be found here. The Cornerstone researchers noted that that the new filings in 2007 were still less than the historical average of 194 and that the "core" litigation (excluding subprime and backdating cases) rate remains low. SCAS data indicates that 199 federal lawsuits were filed in 2007; eight of those cases were filed by the Securities and Exchange Commission. NERA estimated that 38 of the 2007 cases arose from the meltdown of the subprime mortgage market, while Cornerstone documented 32 of these lawsuits. The rate of those case filings has accelerated in the second half of the year as more Wall Street firms, mortgage lenders, and builders reported significant losses. According to NERA, the first subprime-related case was filed on Feb. 8, and nine such cases were filed before June 30. During the last six months of the year, 29 subprime cases were filed. As the NERA researchers pointed out, the glut of subprime cases was not the only contributor to the increase in new filings. Standard federal filings (which excludes subprime or options backdating cases) increased from 109 cases in 2006 to 151 in 2007. The Cornerstone report noted that "the increase in filings
in the second half of 2007 coincided with an increase in volatility of the
U.S. stock market from the historically low levels that prevailed in 2006
and the Another notable development was that more foreign companies were sued in U.S. courts in 2007. Twenty-six foreign firms were sued, up from 15 the year before, according to NERA. The number of standard cases, 26, against foreign issuers were the second-highest since 1996, trailing only the 30 standard cases filed in 2004. During 2007, 68 lawsuits were filed in federal courts overseen by the New York-based U.S. Court of Appeals for the Second Circuit, NERA reported. Another 54 were filed in the Ninth Circuit, which includes California and Pacific Coast states. These two judicial circuits traditionally have received the majority of case filings. Meanwhile, settlement levels reached new highs in 2007. The average accord (which excludes settlements over $1 billion and tentative agreements) was $33.2 million, up from $22.7 million in 2006, according to NERA. The median settlement also reached a new record of $9.6 million, up from $7 million the year before. The median settlement increased even though the median investor loss in settled cases declined from $407 million in 2006 to $310 million in 2007. The 2007 median loss also was lower than the median losses in 2004 and 2005. The median 2007 settlement amounted to 2.4 percent of the median investor losses, which is comparable to other years since 2002. However, the median investor loss in newly filed cases increased to $355 million, the highest in three years, which "is a signal that the settlements associated with these new cases might remain high," the NERA researchers wrote. Will the Surge in New Filings
Continue? In the near term, it appears that there will be significant number of securities lawsuits this year as more companies report losses from investments in mortgage-backed securities and other collateralized debt obligations (CDOs). As compared to the wave of lawsuits against technology firms early this decade, a wider group of defendants have been sued, including insurers, bond funds, rating agencies, and homebuilders. In the past six weeks, UBS, Freddie Mac, HomeBanc, and Security Capital Assurance have been sued. Investors also have sued a mutual fund management company, Morgan Asset Management, over losses by the Regions Morgan Keegan funds. First Republic Bank investors have sued Merrill Lynch, alleging that the Wall Street firm failed to fully disclose subprime-related losses before shareholders approved a $1.8 billion sale of the banking company to Merrill. Financial Week predicts that institutional investors will bring more cases in 2008 against Wall Street firms that underwrote and securitized CDOs, rather than just the firms that originated those securities. "Practically every day there are more companies announcing more write-offs in the multibillions of dollars," Stanley Bernstein, a senior partner with Bernstein Liebhard & Lifshitz, who represents investors, told The Wall Street Journal. "It's clear the situation has not revealed itself fully." International shareholders also are filing claims. According
to Financial Week, municipal and charitable investors in New
South Wales, Australia, have sued Grange Securities,
which marketed CDOs originated by Lehman
Brothers. "To be sure, it will take several more years’ worth of data
to be able to assert with any real statistical confidence that there is a
decline in the filing rate that can be attributed to a reduction in the
incidence of alleged frauds, but the data to date are not-inconsistent
with that hypothesis," Grundfest wrote in the Cornerstone report. "Indeed,
emerging academic literature suggests that managements have become more
conservative and accurate in reporting financial results since the
Enron and WorldCom scandals. Those
findings are quite consistent with the fraud reduction
hypothesis."
TENTATIVE SETTLEMENTS Martek Biosciences Martek, based in Columbia, Maryland, develops dietary supplements for use in infant formula and health food products. For more details, see the SCAS Web site by clicking here Biovail Biovail, headquartered in Mississauga, Ontario, is a pharmaceutical company that develops drug-delivery technologies to improve the effectiveness of medicines. For more details, see the SCAS Web site by clicking here Refco Refco, now owned by MF Global, provided execution and clearing services for exchange-trade derivatives and brokerage services in the fixed income and foreign exchange markets. For more details, see the SCAS Web site by clicking here Other recent tentative settlements include: Xethanol and American Tower. DISMISSALS Winn-Dixie StoresA federal judge in the Middle District of Florida has dismissed a lawsuit filed by investors who purchased the company’s shares from Aug. 7, 2002, to Jan. 29, 2004. The company is a food retailer that operates under the Winn-Dixie and Winn-Dixie Marketplace names. For more details, see the SCAS Web site by clicking here Redback NetworksA federal judge in the Northern District of California has dismissed a lawsuit filed by Redback investors in December 2003. The complaint alleged that the company issued a series of false and misleading statements that caused Redback's stock to trade at artificially inflated levels. Redback provides edge routers and other equipment that telecommunications companies and Internet service providers use to deliver broadband services to subscribers. For more details, see the SCAS Web site by clicking here Other dismissals include: Equity Office Properties Trust. TENTATIVE DISMISSALS Investor lawsuits against BEA Systems and IndyMac Bancorp have been dismissed without prejudice. The plaintiffs in both cases will have an opportunity to file an amended complaint before the dismissals become final.
Funds recently have been recently disbursed (or approved for disbursal) in the following cases:
Tyco Settlement and Record Legal
Fee Request Approved On Dec. 19, a federal judge approved a $3.2 billion
settlement for Tyco International investors that includes
a record $460 million in attorneys’ fees. CA Investors Told to Return $50
Million in Settlement Payments The investors, which include many institutions, were overpaid by about $50 million total (or about $16,700 on average) because of an error by Gilardi & Co., a settlement administration firm, according to the Journal. The newspaper reported that Gilardi realized after issuing $289 million in settlement checks that it had failed to pay 2,000 investors, which resulted in the other investors receiving overpayments. U.S. District Judge I. Leo Glasser in Brooklyn, New York, has given the investors until Jan. 4 to return the overpayments. The settlement stems from a criminal accounting fraud case against the company and its former executives. The Islandia, N.Y.-based business software company was known as Computer Associates International. Judge Rejects Attorneys’ Fee
Request in Chiron Case The settlement arose from an investor lawsuit that claimed that Chiron, which is now owned by Novartis, failed to properly disclose production problems at a U.K. vaccine plant during the 2004 flu vaccine shortage in the United States. The lead plaintiff is the International Union of Operating Engineers Local No. 825 Pension Fund. U.S. District Judge Vaughn Walker criticized the fee
request, which would amount to 25 percent of the $30 million settlement,
as too high. The judge said the fee request would amount to “eight to 10
times” the law firm’s normal hourly fees, while noting that the normal
multiplier for class counsel is between one and four, according to The
Recorder, a San Francisco legal newspaper. Walker has been critical of Milberg Weiss in the past. In 2000, he rejected a lead plaintiff request by a group of Copper Mountain Networks investors represented by Milberg, according to the San Francisco Chronicle. The judge criticized Milberg’s arrangement to be paid up to 30 percent of any recovery, and pointed out that a smaller firm had offered to represent investors for half that fee. That ruling was later overturned by a federal appeals court. In other cases, Walker has held auctions to select lead counsel based on the lowest fee offered. Conrad Black Sentenced to
Prison His sentence was shorter than the eight-year term specified
by federal guidelines, according to the Associated Press. Prosecutors, who
argued that Black had shown no remorse for his crimes, asked U.S. District
Judge Judy St. Eve to impose more than a 20-year prison term. Black was
ordered to pay a $125,000 fine and forfeit $6.1 million, according to
Toronto's Globe and Mail newspaper. The Canadian-born media tycoon was prosecuted after shareholders questioned the use of non-compete agreements by Black and other executives to collect pocket millions of dollars from buyers of Hollinger newspapers from 1998 to 2001. Prosecutors claimed the payments were a "money grab" and said the funds should have gone to Hollinger shareholders. Among the institutional investors that questioned the payments or Hollinger's governance practices were Tweedy, Browne Co., Cardinal Capital Management, and Omega Advisors. According to evidence presented at his trial, Black originally dismissed these concerns as part of an "epidemic of shareholder idiocy," and called corporate governance a "fad," Bloomberg News reported. Chicago-based Hollinger is now known as the Sun-Times Media Group.
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