Is The Golden Era of Securities Class-Action Suits Coming to An End?

[WSJ Law Blog]

It’s the little suit that made Bill Lerach (pictured) famous, scads of plaintiffs lawyers rich, and more than one corporate general counsel wonder why he ever went to law school in the first place. It’s the securities class-action lawsuit, specifically, the “10b-5″ suit, named after the SEC rule that prohibits fraud in the sale of stock. According to a new study, the old 10b-5 has seen better days.

According to the study, issued by Stanford Law School and Cornerstone Research, securities-fraud class-action suits fell 24 percent in 2009 as litigation related to the credit crunch began to dry up. Click here for the report; here for a story from Bloomberg.

“That pig has moved through the python,” Stanford Law School Professor Joseph Grundfest told Bloomberg. “All of the major cases that were profitable have already been filed,” he said. “The pool is in effect fished out.”

The number of companies sued on stock-fraud claims dropped to 169 from 223 in 2008, compared with an annual average of 197 cases over the previous decade, according to the study. Almost half of the decline stems from the lack of new grounds for suits related to credit losses, the researchers found. A drop in stock-market volatility was also a significant reason that the number of stock-fraud suits was relatively low in 2009, the study said.

Stock-fraud suits hit a record 266 in 2002 after an accounting scandal forced Enron to file what was then the biggest bankruptcy in U.S. history. The 2001 collapse of Enron and other accounting-fraud scandals led in part to passage of the Sarbanes-Oxley Act, which imposed stricter accounting rules.

Interestingly, the study found there was a longer delay from the time of the fraud, as alleged in complaints, to the filing of suits. More than 60 percent of claims with such a time-lag of more than six months were filed by Lerach’s former firm, Coughlin Stoia, according to the study.

According to Grundfest, the increase in old filings suggest that plaintiffs are trying to fill back up the pipeline by bringing old inventory to the fore. “The remarkable increase in old claims filed during 2009 suggests that plaintiffs are trying to fill the litigation pipeline by bringing lawsuits that were previously sitting in inventory,” Grundfest said in a statement. Until more lucrative financial sector suits dried up, he said, “they didn’t seem attractive enough to file.”

In the meantime, Coughlin Stoia isn’t conceding anything remotely close to a defeat. “No firm has had more success standing up for victimized investors, so Coughlin Stoia will stay busy as long as greedy corporations continue to commit fraud,” the firm said in a statement to Bloomberg.