Investors' Class-Action Lawsuits Drop Sharply

By Brooke A. Masters
Washington Post Staff Writer
Thursday, July 27, 2006

The number of new federal class-action lawsuits filed by disgruntled investors has dropped dramatically and is now at its lowest level since 1996, according to a new Stanford University study.

Only 61 new class-action shareholder lawsuits were filed in the first six months of 2006, compared with 111 in the first half of 2005. If the trend continues for the rest of the year, the 2006 totals will be 31 percent lower than the 182 lawsuits filed last year. The current six-month total is also 36 percent below the historical average for the entire 1996-2005 period, according to a report by the Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research.

Part of the decline almost certainly stems from the fact that the stock market was rising and had low volatility from 2005 through May 2006. Investors who are making money have little reason to sue.

In addition, the lawyers at the country's largest class-action firm, Milberg Weiss Bershad & Schulman LLP, have been distracted because the firm is under indictment for fraud and has been fighting efforts by some corporate defendants to have it removed as lead attorney.

But one of the study's authors thinks there may be another reason: Companies have cleaned up their acts in the wake of corporate scandals that included the collapse of Enron Corp. and WorldCom Inc.

"It's possible that improved governance may have reduced plaintiffs' ability to allege fraud," said Stanford law professor Joseph Grundfest, who heads the clearinghouse. Still, he added that he continues to believe that Congress's major effort to improve corporate accountability, the 2002 Sarbanes-Oxley law, was too far reaching and too expensive to implement. "We could have achieved the gains of Sarbanes-Oxley at significantly lower cost," he said.

This year's decline comes even as federal investigators are digging into allegations of improperly backdated stock options at more than 80 companies. Only eight class-action suits stemming from that probe were filed from January to June, the study said.

The researchers said they think the options investigation has had only a limited impact because some of the allegations are beyond the statute of limitations and other angry investors may have taken their cases to state court where, unlike in federal court, plaintiffs don't have to show that the stock price fell when the alleged fraud was revealed.

It's not clear whether shareholders will launch another volley of lawsuits in the wake of the stock market's recent decline. "I'd like to see another year of data before we say there's a permanent shift," said John Gould, a Cornerstone vice president who worked on the study.

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