Friday, January 21, 2011

Securities: Class Action Claims Up

A study prepared by Stanford Law School in conjunction with Cornerstone Research reports that class action filings in federal court rose 4.8% between 2009 and 2010. Interestingly, the report says that the greatest growth in filings are cases alleging disclosure violations in merger and acquisition transactions. These violations replaced traditional fraud cases, which experienced a sharp decline in filings, as the most prominent types of cases.

The growth in merger and acquisition filings resulted primarily from a large increase in the number of cases filed naming Chinese issuers. Cases against Chinese firms amounted to almost 43% of the cases filed against all foreign issuers.

The reason for the larger numbers of cases involving Chinese issuers is not readily apparent. One explanation is that Chinese companies are new to the American market. As a result, the people operating these companies are not yet very familiar with Securities and Exchange Commission disclosure rules. In a sense this theory views the issue as a acculturation process. As the Chinese business community becomes more comfortable with U.S. regulations, problems with disclosure violations should cease. A less benign explanation for the number of cases is the possibility of outright fraud. The geographic distance could lead confidence artists to conclude that the likelihood of capture for fraud is remote, thus encouraging the risk of unlawful behavior.

The study also appears to show that effects of the credit crisis are wearing off, at least in the context of federal class action filings. Plaintiffs filed only 13 such cases in 2010, a 76.4% decrease from 2009.

It will be interesting to see if 2011 shows that merger and acquisition cases remain strong or whether the spurt in activity resulted from corporate economic contraction resulting from the recent financial crisis. If that is the case, we should see traditional fraud cases returning to the forefront of federal class action securities filings.

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