Tuesday, July 21, 2009
The reasons behind the drop aren’t particularly hard to finger. According to this NLJ story, the decline is partly reflected in the fact that the largest financial firms — a big target of the latest wave of securities suits — were sued en masse in 2008, as the credit crunch and ensuing economic meltdown were in full swing. Another possible factor: securities-fraud suits tend to get filed in the wake of swift stock drops. While the market levels are still well down from highs hit in earlier in the decade, they’ve largely stabilized when compared to last year.
I want to suggest another possible explanation, first developed in this law review article back in 2006: What's Up on Stock Drops? Moench Revisited, 39 John Marshall L. Rev. 605 (2006). That article points out what I have often felt: ERISA breach of fiduciary class actions are easier to win than the securities class actions.
Here's what I wrote on this blog back in September 2008 about this:
I have written abut this type of stock drop litigation before. The issues at the forefront are how ERISA is overtaking securities as the litigation vehicle of choice by plaintiffs who suffer stock losses and how these cases almost never make it to trial because the firms being sued are forced to settle if certification of the class is granted by the court.
Given the financial pain being felt by everyone these days, and with little hope of an end being in sight, I would suspect courts to either cut down on certification of these classes or for a movement by the corporate lobby to amend ERISA to cut down on these types of suits.
These new empirical findings about securities suit convince more of this dynamic. It would be interesting to see whether the number of ERISA class actions have gone up this year. For more on this topic, see this article and my comments to it.