Bull Market Is A Bust For Securities Class Action Business

Jan 28 2014, 1:01am CST | by

It’s one of the strangest phenomena among the many strange things that humans do. When the stock market goes up, corporate fraudsters slack off. Instead of using a rising market to dump even more over-hyped stock on gullible investors, they shrink their illegal schemes.

That, at least, is one conclusion from the most recent Cornerstone Research review of securities class actions. Federal cases increased slightly to 165 last year, but one measure of the magnitude of fraud committed fell to its lowest level since 1998. Perhaps because of this relative dearth of opportunities, plaintiff lawyers were quicker on the trigger, with the median lag time between the end of the class period and the filing of a thoroughly researched, good-faith claim for damages dropping to 15 days. That’s one of the lowest lag times observed by Cornerstone, and 25 percent of the cases were filed  within five days of when corporate fraud reared its ugly head.

Cornerstone compiles the report each year in collaboration with the Stanford Securities Class Action Clearinghouse. The data provide an interesting window into an extremely lucrative business based on the idea that each time a stock price falls, fraudulent activity is to blame. What the data really show is “fraud” tends to rise when the stock market falls, and recede when the market goes up.

Class-action filings hit a recent peak of 233 in 2008, for example, including 100 related to financial firms. They fell to 152 in 2011 and rose to 165 last year.

The maximum dollar loss, or change in market value from the highest stock price during the class period to the price after the class period ended — usually the date of the announcement that caused the company’s stock price to fall — fell to $279 billion. That was the lowest since 1998 and well below the $816 billion in 2008.

Another factor limiting opportunities for lawyers accusing corporate executives of fraud is the number of publicly traded U.S. companies shrank by 46% since 1998. But the likelihood of getting sued also shrank, to one in 29 companies, or 3.4%, down from an average of 5.9% since the studies began.

If securities plaintiff lawyers are to be believed, their litigation serves as a deterrent to fraud. So maybe they’ve had an effect since 2008. But that doesn’t explain why fraud erupted that year, after plunging iin 2005 and 2006. Over the long haul, it looks like corporate fraud never really goes away, it just swings with the stock market.

Securities-fraud lawyers may face even tougher times ahead if the Supreme Court takes away their most powerful tool in Halliburton v. Erica P. John Fund. That case challenges the “fraud on the market” theory, under which all investors are presumed to have relied on a faulty market price to their detriment when a stock’s price subsequently falls. This theory is illogical for several reasons, the biggest one being the most obvious: Other than index funds, most investors buy a stock because they think the market price is wrong.

There were good reasons to doubt the fraud on the market theory when the Supreme Court embraced it in 1988. The court’s conservatives may finally accept the conclusions of modern finance theory and kill it this spring. Stock prices will continue to fall unexpectedly, but lawyers will no longer be able to claim that everybody who bought high and sold low was the victim of corporate fraud.

Source: Forbes Business

 
 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

FCC to propose pay-for-priority Internet standards
LOS ANGELES (AP) — The Federal Communications Commission is set to propose new open Internet rules that would allow content companies to pay for faster delivery over the so-called "last mile" connection to people's...
 
 
Zynga founder Pincus leaving operations role
NEW YORK (AP) — Online game maker Zynga's founder Mark Pincus is stepping down as chief product officer, less than a year after he was replaced as the company's CEO, as the company's sales slide. Zynga...
 
 
Prefabulous World: Energy-Efficient And Sustainable Homes Around The Globe
Recently, I interviewed Sheri Koones, author of the new book titled Prefabulous World: Energy-Efficient and Sustainable Homes Around the Globe, which features sophisticated examples of eco-friendly home design in...
 
 
Note to Airlines: Start Talking to Your Customers
When it comes to air travel, there’s certainly no shortage of bad customer stories. A report released last week by the U.S. PIRG Education Fund pored through five years of airline passenger complaints to the Department...
 
 
 

Latest from the Network

FCC to propose pay-for-priority Internet standards
LOS ANGELES (AP) — The Federal Communications Commission is set to propose new open Internet rules that would allow content companies to pay for faster delivery over the so-called "last mile" connection to people's...
Read more on Business Balla
 
Debra Messing has lost 20 pounds
Debra Messing feels great after losing 20 pounds. The former 'Will and Grace' star - who split from Daniel Zelman in June 2012 after 10 years of marriage, with whom she has 10-year-old son Roman - claims she didn't mean...
Read more on Celebrity Balla
 
Apple's iPad Rules The Enterprise. So When's The Second Act?
Apple's iPad is a fixture in the enterprise market, the company is proud to say. During the investor call for its second quarterly earnings Apple CEO Tim Cook noted–as he has in previous earnings calls–that 98% of the...
Read more on Apple Balla
 
Zynga founder Pincus leaving operations role
NEW YORK (AP) — Online game maker Zynga's founder Mark Pincus is stepping down as chief product officer, less than a year after he was replaced as the company's CEO, as the company's sales slide. Zynga...
Read more on Business Balla
 
Courteney Cox sparks engagement rumors
Courteney Cox has sparked rumors she is engaged to Johnny McDaid. The former 'Friends' actress, who started dating the Snow Patrol frontman in September, was spotted wearing a huge diamond ring on her engagement finger...
Read more on Celebrity Balla
 
Reports On The Death Of The iPad Are Greatly Exaggerated
Apple’s second quarter results were announced today by CEO Tim Cook (Mark Rogowsky has more coverage here on Forbes). As part of the earnings call, Cook talked about the sales and acceptance of the iPad. Sales are lower...
Read more on Apple Balla
 
Prefabulous World: Energy-Efficient And Sustainable Homes Around The Globe
Recently, I interviewed Sheri Koones, author of the new book titled Prefabulous World: Energy-Efficient and Sustainable Homes Around the Globe, which features sophisticated examples of eco-friendly home design in...
Read more on Business Balla
 
Note to Airlines: Start Talking to Your Customers
When it comes to air travel, there’s certainly no shortage of bad customer stories. A report released last week by the U.S. PIRG Education Fund pored through five years of airline passenger complaints to the Department...
Read more on Business Balla
 
Apple Splits Stock 7-For-1, Will Splash $130B In Cash On Investors
Talk about burying the lede. Apple announced a 7-for-1 stock split Wednesday, but not until the last sentence of a press release heralding an upsized capital return program to $130 billion and alongside the company’s...
Read more on Business Balla
 
John Baker's Desire2Learn Is Leading Education Transformation
A Series of Forbes Insights Profiles of Thought Leaders Changing the Business Landscape:  John Baker, Founder and CEO, Desire2Learn… Desire2Learn (D2L) is transforming education through technology.  The Waterloo,...
Read more on Business Balla
 
 
Auto Balla Sexy Balla Sport Balla TV Balla Politics Balla Movie Balla Apple Balla Business Balla Ad Balla Celebrity Balla