Legal News

Making Sense of the Mini-Boom in Securities Suits

By Ashby Jones

One of the reasons the economic meltdown has hit law firms so hard, it seems, is because litigation — typically thought of as a counter-cyclical practice — for some reason stayed on a fairly low burn. But alas, that might be changing. And the reason just may have to do with the recession.

According to a report out by Advisen, securities-litigation filings for the first quarter of 2009 were up — way up — over both the same quarter a year ago and the fourth quarter of 2008. According to the study:

Securities cases tracked in Q1 2009 reached 169 filings, up from 125 in Q4 2008 and 134 a year earlier in Q1 2008.

and . . .

On an annualized basis, securities suits filed in Q1 2009 were at 676 cases, representing an increase of 38% from 490 cases filed in 2008.

Financial services firms were by far more likely to have a securities lawsuit filed against them in Q1 2009 than firms from any other sector. Out of the 169 securities suits filed in the first quarter, 108 of them named financial services firms, or 64% of all securities suits filed. Cases related to four topics resulted in 111 suits filed in the first quarter: Madoff (50); subprime/credit crisis (44); specialist improper trading (11); and Allen Stanford (6).

We checked in with a couple practitioners to get their takes on the figures — Seth Schwartz at Skadden, who works mostly on the defense side, and Jeffrey Barack, a plaintiff-side lawyer in Philadelphia. The two came at the issue from different perspectives.

Schwartz called the development “unsurprising.” “Look,” he said, “the most direct correlation with the filing of these suits is with drops in stock prices. People lose money and they want to have somebody pay them back.”

He called the trend a variation on an old theme. “The only thing that seems to change is the fact pattern — whether you’re talking about Madoff or subprime or something else. The triggering event is usually a stock drop, which gets followed by a lawsuit.”

Barack, however, said that in many instances, the work of the plaintiffs’ bar was largely being done for them — by the government. “Whether it’s probes made by Congress or the executive branch, they’ve uncovered a lot of evidence that they’ve made available to the public,” says Barack. “When investors read this stuff, they say ‘wow, this guy hurt me,’ and they call their lawyers.”

Barack says, however, that every stock drop does not a lawsuit make. “I have this conversation with people all the time, people who just want to run out and sue somebody,” he says. “I tell them that it’s not always a fraud, sometimes it’s just market conditions and that’s just the way things go.”

We asked Schwartz about settlements. In the last several months, folks on the defense side have given us a lot of conflicting information and theories about settlements — some say you settle early in the throes of a recession, in order to minimize exposure. Others would rather delay a big settlement payout until the economy — and the balance sheet — improves.

From where he sits, Schwartz said he hadn’t seen too much of a shift either way. “It hasn’t really changed,” he says. “As a general matter, in large litigations, the amount at stake is so high — the plaintiff is looking for the sun and the moon — it’s impossible to make minds meet. It typically takes some time, and a little discovery, before the both the plaintiff and, frankly, the defendant, start to take a more realistic view.”

Full post as published by Law Blog - WSJ.com on May 06, 2009 (boomark / email).