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January 23, 2013

Securities Class Action Clearinghouse Finds Fewer Class Actions in 2012, Some Whistleblower Activity

By Anne Sherry, J.D.

2012 saw a sharp decrease in federal securities class action filings over 2011, according to the report released January 23, 2013, by the Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research. The law school and consulting firm analyzed trends based on the 3500-plus federal securities class actions filed between 1996 and 2012. The 152 class actions filed last year represent an approximately 20-percent drop both from 2011's figure of 188 and from the historical average of 193.

Classification of complaints. M&A class actions in particular fell sharply, from 40 and 43 cases in 2010 and 2011, respectively, to only 13 in 2012. Chinese reverse merger (CRM) filings declined from 31 in 2011 to 10 in 2012, most of which were filed in the first half of the year. Eighty-five percent of class action claims filed were Rule 10b-5 claims; this represents the highest percentage since 2008. The report found that only nine percent of filings last year did not include Rule 10b-5, Section 11, or Section 12(2) claims, corresponding to the decline in M&A filings. Only 23 percent of filings alleged GAAP violations, compared to 37 percent in 2011. The report attributes this decrease to the decline in CRM filings and noted that SEC enforcement actions relating to financial fraud also declined.

Market capitalization losses. The report includes Disclosure Dollar Loss and Maximum Dollar Loss indices that give the picture of the information revealed to the market at or near the end of the class period. DDL is the dollar-value change in the defendant's market capitalization between the trading day immediately preceding the end of the class period and the trading day immediately following the end of the class period. MDL is the dollar-value change in the defendant's market capitalization from the trading day with the highest market cap during the class period to the trading day immediately following the end of the class period.

The total DDL in 2012 was $98 billion, down from both 2011 and from the historical average. There were four "mega DDL" filings — those that exceeded $5 billion in end-of-class market capitalization — in 2012, the same number as in 2011 but less than the historical average of six. The total MDL in 2012 was $405 billion, 21 percent below 2011 and 39 percent below the historical average. There were 10 "mega MDL" filings with losses exceeding $10 billion, one more than 2011, although the 2012 filings were 43 percent smaller in the aggregate than the 2011 filings.

Whistleblower and enforcement activity. The SEC has received 3001 tips since the inception of the Dodd-Frank whistleblower program and paid out its first reward in 2012. The report identifies the most common categories of tips as corporate disclosure and financials, offering fraud, and market manipulation, which together make up nearly half of all tips received. Looking forward, Professor Joseph Grundfest, the director of the Clearinghouse, questions whether the Dodd-Frank whistleblower program will translate into quality SEC enforcement actions and whether private parties will piggyback onto these enforcement complaints, unsettling the current "quiet patch" in private securities fraud litigation.

LitigationandEnforcement: DoddFrankAct Enforcement FraudManipulation

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