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2004 Securities Class
Action Case Filings

Class Action Securities Fraud Lawsuits Up 17%;
Dollar Disclosure Losses Nearly Triple

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John Gould, Ph.D.
Vice President
Cornerstone Research
See also:
2003 Securities Class Action Settlements
2004 Securities Class Action Settlements
2005 Securities Class Action Case Filings
2005 Securities Class Action Settlements
2006 Mid-Year Assessment: Securities Class Action Case Filings
2006 Securities Class Action Case Filings
2006 Securities Class Action Settlements

marginThe number of federal securities fraud class actions filed in 2004 increased only moderately from 2003 levels, rising to 212 companies sued from 181. However, the decline in stock market capitalization corresponding to these actions increased dramatically, according to a report released by the Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research. See: 2004: A Year in Review.

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Joseph A. Grundfest, Esq.
Professor, Law and Business
Stanford Law School

marginA significant index is the total decline in the market capitalization of the defendant firms from the trading day just before the end of the class period to the trading day immediately after the end of the class period, i.e., the "Disclosure Dollar Loss (DDL)," nearly tripled from $58 billion in 2003 to $169 billion for cases filed in 2004.

marginOnly eight filings produced this 192 percent increase in the DDL index; each defendant firm experienced disclosure dollar losses in excess of $5.0 billion. During all of 2003, there had only been one filing with a DDL in excess of $5.0 billion.

margin "It is remarkable that we have consistently seen around 200 filings a year for the past eight years," said Dr. John Gould, vice president of Cornerstone Research and contributor to the study. "In addition, it is surprising that the Dollar Disclosure Loss for this period tripled to approach the levels seen after the dramatic market decline in 2000."

marginThe number of lawsuits alleging violations of Generally Accepted Accounting Principles (GAAP) remained relatively constant in 2004, declining slightly to 102 (48%) in 2004 from 107 (59%) in 2003. "In addition, the order of the three most-frequently mentioned specific accounting allegations changed from 2003 to 2004. In 2004, the four most-commonly mentioned accounting allegations were revenue recognition (61 cases or 60 percent), overstatement of accounts receivable (17 cases or 17 percent), and overstatement of other assets or understatement of liabilites (15 cases or 15 percent each). In 2003, the most frequently-mentioned specific accounting allegation was overstatement of accounts receivable (60 cases or 56 percent), followed by revenue recognition (49 cases or 46 percent), and overstatement of other assets (24 or 22 percent) ."

margin"Typically, a class action securities fraud lawsuit arises from allegations that the issuer lied about its financial performance," explained Professor Joseph Grundfest of Stanford Law School, a former Commissioner of the Securities and Exchange Commission. "This year, however, allegations relating to insurance industry sales practices at companies such as American International Group and Marsh & McLennan, and concerns about the safety of COX-2 inhibitors marketed by Merck and by Pfizer triggered some of the year's largest lawsuits. These lawsuits do not allege the traditional form of misrepresentation yet they account for approximately 35 percent of 2004's Dollar Disclosure Losses."

marginPrevious experience is continued with the median 2004 maximum dollar loss and disclosure dollar loss for NYSE and Amex firms being significantly higher than the medians for NASDAQ firms. This finding is not surprising since the firms listed on the NYSE are typically larger than the firms listed on the NASDAQ.

marginThe top three industry sectors in 2004 in terms of number of issuers sued were Consumer Non-Cyclical, Technology, and Communications. The number of issuers sued in the technology sector nearly doubled over 2003 (19 versus 37 in 2004, a 95 percent increase). Energy sector filings almost tripled, increasing from three to eight. Of note, while the Communications sector was one of the three most-frequently sued in 2004, maximum dollar losses in the industry dropped nearly 80 percent from $240 million in 2003 to $51 million in 2004 reflecting a lower market capitalization decrease for the average communication company sued in 2004.

marginThe report also finds that the most active federal circuits as measured by the number of issuers sued in 2004 were: the Ninth Circuit (including California) with 64 filings, an 83 percent increase over 2003; the Second Circuit (including New York) with 45 filings; and the Eleventh Circuit (Alabama, Florida, and Georgia) with 20 filings.

marginA full *.pdf copy of this report can be downloaded at 2004: A Year in Review. Additionally, Professor Grundfest and Dr. Gould are available for interviews and speaking engagements.

Cornerstone Research provides financial and economic analysis in civil litigation and regulatory proceedings, and concentrates in securities, antitrust, intellectual property, energy and financial institutions litigation. Cornerstone Research helps to sponsor Stanford Law School's Securities Class Action Clearinghouse, the leading source of data and analytical information regarding the financial and economic characteristics of securities class action litigation.
John Gould, Ph.D.
Vice President Boston Office

Cornerstone Research
360 Newbury Street
Boston, MA 02115


Email: John Gould, Ph.D.


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Joseph A. Grundfest, Esq. William A. Franke
Professor of Law and Economics

Stanford Law School
Crown Quadrangle
559 Nathan Abbott Way
Stanford, CA 94305-8610


Email: Joseph A. Grundfest,


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Revised: February 17, 2005 TAF

© Copyright 2005 John Gould and Joseph A. Grundfest. / Cornerstone Research, All Rights Reserved


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