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2006 Mid-Year Assessment
Securities Class Action Case Filings


Securities Fraud Lawsuits Continue to Decline
in First Half of 2006


Options Backdating Scandal Not Drawing
Much Federal Class Action Litigation

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

2007 Securities Class Action Case Filings
Securities Class Action Settlements:
   2007 Review and Analysis

2007 Mid-Year Assessment:
   Securities Class Action Case Filings

2008 Mid-Year Assessment:
   Securities Class Action Case Filings

2008 Securities Class Action Case Filings

marginThe annualized number of "traditional" securities fraud class actions filed from January through June 2006 decreased 31 percent compared to 2005 levels, falling from 179 filings to an annualized estimate of only 123, based on 61 filings through June 30, 2006, finds a new, mid-year report released by the Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research.

Grundfest Photo
Joseph A. Grundfest, Esq.
Professor, Law and Business
Stanford Law School
marginAccording to the report, the number of filings in the first half of 2006 is at the lowest level for any six month period since 1996, and on an annualized basis is 36 percent below the 1996-2005 historical average of 194. The study also compared the number of filings over the first six months of 2006 to the average number of filings over all semi-annual periods beginning in January 1997. A t-test indicates that the number of filings over the first six months of 2006 is lower than the average during 1997 to 2005 and the difference is statistically significant at a 5% confidence level.

marginThe mid-year study also finds a large decline in market capitalization losses related to all securities fraud class action lawsuits filed so far in 2006. The Disclosure Dollar Loss (DDL) decreased 55 percent on an annualized basis from $100 billion in 2005 to $22 billion ($45 billion on an annualized basis) in the first half of 2006. The maximum dollar loss (MDL) decreased 44 percent on an annualized basis from $456 billion in 2005 to $127 billion ($255 billion on an annualized basis) in the first half of 2006.* The decreases in total DDL and MDL are reflective of the lower number of filings and lower market capitalization losses associated with the average/median filing.

margin"We're halfway through 2006 and already we're witnessing evidence consistent with a slowdown in the volume of federal class action litigation activity" said Stanford Law School Professor Joseph Grundfest, Director of the Securities Class Action Clearinghouse and former Commissioner of the Securities and Exchange Commission. "While we lack the data necessary to determine the precise cause of the slowdown, the most intriguing hypothesis is that extensive and expensive corporate efforts to improve governance and accounting have reduced plaintiffs' ability to allege fraud."

marginDr. John Gould, vice president of Cornerstone Research and major contributor to the study, suggests caution in interpreting the recent slowdown in filings: "Although there is no doubt that there has been a considerably lower level of filing activity over the last year, it is still too early to tell whether this represents a permanent shift."

marginDespite the recent wave of public attention surrounding the alleged backdating of options at more than sixty publicly traded companies, the impact of the scandal has not been as large as some might expect.

marginIn fact, only eight federal class actions had been identified alleging illegal backdating behavior by June 30, 2006 (Comverse Technology, Inc.; Vitesse Semiconductor Corporation; UnitedHealth Group, Inc.; American Tower Corporation; Brooks Automation, Inc.; KLA-Tencor Corporation; Brocade Communication Systems, Inc.; and Mercury Interactive Corporation). Since the close of the report's sample period, two more issuers have been named in backdating class actions (Juniper Networks, Inc. and Rambus, Inc.) bringing the total number of backdating related class actions to ten.

marginProfessor Grundfest notes several reasons why class action complaints in backdating situations are not more common.

1. Many disclosures relating to allegations of backdating are not accompanied by statistically significant stock price declines.

2. The alleged options backdating activities occurred so long ago that the statute of limitations defense may be effective.

3. In some situations, the uncertainties associated with the application of appropriate accounting principles may cause potential plaintiffs to recognize that they will have difficulty alleging that there was an intention to commit fraud.

4. Most of the litigation is being filed in state court through derivative actions because these actions do not, as a practical matter, require significant stock drops as a predicate to filing, and it may be easier to allege a violation of a fiduciary duty in many of these cases than to demonstrate a willful fraud.

marginProfessor Grundfest and Dr. Gould are available to speak to the media about the report. The full text of the 2006 mid-year report can be found 2006 Mid-Year Assessment: Securities Class Action Case Filings

marginStanford Law School's Securities Class Action Clearinghouse is an authoritative source of data and analysis regarding the financial and economic characteristics of federal securities fraud class action litigation.

marginCornerstone Research is a national consulting firm providing financial and economic analysis in civil litigation and regulatory proceedings, and concentrates in securities, antitrust, intellectual property, energy, accounting, and financial institutions litigation. Cornerstone Research cosponsors the Stanford Law School Securities Class Action Clearinghouse and maintains offices in Boston, Los Angeles, Menlo Park, New York, San Francisco, and Washington.

margin* The Clearinghouse's Disclosure Dollar Loss Index DDL IndexTM is the running sum of "disclosure dollar losses" for all class action lawsuits filed year-to-date. The Maximum Dollar Loss Index MDL Index TM is the running sum of "maximum dollar losses" for all class action lawsuits filed year-to-date.

John Gould, Ph.D.
Vice President Boston Office

Cornerstone Research
360 Newbury Street
Boston, MA 02115

617.927.1500

Email: John Gould, Ph.D. jgould@cornerstone.com

URL: http://www.cornerstone.com

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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

650.723.2465

Email: Joseph A. Grundfest, Esq.grundfest@stanford.edu

URL: http://lawschool.stanford.edu/



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Revised: December 28, 2006 TAF

© Copyright 2006 John Gould and Joseph A. Grundfest. / Cornerstone Research, All Rights Reserved