Shareholder, IPO Litigation Surges
Disgruntled investors are filing lawsuits at an accelerating pace this year, with many of the latest cases targeting Wall Street brokerage firms for their handling of initial public stock offerings in the late 1990s, according to statistics released Monday.
Through Friday, 263 shareholder lawsuits have been filed this year, up from 201 all of last year and 207 in 1999, according to consulting firm PricewaterhouseCoopers. The record in the late-1990s was 260 suits in 1998.
The data underscore the dramatic surge in litigation that has occurred this year after the stock market plunge.
“There’s nothing like losing money to inspire people to sue,” said Alan Bromberg, a securities-law expert at Southern Methodist University.
Lawsuits against individual companies, as well as arbitration cases against stockbrokers and securities firms, frequently spike whenever the market falls sharply. For example, individual investors are on pace to lodge 6,716 arbitration cases against brokerages this year, topping the 6,058 of 1995--the year after the market slipped in 1994, according to the National Assn. of Securities Dealers.
But investors this year also are targeting trends and issues that gained considerable attention during the market boom of the late 1990s.
Of this year’s lawsuits, 143 are aimed at Wall Street brokerage firms for alleged infractions in the IPO market. In fact, of the roughly 150 total lawsuits filed since June 1, about 120 allege wrongdoing in IPO distributions.
The Securities and Exchange Commission and the U.S. attorney’s office in Manhattan are investigating whether top Wall Street brokerage firms may have received what amounted to kickbacks for dishing out shares of hot IPOs to favored clients in the late 1990s.
The SEC also is looking into whether brokerages pushed IPO prices higher once new stocks began to trade by requiring some customers who got IPO shares to purchase additional shares at higher prices.
In their lawsuits, investors allege that Wall Street’s handling of IPOs cost them millions in investment losses, which they are now trying to recover through the courts.
In addition, several high-profile lawsuits have been filed recently against individual stock analysts, alleging that their advice was tainted by financial conflicts of interest.
James Spellman, spokesman for the Securities Industry Assn., Wall Street’s main trade group, defended the investment companies.
“When the Internet bubble burst it caused a lot of people to look for a scapegoat,” Spellman said. “But investors have a responsibility to understand what they’re investing in and what the risks might be.”
He also defended IPO allocations, saying the number of cases appears to be small in relation to the vast number of IPOs that were done in the late 1990s. IPO volume surged in 1999 and 2000, as a record $80.6 billion was raised last year in 452 first-time offerings.
The pace of securities lawsuit filings is the largest this decade, and may be an all-time record.
According to data compiled by Stanford Law School, 271 securities lawsuits have been filed this year, surpassing the 1990s peak of 236 in 1998.
The surge in lawsuits is notable given that Congress passed major legislation in 1995 and again in 1998 aimed at limiting the number of securities litigation cases.
Legislators at the time said they were trying to stamp out what they saw as frivolous lawsuits designed to force companies into costly legal settlements.
However, several experts said the IPO lawsuits were to be expected given the attention generated by the government investigations.
It is uncertain how investors will fare in their IPO cases. Their success could hinge in large part on whether the government charges any firms with wrongdoing, and whether it prevails in those cases, experts said.
“A lot of these cases are going to ride on what comes out of the SEC and the U.S. attorney’s investigations,” Bromberg said. “What facts and theories they come up with and whether they’re able to pin a violation” on any firms.
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Going to Court
Securities lawsuits filed by disgruntled investors are running well ahead of last year’s pace.
2001*: 263
*Through Aug. 17
Source: PricewaterhouseCoopers
