Securities Fraud Suits Hit Record in 2002

From Bloomberg News

A record number of shareholder fraud lawsuits were filed against corporations in 2002, a year marked by accounting restatements and drops in the stock prices of many companies, Stanford Law School reported Tuesday.

WorldCom Inc., Vivendi Universal, Tyco International Ltd., Martha Stewart Living Omnimedia Inc., Adelphia Communications Corp., Merrill Lynch & Co. and Bristol-Myers Squibb Co. were among the 260 companies sued for securities fraud last year, the Stanford Law School Securities Class Action Clearinghouse said.

"A large part of this is the fallout from Enron and the other corporate megafrauds," said Joseph A. Grundfest, a securities law professor at Stanford Law School. Enron Corp. was sued in 2001 by shareholders who claimed the energy trader hid billions of dollars of debt in off-the-books partnerships.

The number of lawsuits filed by shareholders representing groups of stock owners was 54% higher than the 169 recorded in 2001, the clearinghouse reported. The record was reached despite restrictions of the 1995 Private Securities Litigation Reform Act, which was designed to discourage such group lawsuits, known as class actions. The law made it easier for companies to get class actions dismissed before trial.

Lawyers who represent shareholders in fraud lawsuits said the number of suits might have been higher without the law.

Securities fraud lawsuits are usually settled, almost never going to trial, lawyers said. In 2001, three in five settlements ranged from $1 million to $10 million, according to data maintained by the Stanford clearinghouse. The average settlement was $16 million, with some settlements greater than $75 million.

The increase in securities fraud lawsuits is matched by a rise in financial restatements by public companies, an occurrence that frequently triggers fraud suits, lawyers said. In the first half of 2002, 125 companies issued restatements of financial results, putting the year on a pace to beat the 2001 record of 224 restatements, according to a report by the General Accounting Office. The number of restatements has risen every year since 1997, the beginning of the period analyzed in the report.

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