The Cornerstone/Stanford report on securities class actions filings in 2005 has been the subject of press commentary, primarily focused on the “sharp decline” in cases. The New York Times has a Legal Beat column discussing the report in today’s edition.
There are two interesting questions that arise out of the report’s findings.
First, is the decline actually significant? Securities Litigation Watch has done a great job of pointing out that commentators are ignoring the actual statistical trend – perhaps because they are merely relying on the press release that accompanied the report. In the context of post-PSLRA filings (i.e., since 1996), last year’s 175 filings is entirely consistent with the normal up-and-down pattern.
Second, and perhaps more interestingly, why was there no rise in the number of securities class action filings last year given the astonishing increase in financial restatements? There were an estimated 1200 financial restatements in 2005, nearly twice as many as in 2004. Although not every financial restatement brings a lawsuit, there is little doubt that the correlation is significant. The Cornerstone/Stanford report found that 89% of securities class actions filed in 2005 alleged misrepresentations in financial documents.
The New York Times column states that restatements are becoming more commonplace and may not indicate misconduct, but then quotes some experts suggesting that the real reason for the decline in filings is a combination of the PSLRA and judicial decisions (including Dura) that have made it more difficult for investors to bring cases. One missing link, however, is the relationship between restatements and stock price declines. The announcement of a restatement that is not accompanied by a significant stock price decline is unlikely to engender a securities class action (not enough damages). So it would appear that we need at least one more piece of the statistical puzzle: how many of last year’s restatements led to a significant stock price decline?