Subprime leads to growth in class actions

High levels of securities class action filings in the US during the first half of 2008 are linked to volatility in the financial markets, said a new report.

There were 110 filings between January 1 and June 30, 2008, according to a report released today by Cornerstone Research in cooperation with Stanford Law School’s Securities Class Action Clearinghouse.

The recent high level of filings coincided with a marked increase in stock market volatility, said the report. Filings jumped from 119 in the 12 months ending June 2007 to 217 over the next year, and stock market volatility doubled over the same period.

This level of litigation activity exceeded the annual average between January 1997 and December 2007.

About half of the filings in the first half of 2008 were driven by the subprime mortgage/credit crunch, with 58 filings containing related allegations.

Professor Joseph Grundfest, co-Director of the Rock Center on corporate governance and former Commissioner of the Securities and Exchange Commission, noted that, “We continue to witness the dramatic effects of the subprime market meltdown, with half of the filings so far this year linked to the subprime/credit crunch disaster.”

John Gould, vice president at Cornerstone Research and contributor to the report, said, “We have also seen a sharp increase in defendant firms’ average market capitalization losses associated with filings. The median loss in the first half of 2008 was $243m, more than twice the historical average. Not since the period of heightened filing activity in 2000–02 have we seen market capitalization losses of this size among defendant firms.”