The number of class-action securities lawsuits filed in 2004 increased 17 percent to 212, up from 181 in the prior year, while the decline in aggregate market capitalization as a result of the litigation nearly tripled from the year-ago period, according to a recent report.
The decline in market capitalization of defendant companies, known as the "disclosure dollar loss," nearly tripled, to $169 billion for cases filed in 2004, according to a report by Stanford Law School and Cornerstone Research. The DDL is measured from the trading day just before the end of the class-action period to the trading day immediately after the end of the period.
The report indicated that the dramatic rise in the DDL Index stemmed from eight filings in which each defendant company experienced disclosure dollar losses in excess of $5 billion. By contrast, 2003 saw just a single filing with equivalent losses.
In other findings, the number of class-action lawsuits alleging violations of generally accepted accounting principles remained relatively constant in 2004 at 102, compared with 107 in 2003. Several of the high-dollar DDL losses recorded in 2004 were the result of product market developments that had material adverse stock prices.
"Typically, a class-action securities fraud lawsuit arises from allegations that the issuer lied about its financial performance," said Joseph Grundfest, Stanford Law School professor and a former Securities and Exchange Commission commissioner. "This year, however, allegations relating to insurance industry sales practices at companies such as American International Group and Marsh & McLennan, and concerns about the safety of COX-2 inhibitors marketed by Merck and by Pfizer, triggered some of the year's largest lawsuits."
The top three industry sectors in 2004 in terms of number of issuers sued were consumer non-cyclical, technology and communications. The number of issuers sued in the technology sector nearly doubled over 2003 from 19 to 37 in 2004. Energy sector filings almost tripled, increasing from three to eight.
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