The number of securities fraud class actions filed in 2006 was the lowest ever recorded in a calendar year since the adoption of the Public Securities Litigation Reform Act of 1995, according to a new report.

“The Securities Class Action Filings 2006 Year in Review” report released by the Stanford Law School Securities Class Action Clearinghouse, reports that securities fraud class actions decreased by 38 percent since 2005 -- plunging from 178 filings to just 110. The year’s numbers were nearly 43 percent lower than the 10-year historical average of 193.

The report says the decrease is even more striking considering that the associated market capitalization losses also sank 44 percent, and that the total figure includes
20 filings alleging options backdating.

The study attributes the record low numbers of securities fraud class action filings in 2006 to three primary factors:

  • Strengthened federal enforcement environment, reflected in the pressure that the Securities and Exchange Commission and Department of Justice now bring to bear on corporations to conduct internal investigations that implicate the individual executives responsible for the fraud;
  • A strong stock market, which, when combined with lower stock price volatility, typically reduces the number of cases filed; and,
  • The conclusion of the majority of securities fraud class actions that were filed in the late 1990s to the early 2000s.

There were more allegations of specific accounting irregularities in the complaints filed in 2006 compared to 2005, a trend that is consistent with last year’s findings, and that the report said indicates a continued concern over the quality of financial reporting.Of significance, there was a more than 70 percent spike in the percentage of cases involving “other” accounting allegations, jumping from 37 percent of all accounting allegations in 2005 to 63 percent in 2006. Almost half of the “other” accounting allegations were related to stock options issuances.
The full text of the 2006 Year in Review report can be found at http://securities.stanford.edu

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