Did you know that in the mid-1990s, during the disastrously counterproductive “deregulation hysteria” that gripped the country, Congress made it much more difficult for defrauded investors to bring any kind of legal action? (Read more here.) That law was called the Private Securities Litigation Reform Act. Interestingly, another thing the PSLRA did was to allow researchers to start tracking securities fraud settlement data. Since 1996, Stanford Law School and Cornerstone Research have been doing just that. Let me just say, if you thought that the economic collapse would have led to a steady increase in securities fraud cases, you would be wrong. Sort of. Cornerstone’s new study came out today and here is what researchers found:
The number and size of securities fraud settlements that won final U.S. court approval fell in 2011 to the lowest in a decade, amid a drop in cases linked to accounting problems and U.S. Securities and Exchange Commission enforcement activity.
According to a study being released on Wednesday by Stanford Law School and Cornerstone Research, courts in 2011 approved 65 such settlements totaling a mere $1.36 billion, down from 86 settlements totaling $3.21 billion a year earlier.
The dollar amount is less than half the $2.78 billion recovered in 2003, which had been the lowest since the adoption the prior year of the Sarbanes-Oxley corporate governance law.
Sarbanes-Oxley, you may recall, was enacted after the Enron disaster despite the U.S. Chamber of Commerce's furious lobbying against it, saying “an accounting error should never be seen as a crime,” and “[b]usiness should stop apologizing for being the one institution in America that really works.” Uh huh. Actually, the law that eventually passed was considered by many to be pretty watered-down and certainly, it did nothing to prevent the financial collapse a few years later. But back to those securities fraud cases.
It does seem very unlikely that defrauded investors would simply have stopped being enraged, but that’s not really what has happened. In fact, one of the Cornerstone authors told the New York Times that the 2011 stats were “an anomaly,” and “we already see some signs that in 2012, this trend will be reversing.” Specifically,
[L]arge settlements involving American International Group Inc. and other companies, as well as increased SEC enforcement activity, may make 2012 a more rewarding year for investors. Settlement totals for 2012 will include AIG's $725 million settlement to resolve claims accusing the insurer of accounting fraud and stock price manipulation.
Other accords topping $100 million that may also be included are with Lehman Brothers Holdings Inc.; wireless equipment company Motorola Solutions Inc.; National City Corp, a bank now owned by PNC Financial Services Group Inc.; and private education company Apollo Group Inc.
But while 2011 may have been a year of “weaker” cases, it also true that today it has become more difficult to bring cases due in part to “tougher standards of proof imposed upon by the U.S. Supreme Court and market instability that has made it more difficult for shareholders filing suit to say they weren’t aware of the inherent risk of investing.”
Something to keep our eye on, for sure.