Stanford University Law School and Cornerstone Research released their Securities Class Action Case Filings report yesterday which showed that the overall number of federal securities class actions filed in 2005 decreased more than 17%, falling from 213 filings to 176.   The press release announcing the report includes a great quote from Stanford's Joseph Grundfest, who helps explain the drop by stating that "The pig may have moved through the python."

Prof. Grundfest adds that "Two factors are likely responsible for the decline. First, lawsuits arising from the dramatic boom and bust of U.S. equities in the late 1990s and early 2000s are now largely behind us. Second, improved governance in the wake of the Enron and WorldCom frauds may have reduced the actual incidence of fraud." 

I'll preface this by simply admitting up front that Prof. Grundfest has forgotten more about securities law and securities litigation than I will ever know, but let me play devil's advocate a bit on whether the decline noted in the report is (a) significant, or (b) due to those factors.

First, I would suggest that the 2005 decline of 37 cases (17%) does not appear to be historically significant.  To the contrary, it appears to be directly in line with the pattern of the last 9 years.  Look at the chart on page 3 of the report ("CAF Index -- Number of Class Action Filings"):  It shows that since 1997, the number of securities class action filings has gone up and down in a narrow range with pretty amazing consistency: up a bit every even year, down a bit every odd year.  Looking at the declines in the odd years, they have been as follows: 

1999: down 34 cases (14%)

2001: down 37 cases (17%)

2003: down 45 cases (19%)

2005: down 37 cases (17%)

Draw your own conclusion on whether 2005's decline is significant in some way, but I'm personally not seeing any pig through any python. To the contrary, I'm seeing a very consistent number of cases year over year (around 195 plus or minus 15%), which may simply reflect, in the words of MoFo's Jordan Eth, "the speed of Bill Lerach's printing press."

Second, while we would all like to hope that improved corporate governance arrived last year in the wake of Enron and WorldCom and reduced the number of filings, it is not at all clear to me that this is the case.  Indeed, today I read in this New York Times article that

Earnings restatements, for instance, reached a high in 2005, more than 50 percent higher than the previous year. The restatements often involved plain accounting issues, like when to recognize earnings or properly calculate interest accruals. About a quarter of the restatements were related to the failure by companies to follow accounting rules issued more than 30 years ago on how to account for leases.

But the numbers suggest that there is more work to be done. Through the end of October, there were 1,031 restatements, compared with 650 for all of 2004 and only 270 in 2001, the year Enron collapsed, according to figures compiled by Glass, Lewis. Turner said he expected the total number to reach about 1,200 restatements for all of 2005.

The article adds that this increasing number may be due in part to "the greater vigilance of auditors and the new requirements by the Sarbanes-Oxley Act, which has prompted more than 1,250 companies to report by the end of October that they had material weaknesses in their internal controls, out of a total of around 15,000 public companies."

Statistics like these about restatements--which inevitably lead to securities class actions--lead me to conclude that the "false financials" cases are from from being out of the system, and that the corporate governance measures that followed Enron and WorldCom may lead to an increase rather than a decrease in securities class actions over the next few years.