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U.S. securities fraud class actions tumble

A general exterior view of the U.S. Securities and Exchange Commission (SEC) headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ern
A general exterior view of the U.S. Securities and Exchange Commission (SEC) headquarters in Washington, June 24, 2011. REUTERS/Jonathan Ern

By Jonathan Stempel

WASHINGTON (Reuters) - Fewer investors are taking corporate America to court for fraud.

The number of new federal securities fraud lawsuits seeking class-action status fell to a 7-year low in 2012, according to a study by Stanford Law School and Cornerstone Research released on Wednesday.

Just 152 such lawsuits were filed last year, down 19 percent from 188 in 2011, mainly because of fewer lawsuits challenging mergers.

Last year's total is also 20 percent below the average of 190 for the period from 1997 to 2012.

Only 2005, when 120 lawsuits were filed, was a quieter year for new cases. And in last year's fourth quarter, just 25 new securities fraud lawsuits were filed, the fewest in any quarter since 1997, the first year included in the study.

Big companies also were sued less in 2012 than in prior years. Seventeen companies in the Standard & Poor's 500 index were named as defendants in 2012, versus an average of 31 over the prior decade.

Mark Holland, a securities litigation partner at Goodwin Procter in New York, said the dropoff in new cases may be linked to a recent lack of major market disruptions, such as the 2000 bursting of the technology bubble and the 2008 financial crisis.

Holland also said more lawyers may be turning to state courts to fight mergers.

"State court judges don't have the same tools as federal judges to get rid of cases quickly, so cases can last longer, which can result in more settlements," he said.

According to the study, just 13 merger-related securities fraud lawsuits were filed in federal courts last year, down from 43 in 2011.

The number of lawsuits tied to initial public offerings of Chinese companies, including those with questionable accounting, also dropped, falling to 10 from 31. Last year, moreover, had no new lawsuits tied to the 2008 financial crisis.

Helping to offset these declines was an increase in the number of lawsuits raising more traditional securities fraud claims, such as a failure to disclose market-moving news sooner.

Stanford and Cornerstone said the U.S. Securities and Exchange Commission's whistleblower program begun after passage of the Dodd Frank financial reforms could spur more lawsuits.

The SEC has said in a report that it received 3,001 tips from October 2011 to September 2012. Nearly half related to corporate disclosures and financials, fraud in securities offerings or manipulation. It gave its first whistleblower award, of nearly $50,000, in August.

Joseph Grundfest, a Stanford law professor and former SEC commissioner, in a telephone interview said a successful SEC whistleblower program could herald more private lawsuits.

"The question is how many cases the SEC brings, how strong those cases are, and how easily will private party plaintiffs be able to 'piggyback' on disclosures from the commission's complaints," he said.

(Reporting by Jonathan Stempel in Washington, D.C.; Editing by Martha Graybow and Richard Chang)

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