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It was the best of times; at least going back to 1996. A combination of prolonged stock-market strength, tougher regulation and a sharper sense of corporate ethics had reduced the number of securities class-action lawsuits filed in the United States in recent years to below historical averages.

According to a recent study, 1998 proved to be the peak year for securities class actions with 240. The study covered the time period between 1996 and early 2007. Things have cooled off so much that 2006 saw only 116 filings.

In the first half of 2007, according to the Cornerstone 2007 Mid-Year Assessment of Securities Class Action Case Filings, there were 15 financial securities class-action filings. That's a big bump when you consider that there were only 10 financial securities class-action lawsuits filed in all of 2006. And more lawsuits fed by unhappiness and losses over the implosion of some mortgage-backed securities could be on the way, according to insurance brokers in the financial services sector.

"This issue is still showing itself, and we don't know where it's going to wind up," says Siobhan O'Brien, a New York-based senior vice president with Marsh.

"There's no doubt in my mind we will see securities litigation arising from these events," says Adam McDonough, the president and CEO of San Francisco-based Lockton Insurance Brokers Inc.

According to the researchers, three of the financial services securities lawsuits filed as of June 25, 2007, involved allegations of fraud or alleged misrepresentations of the investment value of securities containing subprime mortgages. Perhaps the most prominent name that has been brushed by the scandal this year is the New York-based debt securities ratings agency, Moody's Corp.

A class action filed in the U.S. District Court for the Northern District of Illinois filed on July 19 alleges that Moody's assigned excessively high ratings to bonds back by investments in subprime mortgages before downgrading billions of dollars of such bonds earlier that month. Because the filing is so fresh, Moody's has not yet had time to file a response.

Additional financial securities class-action filing targets this year include Melville, N.Y.-based American Home Mortgage Investment Corp. and the Calabasas, Calif.-based Countrywide Financial Corp.

How many other mortgage companies and financial services companies will be hit in the remainder of the year is anybody's guess. But you shouldn't need a calculator to extrapolate that 15 securities class-action filings in the first half of 2007 has a good chance to translate to a good 30 by the end of 2007; or triple what was racked up in 2006.

From their perspective, brokers say underwriters are putting a lot more pressure on financial services companies at renewal time. They say they're asking tougher questions in the effort to save financial services executives from directors' and officers' liability or errors-and-omissions claims.

Perspective, if not outright optimism however, is as always helpful to maintain.

Overall, the number of securities class-action lawsuits filed so far in 2007 is nowhere near the levels they were at a few years ago, according to the Stanford and Cornerstone research. The first half of 2007 marked the fourth consecutive six-month period with below average securities class-action filing activity.

The 59 filings in the first half of 2007 are a full 42 percent below the semiannual filing rate of 101 filings that was observed over the nine-year period ending in June 2005, the Cornerstone-Stanford report states.

Likewise, the maximum dollar loss for all securities class-action lawsuits is nowhere near what it was just five years ago. Maximum dollar loss, according to the study, represents the dollar value decrease in the market capitalization of the defendant firm from its highest point during the class period to the trading day immediately following the end of the class period.

In 2002, with the markets reeling from the aftereffects of Sept. 11, 2001, and a pre-existing recessionary trend, the maximum dollar loss claimed in class-actions lawsuits was $2.06 trillion. By 2006, that number had shrunk to $295 billion. According to the study's projections, 2007 is on track to register $334 billion in maximum dollar losses claimed. That's still not as high as 2005, which had $362 million in maximum dollar losses, but it represents a shift up.

With that unsettling trend in mind, the lancing of the subprime blister might yet prove to be a necessary correction that doesn't have the far-reaching effects that some fear it might. And according to a Stanford University law professor quoted in the Cornerstone report, the corporate ethical atmosphere may have evolved to a point where, barring some cataclysmic event, we might never see the maximum dollar losses claimed to the degree that we did back in 2002.

"In my opinion, the size of class-action securities fraud litigation activity may have experienced a permanent shift," said Professor Joseph Grundfest of the Stanford Law School.

DAN REYNOLDS is senior editor of Risk & Insurance®.

October 15, 2007

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