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Credit crisis securities lawsuits fall sharply in Q3

Despite a moderate uptick in the number of securities lawsuits filed in the third quarter, the number of new suits related to the credit crisis fell sharply, as fears of a tidal wave of claims from the financial turmoil continue to recede.

According to a new report from US insurance information provider Advisen, 169 securities lawsuits were filed in the period, up 11 percent on Q2.

But the total was still significantly lower than a "hyperactive" first three months of the year that produced 249 suit filings, including a flurry of actions related to the Madoff Ponzi scheme.

And, significantly, only nine of the suits filed in Q3 were related to the credit crisis, compared to 24 in the second quarter and 46 in the first, said the firm.

Advisen's executive vice president Dave Bradford noted the continuing trend for securities fraud suits brought by regulators and law enforcement agencies to dominate filings.

"Securities fraud suits have replaced securities class actions as the most frequently filed type of suit," he observed.

"They probably will grow to an even larger percentage of the total as the Securities and Exchange Commission steps up enforcement activities under the Obama administration."

There were a total of 70 securities fraud filings in the third quarter, up from 50 in Q2 and representing 41 percent of all securities cases - an all-time high.

In contrast, Madoff-related new filings dropped off significantly as the dust continues to settle on the case, with six suits in the period, compared to 17 in Q2, and 54 in Q1.

Non-US companies saw a significant number of actions, with 20 suits, or 12 percent of the total filed in the quarter, continuing a trend of growing global exposure.

The Advisen report also noted an increase in potential damages due in shareholder class action suits, with average losses in terms of market capitalisation per lawsuit of $8.5bn in 2009 and $6.7bn in 2008 as class periods coincided with the large stock market losses of the last two years.

The average market capitalisation losses for credit crisis-related cases was well above the overall average, with $14.5bn per lawsuit in 2009, and $13bn in 2008.

"This metric suggests that the average credit crisis-related securities lawsuit may pay out higher sums than other securities lawsuits," the report said.

Speaking during an Advisen webinar on the findings, partner at US law firm OakBridge Insurance Services, Kevin LaCroix, said it was "too early to say" whether the end of credit-crisis related litigation has come.

"One concern I have is that we can no longer really describe with specifity what credit crisis represents - as the economic downturn affects the whole economy it's hard to isolate single causes. But I don't think it's played out entirely yet," he explained.

With respect to potential insurance, the Advisen report noted that there are a growing number of securities suits "that potentially trigger insurance coverage other than D&O insurance.

The report notes that this trend "started in 2008 and continued in 2009," largely due to the filing of credit crisis and Madoff-related lawsuits. These cases may even be excluded by D&O policies but covered by Errors and Ommissions (E&O) or fiduciary liability policies.

"Limits adequacy has to factor in defense costs," LaCroix added during the conference, explaining: "There have been some cases where the defence fees were staggering and entirely exhausted the D&O limit. There is a point where continually increasing limits cannot be the solution: there is a limit to how much any given company is going to want to pay.

"Individuals on boards have become much more sophisticated on these topics, and it is often the case that they want to talk about Side A coverage long before you had introduced the topic" LaCroix explained.

AJ Gallagher president, professional liability, Phil Norton agreed, commenting: "I think a lot of companies are not buying sufficient limits. Even if you settle for 5 to 10 percent of damages sought, these are big numbers. Going into claims situations and having to settle above the limit is not uncommon."

The report also notes the "long-term trend of growing numbers of suits against non-US companies." Specifically, the report highlights "the number of large securities suit filings against non-US companies" are on a "long-term growth path."

Paul Schiavone, CUO of directors' and officers' liability insurance at Zurich Global Corporate also highlighted the trend of international litigation against financial institutions.

"The interesting thing to me was the spread of the countries being sued," he said, explaining that while the usual suspects in international securities law suits are Canadian, Bermudian and Israeli companies, recent suits have been filed against companies from the Netherlands, Switzerland and Germany, for example.

"The plaintiffs bar is expanding its risks. No-one is safe anymore, no matter what company you're from," Schiavone concluded.

Many countries around the world, especially in Europe, are "modernising" their civil legal systems by providing greater access to court remedies through various collective action mechanisms, Advisen said.

This is resulting in closer alignment with the US class action system, and ultimately more suits with greater payouts from courts outside of the US.

Advisen calculated that an "increasing number" of European companies agreed to settlements in excess of $100mn.

In addition, financial regulators around the world, such as the UK's Financial Services Authority, have stepped up enforcement efforts in the wake of the credit crisis, and increasingly work in consort with US authorities.

"Any company with operations in the US, and particularly any company with shares trading on US exchanges, is subject to securities litigation (and other management liability-related litigation) in US courts," the report concluded.

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