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Unsettled: Securities Fraud Cases, Payouts Down in 2011

Case filings and payouts for white collar crimes such as securities fraud fell last year to the lowest totals in a decade, according to Stanford Law School and Cornerstone Research.

The study revealed that in 2011 courts approved 65 white collar crime settlements for a total of $1.36 billion. By comparison, 86 settlements totaling $3.21 billion occurred a year earlier. The formerly lowest settlement amount since the adoption 10 years ago of the Sarbanes-Oxley corporate governance law was $2.78 billion in 2003. Conversely, the years 2005 and 2006 saw the biggest payouts of $10.5 billion and $19.19 billion, respectively, thanks to settlements with WorldCom Inc. and Enron Corp.

The research suggests 2011 was slower due in part to a decline in cases tied to accounting errors and U.S. Securities & Exchange Commission enforcement activity.

One expert says accounting-related cases may have fallen as an indirect result of improved corporate governance. That same expert also suggests traditional securities fraud cases experienced post Sarbanes-Oxley lows because plaintiffs placed a heavier focus on housing-related litigation and the sale of dicey mortgage-backed securities.

Another expert speculates the decline was brought about by weaker plaintiff claims or pro-defendant changes to the courts, or a combination thereof.

The activity within the securities fraud market may not stay quiet for long. The co-author of the study says large settlements involving American International Group Inc. and some other companies, and a rise in SEC policing could lead to 2012 being a more profitable year for investors. The AIG settlement is worth $725 million and there are at least five other lawsuits topping $100 million that may go on the books in 2012.

Cornerstone's study did not include settlements challenging mergers, which accounted for 23 percent of new securities fraud cases filed a year ago.

Source: Insurance Journal, Securities Fraud Settlements in 2011 Were Lowest in Decade, by Jonathan Stempel., Mar.14, 2012.

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