The Stanford/Cornerstone report in January got the ball rolling when it showed that new case filings dropped 17 percent in 2005 (from 213 new cases in 2004 to 175). Articles in The Wall Street Journal and the New York Times covered the release of this report by describing the "steep drop" or "sharp decline" in securities class actions in 2005, and pondered the possible causes, from the success of Sarbanes-Oxley to the end of the dot-com line of cases.

In fact, however, there was no "steep drop" or "sharp decline" in cases in 2005. Viewed in context, the 2005 decline of 37 cases simply does not appear to be historically significant. To the contrary, it is directly in line with the pattern of the last nine years. Looking at the fluctuation of the number of cases filed through the years as shown in the same Stanford/Cornerstone report, this becomes quite clear. Since 1997, the number of securities class action filings has gone up and down in a narrow range with amazing consistency: up a bit every even year, down a bit every odd year.

The NERA Economic Consulting study, which was published in April, similarly found that the number of federal filings in 2005 declined to its lowest point since 1997. It concluded, however, that "it is far too early to conclude that there is a downward trend." The study's statistical testing confirmed what a glance at the chart above also shows--that "the 2005 dip is not statistically different from either the post-PSLRA average or from a longer-term trend." Interestingly, NERA also clarified that almost all of the difference between the 2004 and 2005 totals was accounted for by an unexplained drop in filings in the Ninth Circuit, and it concluded that the most likely explanation for the drop in 2005 was simply random year-to-year variation.

The NERA study contained another statistic, however, that generated its own measure of confusion. The study noted that "dismissal rates have doubled since PSLRA" became effective in 1996, stating that "dismissals accounted for only 19.4 percent of dispositions for cases filed between 1991 and 1995. More recently, for cases filed between 1998 and 2003, dismissals have accounted for 40.3 percent of dispositions." The report explained, though, that "there is no indication that dismissal rates have continued to rise after an initial adjustment to the tougher pleading requirements of PSLRA." In other words, nothing has changed in terms of dismissal rates since approximately 1998.

Notwithstanding that fact, a newsletter called Agenda wrote in late May that securities class actions have begun to "dry up," citing both the lower number of cases in 2005 and "the increase in the number of securities class actions that have been dismissed in recent years. Indeed, more than 40 percent of the securities class actions filed between 1998 and 2003 were dismissed, according to a study issued last month by NERA Economic Consulting. That's more than double the number of cases filed in the four-year period from 1991 to 1995 that were dismissed."

Again, viewed in context, neither the number of cases in 2005 nor the NERA dismissal statistics support the argument that securities class actions have recently "dried up" in any meaningful way--the number of cases is roughly what it has been since 1997 and the dismissal rate is, according to NERA, the same as it has been since 1998.

Other recent events that, while noteworthy, do not seem to signal any dramatic change in the securities litigation landscape include the Enron settlement and the indictment of law firm Milberg Weiss. While the approval of the Enron settlement in May prompted some to assume that the settlement symbolized the end of the line for big securities settlements, this does not appear to be the case. Indeed, the ISS Settlement Pipeline, which measures the sum of all pending or tentatively announced settlements for which the claim deadline has not passed, currently stands at a massive $14.9 billion and includes significant cases such as Nortel Networks ($2.7 billion), Royal Ahold ($1.1 billion), and the IPO Securities Litigation (currently $1 billion and possibly much more). Indeed, including SEC settlements, there are currently 20 settlements in the pipeline valued at over $100 million.

With respect to Milberg Weiss, it seems clearer now that even if the firm's practice is diminished or destroyed altogether by the indictment, there will not be a significant impact on securities class actions generally. There are far too many competent plaintiffs' law firms out there that will gladly fill any void that may be created. It also appears that to the extent Milberg Weiss is losing any lawyers, it is because these lawyers are being recruited away by competitors, where they will promptly resume their securities class action practices.

One thing that has changed markedly in the securities class action world is the size of settlements. The recent PwC 2005 Securities Litigation Study showed that the average settlement of a securities class action soared to $71.1 million in 2005, a 156 percent increase from the $27.8 million average in 2004. Notably, these numbers exclude the mega-settlements in the historic WorldCom and Enron cases.

As PwC notes, the reasons for this surge likely include the success of plaintiffs in involving third parties such as investment banks, accountants, and law firms as defendants in these cases, as well as the huge "theoretical economic damages" present in cases involving companies with large market capitalizations and huge stock drops. Other reasons may include the impact of large pension funds serving as lead plaintiffs, and the phenomenon that each new high dollar settlement sets the bar a bit higher, encouraging plaintiffs to demand more money in settlements (and arguably contributing to a recent surge in the number of trials occurring in securities class action cases).

In short, the "State of Securities Litigation" in 2005 looked a lot like it did in 2004 ... and 2003 ... and 2002 ... and so on. Just with bigger numbers.