The first half of 2012 saw a fifty percent decline in federal securities class action lawsuits when compared with the same period in 2011. The decline is attributed to a decline in Chinese reverse mergers as well as the lowest amount of mergers and acquisitions since the second half of 2009.
The Stanford Law School Securities Class Action Clearing House and Cornerstone Research found 88 federal securities class-action lawsuits were filed in the first six months of 2012, a six percent drop from the entire year of 2011.
The decline in filings was not a surprise to a professor at Stanford Law School. He stated "that sector of the market has already been badly hit by concerns over the integrity of the Chinese private-company statements and these deals have been disappearing from the market."
A reverse merger happens when a private company buys a publicly traded business and then shifts its management into the purchased company. The publicly traded company usually gets renamed as a result. The private company can then be traded on the public markets without having to go through the paperwork required for an IPO.
The Stanford law professor anticipates future filings to arise because of Libor rigging allegations.
The Libor issue is stemming from allegations that a dozen banks around the world manipulated a benchmark for financial products. Investigators are looking into the issue to determine if traders acted in concert to rig the rate for profit, and to see if banks understated their borrowing costs to appear in better financial shape than they really were.
Lawsuits may have declined for a few months, but that does not necessarily mean that fraud activity has decreased as well. Chances are good that illegal activities are still being perpetrated, and simply flying under the radar. Be careful with investments, and stick with the "if it's too good to be true, it must be" mantra when making investment decisions.
Source: Businessweek, "Securities Lawsuits Decreased in First Half of 2012," Joel Rosenblatt, July 25, 2012
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