If you had asked me yesterday whether there were a lot of securities lawsuits last year, I would have said, “Oh, absolutely.” And I would have been absolutely wrong. Lawsuits were up in 2011 compared to 2010, but still below the recent average. As the NYTimes reports, according to a new report by Stanford Law and Cornerstone Research, “188 federal securities class-action suits were filed last year, compared with 176 filed the prior year. Even then, that figure trails the annual average of 194 filings for the period from 1997 to 2010.”
I’m guilty of what Daniel Kahneman calls “WYSIATI” (What You See Is All There Is). First off, I (and you too) only see what gets reported, like the new crop of lawsuits related to Chinese reverse-mergers. Obviously, we don’t see what doesn’t get reported, i.e. the not-filed lawsuits. Moreover, now that this kind of thing is my job, I’m way more sensitive to reports about securities lawsuits (unlike most normal people, I won’t skip an article with a headline like “Corporation’s MD&A in 10-K sparks 10b-5 Claim”). This is the same little tick in our thinking that makes a teenager’s parents overreact to news stories about the latest drug and/or sex fad sweeping the nation. Already sensitive to a particular danger, a news report (especially a sensationalist one) about an isolated incident sticks in our minds and makes us overestimate the size of the danger.
This study only measured the number of fraud claims, so there are still a bunch of other securities-related lawsuits that aren’t counted here. That said, the takeaway remains that lawsuits remained steady because the IPO and merger markets remained soft last year. That, OR the securities industry was just way more honest last year. I’ll let you decide which theory sounds better.