Among his predictions for the big stories that the mutual fund industry will see in 2008, Columnist Chuck Jaffe of the Arizona Daily Star sees a potential wave of class action lawsuits against funds that have been burned by the sub-prime mortgage problem.  He explains:

There hasn’t been a good wave of lawsuits against funds for years, but with funds like Regions Morgan Keegan Intermediate Bond and High Income, there’s little doubt that the plaintiff’s bar has potential cases to talk about. Those funds were each hurt in their own way by investments made in sub-prime mortgages; in the case of the RMK funds, the fallout was disastrous, amounting to losses surpassing 45 percent. Even in cases like Fidelity Ultra Short — down about 5 percent this year — lawyers will say the fund should not have lost money stretching out of its comfort zone in an effort to get additional yield.

On June 13, 2007, Stanford Professor Joe Grundfest spoke at a breakfast event entitled “The Times They Are A-Changin” at The Yale Club of New York City (details available here).  Among his comments were several bold predictions based on a two year lull in securities class action filings between July 2005 and June 2007:

• “The class action securities fraud litigation business will continue to shrink and law firms need to respond by shifting resources.”
• “We’re going to have to find other things to do with our time and I think that’s something to be celebrated.”  Grundfest compared the trend to doctors finding a cure for disease, which is a positive development but leads to fewer patients.
• While the number of securities fraud filings had been averaging about 200 annually, that number will probably be closer to 100 to 120 from now on, Grundfest said. There are several reasons for the trend, including there simply being less fraud, he said.

Not so fast.  It now appears that beginning a week or so following those remarks, the number of securities class action filings surged and returned to roughly the ”pre-lull” levels that had been the norm from 1996-2005.  According to Stanford Law School/Cornerstone Research’s just-released 2007 Securities Fraud Class Action Filing Report, “one hundred companies were sued in the second half of the year, a litigation rate that reversed a trend of four consecutive six-month periods with well below average litigation activity.”  The Report found that a total of 166 companies were sued in all of 2007.

The Report concludes that the increase in litigation activity in 2007 is attributable to both the subprime crisis, which has led to numerous securities class actions, and stock market volatility. The Report adds that “stock market volatility and the number of filings are correlated. On average, a 10-point change in the quarterly average S&P 500 Implied Volatility Index (VIX) is associated with 12 additional litigations per quarter.”

This article by Vesna Jaksic of the NLJ, which discusses a recent two-hour speech by former SEC commissioner Joseph A. Grundfest, has prompted us to create an entirely new category on this blog for "Predictions."  Among the eye-opening statements by Professor Grundfest at a breakfast event sponsored by Cornerstone Research entitled "The Times They Are A-Changin" :

• "The class action securities fraud litigation business will continue to shrink and law firms need to respond by shifting resources."
• "We’re going to have to find other things to do with our time and I think that’s something to be celebrated."  Grundfest compared the trend to doctors finding a cure for disease, which is a positive development but leads to fewer patients.
• While the number of securities fraud filings had been averaging about 200 annually, that number will probably be closer to 100 to 120 from now on, Grundfest said. There are several reasons for the trend, including there simply being less fraud, he said.

Check back here in five years or so to see if he was right.