Shareholder fraud suits against companies plummet nationally in 2006 but rise in South Florida

MIAMI — Shareholder suits in federal court against companies for fraud dropped by 38 percent in 2006 , largely because of stricter federal enforcement and a stable stock market, according to a report released Tuesday by the Stanford Law School Securities Class Action Clearinghouse.

The number is the lowest ever recorded by the Stanford clearinghouse. However, suits against South Florida companies actually increased.

Nationally, the number of suits filed in federal courts fell to 110 in 2006 from 178 in 2005. The 10-year average is 193 suits a year, with 1998 being the high water mark, with 240 suits filed.

The number of South Florida companies sued in federal court increased to five from two the year before. Eight South Florida companies were defendants in 2004 and seven in 2003.Companies sued in 2006 were:

• Applica Inc., the Miramar-based kitchen appliance maker, which is accused of making false and misleading statements about the company’s ability to remake itself from a manufacturing company into a marketing and distribution business. The company also allegedly filed financial statements that didn’t meet generally accepted accounting principles;
• GlobeTel Communications, the Fort Lauderdale company that installs wireless communications systems. A suit filed in April alleges that the company touted a $600 million deal to install wireless systems in Russia’s 30 largest cities. That deal, the suit alleges was nothing more than a sham intended to drive up GlobeTel stock;
• Forward Industries, a Pompano Beach company that makes carrying cases for cell phones, cameras and medical equipment. The company allegedly overstated sales figures, failed to disclose diminishing margins for its products and failed to disclose details about its business prospects;
• Parlux Fragrances, the Fort Lauderdale perfume retailer. The company is accused to issuing positive public statements intended to create an impression of growing review and strong profit prospects to give insiders the opportunity to sell stock at high prices. Shares hit a high of $38.48 in February 2006, and fell to $4.95 in August as the company’s true financial condition became apparent, the suit alleges;
• Technical Olympic USA, a Hollywood-based home builder. The company allegedly issued misleading statements about the financial terms of a joint venture.

In 2005, Andrx Corp. and SFBC International were the only South Florida companies that became targets of shareholder suits.

“These are unprecedented numbers, and my bet is that the private securities fraud litigation market is shrinking because corporations are engaging in less activity that gives plaintiffs an excuse to file a complaint alleging fraud,” said Stanford Law professor Joseph Grundfest. “The federal government is a much more aggressive adversary than the private bar, and the feds can force a level of compliance that private class action lawyers could never touch. I think we are seeing the effects of a tougher and smarter campaign against white collar fraud by the SEC and Department of Justice.”

Grundfest is director of the Securities Class Action Clearinghouse, co-Director of the Rock Center on Corporate Governance, and former member of the Securities and Exchange Commission.