Securities Class Action Settlements

The following post comes to us from Narayanan Subramanian, principal at Cornerstone Research. This post discusses a Cornerstone Research report by Ellen M. Ryan and Laura E. Simmons, available here.

There were 65 court-approved securities class action settlements involving $1.4 billion in total settlement funds in 2011—the lowest number of approved settlements and corresponding total settlement dollars in more than 10 years, according to Securities Class Action Settlements—2011 Review and Analysis, an annual report by Cornerstone Research. The number of settlements approved in 2011 decreased by almost 25 percent compared with 2010 and was more than 35 percent below the average for the preceding 10 years. Further, the total dollar value of settlements declined by 58 percent, from $3.2 billion in 2010 to $1.4 billion in 2011. The change in the number of settlements from 2010 to 2011 is one of the two largest year-over-year declines and, combined with a year-over-year decrease in settlements in 2010, the first time there has been a decline in the number of settled cases for two consecutive years.

The median settlement amount for the 65 court-approved settlements decreased substantially in 2011 to $5.8 million, an almost 50 percent decline from the $11.3 million median in 2010, and represents the lowest median settlement amount in more than 10 years. The average reported settlement amount also decreased from $36.3 million reported in 2010 to $21.0 million in 2011 and remains substantially below the average of $55.2 million for all post–Reform Act settlements through 2010. Median “estimated damages” decreased in 2011 by more than 40 percent from the median reported for cases settled in 2010. Since “estimated damages” are the most important factor in determining settlement amounts, the decrease in “estimated damages” in 2011 likely had a major impact on the decline in average settlement amounts compared with 2010. Average “estimated damages” for 2011 are the lowest since 2002. This is consistent with the lower average settlement amounts that we observe for the year-over-year comparison as well as the longer-term comparison.

Dr. Laura E. Simmons, Senior Advisor at Cornerstone Research commented, “The decrease in the median settlement amount is surprising; however, we can point to several factors in 2011 that contributed to this decline. Some of these factors are not likely to persist, suggesting that settlement amounts may rise in the future. For example, accompanying SEC actions tend to be associated with higher class action settlements, and while cases accompanied by corresponding SEC actions were down this year, the SEC has actually increased its level of enforcement activity in recent years. This suggests that all else equal, the number of class actions with corresponding SEC actions will likely increase.”

According to Professor Joseph Grundfest, Director of the Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research, “The class action securities fraud market is a business, just like any other, and the 2011 settlements data indicate that plaintiffs and their counsel are coming off of a weak year. The softness in the data suggests that plaintiffs have been settling a smaller number cases at a lower price point than in the past. Lawyers will debate whether this decline is a result of plaintiffs having brought weaker claims or prodefendant changes in the legal regime, or some combination of the two, but the reality appears clear—the really big litigation bucks were not in the class action securities fraud market in 2011.”

Additional key findings in Securities Class Action Settlements—2011 Review and Analysis include the following.

  • Among settlements in 2011, allegations related to violations of generally accepted accounting principles were included in only about 45 percent of settled cases compared with nearly 70 percent of settled cases in 2010 and 68 percent for the prior five years. Settlements that included instances of a restatement (or announcement of a possible restatement) of financials also declined substantially from more than 40 percent for cases from 2006 to 2010 (and more than 45 percent for cases in 2010) to 25 percent in 2011.
  • Class action settlements involving accompanying SEC actions decreased to less than 10 percent in 2011 compared with nearly 30 percent in 2010.
  • The percentage of settlements involving underwriters in 2011 matched the all-time high of 26 percent reached in 2010. As 60 percent of those cases that settled in 2011 had filing dates in 2007 and 2008, this increased level can be attributed to the higher number of case filings involving Section 11 claims and underwriter defendants during those years. The percentage of underwriter defendants also remained high among cases filed in 2009; thus, we expect that the presence of an underwriter defendant will continue to be a significant factor among settlements in the near future as these cases reach the settlement stage.
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