2012 Trends in Securities Class Actions

The following post comes to us from Dr. Ron Miller, Vice President at NERA Economic Consulting, and is based on a NERA publication by Dr. Miller, Dr. Renzo Comolli, Svetlana Starykh, and Sukaina Klein; the full document, including complete footnotes, is available here.

Update: The full-year review, which includes December 2012 statistics, is available here.

The Steady Stream of Filings Has Continued Throughout 2012

The steady stream of federal securities class actions has continued unabated throughout 2012. [1] Through the end of November, 195 securities class actions were filed in federal courts—a pace that, if continued through December, would lead to a total of 213 cases for the full year. (See Figure 1.) This would put 2012 filings just slightly below their average rate over the previous five years.

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It is noteworthy that this level of filings has been maintained even though cases related to the credit crisis, which had been prominent in recent years, have all but ended. [2] For example, of the 208 filings in 2009, 59 were related to the credit crisis; by contrast, only four cases of the 195 filed through November of this year involved such allegations. While the decline in credit crisis cases itself is not surprising, it is notable that this decline has not translated into an overall decline in federal filings. The average number of federal filings in 2005-2006, just before the crisis hit, was only 160. One might have expected the rate of filings to return to this lower level after the wave of credit crisis cases subsided, but that has not happened: the plaintiffs’ bar has found new causes of action, with merger objection cases picking up much of the slack.

Number of Settlements Plummets; Number of Dismissals Down Even More

The pace of settlement activity this year is at a record low level—only 92 settlements have been approved this year (or are expected to be approved by the end of the year), the lowest number since at least 1996 and 25% fewer than last year. [3] (See Figure 2 in blue.)

The number of dismissed cases has also dropped. [4] Only 60 cases have been dismissed this year—a reduction of more than 50% since last year and the lowest level since 1998. (See Figure 2 in green.)

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Overall, 152 cases have been resolved (settled or dismissed) in 2012, also a record low since at least 1996.

It is likely that the drop in the number of resolved cases this year has multiple causes. Compared to previous years, 2012 started off with a smaller pool of cases that could potentially be resolved. Because, generally speaking, few cases are dismissed or settled in the same year in which they are filed, the pool of cases that can potentially be resolved during any given year mostly comprises those cases that were pending at the end of the previous year. [5] At the end of 2011, the pool of pending cases was at its lowest level since at least 2000, with only 541 cases available for potential settlements. (See Figure 3.) However, the decrease in the number of pending cases at the end of 2010 versus 2011 is much smaller than the decrease in the number of cases resolved in 2011 versus 2012. This difference suggests that other changes in the legal environment, whether permanent or transitory, are causing a slowdown in resolution. One possible contributing factor is that some resolutions may be being delayed while the Supreme Court considers the Amgen case.

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It is also worth noting that after years of steady decrease, the number of pending cases has increased this year: as of the end of November, there were 578 cases pending, 37 more than last year. This number is likely to increase slightly by year’s end as more complaints are filed. The increase in the number of pending cases reflects, to a large extent, the slow pace of resolutions, since filing rates have been stable; about the same number of cases are entering the pending pool, but few are leaving it.

Median Settlements Exceed $10 Million for the Second Time Since 1996

Although the number of settlements is unusually low this year, the average value of the settlements that have been reached has been within the range of averages we have seen in recent years. The average settlement in 2012 was $36 million, as compared to an average of $42 million over the period 2005-2011. [6] (See Figure 4.)

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As can be seen in Figure 4, the average settlement level has been volatile over time, partly because very large settlements can have an overwhelming impact on the settlement average. When we exclude such settlements, the averages this year are more in line with recent trends and, in particular, a gradual increase that has occurred since the mid-1990s. More specifically, if we exclude settlements over $1 billion, and we also exclude IPO laddering cases and merger objection cases, the average settlement this year was $36 million, a bit above the 2005-2011 average of $32 million. (See Figure 5.)

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The median settlement was $11.1 million, marking only the second year since 1996 in which the median settlement has exceeded $10 million and the largest ever since 1996. (See Figure 6.) Viewed over the whole sample period, the median settlement has also exhibited a gradual increase since the mid-1990s, with some variability around that increase.

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[1] This paper is based on information as of November 30, 2012. NERA tracks class actions filed in federal courts that involve securities. Most of these cases allege violations of federal securities laws; others allege violation of common law, including breach of fiduciary duty as with some of the merger objection cases. If multiple such actions are filed against the same defendant, are related to the same allegations, and are in the same circuit, we treat them as a single filing. However, multiple actions filed in different circuits are treated as separate filings. If cases filed in different circuits are consolidated, we revise our count to reflect that consolidation. Therefore, our count for a particular year may change over time. Different assumptions for consolidating filings would likely lead to counts that are directionally similar but may, in certain circumstances, lead observers to draw a different conclusion about short-term trends in filings.
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[2] We have classified cases as “credit crisis-related” based on the allegations in the complaint. The category includes cases with allegations related to subprime mortgages, mortgage-backed securities, and auction-rate securities, as well as some other cases alleged to involve the credit crisis. Our categorization is intended to provide a useful picture of trends in litigation but is not based on detailed analysis of any particular case.
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[3] We define “Resolution Year” as the year in which the first court hearing related to the fairness of the settlement occurred. Because such hearings are typically scheduled more than a month in advance, the number of settlements shown here for 2012 includes our best estimate of the cases to be settled in December. For cases with multiple partial settlements, a settlement year is determined by the court fairness hearing date of the final partial settlement that concludes the case. Unless otherwise noted, the following settlements have not been included in our statistics: tentative settlements and cases in which some defendants have settled but others have not yet settled, and have not yet been dismissed.
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[4] The number of dismissed cases shown includes dismissals that are not final; some cases may be appealed, others may be filed again. As a result, this figure may change somewhat in future editions as these cases evolve.
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[5] In each year, pending cases are cases that have been filed but have not yet been settled or dismissed. For our calculations, in each year, cases that had been filed more than eight years earlier but had not yet been resolved have been excluded from the pool of pending cases. Cases filed before 1996 have also been excluded.
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[6] Note that the tentative settlement of $2.43 billion in connection with Bank of America’s acquisition of Merrill Lynch is not included in this year’s average, consistent with our general methodology of including only confirmed settlements.
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