Securities Class Action Settlement Amounts Increase from 2011

The 53 court-approved securities class action settlements reported in 2012 represent a 14-year low, according to Securities Class Action Settlements—2012 Review and Analysis by Cornerstone Research. This represents an 18 percent decrease from the number of approved settlements in 2011, and a decline of more than 45 percent from the 10-year average from 2002 through 2011.

As securities class actions historically take a number of years to settle, the decrease in settlements may be due in part to the relatively low number of securities class actions filed in 2009 and 2010. Despite the decrease in the number of cases settled, total settlement amounts increased by more than 100 percent in 2012 compared with 2011, with the number of mega-settlements (settlements in excess of $100 million) accounting for nearly 75 percent of all 2012 settlement dollars. One-third of the settlements in 2012 were for issuers in the financial services industry, with the technology and pharmaceutical industries being the next most prevalent sectors.

The average reported settlement amount dramatically increased from 2011 levels—in excess of 150 percent (from the inflation-adjusted amount of $21.6 million in 2011 to $54.7 million in 2012). The average settlement amount in 2012, however, is closer to the average for all prior post–Reform Act cases.

Median “estimated damages,” a simplified measure of damages that is the single most important factor in determining settlement amounts, had decreased substantially for settlements in 2011. Cornerstone Research observed a nearly 80 percent year-over-year increase in median “estimated damages” for 2012 settlements. At $605 million, the median “estimated damages” for 2012 is at an all-time high among post–Reform Act settlements.

Average “estimated damages” for 2012 reached a six-year high. This increase was driven by a number of extremely large cases, a significant portion of which were related to the credit crisis.

Commentary

Dr. Laura E. Simmons, Senior Advisor of Cornerstone Research:

“It is well known that larger cases tend to settle for smaller proportions of shareholder losses. However, never has this been more apparent than in the 2012 data, which revealed an all-time high for ‘estimated damages’ and a historic low in settlements as a percentage of ‘estimated damages.’”

“Based on the volume of recent securities class action filings, the unusually low number of settlements reported in 2012 is unlikely to persist in the future.”

Professor Joseph Grundfest, Director of the Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research:

“Class action securities fraud litigation is, like many other lines of business, ‘hit driven,’ in that a small number of settlements often account for a large percentage of the dollar flow. That fact of life can make annual settlement data quite lumpy. Settlement trends are often best viewed over time periods longer than a year, and by carefully analyzing settlement data to reflect the underlying characteristics of the cases being settled. So, just as a lull in last year’s data suggested a pickup for this year in the aggregate statistics, it is always possible that this year’s bump could cause total settlement dollars to tick downward next year. That said, a large portion of recent settlement dollars was from filings associated with some of the largest declines in market capitalization during the past 10 years, and we may continue to see settlement totals influenced by a small group of similar cases.”

Additional Study Findings

• The average settlement dollar amount for 2012 mega-settlements increased more than 90 percent from the 2011 average for cases within this size range.
• More than half of post–Reform Act cases have settled for less than $10 million. However, in 2012, fewer than 50 percent of settlements were less than $10 million, reflecting a possible shift in the typical case size.
• A new analysis related to the stage to which the litigation has progressed at the time of its settlement is included in this year’s report. Stages include: settling prior to a ruling on motion to dismiss (Stage 1); settling after a ruling on motion to dismiss but prior to a ruling on motion for summary judgment (Stage 2); and settling after a ruling on motion for summary judgment (Stage 3). The sample of cases reaching Stage 3 have median “estimated damages” more than two and a half times the median “estimated damages” of cases reaching Stage 1. In other words, larger cases tend to advance further in the litigation cycle prior to settlement.
• The median DDL (Disclosure Dollar Loss) associated with settled cases in 2012 increased more than 60 percent from 2011, to $174 million.
• A small portion of the settled cases involved only Section 11 and/or Section 12(a)(2) claims (i.e., they do not include Rule 10b-5 claims). Nearly half of these were settled in 2009 through 2011; however, there were only three of these settlements in 2012. The decrease in this case type is tied to the significant slowdown in the IPO market in 2008 and 2009.
• Institutional investors play an active role as lead plaintiffs in post–Reform Act class actions. Since 2006, more than half of the settlements in any given year have involved institutions as lead plaintiffs with an increasing presence from public pensions. In 2012, public pensions served as lead plaintiff in 49 percent of settled cases compared with only 6 percent in 2003.
• Cases that involve corresponding SEC actions are associated with significantly higher settlements and have higher settlements as a percentage of “estimated damages.” For settlements throughout 2012, at $13 million, the median settlement amount for cases involving corresponding SEC actions was more than twice the median of $6 million for cases without such regulatory actions.

The full study is available here.