Cornerstone Research Releases 2010 Securities Class Action Settlement Study

Though the average dollar value of securities class action settlements approved in 2010 declined slightly compared to 2009, the median settlement amount reached record levels, according to Cornerstone Research's annual 2010 Securities Class Action Settlement Study. Cornerstone's March 10, 2010 press release about the study can be found here, and the study itself can be found here. Largely as a result of the decline in the number of mega-settlements, the average securities class action lawsuit settlement approved in 2010 declined to $36.3 million, compared to S37.2 million in 2009. Both of these figures are well the 1996-2009 average settlement of $54.8 million. Even if the post-Reform Act settlement average is "normalized" by excluding the top-three settlements during that era, the 2010 average is still below the adjusted 1996-2009 average of $38.8. (All historical averages are adjusted for inflation.) The median average class action lawsuit settlement approved in 2010 increased to $11.3 million from a 2009 median of $8.0 million. This 40% increase represents the largest single year increase in the median settlement in the last ten years. The sizeable gap between the averages and medians is a reflection of the presence of a few significant larger settlements During the post-Reform Act era, more than half of the securities class actions have settled for less than $10 million, about 80% have settled for under $25 million.. Only 7 percent of cases have settled for more than $100 million. Thus, "while large settlements tend to receive substantial attention, they tend to occur infrequently." The Cornerstone study reports the number of securities class action lawsuit settlements approved during 2010 is the lowest in ten years. The "more likely cause" for this decline is combination of the substantial drop in the number of new securities class action lawsuit settlements and the fact that the credit-crisis suits have taken longer to settle. The average time to settlement for cases settled in 2010 was 4.1 years, compared to 3.9 years for the cases settled in 2009. Obviously, the most significant factor with respect to the overall size of securities suit settlements is the overall amount of investor losses (although the proportionate relationship between the size of the settlement and the size of investor losses decreases as the size of "plaintiff-style" damages increases.) There are a number of other lawsuit features that present statistically significant differences in the size of the settlements. First, cases involving accounting allegations are resolved with larger settlements than cases without accounting allegations. For example, cases involving a restatement settled during the 1996-2010 period settled for 3.9% of "plaintiff-style" damages, but cases without a restatement settled for 3.1% of those amounts. In addition, filings that do not involve accounting allegations are more likely to be dismissed than filings with accounting allegations. The report goes on to observe that the increased complexity of cases involving accounting allegations means these cases may take longer to resolve, which may be a factor contributing to the increased interval between the filing date and the settlement date observed over time. Second, the presence of public pension plans as lead plaintiffs is associated with higher settlements as well. Though this observation could be explained by these investors choosing to participate in stronger cases, the study reports that even controlling for observable factors that affect settlement amounts, "the presence of a public pension plan as a lead plaintiff is still associated with a statistically significant increase in settlement size." Other lawsuit features that are associated with statistically significant settlement amounts are the presence of Section 11 and/or Section 12(a)(2) claims; the presence of a remedy of a corresponding SEC action; and the presence of companion derivative claims. On the latter point, the report notes that class actions accompanied by derivative actions tend to be associated with other factors important to settlement amounts, such as accounting allegations, the presence of related SEC action and the involvement of public pension fund plaintiffs. The credit crisis cases have settled more slowly than "traditional cases." There have also been relatively few settlements of these cases to date, as well. Of the credit crisis cases that have settled so far, they have tended to settle for larger amounts (median settlements of $31.3 million and average settlements of $103.1 million) but for lower percentage of estimated "plaintiff-style" damages (3.2% on average compared to 4.9% for all cases). My compilation of all credit-crisis settlements can be accessed here. Some readers may note slight variations between the averages and median settlement figures reported in the Cornerstone report compared to those reported elsewhere. Thought there are differences, the figures are directionally consistent. The differences may be due to a combination of timing and methodology. The Cornerstone report designates the settlement year as the year in which the hearing to approve the settlement was held. Cases involving multiple settlements are reflected in the year of the most recent partial settlement (subject to certain additional considerations). Though all of the report's findings are interesting and important and the report is well worth reading at length and in full, for me the most significant finding is the report's conclusion about the dramatic increase in the size of the median settlement. Averages can be driven by outliers, but medians are more reflective of the overall direction of settlements in general. The rapid increase in the median settlement amount has important implications for corporate insurance buyers as well as for their insurers, particularly at a time when costs of defense are also escalating rapidly. For buyers, the rising median settlement amount clearly has important implications for purposes of limits selection and limits adequacy. I think the unmistakable conclusion is that the questions of limits adequacy may now involve larger levels of insurance than may have been the case in the past. For insurers, and particularly those insurers who more typically are involved in the excess layers, the rising median may have important implications for likely loss experiences. The clear implication is that higher attaching excess layers are increasingly likely to be called upon to participate in case resolution, particularly in light of rising costs of defense. Losses are likelier to push up into higher layers.

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