Cornerstone Releases Study of 2006 Securities Class Action Settlements
On March 21, 2007, Cornerstone Research released its analysis of 2006 securities class action settlements (here). Cornerstone had previously released its study of 2006 securities class action filings (here). NERA Economic Consulting also previously released its analysis of 2006 securities class action filings and settlements (here). Cornerstone’s study differs in some details from the NERA report but the two studies are directionally consistent. The Cornerstone study also includes some interesting additional observations and conclusions.
The most significant conclusion of the Cornerstone study is its observation that the aggregate value of all 2006 settlements was $17.1 billion, an all-time high, and that even excluding the massive Enron settlement, the remaining $10.6 billion was still an all-time high, exceeding 2005’s previous high of $9.4 billion. The 2006 record high was primarily driven by an increase in average settlements, which in turn was driven by the presence of multiple settlements in excess of $1 billion. These mega settlements are part of a group of 14 cases that settled for $100 million or more.
These large settlements led to a 2006 average settlement of $100.6 million (excluding the Enron settlement), compared with a 1996-2005 average of $22.6 million (adjusted for inflation and excluding the WorldCom and Cendant settlements). If the excluded cases are included, the 2006 average is $180.6 and the 1996-2005 average (adjusted for inflation) is $36.2 million. If the five 2006 settlements over a billion are excluded, the 2006 average settlement is $45 million.
But while the mega cases were driving up the average settlement, settlements in smaller cases did not change that much from prior years. 60% of all 2006 settlements were below $10 million, and the 2006 median settlement of $7.0 million is close to the $6.7 million median during the period 1996-2005.
The 2006 settlement data may reflect a peak of sorts. According to Stanford Law Professor Joseph Grundfest's comments in Cornerstone's press release about the study, (here), “2007 is virtually certain to generate a far smaller aggregate settlement amount.” This is largely because the bulk of the mega cases have worked their way through the system, as a result of which, according to Grundfest, “aggregate settlement amounts have only one way to move, and that’s down.” Grundfest noted that “because a smaller number of cases are now being filed and because these cases involve smaller market losses, I wouldn’t be surprised if the aggregate annual settlement statistics fall dramatically over a period of several years.”
The Cornerstone study also notes a number of specific factors that appear to affect settlement amounts:
Section 11/Section 12(a)(2) Claims: These allegations appear in about 20% of lawsuits, and appear to result in increased settlements. During the period 1996 to 2006, lawsuits with Section 11/Section 12 (a)(2) claims settled for 4.2% of estimated damages, compared to 3.3% for lawsuits with no Section 11/Section 12 (a)(2) claims.
Institutional Investors: Institutional investors are serving as lead plaintiffs in an increasing number of class actions, and served as lead plaintiffs in 50% of all cases settled in 2006. Cases with institutional investors have significantly higher settlement amounts, but that raises a question whether institutions choose to participate in cases with stronger merits or higher potential damages. But even when the data is controlled for these factors, “the presence of an institutional investor results in a statistically significant increase in settlement size.” For example, the median settlement for a case with an institutional investor lead plaintiff in 2006 was $9.0 million, compared with $4.3 million in cases without an institutional investor lead plaintiff. (For a more extensive discussion of the impact of institutional investors as lead plaintiffs, see my prior post, here.)
Derivative Actions: The number of cases with companion derivative actions is increasing, and an accompanying derivative action appears to correlate with a higher class action settlement (perhaps because accompanying derivative actions are most likely when investor loss is greater or the allegations are most serious). During the period 1996 to 2006, the median class action settlement in class actions with accompanying derivative cases was $13.8 million, compared to $5.1 million for cases without accompanying derivative settlements.
SEC Actions: Over 20% of post-Reform Act securities class actions are accompanied by SEC enforcement actions. Class actions with accompanying SEC enforcement actions tend to result in larger settlements (again, perhaps because the SEC Actions are most likely to arise in cases with the most egregious facts). During the period 1996 to 2006, the median settlement in class actions with accompanying SEC actions was $11.0 million, compared to $6.5 million for cases without SEC actions.
Bankruptcy: Over 35% of settlements involved companies that had filed for bankruptcy or had their stock delisted. But settlements of cases involving distressed companies resulted in smaller settlement. The median settlement during the period 1996 to 2006 for a distressed company was $5.3 million, compare to a median settlement for non-distressed companies of $6.8 million.
Opt-Outs: The Cornerstone study notes what “might be the beginning of the trend of an increase in ‘opt-out’ plaintiffs.” But other than noting the (potential) trend, the study does not report or comment on the opt-out cases, undoubtedly because the momentum in opt-out settlements didn’t really get going until 2007.
For whatever it may be worth, I note that the prevalence of opt-out settlements may prove to be a factor that cuts against a decline in securities fraud lawsuit severity, notwithstanding Professor Grundfest’s comments about the probably decline in the size of class action settlements. The D & O Diary’s prior comments about the effect of opt-out settlements in severity can be found here and here.
One final interesting detail: according to the Cornerstone study, the aggregate amount paid in securities class action settlements between 1996 and 2006 is $43.69 billion. That of course does not include defense expense and amounts paid in settlement of SEC actions, or fines or penalties.
My prior analysis of the 2006 securities class action filings and settlements can be found here.
My prior post about Cornerstone’s study of 2006 securities class action filings can be found here. My prior post about the 2006 NERA study can be found here.
Options Backdating Litigation Update: With the addition of the Wireless Facilities securities fraud lawsuit (here), the count of companies that have been sued in securities class action lawsuits based on options backdating allegations now stands at 29. The number of companies named as nominal defendants in shareholders derivative suits stands at 154. The D & O Diary’s running tally of the options backdating lawsuits can be found here.
The Securities Litigation Watch is also maintaining a count of the options backdating related securities lawsuits, which can be found here.
A Break in the Action: There will be a break in The D & O Diary’s publication schedule over the next few days. Normal publication will resume after April 1.
The most significant conclusion of the Cornerstone study is its observation that the aggregate value of all 2006 settlements was $17.1 billion, an all-time high, and that even excluding the massive Enron settlement, the remaining $10.6 billion was still an all-time high, exceeding 2005’s previous high of $9.4 billion. The 2006 record high was primarily driven by an increase in average settlements, which in turn was driven by the presence of multiple settlements in excess of $1 billion. These mega settlements are part of a group of 14 cases that settled for $100 million or more.
These large settlements led to a 2006 average settlement of $100.6 million (excluding the Enron settlement), compared with a 1996-2005 average of $22.6 million (adjusted for inflation and excluding the WorldCom and Cendant settlements). If the excluded cases are included, the 2006 average is $180.6 and the 1996-2005 average (adjusted for inflation) is $36.2 million. If the five 2006 settlements over a billion are excluded, the 2006 average settlement is $45 million.
But while the mega cases were driving up the average settlement, settlements in smaller cases did not change that much from prior years. 60% of all 2006 settlements were below $10 million, and the 2006 median settlement of $7.0 million is close to the $6.7 million median during the period 1996-2005.
The 2006 settlement data may reflect a peak of sorts. According to Stanford Law Professor Joseph Grundfest's comments in Cornerstone's press release about the study, (here), “2007 is virtually certain to generate a far smaller aggregate settlement amount.” This is largely because the bulk of the mega cases have worked their way through the system, as a result of which, according to Grundfest, “aggregate settlement amounts have only one way to move, and that’s down.” Grundfest noted that “because a smaller number of cases are now being filed and because these cases involve smaller market losses, I wouldn’t be surprised if the aggregate annual settlement statistics fall dramatically over a period of several years.”
The Cornerstone study also notes a number of specific factors that appear to affect settlement amounts:
Section 11/Section 12(a)(2) Claims: These allegations appear in about 20% of lawsuits, and appear to result in increased settlements. During the period 1996 to 2006, lawsuits with Section 11/Section 12 (a)(2) claims settled for 4.2% of estimated damages, compared to 3.3% for lawsuits with no Section 11/Section 12 (a)(2) claims.
Institutional Investors: Institutional investors are serving as lead plaintiffs in an increasing number of class actions, and served as lead plaintiffs in 50% of all cases settled in 2006. Cases with institutional investors have significantly higher settlement amounts, but that raises a question whether institutions choose to participate in cases with stronger merits or higher potential damages. But even when the data is controlled for these factors, “the presence of an institutional investor results in a statistically significant increase in settlement size.” For example, the median settlement for a case with an institutional investor lead plaintiff in 2006 was $9.0 million, compared with $4.3 million in cases without an institutional investor lead plaintiff. (For a more extensive discussion of the impact of institutional investors as lead plaintiffs, see my prior post, here.)
Derivative Actions: The number of cases with companion derivative actions is increasing, and an accompanying derivative action appears to correlate with a higher class action settlement (perhaps because accompanying derivative actions are most likely when investor loss is greater or the allegations are most serious). During the period 1996 to 2006, the median class action settlement in class actions with accompanying derivative cases was $13.8 million, compared to $5.1 million for cases without accompanying derivative settlements.
SEC Actions: Over 20% of post-Reform Act securities class actions are accompanied by SEC enforcement actions. Class actions with accompanying SEC enforcement actions tend to result in larger settlements (again, perhaps because the SEC Actions are most likely to arise in cases with the most egregious facts). During the period 1996 to 2006, the median settlement in class actions with accompanying SEC actions was $11.0 million, compared to $6.5 million for cases without SEC actions.
Bankruptcy: Over 35% of settlements involved companies that had filed for bankruptcy or had their stock delisted. But settlements of cases involving distressed companies resulted in smaller settlement. The median settlement during the period 1996 to 2006 for a distressed company was $5.3 million, compare to a median settlement for non-distressed companies of $6.8 million.
Opt-Outs: The Cornerstone study notes what “might be the beginning of the trend of an increase in ‘opt-out’ plaintiffs.” But other than noting the (potential) trend, the study does not report or comment on the opt-out cases, undoubtedly because the momentum in opt-out settlements didn’t really get going until 2007.
For whatever it may be worth, I note that the prevalence of opt-out settlements may prove to be a factor that cuts against a decline in securities fraud lawsuit severity, notwithstanding Professor Grundfest’s comments about the probably decline in the size of class action settlements. The D & O Diary’s prior comments about the effect of opt-out settlements in severity can be found here and here.
One final interesting detail: according to the Cornerstone study, the aggregate amount paid in securities class action settlements between 1996 and 2006 is $43.69 billion. That of course does not include defense expense and amounts paid in settlement of SEC actions, or fines or penalties.
My prior analysis of the 2006 securities class action filings and settlements can be found here.
My prior post about Cornerstone’s study of 2006 securities class action filings can be found here. My prior post about the 2006 NERA study can be found here.
Options Backdating Litigation Update: With the addition of the Wireless Facilities securities fraud lawsuit (here), the count of companies that have been sued in securities class action lawsuits based on options backdating allegations now stands at 29. The number of companies named as nominal defendants in shareholders derivative suits stands at 154. The D & O Diary’s running tally of the options backdating lawsuits can be found here.
The Securities Litigation Watch is also maintaining a count of the options backdating related securities lawsuits, which can be found here.
A Break in the Action: There will be a break in The D & O Diary’s publication schedule over the next few days. Normal publication will resume after April 1.
posted by Kevin LaCroix at 3:38 PM
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