Class Actions: Fewer Settlements, More Dollars
Securities class action settlements reached a 14 year low last year in terms of the number of cases resolved, according to a new report from Cornerstone Research (here). Nevertheless, the total dollars paid in those settlements more than doubled compared to the prior year. In 2012 the total amount paid to settle securities class actions was $2,201 million compared to just $1,405 million in 2011.
The settlement amounts paid last year are comparable to those reported from 1996 through 2011 when viewed in terms of the minimum amount, the mean, the average and the maximum. In 2012 the minimum payment was $0.5 million, the median $10.2 million, the average $54.7 million and the maximum $822.6 million. Over the prior fifteen years, beginning in 1996 the average for each is: A minimum of $0.1 million; a median of $8.3 million; an average of $55.2 million; and a maximum of $8,325.1 million.
Settlement values for last year were significantly impacted by mega settlements, defined as those over $100 million. Those settlements accounted for nearly 75% of the total settlement dollars in 2012. That compares to 41% in 2011, 60% in 2010, 75% in 2009 and 52% in 2009. Indeed, more than half of the securities class action settlements since the passage of the Reform Act have been for less than $10 million. That contrasts with 2012 where less than half of the settlements were below $10 million. This may suggest a shift in typical case size, according to Cornerstone. Those higher settlement values may also account for the fact that less than 60% of the settlements were fully funded by D&O insurances compared to almost 80% in the prior year.
An analysis of the time to settlement suggests that in 2012 the number years between the filing of the complaint and resolution decreased. In 2012 22.6% of the cases settled in two years compared to 13.4% between 2007 and 2011. While those percentages reverse in the 2-3 year range with 17% for 2012 and 30.6% for the four prior years, the numbers shifts back again in the 3-4 year time frame to 26.3% for 2012 compare to 19.3% over the 2007 to 2011 period.
The number of settled cases that involved a corresponding action by the SEC increased last year compared to 2011. In 2012 there were 11 settled securities class actions with a parallel SEC enforcement action compared to just 5 in the prior year. The number last year is, however, far below those in earlier years. For example, in 2010 21 settled securities class actions had a parallel SEC action while in 2009 and 2008 there were 22 in each year and 31 in 2007 as the market crisis started to unfold. This may in part be explained by the mix of allegations in the cases. In 2012 about 60% of the settled securities class actions cases involved alleged violations of GAAP while the number of accounting fraud actions brought by the SEC in recent years has declined significantly.
Two other points about last year’s settlements are noteworthy. First, since the passage of the Reform Act institutional investors have played an increasing role. Since 2006 institutional investors have served as lead plaintiff in more than half of the cases. This trend continued last year with public pension funds serving as lead plaintiff in about 49% of the settled cases. Typically, the settlement values are higher when an institutional investor serves as lead plaintiff.
Finally, last year more than 50% of the settled securities class actions were accompanied by a derivative suit. That represents a significant increase over the post-Reform Act average of about 30% per year. Settlements in class actions accompanied by a derivate suit tend to be significantly higher, according to Cornerstone, even when the settlements are not at the same time.