by T. GormanPosted on Posted in SECActions

The trends in securities class actions are up. The number of cases filed last year was up as previously reported. The number of settlements in 2016 was up. The amount of those settlements was up. The number of mega settlements was up. These and other trends are detailed in the latest report from Cornerstone Research, Securities Class Action Settlements – 2016 Review and Analysis (here).

The trends in securities class action settlements are evidenced by key statistics. The largest settlement in 2016 was $1.575 billion compared to $982.8 million the prior year. The minimum settlement in 2016 was $0.9 million compared to $0.4 the prior year. Similarly, the average settlement amount increased to $70.5 million in 2016 from $38.4 million the year before. And, the number of settlements in 2016 increased to 85 compared to 80 the prior year.

Last year the number of mega settlements was the highest in 10 years. The number of settlements over $100 million almost doubled in 2016 compared to the prior year. Four of the ten approved mega settlement in 2016 were between $100 million and $250 million; four were between $250 million and $500 million; and two exceeded $1 billion. That is the first year since 2006 that there were two settlements over $1 billion in a single year. At the same time the number of what Cornerstone calls “nuisance settlements” those under $2 million) declined from 25% in 2015 to 12% in 2016.

Other key trends include:

  • Total value: The total settlement dollars in 2016 (in millions) increased to about $5,990 compared to $3,073 the prior year and $1,164 in 2014, although the 2016 amount did not exceed that of 2007 which was $8,377.
  • Restatements: Over 30% of the cases settled in 2016 involved a restatement of the issuer’s financial statement, although the number of actions alleging violations of GAAP declined slightly and there were no settlements involving accounting irregularities.
  • Third parties: Only 17% of the settled actions last year named an auditor as a defendant; the median settlement in those actions was lower than in the other settled cases; in contrast 79% of the cases based on Securities Act Section 11 named an underwriter, up compared to the prior year.
  • Institutional investor plaintiff: The median settlement amount for cases with an institutional lead plaintiff was more that two and one half times that of other cases; at the same time cases with a public pension plan serving as lead or co-lead plaintiff tended to have larger issuer defendants, longer class periods and were associated with longer time periods to reach settlement.
  • Derivative suits: In 2016 40% of the settled cases were accompanied by derivative actions, compared to 34% over the period since the Reform Act.
  • Parallel SEC action: In 2016 the median amount of the settlement in actions with a parallel SEC case at $8.6 million differed little from the $8.4 million in the other actions; traditionally, however, a corresponding SEC action is associated with a higher settlement amount – the actions tend to involve larger issuer defendants but they are also frequently delisted firms and tend to settle prior to the ruling on the first motion to dismiss.

Finally, Cornerstone found that median settlement amount tended to increase over the time the case was pending. For example, in 2016 the median settlement for cases settling within two years of filing was 70% lower than those which took longer to resolve, although the numbers were impacted by the mega settlements.

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by T. GormanPosted on Posted in SECActions

The Commission and the DOJ have recently brought a number of securities fraud cases in which a key person in the misconduct concealed a prior criminal conviction for securities related offenses from investors. Another case in this series was announced by the U.S. Attorney for the Eastern District of New York at the end of last week. U.S. v. Schiro, Case No. 1:17-cr-00130 (E.D.N.Y.).

Patrick Schiro is the founder of Black Rock Morgan LLC, supposedly an investment management firm. The firm name appears to mimic, at least in part, that of hugely successful private equity giant BlackRock and well known Wall Street bank J.P. Morgan. Unfortunately for investors the firm was neither. Mr. Schiro is a securities law recidivist, having been previously convicted of securities fraud.

Over a period of about fifteen months, beginning in July 2014, Mr. Schiro raised at least $440,000 from five investors. The sales pitch used by Mr. Schiro is perhaps typified by his representations to one individual. There the potential investor was told that Black Rock had many clients, managed million of dollars and had a team of investment professionals with deep sector specific experience and numerous clients.

Investor funds were supposed to be invested. In fact only a small portion of the investor funds were actually invested. Most of the investor funds were diverted to paying the personal expenses of Mr. Schiro. Investor requests for a return of their capital were typically ignored, although in one email Mr. Schiro claimed that in view of the firm’s AML responsibilities and its obligations under the U.S. Patriot Act, withdrawals were not permitted. The sole exception was if the funds were wired directly to the bank account associated with their Black Rock account. There were no such policies.

Mr. Schiro pleaded guilty to one count of wire fraud on Friday. Sentencing is scheduled for August 2, 2017.

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