Part I: Securities Class Actions: Current and Emerging Trends
Following the introduction of this new occasional series last week (here), we begin our examination of trends in securities class action litigation with a look at key statistics.
In 2007, there were 163 cases filed, compared to 109 the prior year. Numbers can be deceptive, however. A closer look at the numbers demonstrates that the subprime crisis is having a significant impact. Of the cases filed last year, 29% or 37 actions were tied to the current market crisis. At the same time, the number of securities class actions filed in 2006 may have been down because of the option backdating scandal. Many of those cases were filed as derivative suits, rather than securities class actions.
Perhaps a better way to consider the number of cases filed last year is in comparison to the post–PSLRA average. Since the passage of the Private Securities Litigation Reform Act in 1995, there has been an average of 191 securities class actions filed each year. Viewed against this yard stick, the number of filings last year decreased significantly, particularly if the subprime cases are excluded. A reduction in the number of cases is consistent with the goals of the PSLRA, which sought to weed out those which lacked merit.
Another key statistic involves settlements. Last year there were 113 settlements, compared to 112 the prior year. The total amount of settlements in 2007 dropped compared to 2006, largely because last year there was only one billion dollar settlement compared to three the prior year.
Last year’s largest settlements were:
Tyco: $3.2 billion
Cardinal Health: $600 million
Delphi Corp.: $333.4 million
CMS Energy: $200 million
Motorola: $190 million
However, if the billion dollar cases are excluded, the average settlement in 2006 was larger than in 2007. In addition, the median settlement for 2007 was higher than in other years, due largely to an increase in settlements in the $10 to $20 million range. This again suggests that a key goal of the PSLRA is being met – less meritorious cases are being weeded out.
The largest settlements are those in which there is a labor pension fund as lead plaintiff, there is a parallel SEC or DOJ action and the allegations are based on accounting issues. Since the PSLRA dramatically altered the rules for selecting a lead plaintiff in favor of institutional investors, this trend is also consistent with the statutory goals.
Finally, most cases are resolved at or around the motion to dismiss stage. To date, 81% of the cases filed since the passage of the PSLRA have been settled. Of those cases, 41% were dismissed while 59% were settled. 60% of those settled were resolved at the motion to dismiss stage.
In contrast, few cases have gone to trial. Since the passage of the PSLRA, only 11 securities class actions have proceeded to trial. Five of those cases resulted in defense verdicts, while four settled during trial. Again, these trends are also consistent with the PSLRA. The Act’s substantive and procedural requirements focus on the motion to dismiss stage of the case. At the same time, the discovery provisions of the Federal Civil Rules, which focus on creating a “level playing field” and disclosure of all relevant information, clearly encourage settlement for those securities class actions which survive the initial pleading and motion to dismiss requirements of the PSLRA. Thus, overall the number of securities class actions being filed has declined since the passage of the PSLRA, but the settlement value of the remaining cases is increasing.
Next: The scope of liability under antifraud Section 10(b), the basic claim in securities class actions