Corporate executives and their counsel, take note: While soaring average and total settlement amounts in recent years have been making headlines—driven by a small number of extremely large cases—the latest data show that the largely ignored mid-range settlements are packing a pretty big punch as well. That’s according to the latest data on securities class action settlements in 2007, compiled by Cornerstone Research.
Middle-range settlements—defined in the report as those worth $10 million to $20 million—made up a bigger piece of the settlement pie last year, accounting for nearly 25 percent of the total, compared with just over 10 percent in 2006. The result was a spike in the median settlement to a record high of $9 million, up from $6.9 million for the years 1996 through 2006.
Simmons
“This is the first time we’re seeing upward shift in what represents a more typical case,” Laura Simmons, one of the report’s authors and a senior advisor to Cornerstone Research, tells Compliance Week.
Companies should take heed, because the trend could affect their insurance purchasing decisions, notes Kevin LaCroix, a partner in OakBridge Insurance Services and publisher of the D&O Diary, a blog about directors’ and officers’ liability issues.
“The median is much more indicative [than the average or aggregate] of what’s happening in the vast run of cases,” says LaCroix. “Companies may need to relook at that and make sure they have enough insurance to protect a typical exposure.”
LaCroix
Many companies purchase insurance coverage within that $10 million to $20 million range, which may no longer be sufficient, says LaCroix. “With the increase in the median settlement and increasing defense expenses, companies need to make sure they have enough insurance to settle a likely range of cases.”
A Look at the Numbers
Joseph Grundfest, director of the Stanford Law School Professor and Securities Class Action Clearinghouse, says the aggregate dollar value of settlements over the next two or three years is likely to decline significantly “because the inventory of large cases in the pipeline just isn’t there.”
However, Grundfest says there’s an open question as to whether the sub-prime crisis will cause an increase in securities fraud settlement activity, which might not become apparent for three to five years anyway since it typically takes that long for cases to settle.
Adam Savett, vice president and director of RiskMetrics Group’s Securities Class Action Services, disagrees. He expects to see the median to “stay where it is or even tick up a little bit.”
Savett
“More of the top 100 largest securities class-action case settlements from the time the Private Securities Litigation Reform Act was enacted have been settled in the last three years than were settled in the prior nine years,” Savett says. According to data tracked by RiskMetrics, 22 of the top 100 SCA settlements occurred in 2007, compared with 17 in 2006 and 19 in 2005.
Additionally, there’s been tremendous growth in the participation of institutional investors as lead plaintiffs, which tends to drives up settlement values. Indeed, the Cornerstone report notes that almost 60 percent of cases settled in 2007 included institutions as lead plaintiffs.
SETTLE UP
Settlement Summary Statistics
2007
Settlements Through 2006
Minimum
$0.4 million
$0.1 million
Median
$9.0 million
$6.9 million
Average
$62.7 million
$54.7 million
Maximum
$3.2 billion
$45.0 billion
Settlement dollars adjusted for inflation; 2007 dollar equivalent figures shown. Excluding the top four settlements, the average and total values are: $34.2 million and $3.8 billion for 2007 and $33.2 million and $27.2 billion for all settlements through 2006.
Source
Cornerstone: Class-Action Analysis (2007).
The number of securities class-action cases settled last year climbed 21 percent, from 92 in 2006 to 111 in 2007. The number of settled cases involving companion derivative actions also increased.
More than 55 percent of cases settled in 2007 were accompanied by the filing of a derivative action, compared with 45 percent in 2006 and 35 percent in 2005, Cornerstone reports. While the settlement of a derivative action doesn’t necessarily result in a cash payment, the report notes that settlements for class actions accompanied by derivative cases are also significantly higher than for cases not involving them.
Additionally, Savett says, “There are also still some fairly big cases out there that are unresolved.” For instance, Xerox Corp. agreed in late March to pay $670 million to settle an eight-year-old securities lawsuit.
The average settlement in 2007, at $62.7 million, pales in comparison to the astronomical level of 2006 of $105 million (excluding the $7.2 billion Enron settlement). However, it’s still far higher than the average of $54.7 million for the years 1996-2006, the report notes.
“Yes, the totals were down precipitously from 2006, but 2007 was still the second largest year ever,” says Savett.
However, last year saw the third-largest settlement in history behind Enron and WorldCom: the $3.2 billion Tyco International settlement, which accounted for almost 45 percent of the total $7 billion value of settlements. Tyco was the only settlement approved in 2007 that exceeded $1 billion, compared with four in 2006, according to Cornerstone. Last year saw nine settlements exceeding $100 million, down from 14 in 2006.
Following an unusually high average of estimated damages for settled cases in 2006, 2007 saw a return to the 2003-05 average. While 2006 had 18 settlements with estimated damages in excess of $5 billion, 2007 had just 10. In 2007, only 24 percent of settlements (27 cases) involved estimated damages of $1 billion or more—the lowest percentage since 2003.
Declining Restatement Allegations
The report also notes that, for the second year in a row, the percentage of cases involving allegations that resulted from restatements declined, representing just 30 percent of settlements in 2007.
While Cornerstone notes that more than 75 percent of the settlements last year were for cases filed after the 2002 passage of Sarbanes-Oxley—which is consistent with the notion that corporate governance improvements are contributing to the reduced frequency of allegations involving restatements in settled securities litigation matters—the report says “it is too early to conclude with any certainty the cause of the decline” or whether it will persist.
While useful, LaCroix and Savett both note that the Cornerstone data do not provide a complete picture when it comes to understanding the costs associated with resolving securities litigation.
SETTLE DOWN
Median Settlements and Derivative Actions (in millions, 1996-1997)
Year
No Public Pension as Lead Plaintiff
Public Pension as Lead Plaintiff
1998
$6.3
$63.3
1999
$5.8
$5.8
2000
$5.0
$24.0
2001
$5.0
$118.8
2002
$5.1
$25.4
2003
$5.8
$35.0
2004
$5.1
$67.5
2005
$5.8
$22.6
2006
$5.1
$99.3
2007
$6.0
$18.0
Source
Cornerstone: Class-Action Analysis (2007).
“The report only looks at federal cases, which is just a small subset of overall securities litigation universe,” says Savett. “While the bulk of cases are at the federal level, they exclude an important part of the overall case volume.”
When federal, state, SEC, and international settlements are taken into account, the total number of settlements in 2007 was a record high of 243 with a combined value of $9.96 billion, according to data tracked by RiskMetrics. That’s compared with 180 settlements valued at a total of $19.3 billion in 2006.
‘Opt-Out’ Settlements
Another factor the Cornerstone report doesn’t take into account is settlements involving ‘opt outs.’ Savett says there’s been an increasing trend among large institutional investors to opt out of settlement classes, enabling them to file their own individual actions.
In fact, LaCroix notes that a $411 million settlement Qwest agreed to pay to opt-out claimants last year exceeded the value of the $400 million it agreed to pay to settle a securities class-action lawsuit.
“The opt-out phenomenon is important for understanding the total severity picture for SCA lawsuits,” says LaCroix. “If you only look at the class-action settlements and you don’t take into account the individual opt-out actions, you may underestimate your exposure to securities litigation.”
Adds LaCroix, “While the opt outs are a relatively new phenomenon, the conversations I’ve had with plaintiffs’ attorneys makes me think they’re not going to go away.”
LaCroix says another unknown is the impact of the June 2007 Supreme Court decision in Tellabs v. Makor. “The Tellabs decision is still working its way through the lower courts,” he says. “Some courts have shown a willingness to interpret the Supreme Court mandate in Tellabs as shifting the balance toward a more skeptical, more defense-oriented approach.”
While an increase in dismissals might see the dollars involved coming back down, he says, “On the other hand, if the cases that survive are that much more serious, we might see the numbers continue to go up.”
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