On December 14, 2010, NERA Economic Consulting released its annual year-end study of securities class action lawsuit filings and settlements. The report, entitled "Trends 2010 Year-End Update," can be found here. Among other things, the NERA study reports that class action filings "picked up substantially" in the second half of 2010, and that median class action settlements reached an all-time high in 2010.
There are a couple of important considerations to be taken into account with respect to the NERA report. The first is that its analysis is with respect to filings and settlements through November 30, 2010. The report does incorporate a number of projections to account for the year’s final month.
In addition, the NERA report’s "counting" methodology, as reflected in footnote 3 of the study, may differ from the methodology used in other publicly available analyses of securities class action filings.
The NERA report states that "until cases are consolidated, we report multiple filings that potentially are related to the same allegations if complaints are filed in different circuits." And until cases are consolidated, "we report multiple filings if different cases are filed on behalf of investors in common stock and other securities." If the cases are ultimately consolidated, the data are adjusted. NERA’s methodology differs from that used by other observers (including The D&O Diary), and may result in a filing count that is higher than reported elsewhere.
The study does report a number of interesting findings, including the fact that class action filings accelerated in the second half of 2010. In fact, the study reports, the number of new class action filings in September (25) represents the highest monthly total of new "standard" filings since August 2004.
According to the NERA report, there were a total of 219 filings in the year’s first eleven months. NERA projects a total of 239 filings by year end, which would represent an increase over the 220 filed in 2009 and would be "broadly consistent with the long-term average."
Though companies in the financial sector remain the most frequently targeted, the number of credit crisis-related lawsuits continues to decline. There were only 31 credit crisis related filings in 2010, compared to 57 in 2009 and 103 in 2008. More than half of the new lawsuits against companies in the financial sector in 2010 were unrelated to the credit crisis. About 40% of all 2010 cases named companies in the financial sector, which, while well below the peak of 72% in 2008, still remains above the 28% in 2005 and 2006, prior to the credit crisis.
Other sectors that also saw significant amounts of securities class action litigation included health technology firms, electronic technology and technology services sector. As I previously noted (here), there was also a sharp upturn in cases against companies in the for-profit education sector.
Despite the U.S. Supreme Court’s holding in Morrison v. National Australia Bank (about which refer here), the anticipated drop in cases against non-U.S. companies did not really materialize, largely do to the "spate of suits against Chinese-domiciled companies" (about which I recently commented here).
On the other hand, the number of belated filings of securities lawsuits declined in the second half of 2010. As I previously noted, there had been an upsurge in new case filings reflecting a substantial time lag between the date of filing and the proposed class period cutoff. The NERA study reports that for 2010 filings, the median time to file was only a month, compare to nearly six months for cases in the second half of 2009.
Among trends in factual allegations, the NERA study reports that filings of cases alleging breach of fiduciary duty more than doubled in 2010. Many of these cases were related to mergers or acquisitions.
With respect to case resolutions, the NERA study reports a number of interesting filings. Among other things, the study reports that the average settlement for cases settled in 2010, adjusted for outlier settlements, was $42 million, which is in line with 2009’s record high but well above the $30.4 million average for the period 2003 to 2010.
Even more significantly, the NERA study reports that in 2010, the median settlement jumped to $11.1 million, which not only represents an all-time high, but is more than a third higher than the 2009 median of $8.5 million. However, the report also notes that median investor losses for cases filed in 2010 were down substantially and more in line with pre-credit crisis cases. These more recently filed cases may push median settlements down in future years closer to the historical median.
Consistent with this last point, though average and median settlements are elevated, the settlements as a percentage of investor losses were consistent with similar ratios going back to 2002. The percentage in 2010 was 2.4%, well within the 2.2% to 3.1% range between 2002 and 2009.
One factor that may affect average and median settlements in the near term is the substantial overhang of unresolved subprime and credit crisis-related lawsuits. Even though several high-profile credit crisis cases have been resolved, many more remain pending. The NERA study reports that of the 230 credit crisis-related securities class action lawsuits, only about 8% have been settled, and another 29% have been dismissed, but fully 63% remain unresolved. These cases will continue to work their way through the system in the months ahead.
The NERA report is full of a wide variety of interesting information and insights, and is worth reading at length and in full. I hope to have my own study of the 2010 filings shortly after year end.