What are the factors that affect the timing of securities class action lawsuit dismissals and that affect the timing and size of securities suit settlements? These are the questions examined in an April 2012 PLUS Journal article entitled “When Are Securities Class Actions Dismissed, When Do They Settle and For How Much? An Update” (here) by Stanford Law School Professor Michael Klausner and his colleagues Jason Hogland and Matthew Goforth. In this article, the authors update their earlier research on these same questions.
In order to examine these issues, the authors examined the 652 securities class action lawsuits filed between 2006 and 2010. Of the 652 cases, 119 (18%) are ongoing, 257 (40%) have settled, 206 (32%) have been dismissed with prejudice, and 74 (11%) have been voluntarily dropped. Disregarding amounts paid in settlement by third parties (such as offering underwriters), of the cases from this period that settled, the mean settlement amount is $36 million and the median is $9 million.
The authors followed the progression of these cases through the motion to dismiss stage. They found that, among other things, as a result of a combination of dismissal motion rulings, voluntary withdrawls and settlements reached before a dismissal motion ruling, over half of all securities class action lawsuits “end well before discovery and before even a second complaint is filed.”
In 25% percent of cases, the motion to dismiss is granted with prejudice, on average within 19 months of the date on which the complaints were first filed. An additional 9% of cases were voluntarily dropped before the dismissal motion was heard, and another four percent were dropped after the motion to dismiss was granted without prejudice. Thus, a total of 38% of cases “ended relatively quickly and painlessly for defendants.”
In addition, another 13% of cases settled before the motion to dismiss was heard and another 2% of cases settled after the court granted a motion to dismiss without prejudice but before the plaintiffs filed an amended complaint. These cases “entailed costs to defendants and their insurers, but they did not involve extended litigation.”
In 34% of cases, the court granted the motion to dismiss without prejudice, of which 85% of plaintiffs filed a second complaint. The outcome of the second complaint cases roughly parallels the outcomes at the first complaint stage. On average about 30 months passed between the initial filing and the resolution of these second complaint stages. Only five percent of cases reached the third complaint stage, and even fewer involve subsequent complaints. The authors conclude that “relatively few cases entail the filing of a second, third or later consolidated complaint.”
Of all cases that are ultimately dismissed with prejudice, 66% are dismissed at the first complaint stage, 28% are dismissed at the second complaint stage, and 6% are dismissed at the third complaint stage. (Only one case was dismissed at the fourth complaint stage and one was dismissed at the fifth complaint stage.)
Certain factors clearly affect the likelihood of dismissal. For example, when a securities suit involves a parallel SEC enforcement action, the class action was dismissed in only 12% of cases. Cases that involved restatements “were dismissed less frequently than cases that involve non-restatement accounting issues, which in turn were dismissed less frequently than are non-accounting cases.”
In looking at the timing of settlement, the authors categorized the procedural stages of the cases as early pleading (that is, up through the first dismissal motion ruling), later pleading (involving the pleading stages following the first ruling but before the final determination), and discovery (involving the period after the dismissal motion has finally been denied). Forty three percent of settlements occur in the early or late pleading stage, that is while there is still a possibility of dismissal. Just under 60% of settlements occur in the discovery stage, some shortly after the motion to dismiss is denied.
For cases that settle after the motion to dismiss is denied, the time it takes the cases to settle ranges from one month to 46 months, but the mean length of time for a case to settle after the dismissal motion is denied is 16 months.
The authors found that settlement size is related to settlement timing. Settlement size increases as the cases move through the early pleading stage to the discovery stage. The mean settlement for cases that settle in the discovery stage is over $60 million, while the mean settlement of cases that settle in the early pleading stages is less than $20 million.
However, though the settlements tend to grow larger as the cases progress, the settlements as a percentage of shareholder losses decline as the cases advance through the various stages. The authors attribute this seeming contradiction to company size, as larger companies tend to settle later than smaller companies. Though cases involving larger companies settle for larger amounts in terms of absolute numbers of dollars, smaller companies tend to settle for a larger fraction of shareholder losses.
The authors concluded by noting that their findings in this latest updated study are consistent with the finding in their prior study, which had focused on cases filed between 2000 and 2004. The authors note that “it appears that the forces shaping the patterns of dismissal and settlement over the past decade have remained stable.”