Most securities class action lawsuits that are not dismissed outright ultimately settle. One of the starting points for securities suit settlement negotiations is what is referred to as “plaintiffs’ style” damages estimate. The plaintiffs’ damages estimate is usually adjusted to reflect the composition of the class, the duration of the class period, trading patterns in the defendant company’s stock, and so on. Even with these adjustments, the dollar amount under discussion, at least on the plaintiffs’ side of the equation, is still some form of the plaintiffs’ damages estimate.
One specific fact that would be useful in the dialogue would be to know how much the estimated damages exceed the dollar amount of the damages claims that will actually be submitted and approved for payment if the case settles or if the plaintiffs prevail at trial. It is difficult to come up with the data to calculate these amounts because the outcomes of securities class action lawsuit settlement claims processes are not publicly available and because few cases go to trial and reach a verdict.
However, in a recent paper, several researchers from Cornerstone Research examined the claims data following two recent securities suit jury verdicts. Their analysis identifies actual claims rates in these two cases, information that may be useful to securities litigators and to their clients’ D&O insurers.
In their paper “Approved Claims Rates in Securities Class Actions” (here), Catherine Galley, Erin E. McGlogan, and Pierrick Morel of Cornerstone Research take a look at these issues in the context of the claims processes that followed the recent jury verdicts in the Vivendi Universal and Household International securities class action lawsuits.
The authors note that there are a number of reasons why aggregate damages estimates will likely differ from the total amount of approved claims resulting from a judgment in a securities class action lawsuit in favor of the plaintiffs. These reasons include the fact that: (1) the trading models used in damages estimates are “unreliable” (in that they do not provide an accurate estimate of damaged shares); (2) not all damaged investors submit damages claims; (3) some claims may be rejected (as for example if the defendants are successful in rebutting the presumption of reliance on the market); and (4) there can be methodological differences attributable to the court’s determination of how damages will be calculated for individual directors.
As a result of these factors, there is a difference between the aggregate damages estimates based on the jury verdict and the damages claims that are actually approved. The authors describe the ratio of the approved damage claims to the estimated damages the “approved claims rate.”
The starting point for calculating the “approved claims rate” is first calculating the aggregate estimated damages based on class period and the amount of inflation in the shares of the defendant company, based on the jury verdicts. This calculation must also take into account the publicly available float of the company’s shares, as well as the trading volume, and a model intended to describe the pattern of trading in the company’s shares. Using these factors, the authors calculated the aggregate estimated damages that the jury verdicts in the Vivendi and Household International cases represented.
Having calculated that aggregate estimated damages in connection with the jury verdicts in these two cases, the authors then examined the total dollar amount of the actual approved claims in the cases. Using this methodology, the authors found that the approved claims rate for the Vivendi case was 20 percent, and the approved claims rate for the Household International case was 38 percent.
In other words, the Vivendi case the dollar value of the approved claims was only 20 percent of the aggregate estimate damages that the jury verdict represented. The dollar value of the approved claims in the Household Financial case was only 38 percent of the aggregate estimated damages in the case.
It is worth noting that in both of these two cases there were significant post-verdict proceedings and developments that substantially affected the amount that the class members ultimately realized in each case.
The authors’ analysis of their research is detailed but it does not include an extended discussion of what would follow in a discussion paragraph that began with the word “Therefore.” While the authors state (correctly in my view) that their derivation of the approved claims rate will be “useful” for securities litigators or D&O insurers, they do not spell out in so many words why they think these data would be useful or how these players might use this information.
In my current role these days, I am no longer regularly involved in securities class action litigation settlement negotiations. I have however been involved in these kinds of negotiations in the past. I know that one of the critical details around which the discussions revolve are various assertions about what the defendants’ damage exposures is. (There are of course other factors that enter the discussion, such as the amount of insurance available, the likelihood of either party prevailing on a summary judgment motion, etc.)
As the authors note, one of the factors on which plaintiffs’ counsel attempts to rely in the settlement discussion is the plaintiffs’ damages estimate, calculated using one of the “plaintiffs’-style” damages calculation methods, as adjusted by factors like that trading patterns in the company’s stock, and so on.
If, as the authors’ analysis suggests, only a fraction of the defendants’ damages exposure will actually be realized in claims presented on behalf of claims members, then the estimate of the defendants’ true damages exposure needs to be adjusted to take this fact into account.
That is, if only, say, 20% to 38% of the total estimated damages ultimately will materialize in actual damages claims, then the defendants’ actual damages arguably are substantially less than the aggregate damages as calculated without taking the approved damages claim rate into account.
As the authors suggest, their derivation of the actual claims rate in these two cases will indeed be of interest to securities litigators and D&O insurers.
The value of the calculation of the actual claims rate for these cases is that the provide a basis on which to argue that the defendant company’s actual damages exposure is actually substantially less than the asserted amount of defendant’s supposed estimated actual damages, because in reality only a small percentage of the claims that the aggregate damages estimate supposedly represents will actually be presented and approved. The authors’ analysis substantiates this point.