Cornerstone Research Releases 2010 Securities Class Action Settlement Study

Posted on March 10, 2011 by Kevin LaCroix

Though the average dollar value of securities class action settlements approved in 2010 declined slightly compared to 2009, the median settlement amount reached record levels, according to Cornerstone Research’s annual 2010 Securities Class Action Settlement Study. Cornerstone’s March 10, 2010 press release about the study can be found here, and the study itself can be found here.

 

Largely as a result of the decline in the number of mega-settlements, the average securities class action lawsuit settlement approved in 2010 declined to $36.3 million, compared to S37.2 million in 2009. Both of these figures are well the 1996-2009 average settlement of $54.8 million. Even if the post-Reform Act settlement average is "normalized" by excluding the top-three settlements during that era, the 2010 average is still below the adjusted 1996-2009 average of $38.8. (All historical averages are adjusted for inflation.)

 

The median average class action lawsuit settlement approved in 2010 increased to $11.3 million from a 2009 median of $8.0 million. This 40% increase represents the largest single year increase in the median settlement in the last ten years.

 

The sizeable gap between the averages and medians is a reflection of the presence of a few significant larger settlements During the post-Reform Act era, more than half of the securities class actions have settled for less than $10 million, about 80% have settled for under $25 million.. Only 7 percent of cases have settled for more than $100 million. Thus, "while large settlements tend to receive substantial attention, they tend to occur infrequently."

 

The Cornerstone study reports the number of securities class action lawsuit settlements approved during 2010 is the lowest in ten years. The "more likely cause" for this decline is combination of the substantial drop in the number of new securities class action lawsuit settlements and the fact that the credit-crisis suits have taken longer to settle. The average time to settlement for cases settled in 2010 was 4.1 years, compared to 3.9 years for the cases settled in 2009.

 

Obviously, the most significant factor with respect to the overall size of securities suit settlements is the overall amount of investor losses (although the proportionate relationship between the size of the settlement and the size of investor losses decreases as the size of "plaintiff-style" damages increases.)

 

There are a number of other lawsuit features that present statistically significant differences in the size of the settlements. First, cases involving accounting allegations are resolved with larger settlements than cases without accounting allegations. For example, cases involving a restatement settled during the 1996-2010 period settled for 3.9% of "plaintiff-style" damages, but cases without a restatement settled for 3.1% of those amounts. In addition, filings that do not involve accounting allegations are more likely to be dismissed than filings with accounting allegations.

 

The report goes on to observe that the increased complexity of cases involving accounting allegations means these cases may take longer to resolve, which may be a factor contributing to the increased interval between the filing date and the settlement date observed over time.

 

Second, the presence of public pension plans as lead plaintiffs is associated with higher settlements as well. Though this observation could be explained by these investors choosing to participate in stronger cases, the study reports that even controlling for observable factors that affect settlement amounts, "the presence of a public pension plan as a lead plaintiff is still associated with a statistically significant increase in settlement size."

 

Other lawsuit features that are associated with statistically significant settlement amounts are the presence of Section 11 and/or Section 12(a)(2) claims; the presence of a remedy of a corresponding SEC action; and the presence of companion derivative claims. On the latter point, the report notes that class actions accompanied by derivative actions tend to be associated with other factors important to settlement amounts, such as accounting allegations, the presence of related SEC action and the involvement of public pension fund plaintiffs.

 

The credit crisis cases have settled more slowly than "traditional cases." There have also been relatively few settlements of these cases to date, as well. Of the credit crisis cases that have settled so far, they have tended to settle for larger amounts (median settlements of $31.3 million and average settlements of $103.1 million) but for lower percentage of estimated "plaintiff-style" damages (3.2% on average compared to 4.9% for all cases). My compilation of all credit-crisis settlements can be accessed here.

 

Some readers may note slight variations between the averages and median settlement figures reported in the Cornerstone report compared to those reported elsewhere. Thought there are differences, the figures are directionally consistent. The differences may be due to a combination of timing and methodology. The Cornerstone report designates the settlement year as the year in which the hearing to approve the settlement was held. Cases involving multiple settlements are reflected in the year of the most recent partial settlement (subject to certain additional considerations).

 

Though all of the report’s findings are interesting and important and the report is well worth reading at length and in full, for me the most significant finding is the report’s conclusion about the dramatic increase in the size of the median settlement. Averages can be driven by outliers, but medians are more reflective of the overall direction of settlements in general.

 

The rapid increase in the median settlement amount has important implications for corporate insurance buyers as well as for their insurers, particularly at a time when costs of defense are also escalating rapidly. For buyers, the rising median settlement amount clearly has important implications for purposes of limits selection and limits adequacy. I think the unmistakable conclusion is that the questions of limits adequacy may now involve larger levels of insurance than may have been the case in the past.

 

For insurers, and particularly those insurers who more typically are involved in the excess layers, the rising median may have important implications for likely loss experiences. The clear implication is that higher attaching excess layers are increasingly likely to be called upon to participate in case resolution, particularly in light of rising costs of defense. Losses are likelier to push up into higher layers.

 

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Cornerstone Releases 2010 Securities Litigation Study

Posted on January 20, 2011 by Kevin LaCroix

As a result of a spike in second half filings, the number of new securities class action lawsuits increased slightly in 2010 compared to the year before, although the 2010 filing levels remained below historical averages, according to the annual study released jointly by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse. This year’s version of the study, entitled "Securities Class Action Filings: 2010 Year in Review," introduces some innovations that provide some interesting perspectives on securities class action lawsuit filings.

 

The study can be found here, and the joint January 20, 2011 press release about the study can be found here.

 

According to the study, there were 176 securities class action lawsuit filings in 2010, up 4.8% from 2009, but 9.7% below the 1997-2009 average number of filings (195). The increased number of filings in 2010 was largely due to the increased filing activity in the second half of the year, when 104 new securities suits were filed (compared to only 72 in the first half).

 

A significant factor in the increased number of 2010 filings was the number of lawsuits related to merger and acquisition transactions. According to the report, there were 40 filings with allegations related to M&A transactions, which represents a 471 percen increase from the seven M&A-related filings in 2009.

 

This increase in M&A-related litigation cannot be explained simply as reflection of increased M&A activity, since M&A activity increased only 20 percent in 2010. The increase, the report suggests "may be largely a result of changes in plaintiff law firm behavior rather than changes in underlying market forces." The press release quotes Stanford Law Professor Joseph Grundfest as saying that "plaintiffs lawyers are scrambling for new business as traditional fraud cases seem to be on the decline," adding that "there is little reason to believe that this trend will reverse or slow down."

 

The report also notes a number of trends that have previously been noted elsewhere, including the decreasing number of credit crisis-related lawsuits during the year, and the spate of lawsuits involving for-profit education companies and also involving Chinese companies.

 

With regard to the surge in lawsuits involving Chinese companies, the press release quotes Professor Grundfest as saying that this litigation is arising as "some Chinese issuers struggle to conform to Western market norms, adding that at the same time others might engage in outright fraud." The report itself adds the observation that most of the Chinese companies sued in 2010 were only recently listed on major U.S. exchanges; eight out of the 12 Chinese companies sued were listed during 2009 or 2010, while the remaining three issuers were listed toward the end of 2006, 2007 and 2008. On average these companies were sued within 1.4 years of their listing dates.

 

The report includes a status update for the credit crisis related filings. The report confirms an observation I had previously noted, which is that the credit crisis cases seem to be reaching the settlement stage more slowly than compared to securities cases generally. The report states that credit crisis filings "have significantly lower settlement rates compared to non-credit-crisis filings," largely as a result of the cases pending in the Second Circuit. The report shows a 9.8 percent settlement rate for credit-crisis filings compared to 24.1 percent for non-credit crisis filings. However, the dismissal rates for credit crisis-related filings "do not appear to be different from non-credit-crisis-filings."

 

A new feature added to this year’s report is an analysis of the litigation exposure following initial public offerings. The report analyzed the likelihood that a company would be sued in the eleven year period after its IPO, and compared that likelihood to the possibility that a company in the S&P 500 would be sued during that same eleven year period.

 

The report found that the exposure to securities class actions is the highest during the first few years after an IPO, although the exposure diminishes over time as the companies mature. The analysis showed that there is more than a 10 percent chance that firms would be hit with a securities suit within three years of an IPO, with the highest risk in the second year after an IPO, when they faced a 4.1 percent chance of being sued.

 

Interestingly enough, at least with respect to IPO companies that survived for eleven years, the possibility of those companies being sued during that eleven year period is actually lower than for the S&P 500 companies during that period. The S&P companies had a 49.9 percent chance of a suit during that period, compared to only 28.7 percent for the IPO companies. The report speculates that this lower risk over the longer period may be explained by the fact that the IPO companies tend to be much smaller than S&P 500 companies, and therefore represent less attractive targets for the plaintiffs’ lawyers.

 

One particularly interesting aspect of the report’s IPO review is its analysis of the survivability of IPO companies. The report shows that only 39.4% of IPO companies survived for the full eleven year study period (compared to 65.1% of S&O 500 companies).Indeed, more than 35 percent of companies failed to survive four years after their IPO (compared to less than 15% of the S&P 500 that failed to survive the first four years of the study period).

 

The report’s industry analysis shows that as filings against financial companies declined due to the diminution of the credit crisis litigation wave, filings against companies in the health care sector spiked.

 

The report also notes that as the number of M&A related cases has increased, the phenomenon noted in recent years of belated filings (in which the filing date came well after the stock price decline that precipitated the suit) has largely abated.

 

Overall, the report contains a number of interesting observations and findings, and the report warrants reading at length and in full.

 

Two final notes: First, the lawsuit count reflected in the Cornerstone report may differ from other published figures, as the Cornerstone report counts multiple filings against the same defendants as a single filing (compared to other commentators that may count separate complaints separately until they have formally been consolidated).

 

Second, while securities class action lawsuit filings may have been down in 2010 compared to historical averages, the overall level of corporate and securities litigation during the year was actually up – indeed, at "record" levels" – at least according to Advisen’s recently issue report about 2010 litigation activity, about which refer here.

 

My own analysis of the 2010 securities class action lawsuit filings can be found here.

 

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Securities Lawsuits "Down Sharply" According to 2009 Cornerstone Report

Posted on January 5, 2010 by Kevin LaCroix

Securities class action lawsuit filings were "down sharply" according to the annual study of securities class action litigation released jointly today by the Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research. The full report can be found here and the January 5, 2010 press release accompanying the report can be found here.

 

According to the study, which found that there were a total of 169 securities class action lawsuit filings through December 21, 2009, the 2009 filings were both 24% below the 223 filings in 2008 and 14% below the annual average of 197 filings during the years 1997 through 2008.

 

The Stanford study reports a lower lawsuit count than previously published studies of the 2009 securities lawsuit filings, including the prior report of NERA Economic Consulting (refer here) as well as my own prior analysis (refer here). I discuss these differences below.

 

The relative decline in the number of lawsuit filings in 2009 compared to prior years, according to the Stanford report, is attributable in part to the decline in subprime and credit crisis related filings. Among other things, the report notes that there were only 17 subprime and credit crisis related lawsuits in the second half of 2009.

 

The press release accompanying the report also quotes Dr. John Gould of Cornerstone Research as saying that the observed decline is consistent with the decline in stock market volatility during 2009, noting that after increasing during the preceding two years, volatility declined both in the first and second halves of 2009.

 

The study also details the large number of filings that were characterized by "a substantial lag between the end of the class period and the filing" date, a phenomenon about which I written extensively in the past (most recently here). The report notes that the percentage of filings with a lag of more than a year has increased steadily from 5% in 2005 to a historical high of 18% in 2009.

 

According to the study, historically, class action lawsuit with longer filing lags "have been dismissed at a higher rate than class actions with shorter filings lags," at a rate of 55% for the one-year lag filings versus 42% for filings with a lag between one year and six months, and 36% with a lag of less than six months.

 

The study also notes that the lag filings are largely the work of the Coughlin Stoia law firm, which was "involved in 63% of the filings with lags longer than six months and 58% of filings with lags longer than a year." This activity levels compares to the firms involvement in 39% of all filings and 29 percent of filings with lags shorter than six months.

 

The press release quotes Stanford Law Professor Joseph Grundfest as saying, with respect to the lag filings, that the belated filings suggest that "plaintiffs are trying to fill the litigation pipeline by bringing older lawsuits that weren’t attractive enough to file while the firms were busy pursuing financial sector claims," adding that "these lawsuits are more likely to be dismissed and can therefore be characterized as lower quality claims" and that the filings may "reflect factors idiosyncratic to one large plaintiff firm’s strategy, and have little to do with larger market forces."

 

In addition to tracking the overall number of filings, the report also notes the number of lawsuits filed against unique issuers, which declined even more sharply than the overall number of filings. Thus, while the report found that overall filings declined by 24% between 2008 and 2009, the total number of unique issuers involved in securities lawsuits decreased by 32 percent. The difference in the attributable to the number of multiple filings against the same target, as well as the relatively large number of filings against private companies and other non-exchange traded entities.

 

The report further notes that of all exchange traded companies, 1.8 percent were defendants in federal securities class action lawsuits filed in 2009 compared to 2.6% in 2008 and compared to a 2.4% annual average for the 12 years ending December 2008.

 

The number of lawsuits against foreign issuers also declined in 2009, according to the study. After peaking at 16.4% of all filings in 2007, the percentage of filings against foreign issuers declined to 12.4% in 2009. The study attributes the relative decline to the falling off of the credit crisis lawsuits, because so many of the suits against foreign companies were related to the subprime and credit crisis.

 

Finally, the decline in 2009 credit crisis filings was also associated with a decline in market capitalization losses in 2009. The disclosure dollar loss attributable to 2009 class actions was $83 billion, a 62 percent decrease from 2008.

 

Some Thoughts about the Numbers: As noted above, the Stanford study’s 2009 lawsuit count varies from previously published figures, including my own. NERA reported 235 filings in 2009, and I reported 189 (I discuss the difference between my count and NERA’s in my prior post, here), compared to the 169 reported by Stanford.

 

I know that part of the explanation lies in the fact that the Stanford report cutoff at December 21, 2009, which meant that the Stanford study missed at least three more lawsuits filed before year end.

 

The Stanford study also counts multiple filings related to the same allegation against the same companies only once. This provides a partial explanation for the differences between the Stanford study and the NERA study, which separately counts separate actions in separate circuits unless and until the lawsuits are later consolidated.

 

Another difference between the studies may be the fact that the NERA study reported a projected year end number, as the result of an extrapolation from filings through mid-December. Though the Stanford study ended prior to year end, it did not incorporate any extrapolation for cases filed after the cutoff date and before year end.

 

All of these factors clearly are relevant but even collectively they don’t seem sufficient to explain the entire difference. Of course, another factor may simply be differences in information, but given that the plaintiffs’ lawyers put out press releases when they file lawsuits, the information differences likely account for only a small part of the differences in lawsuit counts.

 

All of this underscores a point that I made at length in connection with my own study of the 2009 filings, which is that readers would benefit enormously from knowing more about what protocols the various study publishers use when the are deciding what "counts."

 

The Stanford analysis is certainly easier to decode in this respect that other reports since the Stanford Clearinghouse publishes its list of lawsuits on its website — for free, which is a tremendous public service for which all of us should be grateful. But merely knowing which cases were put on the list does not tell us why those cases were included, nor does it tell us what other cases might have been omitted and why. (Indeed, the reason I continue to do my own count and analysis every year, even though Stanford publishes its own list for free on the web, is the uncertainty about what the list does and does not include.)

 

The Stanford report also gets high marks for stating right on its cover what it is included in its "research sample," which is very helpful and very commendable. But even taking this very explicit information into account, it still seems like there must be more going on that would explain the differences between the various reports.

 

Here are some illustrations of questions that would be helpful to know: Are securities lawsuits filed in state courts included? Are merger objection suits included? Are proxy solicitation misrepresentation cases included? How about lawsuits filed separately on behalf of equity shareholders and bondholders – one lawsuit or two? How about lawsuits that only allege state securities law violations? What kinds of cases are omitted from the count? What other sorting criteria are used?

 

The more of this type of information that readers are provided, the more helpful the published reports would be for readers. The approach that would be most helpful to readers would be for the reports to identify the way that their counting protocols differ from those used by other studies, in order to help readers understand the differences.

 

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Cornerstone Releases Year-End 2007 Securities Litigation Report

Posted on January 3, 2008 by Kevin LaCroix
As the latest of the year-end 2007 securities lawsuit reports (including my own, here), Cornerstone Research has released (here) its 2007 report on securities class action filings. Cornerstone's January 3, 2008 press release describing the report can be found here. The numbers in the Cornerstone report differ from those in the previously released year-end report of NERA Economic Consulting (here), but the numbers are directionally consistent. The Cornerstone report does make some additional observations about the 2007 securities lawsuit filings, and also adds some interesting analysis.

The Cornerstone report notes the following findings:

1. Cornerstone reports that there were 166 securities class action lawsuit filings in 2007, which represents a 43% increase over the 116 filings in 2006. The 2007 yearly total is, however, 14 percent below the average for the ten-year period ending in December 2006.
2. Stock market volatility is important in explaining the number of filings. The increase in filings in the second half of 2007 coincided with an increase in volatility in the U.S. stock market from the historically low levels that prevailed in 2006 and the first half of 2007.
3. Securities lawsuit filings as a percentage of the total number of publicly traded companies increased in 2007. 2.19% of publicly traded companies were sued in securities lawsuits in 207, compared to only 1.57% in 2006, and by contrast to the 2.27% ten-year average from 1997-2006.
4. For cases filed in 2007, the drop in market capitalization both from the beginning to the end of the class period and from the class period high to the end of the class period increased, largely driven by several large case filings in the fourth quarter of 2007.
5. Of the 2,646 cases in Cornerstone's database, 81 percent have been resolved. Of the resolved cases, 41 percent were dismissed and 59 percent settled. For the cases filed from 1996 to 2001, almost all of which have been resolved, the median time to resolution is 33 months. The median time to dismissal is 25 months, and the median time to settlement is 36 months. Cases with larger shareholder losses are likely to take longer to resolve.
6. The Finance sector had the largest amount of litigation activity, with 47 Finance cases in 2007, driven by the subprime crisis.
7. The top three Circuits in terms of the number of 2007 filings were the Second Circuit, with 58 filings; the Ninth Circuit, with 39 filings; and the Eleventh Circuit, with 18 filings.
8. Cornerstone counted 32 cases attributable to the subprime crisis (by contrast to my own count of 34 cases, here). The report notes that the subprime filings reflect a shift in emphasis from allegations related to traditional income statement line items to allegations related to balance sheet components.

In attempting to discern the significance of the 2007 filing levels, the Cornerstone report revisits the analytic framework Cornerstone first postulated in its mid-year 2007 report (here). The mid-year report raised two alternative theories for the lull in litigation activity from mid-2005 to mid-2007, the "less fraud" hypothesis and the "lower volatility" hypothesis. The "less fraud" theory, associated with Stanford Law Professor Joseph Grundfest, involved the theory that as a result of corporate reforms, there is less fraud and hence less litigation. (Professor Grundfest went further and speculated that perhaps, as a result of the reforms, there had been a "permanent shift" to a lower litigation level.) The "lower volatility" theory noted that the period of lower litigation activity coincided with historically low stock market volatility, and speculated that litigation activity might return to historical norms if volatility returned.

The year-end Cornerstone report expressly attributes the increased litigation activity in the second-half of 2007 to the heightened level of stock market volatility during that period. Nevertheless, the report also states that "the 'less fraud' theory suggests a significant and permanent shift in the class action landscape" that is "not inconsistent with the recent increase in filing." The report finds this possibility because of the significant amount of 2007 litigation activity that was directly associated with the subprime crisis, which the Cornerstone report describes as "a likely 'one time' event," that "may not be indicative of future filing activity."

To support this analysis, the report suggests that there is an identifiable "core litigation rate," which is a statistical construct based on historical filings from which "one time events" like "backdating, subprime cases [and] IPO Allocation filings are excluded." Using this construct, the report finds that "litigation activity remains well below historical norms." Professor Grundfest describes this "core litigation rate" as "the litigation rate observed net of one-time systemic shocks."

I cannot disagree with the report's overall conclusion that more data is needed before the "less fraud" hypothesis can be conclusively rejected. Indeed, only time will tell. But for a number of reasons, I disagree with the Cornerstone Report's analysis of the 2007 filings, and in particular with the report's conclusions about the significance of the 2007 filing activity.

First, the Cornerstone report treats the 2007 subprime litigation activity as if it consists of a single, uniform phenomenon, limited in scope and duration. But my own view is that even though the subprime meltdown is still relatively recent, the litigation activity has already evolved into a highly diverse set of circumstances, lawsuits and litigants. As I detail at greater length here, the subprime litigation wave already involves a wide variety of kinds of companies and allegations. Moreover, it is likely to continue to evolve in the months ahead. To isolate the subprime cases as if they represent a narrow or contained phenomenon minimizes the potential of the ongoing subprime litigation wave to drive litigation activity for months and perhaps years to come, and disregards the very real possibility that the wave will expand to encompass a far wider variety of litigants and allegations.

Second, even if the subprime litigation wave can fairly be characterized as a "one-time" event, that is hardly sufficient to marginalize its continuing significance. The fact is the world of D & O liability has experienced a steady progression of "one time events" in recent years -- the bursting of the Internet bubble, the telecom crash, the IPO Allocation cases, the corporate scandals, the options backdating cases, and now the subprime crisis. Indeed, the joke among D & O insurance industry professionals at the recent PLUS International Conference was that subprime is "just a one time event" - the joke being that in the D & O industry, there is a one time event every year, and that results are driven by the constant recurrence of supposed "one time events." When one time events become the norm, they are not extraneous, they are the very essence of the risk exposure.

The reality is that the claims experience in the D & O arena is characterized by a succession of one time events. Indeed, no D & O insurance manager who wished to retain his credibility with senior insurance company management would attempt to try to marginalize the subprime litigation wave by describing it as a one time event, simply because there have been too many supposed one time events in recent years for the phrase to retain any meaning. D & O claims are and for years have been driven by these kinds of events. There perhaps may be a statistical construct by which to postulate a "core litigation rate," but the construct would be disregarded by insurance professionals as lacking credibility and unlikely to provide adequate predictive power to describe likely future events. The practical reality is that it must be assumed that there will always be one time events - not as unusual occurrences, but in the ordinary course.

Finally, as I have documented elsewhere (here and here), subprime litigation is only one of a number of important factors driving the recently increased litigation activity. Even without the subprime cases, the uptick in litigation activity is significant.

To be sure, only time will tell whether the increased litigation activity in the second-half of 2007 is indicative of future activity levels. But as I previously stated (here), I think there is already a sufficient basis upon which to declare that the two-year lull in securities lawsuit filings is over, and to state that there does not appear to have been a "permanent shift" to lower securities lawsuit filing levels.
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