On December 21, 2007, NERA Economic Consulting released (here) its 2007 Year-End Update analyzing recent trends in shareholder class actions. The NERA reports notes, as I have discussed in prior reports (most recently here), that securities lawsuit filing activity levels returned to historical levels in the second half of 2007. In addition, the NERA report also notes that in 2007 both average and median class action settlements were at all-time highs.
The NERA report’s key findings are as follows:
- “Despite some well-publicized speculation that filings had moved to a permanently lower level,” securities lawsuit filings “increased in 2007 after a marked decline that began in the second half of 205 and continued through 2006.”
- The report states that there were 198 securities lawsuits filed through December 15, 2007, and extrapolates a total of 207 lawsuits through year end, which the report notes would be slightly above the 2005 level but still below the 1998-2004 average annual filing level of 234.
- The growth in filings was “driven at least in part by litigation related to subprime lending.” The NERA report states that there were 38 subprime related securities filings during 2007.
- The average settlement in 207 was $33.2 million, a jump from $22.7 million in 2006, and well above the 2002-2007 average of $24.4 million. (The averages do not include the nine settlements over $1 billion).
- In 2007, the annual median settlement also reached an all-time high of $9.6 million, up from $7 million in 2006 and well above the 2002-2007 median of $6.8 million.
- The most important factor affecting settlements amount is “investor losses”; the median investor loss for cases settled in 2007 was $310 million. The median investor loss in cases filed in 2007 is $355 million, which the Report states is “a signal that the settlements associated with these new filings might remain high.”
The NERA report’s conclusions about filing levels are directionally consistent with my prior observations on this blog. I do think it is important to note, as I have detailed elsewhere, that while the subprime-related lawsuits are collectively a significant factor in the increase of filings in the second half of 2007, they are only one among many important factors. More to the point, securities filing activity in the second half of 2007 would still be up significantly over the preceding two years even if there were no subprime cases.
In addition, the NERA report’s lawsuit count is quite a bit higher than my own. My count, which consists of data taken from publicly available sources supplemented by tips I get from readers, show only 171 securities class action lawsuits through December 20, 2007. NERA counts 198 through December 15, 2007 and extrapolates 207 through year-end. I doubt that after today we are going to see too many new lawsuits by year end, so the extrapolated number might be high. It is hard to assess NERA’s count of 198 lawsuits though mid-December, without knowing what cases account for the difference between their tally and mine. I am willing to assume that they just have better data than I do, but I sure would be interesting in knowing what cases I supposedly missed.
Finally, I note that NERA’s count of 38 subprime-related class actions differs from my own count of 34 (refer here for my tally). Part of this difference might be definitional, as it is has become more difficult to sharply describe what is and is not subprime-related. If generalized credit issues cause a company’s problems, is the ensuing lawsuit subprime-related or not? I will say this, I have openly listed the lawsuits I have included on my count here. If NERA or anybody else wants to tell me which cases I have omitted, I will add them to my list with alacrity.
In any event, the NERA report closes with a couple of important points with which I completely agree. First, the report notes that “as the crisis in the credit markets continues to deepen and the market for subprime mortgages continues to suffer accordingly, more litigation is likely to follow.” The second is that given the investor losses on the 2007 lawsuits, “the settlements associated with these new filings might remain high.”
So here’s what the weather gauge says: clouds gathering, storms ahead.
CFO.com has a December 21, 2007 article on the NERA report, here. (Full disclosure, I was intereviewed in connection with the CFO.com article.)