On November 10, 2008, NERA Economic Consulting released a report entitled "SEC Settlements: A New Era Post-Sox" (here) that details trends in the number of SEC settlements and of SEC settlement values in the six years since the enactment of the Sarbanes-Oxley Act.


The Report has a number of interesting findings, including the observation that prior to SOX’s enactment, the largest SEC enforcement action penalty was the April 2002 penalty of $10 million imposed against Xerox. However, the Report notes, after SOX, "the SEC has imposed penalties of $10 million against 115 parties, include 14 that were penalized at least $100 million." The Report includes a "top ten" settlements list, which is headed by AIG’s 2006 settlement of $800 million.


The Report also contains an analysis of the five most frequent allegations. Topping the list is microcap fraud (such as broker room operations or pump-and-dump schemes), followed by misstatement/omissions (including options backdating), and misappropriation of investor funds. The majority of cases against publicly traded companies involve allegations of misrepresentations or omissions.


The Report note that the SEC is on pace to reach 739 settlements in 2008, which would represent an increase in the number of settlements for the second straight year. The increase is driven largely by an increase in the number of individual settlements. The number of company settlements, by contrast, is declining. The number of company settlements is on pace to reach 171, which would represent the lowest number of company settlements since SOX was enacted.


The median 2008 company settlement through the end of the third quarter is $1.0 million, which is up from the 2007 median of $700,000, but well below the annual medians during the years 2004-2006, when the medians ranged from $1.1 to $1.5 million. The median individual settlement throughout the post-SOX era has been approximately $100,000.


Median settlements for public company misstatement cases have declined from a 2006 high of $50 million to a 2008 median (through the end of the third quarter) of $12.0 million. The report speculates that this decline may be due to the 2007 institution of a requirement for Commission approval prior to beginning negotiations in public company cases. (It is also probably worth noting that three of the top ten settlements took place in 2006, whereas none of the top ten has yet taken place in 2008.) The majority of public company misstatement cases settle for less than 1% of market capitalization.


The Report did note that of 197 companies the study identified as having settled SEC enforcement proceedings related to company misrepresentations or omissions, 181 had announced the existence of an investigation. The average time from the investigation announcement to the settlement for these 181 companies was 2.3 years.


The report also found that forty-three percent of company payments have been in the form of disgorgement, with 57% representing penalties. With respect to individual settlements, disgorgement represents 88% of payment amounts.


Relation Between SEC Settlements and Securities Class Action Lawsuits?:  The Report anticipated a question that formed in my mind as I read its analysis, which is the relation, if any, between SEC settlements and private securities class action litigation. The Report notes "it might be tempting to draw a comparison" between the number of class action filings, which increased in 2007, and the increase in the number of SEC settlements in 2007 compared to 2006. The Report notes that this comparison would be "misleading" in two respects:


First, the filing of a securities class action represents the first stage of class action legal proceedings, whereas SEC settlements are part of the last stage of the legal process. Because the SEC does not announce its investigations publicly, it is generally not possible to track the beginning of investigations. Instead this paper tracks settlements, which are often the first public information about an SEC matter. Second, most SEC settlements do not parallel shareholder class actions. In 2007, only 22% of SEC settlements were with public companies or their employees and related to misstatements, and were therefore closely comparable to shareholder class actions.


SEC Settlements and D&O Insurance, Briefly Noted: It is probably worth emphasizing that very little if any of the amounts involved in these settlements would have been insured under a typical D&O insurance policy. Most policies exclude from their definition of insured "Loss" such items as "fines and penalties" and disgorgements of amounts are typically excluded or do not otherwise represent insurable loss. However, in many instances, defense fees incurred in connection with the enforcement proceedings would be covered, depending on the applicable policy’s definition of the term "Claim."


New NERA Website: In addition to its Report, NERA also announced on November 10 the launch of its new website entitled "Securities Litigation Trends" (here) where NERA will be centralizing its own securities litigation analysis and also collecting other useful links (including related blogs).


Special thanks to Ben Seggerson at NERA for providing links to the NERA study and to the new web page.