A number of trends that had predominated in recent years diminished during 2010 while new trends emerged, according to PwC’s 2010 Securities Litigation Study, which can be found here. 2010 may also mark “the start of a new era” as a consequences of a new regulatory and enforcement environment take effect, which “could lead to a reinvigorated volume of reported securities violations and associated class actions.” PwC’s April 7, 2011 press release about its report can be found here.
In many ways the 2010 securities litigation filing activity was characterized by the reversal of a number of trends. Thus, for example, the declining numbers of credit crisis related cases meant that fewer cases were filed against financially related companies than in the immediately preceding three years (although financial companies remained the most frequent litigation target in 2010). In addition, accounting-related cases continued to decline in 2010, as did the number of new cases against Fortune 500 companies.
On the other hand, the reversal of these trends was “offset” by other trends that emerged during the year, leading to an overall jump in the number of cases. The focus of activity shifted from an “overwhelming focus on the financial services industry” to a “medley of issues across a variety of industries.” Increasing numbers of cases against companies in the health industry, a surge in M&A related cases, a jump in cases against Chinese companies and a rash of cases against for-profit education companies all contributed to the increased litigation activity.
Overall, the total number of federal securities class action filings rose 12 percent during 2010 compared to 2009, from 155 to 174. (PwC’s count may vary from other published reports as a result of its counting methodology, pursuant to which “multiple filings against the same defendant with similar allegations are counted as one case.”). There were more filings in the third and fourth quarters of 2010 than in either of the first two quarters. Among other things, the increase in filings in the year’s second half reflected the “increasing domination o f non-financial crisis-related cases and the decline in financial-crisis related cases.”
Among the principle drivers of the increased number of filing in the second half of 2010 was the increase in the number of M&A related cases. Overall, M&A cases represented 24 percent of all securities filings in 2010, compared to only 4 percent in 2009.
Health industry cases increased from 17 percent in 2009 to 21 percent in 2010, representing the second highest percentage of for any industry in 2010. The filings included cases against pharmaceutical, medical device and health services companies. (My recent post discussing 2010 securities filings against life sciences companies can be found here.)
The percentage of cases raising accounting-related allegations (including overstatement of revenues, understatement of expenses and liabilities and overstatement of assets) fell from 37 percent in 2009 to 35 percent in 2010, which represents the lowest level of accounting-related cases in 15 years. The report speculates that one possible reason for this decline in accounting-related cases could be “the effectiveness of SOX in combating accounting fraud.” On the other hand, the decline in the number of cases involving accounting allegations could also just be a reflection of the changing mix of cases; the options backdating cases that predominated a few years ago were replete with accounting-related issues, but the increasing numbers of M&A cases in 2010 rarely involved accounting allegations.
Surprisingly, in light of the U.S. Supreme Court’s June 2010 decision in Morrison v. National Australia Bank, the number of filings involving foreign issuers increased during 2010 by 35 percent, and of the 27 cases filed in 2010 involving foreign issuers, 16 (or 59 percent) were filed after the Morrison decision was announced. The percentage of cases involving foreign issuers as a percentage of all filings increased during 2010 from 13 percent in 2009 to 16 percent in 2010.
Of these 27 cases involving foreign issuers, 12 cases (44 percent) involved Chinese companies. Eleven of the 12 cases against Chinese companies involved accounting allegations.
The average settlement of securities related cases during 2010 decreased by 11 percent compared to 2009, from $34 million to $30.1 million.(PwC ‘s figures may differ from other published reports as PwC assigns the settlement to the year of the “primary settlement announcement,” and any subsequent announcements are attributed to the primary announcement year.” PwC also excludes zero dollar settlements.)
However, the average settlement value of cases settled for more than $1 million and less than $50 million increased by 21 percent, from $10.7 million in 2009 to $12.9 million. In addition, median settlements increased by nearly 35 percent, from $7.5 million to $10.1 million.
The PwC report concludes with a survey of the changing liability environment arising from the new regulatory mandates introduced by the Dodd-Frank Act. Because enforcement activities “are likely to increase” and the new Dodd-Frank whistleblower provisions “could produce a surge in allegations of securities violations,” the financial regulatory environment is “vastly different in 2011 from what it was just one year ago, and companies will have to devote significant resources to understanding and adapting to its new topography.” The decade ahead has “the potential to yield yet more transformations.”
My analysis of the 2010 securities class action litigation filing can be found here. My more recent study of first quarter 2011 filings (here) shows that many of the trends that emerged in 2010 continued in the first quarter, including in particular the heightened level of M&A related litigation. In addition, as I recently noted (here), the wave of accounting-related litigation involving Chinese and China-linked companies has also continued in 2011.
WaMu Subprime-Related Securities Lawsuit Settlement in the Works: In case you missed the news last week, the WaMu subprime-related securities lawsuit apparently has settled. According to the Court’s April 6, 2011 minute order (here), the parties have advised the court that the lead case has settled, and the Court has suspended all of the schedules dates and motions. The settlement papers have not yet been filed so the details of the settlement are not yet known, but an April 6, 2011 Seattle Times article by Sanjay Bhatt (here) reports that the amount of the settlement “is in excess of $200 million.”
The WaMu case, of course, relates to the facts and circumstances surrounding the largest bank failure in U.S. history. The case itself did not necessarily unfold smoothly from the plaintiffs’ perspective. In a May 2009 opinion that was sharply critical of the plaintiffs’ pleadings (about which refer here) , Western District of Washington Judge Marsha Pechman has initially granted the defendants’ motion to dismiss. However, the plaintiffs’ amended pleadings survived the renewed motion, and now the parties apparently have settled the case.
The details of the settlement, once they are finally released, will be interesting in and of themselves, but they may be even more interesting in light of the recent action that the FDIC filed against three former WaMu executives and the wives of two of the officials (about which refer here). The possibility that the WaMu securities suit settlement could involve the payment of hundreds of millions of dollars raises the possibility that the settlement would consume the remaining limits of WaMu’s D&O insurance policy, possibly leaving the defendants in the FDIC without insurance remaining for them to defend themselves against and to try and settle the FDIC claims.
So The D&O Diary is interested in a number of details about the settlement, beyond just the settlement’s dollar value. We are interested to see how much of the settlement will be funded by D&O insurance, and whether any of the settlement is to be funded out of the individual defendants’ assets. We are also interested to see if the settlement documents show whether the settlement exhausts the remaining D&O insurance limits. Along the same lines, it will be interesting to see (if possible) what kind of a release the insurers are getting in exchange for the insurance payment, if any, and whether it is a policy release or just a claim release.
In any event, the WaMu settlement is just the first of what I think will be a wave of subprime-related securities lawsuit settlements during the course of 2011. The WaMu settlement also vividly illustrates the competition for insurance policy proceeds that the FDIC will face as it seeks to pursue lawsuits against directors and officers of failed banks, particularly as in many cases the shareholders have been actively pursuing their claims while the FDIC has proceeded much more deliberately.
Speakers’ Corner: On Thursday April 14, 2011, I will be a panelist at the Professional Liability Underwriting Society Southwest Chapter’s Educational Event in Englewood, Colorado. The title of the even t is “Winds of Change in Executive and Professional Liability,” and I will be speaking on panels on the topics of Governmental Investigations and D&O Liability Developments. Information about the event can be found here.
If you are a part of the Southwest Chapter, I hope you are planning on attending. And if you are attending I hope you will take a moment to say hello, particularly if we have never met before.