In the most recent of the securities litigation analyses, on July 26, 2011, NERA Economic Consulting issued its report on the securities class action lawsuit filing during the first six months of 2011. In a report entitled “Recent Trends in Securities Class Action Litigation: 2011 Mid-Review” (here), NERA suggests, perhaps contrary to other recently published reports, that securities suit filings during the first half of the year were “on the rise” and “indeed unusually high.” As I discuss below, the seeming variance among the various published reports is a reflection of different counting methodology. I have comments about that below.
According to NERA (and by rather stark contrast to the conclusions of the analyses of the recently released Cornerstone Research report), during the first half of 2011 “securities class action lawsuits were filed at the second highest semi-annual rate in the last eight years.” According to NERA, there were 130 filings in the first half of the year. If the filing rate were to continue at the same pace for the rest of the year, “there would be 260 filings in 2011, the highest level since 2002, and the fourth highest in the 16 years since the passage of the Private Securities Litigation Reform Act.”
According to NERA, a decline in the year’s first six months was offset by a “surge in suits targeting Chinese companies.” Over a third of the lawsuits during 2011’s first half were filed against foreign domiciled issuers, a rate which is “extraordinary by historical standards,” and “more than double the prior peak of 2004.”
The filings themselves has “continued to migrate from the Second Circuit to the Ninth Circuit,” as the mix of companies targeted has shifted away from financial companies and toward technology companies. Filings against companies in the financial sector has declined from a 2008 peak of 49 percent to just under 20 percent in the first half of 2011. Filings in against companies in the electric technology and technology services sector represented 22 percent of filings in the year’s first six months.
The NERA report notes that filings activity continues to be positively correlated with market volatility. Controlling for market returns, volatility is positively and statistically significantly correlated with quarterly filings from the second quarter of 1996 through the second quarter of 2011. However, the correlation is “not one-for-one.” Indeed, market volatility and market returns together explain only about 20 percent of the variance in quarterly filings. In other words, volatility is important but it does not come close to telling you everything you need to know.
In looking at the status of cases from the 2000 filing year, the NERA report shows that about 63% of all cases from that year have settled and about 37% percent have settled.
With respect to the 245 credit crisis cases filed as of June 30, 2011, 79 have produced “current dismissals” and “only 23 settlements. “
With respect to first half 2011 settlements, the average settlement was $23 million, which is sharply down from the 2010 average settlement of $108 million. The median settlement during the year’s first six months was only $6.3 million, down sharply from the all time high median settlement of $11 million in 2011. The proportion of cases settling for less than $10 million reached a post-2006 high during the first half of 2011, when 58 percent of cases settled below $10 million , up from 41 percent in 2010.
The report speculates that one reason for the lower settlement levels may be that during the first half of 2011 “cases may have been more apt to settle within insurance limits, possibly due to defendants’ reduced ability to pay.” Of the 15 out of the 48 first half settlements for which NERA was able to determine the insurance contribution, insurance paid all of the settlement in eight cases, between 71 and 81 percent in three and an unspecified rate in the remaining four.
The full report, which has a wide variety of other interesting and useful information, warrant reading at length and in full.
It is purely coincidental that the NERA report’s publication came in such close conjunction with the publication of the Cornerstone Research report. But because they appeared so close in time, it is impossible not to compare the two reports’ findings. The contrast between the reports’ conclusions is striking. The Cornerstone Report suggested that securities class action laws filings are in decline and trending toward historically lower levels. The NERA Report, by contrast, suggests that filings “are on the rise” and “unusually high.”
What in the world is going on? Aren’t these two reports supposed to be analyzing the same thing?
The casual reader will be forgiven for assuming that the two reports are analyzing the same thing. But careful reading of the small print and footnotes will disclose that the two reports are not analyzing the same thing. Or to put it more accurately, they are not counting the same things in the same ways. I suspect there are even more differences in what is counted and how it is counted than can be discerned from the reports themselves. But even just based on what can be gleaned from the reports,, the NERA Report (as described in its footnote 1), counts separate filings against a company in separate circuits as separate lawsuits, at least until they are consolidated. Cornerstone, by contrast, counts each target defendant company only once. Cornerstone also counts separate lawsuits brought by separate classes of securityholders separately, at least until consolidated.
I know from my own experience that another very difficult category has to do with the lawsuits arising from M&A-related transactions. Whether or not to include these cases can only be decided on a case by case basis, and reasonable people almost certainly might reach different conclusions , which could produce significantly different lawsuit counts.
My point here is that how you count affects what you count. And what you count affects the ultimate outcome of your count. The net effect is that we have two very reputable analytic firms reaching quite different conclusions about the level of securities class action lawsuit filing activity during the first six months of 2011. Truthfully, that is the reason I keep my own count, because I find it too confusing trying to make sense out of the conflicting conclusions of the reporting firms.
The problem for everyone is that these conflicting conclusions get picked up in the mass media and reported as if they representing absolute conclusions rather than alternative analyses based on mixed data. These conflicting reports create a great deal of confusion among the general public.
I think part of the problem here as the respective commentators act as if they are publishing their data in a vacuum. Nothing could be further from the truth. I suspect to a very high degree of moral certainty that every single reader that reads any one of these report reads them all. Not only that, but the authors of these reports read each others reports and they know that everyone that reads their reports reads all the reports.
It would be extraordinarily helpful if the authors would acknowledge this reality up front (not in footnotes, not in reduced text, not in text buried deep within the document) in a simple cover page statement that declares the counting methodology used and that explains how that contrasts with counting methodologies used in other published reports. It would be even more helpful if this initial disclosure explained how the methodology selected affects the ultimate count.
By making these remarks here, I hope that no one concludes that I am being critical of anyone. To the contrary, I am one of many people who are very grateful that these high-powered analytic firms are willing to publish their reports and make their analyses available for free. These reports are extraordinarily valuable and helpful. My point is simply that these reports would be even more useful if the reports were to recognize the context within which they are read.
Finally, I want to be sure to acknowledge the incredibly fine work that the folks at these firms produce. On behalf of myself and everyone else that devours these reports as soon as they are published. I would like thank everyone associated with the production of these reports. And since this particular post is about the NERA report, I would like to salute all my friends at NERA and to thank them for another fine report. I hope no one interprets my curmudgeonly remarks as anything other than a friendly suggestion.