A decline in the number and size of settlements in 2011 led to a drop in aggregate and average securities class action settlement figures during the year, according to the annual study of securities suit settlements from Cornerstone Research. According to the study, entitled “Securities Class Action Settlements: 2011 Review and Analysis” (here), the number and total value of all securities suit settlements reached a ten-year low during 2011. Median and average settlements were also well below historical levels. Cornerstone Research’s March 14, 2011 press release regarding the study can be found here.
According to the study, there were 65 court-approved securities class action lawsuits settlement during 2011, representing a total of $1.4 billion in settlement funds. (The study uses the year in which a settlement receives court approval as the year of the settlement, rather than the year in which the settlement was first announced.) The number of 2011 settlements is 25 percent below the prior year’s number and 35 percent below the average of the preceding 10 years. The aggregate settlement amount represents a 58 percent decline from 2010’s total of $3.2 billion.
The median settlement amount declined nearly 50 percent in 2011, from $11.3 in 2010 to $5.8 million in 2011. The 2011 median represents the lowest annual median settlement figure during the post-Reform Act era. The average settlement also declined from $36.3 million in 2010 to $21 million in 2011. The 2011 average is well below the 1996-2010 average of $55.2 million. The 2011 average of $21 million is even below the 1996-2010 average if the three largest settlements during that period are removed from the equation (the adjusted 1996-2010 average is $39.9 million). The 2011 average is the lowest average settlement in the last decade.
The relatively low 2011 average is largely attributable to the absence of very large settlements during the year. In addition, the average for settlements of $100 million or greater declined more than 27 percent from 2010 to 2011.
The report reviews several possible explanations for the decline in the number of settlements and in aggregate settlement funds during 2011. First, the report attributes the decline “largely to the drop in traditional securities class actions that began in 2006.” This decline in filings was partially offset by credit crisis cases, but the credit crisis cases tend to take longer to settle than traditional cases.
Another factor in the ten-year low in average and median settlements is that the 2011 settlements involved cases with lower “estimated damages” than prior years. The “estimated damages” for 2011 settlements declined 40 percent compared to 2010.
The 2011 settlements also lacked the involvement of factors that often are associated with larger settlements. There was a substantial decline during 2011 of settlements involving accounting-related allegations, overlapping SEC actions and companion derivative actions. There was also a reduction in the number of settlements involving third-party defendants (such as auditors). As these factors “tend to be associated with higher settlement amounts,” the drop in the number of cases with these characteristics “may explain the lower 2011 settlement values.”
The factors that contributed to the lower settlement figures during 2011 may only be temporary. Indeed, the report notes that in light of the $725 million AIG settlement that was approved in February 2012, “it appears likely that the total dollar amount of settlements will return to more typical levels in 2012.”
The report contains a number of interesting observations, including one that will be of particular interest to readers of this blog. The report states that nearly 80% of settlements with identifiable D&O insurance contributions “were funded 100 percent by such policies,” compared with about 60% in 2010. The report suggests that this increase in the proportion of the settlement amounts covered by D&O insurance “may be a function of the lower overall settlement amounts in 2011 and an increase in the level of D&O coverage carried by firms.”
The report also contains some interesting analysis about the cumulative distribution of all post-Reform Act settlements. According to the report, more than half of the post-Reform Act settled cases have settled for less than $10 million, about 80 percent have settled for less than $25 million, and only 7 percent have settled for $100 million or higher.
One factor that may have a considerable impact on the analysis is the report’s use of the year of settlement approval as the settlement year, rather than the year of announcement. While this factor is at one level simply a timing issue, it does have an impact. Just to pick one settlement by way of illustration, the $725 million AIG settlement noted above may not have been approved by the court until 2012, but it was first announced in 2010 (refer here). By the same token, there are a number of credit crisis related settlements that were announced in 2011 (for example, the $417 million Lehman Brothers underwriters’ settlement), but that will not receive final court approval until 2012 or later.
To be sure, it makes sense to only include settlements that have actually been approved and as they are approved. My point is just that the use of this methodology distributes the settlements in a way that could affect the overall settlement figures, include overall aggregates, medians and averages. A different methodology might produce different conclusions about settlement trends. This is not just an idle observation; practitioners, for instance, pay keen attention to settlement announcements, and their perceptions of settlement trends are based on the most recent settlement announcements, not the most recent settlement approvals.
That said, the time of settlement approval does have important practical significance, because it dictates when investors receive their money. It also dictates when the plaintiffs’ lawyers get paid as well. Given the relative decline in the number of aggregate value of settlements in 2011, it seems that 2011 was an off year for the plaintiffs’ bar.
The report’s observation about the percentage increase in D&O insurance contribution toward settlement is also very interesting. This observation might suggest that even if the aggregate, averages and medians may be dropping, the equivalent figures for the insurers themselves might actually be increasing.
There are a couple of important considerations to keep in mind with respect to Cornerstone Research’s analysis. The first is that the report considers only class settlements. The figures in the report do not include any amounts related to settlements with other claimants that opt out of the class action settlement, which can be a significant factor in connection with at least some settlements. The settlement amounts in the report also do not include amounts incurred in defending against these lawsuits. The defense costs often are enormous, and typically are borne in whole or in part by the D&O insurers, which adds the overall costs this litigation imposes on the D&O insurers.
Finally, the settlements analyzed in the Cornerstone Research report related solely to securities class action lawsuits. Settlements in association with other types of corporate and securities litigation are not included. In most past years, the absence of consideration of other types of litigation would not have been worth noting, as the securities class action suits represented by far the most significant corporate and securities litigation threat. However, as I have noted on this blog (refer here), litigation relating to mergers and acquisitions activity is becoming an increasingly serious problem – and it is a problem that involves both increased frequency and severity, as large settlements in the M&A cases, previously unknown, have become increasingly common. In other words, the consideration of the trends noted in the Cornerstone Research report represent only a part of the serious corporate and securities litigation exposure that companies face.