On November 19, 2013, Cornerstone Research, in conjunction with the Latham & Watkins law firm, released a report analyzing securities suit opt-out cases. The report, entitled “Opt-Out Cases in Securities Class Action Settlements,” and which can be found here, takes a comprehensive look at cases in which individual class members have opted out of the class action settlement and pursued a separate lawsuit. Cornerstone Research’s November 19, 2013 press release about the report can be found here.


The report’s analysis is interesting on its own, but it may take on a special significance in light of the fact that the Supreme Court’s reconsideration of the fraud on the market theory could lead to a securities litigation environment in which aggrieved investors may have to decide whether or not to pursue individual claims rather than class action claims. The analysis of the opt-out cases may help understand the circumstances in which investors might pursue their claims individually.


The report’s authors examined 1,272 securities class action lawsuit settlements between 1996 and 2011. The authors identified 38 cases, or about 3% of the total, in which at least one plaintiff opted out of the class action settlement and pursued a separate case against the defendants.


Unsurprisingly, the authors found that as the size of the class action settlement grew larger, “the propensity of plaintiffs to bring an opt-out case also increases.” The authors found that in ten percent of the cases involving class action settlements over $20 million and eight of 15 cases with settlements over $500 million had associated opt-out actions. However, only 0.9 percent of class action cases with settlements below $20 million had associated opt-out cases.


In 21 of the 38 class action settlements with associated opt-out cases, the authors were able to find publicly available information regarding settlements or judgments in the opt-out cases. The average total opt-out settlement amount was $85.4 million, or 12.5% of the average class action settlement for these cases. The averages are “skewed by the larger opt-out settlements,” as the median opt-out is only $3.9 million, or 3.9 percent of the related class action settlements.


The largest opt-out settlement was in the AOL Time Warner case, where the $764 million in opt-out settlements represented 30.6% of the class action settlement (refer here for background) . The largest opt-opt settlement as a percentage of the class settlement was the Qwest Communications case, where the $411 million opt-out settlement was 92.4 percent of the final, adjusted class action settlement (refer here for background).


In six of the cases involving opt-out settlements, the opt-out settlements exceeded 20 percent of the size of the class action settlement. However, all of the cases in which the opt-out settlement was greater than 5 percent of the class action settlement took place prior to 2007. The largest opt-out settlements took place between October 2004 and December 2007. The authors did not identify any opt-out settlements greater than $10 million from a class action settlement after 2007.


The most common plaintiffs in opt-out cases were pension funds, which were involved in 13 of the opt-out cases between 1996 and 2011.


While the report details a variety of impressive statistics detailing the opt-out plaintiffs’ recoveries, the report also shows that not all opt-outs succeed. The report describes a number of cases where the class action claims settled but in which the opt-out claimants’ separate cases were dismissed.



The report’s analysis about the timing of the larger opt out cases is interesting. The reports findings suggest that opting out as a significant phenomenon in securities class action litigation was most prevalent  — and seemingly most productive for the opting-out party — during the era of corporate scandals, which resulted in some of the largest class action settlements ever.


It is worth noting that there are at least two significant opt-out actions that remain pending: the Countrywide securities lawsuit opt-out action (about which refer here) and the Pfizer securities lawsuit opt-out action (refer here). Both of these were filed more recently; their outcomes could eventually affect the analysis. But the existence of these cases does is not inconsistent with the general conclusion that the opt-out phenomenon is largely associated with the largest cases.


At first I was somewhat surprised the opt-out cases are associated with only 3 percent of securities class action settlements. However, this general observation may be a reflection of the number of smaller settlements. What is most interesting is that opt out cases were associated with ten percent of cases with class action settlements over $20 million.


These observations are interesting in and of themselves, but they are also interesting to think about in light of the fact that the U.S. Supreme Court will now be reconsidering the fraud on the market theory in the Halliburton case. The outcome of the Halliburton case is uncertain, but if the Supreme Court does set aside the fraud on the market theory, it will be more difficult for aggrieved investors to pursue securities suits as class actions. The investors will then have to consider whether or not they want to pursue a claim individually. While there are a host of factors that might affect this analysis, the authors’ report suggests that individual investors would be less likely to pursue individual claims in smaller cases, although likelier to proceed individually in larger cases.


The relatively short report contains a number of interesting observations and is worth reading at length and in full. The report includes a number of interesting observations about the motivations of opt-out plaintiffs and about the effect of the possibility of opt-outs on the class action settlement dynamic.


Third Quarter Securities Litigation Filing Trends: Readers interested in tracking securities class action filings trends will want to take a look at the November 2013 memo from Woodruff Sawyer reporting on filing trends through September 30, 2013. The report contains a number of interesting observations about securities class action filings. Among other things, the report notes that though there was an “upswing” in filings during the third quarter compared to the first two quarter of 2013, “we anticipate that total filings per year will be on par with 2012 at around 125 cases (127 cases were filed in 2012).” The full memo can be found here.