cornerstone reserach pdfThe aggregate amount of all securities class action settlements during 2014 declined to the lowest level in years and there also was a “dramatic” decrease in the average securities suit settlement amount during the year, according to a March 24, 2014 report from Cornerstone Research. The report, which is entitled “Securities Class Action Settlements: 2014 Review and Analysis,” can be found here. Cornerstone Research’s March 24, 2015 press release about the report can be found here.


According to the report, the number of securities suit settlements during 2014 (63) was just about the same as the number in 2013 (66). However the total amount of all securities class action lawsuit settlements during the year was $1.068 billion, compared to $4.847 billion in 2014, a decline of 78 percent. The 2014 total is the lowest level in sixteen years and was also 84 percent below the annual average for the prior nine years. (All figures in the report are adjusted for inflation. The settlement year for purposes of the report corresponds to the year in which the hearing to approve the settlement was held, rather than the year in which the settlement announced.)


In addition, the average settlement amount also decreased in 2014. The average settlement amount during 2014 was only $17.0 million, compared to $73.5 million in 2013, well below the annual average for the period of 1996-2013 of $57.2 million. The average settlement amount in 2014 was 64 percent below the annual average during the post-PSLRA period. The 2014 average settlement amount was the lowest level since 2000. The median settlement in 2014 of $6.0 million is only slightly below the 2013 median of $6.6 million, but more significantly below the 1996-2013 median settlement amount of $8.3 million.


The reason for the decline in the aggregate and average amounts during 2014 is that there were fewer large settlements. The largest settlement in 2014 was $265 million, compared to $2.5 billion in 2013. In 2014, all but one of the 63 cases (98 percent) settled for less than $100 million, and 11 percent settled for $2 million or less. In addition to the decrease in the number of very large settlements, there was also an increase in the proportion of settlements of $10 million or less. About 62 percent of all 2014 settlements were for $10 million or less, compared to 53 percent during the period 2005-2013.


The decline on the number of large settlements arguably is no surprise as the dollars potentially at stake in the cases that settled in 2014 were lower than was the case in recent years. Using what the report calls “estimated damages” as a way to measure amount plaintiff shareholders might seek to recover, the report notes that the “estimated damages” in the 2014 settlements were 60 percent lower than for 2013, and were the lowest in 12 years, which “contributed to the substantially lower average settlement amounts.” The report notes that the volatility of the stock market in recent years has been declining when compared to earlier years, which may have contributed to the smaller average “estimated damages” for cases settled in 2014. Moreover, as a result of the reduction during 2014 of the filing of cases with large market capitalization losses “may mean that the lower level of large settlements will persist in the future.


The report notes that settlements and “estimated damages” are typically smaller for cases involving only Section 11 and/or Section 12(a)(2) claims. There were only three cases that settled in 2014 that involved only ’33 Act claims, and there were another 7 cases that involved both ’33 Act and ’34 Act claims. The increase in IPO activity since 2013 and continuing this year “suggests that settlements of cases involving these claims are likely to be more prevalent in future years.”


The report notes a number of other factors that affect the settlement size. Cases involving accounting allegations are generally associated with higher settlement amounts and higher settlements as a percentage of “estimated damages.” Historically, cases with third-party codefendants (accountants or underwriters) have settled for substantially higher amounts as a percentage of “estimated damages.” However in 2014, cases with and without third-party defendants settled for similar percentages of “estimated damages.”


Companion derivative actions continue to be associated with higher class action settlements. In 2014, the median settlement for cases with an accompanying derivative action was 31 percent higher that for case without an accompanying derivative amount; in 2013, the difference was 78 percent, and in 2012, it was 387 percent. Cases that involved a corresponding SEC settlement are also associated with significantly higher settlement amounts, and also with larger settlements as a percentage of “estimated damages.” In 2014, the median settlement for cases with an SEC action was $8.4 million, compared to $5.5 million without.


The involvement of an institutional investor plaintiff is also correlated with higher settlement amounts, perhaps because the institutional investors only choose to become involved in cases with more serious allegations. (For example, in 2014, institutional investors were involved as lead plaintiff in seven out of the ten settlements that involved a corresponding SEC action.) The median settlement for cases with a public pension as lead plaintiff in 2014 was $13 million, compared to $5 million for cases without a public pension as a lead plaintiff. Interestingly, the percentage of settlements involving public pensions as lead plaintiff declined in both 2013 and 2014. In 2013, only 44% of settlements involved public pensions as a lead plaintiff, down from 47% in 2012, and in 2014, only 37% of settlements involved a public pension as a lead plaintiff.


For the cases that settled in 2014, the median and average time to settlement was three years; however, cases involving larger estimated damages and cases involving larger firms tend to take longer to settle.