cornerstone reserach pdfAggregate and average securities class action lawsuit settlements increased significantly in 2015 compared to the year before, according to the latest annual report from Cornerstone Research. Among reasons for the increase in aggregate settlement amounts is the increase in the absolute number of settlements during the year. The increase in the average settlement amount is largely attributable to an increase in the number of “mega” settlements. While overall and average settlement amounts increased during the year, the number of smaller settlements also increased, and median settlement amounts held steady. The Cornerstone Research report, entitled “Securities Class Action Settlements: 2015 Review and Analysis,” can be found here. Cornerstone Research’s March 29, 2016 press release about the report can be found here.


Number of Settlements: The number of securities class action lawsuit settlements that were approved in 2015 increased to 80, an increase in 27 percent over the 63 settlements that were approved in 2014. The 80 settlements approved in 2015 is the highest number of approved settlements since 2010. The increase in the number of settlements during 2015 is attributable at least in part to three consecutive years of annual increases in the number of securities suit filings. The increased number of filings in the most recent years, including during 2015, suggest that the higher numbers of settlements will persist over the next few years.


Aggregate Value of Settlements: The aggregate value of the 2015 settlements was $3.034 billion, compared to only $1.069 billion in 2014 (a historically low level). The 2015 aggregate value was nine percent higher than the average for the preceding five years ($2.8 billion). There were a number of factors driving the aggregate settlement values in 2015, particularly the increased number of “mega settlements” (that is, settlements equal or greater than $100 million), as discussed in the next paragraph. Though the aggregate settlement amount increased in 2015, it was still well below the historically high levels seen in 2006 ($20,233 billion) and 2007 ($8,273 billion).


The Increased Number of “Mega Settlements”: There were eight mega settlements in 2015, compared to one in all of 2014; the increase in the number of mega settlements is a reflection of the fact that there were more cases that settled in 2015 with very high “estimated damages” – in other words, as you might expect, the increased number of large settlements was a reflection of the fact that there were a higher number of larger cases. However, other factors (such as the number of cases involving third-party defendants and companion SEC actions) that historically have contributed to larger settlements were less of a factor in 2015, as discussed below.  With respect to the 2015 mega settlements, it is important to note that six of the eight were settled for between $100 million and $200 million, while one case was settled for more than $970 million, which drove up both settlement totals and the average settlement. Overall, 10% of the 2015 settlements were mega settlements, but those settlements represented 73% of the aggregate settlement value. Over the last decade, mega settlements have generally accounted for more than 50 percent of settlement dollars.


Proportion of Smaller Settlements: The proportion of settlements of $2 million or less was at the highest level in 18 years in 2015, largely as a reflection of increased numbers of settlements related to Chinese reverse merger companies (these cases tend to involve relatively low “estimated damages” and to settle for comparatively low settlements.) 29% of the cases that settled for $2 million or less in 2015 were Chinese reverse merger cases.  Another factor contributing to the prevalence of smaller settlements is the number of cases that settle within two years of filing; there were 16 of these cases in 2015, an increase of two-and-a-half times over 2014. Cases that settle this quickly tend to be smaller and to be less likely to be characterized by indicators associated with larger settlements.


Interestingly, while much of the discussion about securities class action lawsuit settlements is focused on the mega settlements, in fact, since 1996, the vast majority of cases have settled for less than $25 million. Only about 16% of all settlements during that period involve amounts greater than $20 million.  Indeed, between 1996 and 2015, 34.5% of all securities class action lawsuits settlements were less than $5 million. (The figure for 2015 was 47.5%.)


Higher Annual Average Settlement Values in 2015: Because of the number of very large settlements in 2015, the annual average settlement value for 2015 was $37.9 million, up from $17 million in 2014 (an increase of 124 percent). However, the 2015 average was still about 25 percent lower than the average for the period 1996-2014 overall.


Steady Median Settlements: Though the average settlement value increased in 2015, the median settlement amount ($6.1 million) was roughly equal to the 2014 median ($6.0 million). The median settlement amount has remained largely unchanged in the last three years. Indeed, in only one of the last five years has the median settlement amount been greater than $6.6 million (in 2012, the median settlement amount was $9.5 million). In 2015, median settlements as a percentage of “estimated damages” decreased to historic low levels – only 1.8% in 2015, compared to 2.1% in 2014.


Cases Involving Both ’33 Act and ’34 Act Claims: Historically, cases involving both ’33 Act and ’34 Act claims settle for larger amounts that cases that have either just ’33 Act claims or just ’34 Act claims. The median settlement for lawsuits involving both types of claims during the period 1996-2015 was $13.5 million, compared to $8.2 million for all post-Reform Act claims; $7.9 million for ’34 Act claims alone; and $4.0 million for ’33 Act claims.


Settlements Involving Accounting Allegations: Historically, cases involving restatements and alleged accounting irregularities settle for amounts greater than cases lacking these allegations. During the period 1996-2015, cases that involved restatement allegations settled for 3.5 of “estimated damages,” while cases without restatement allegations settle for 2.7% of “estimated damages.” Restatements were involved in 22 percent of cases that settled in 2015 and were associated with higher settlements as a percentage of “estimated damages.” Cases alleging accounting irregularities settle for 3.9% of “estimated damages,” while cases without these allegations settle for 2.9% of “estimated damages.” However, only one of the 2015 settlements involved reported accounting irregularities.


Settlements Involving Third-Party Defendants: Historically, cases involving additional named third-party defendants have settled for a higher percentage of “estimated damages” than cases without these parties. For example, during the period 1996-2015, cases in which the auditor was included as an additional named defendant settled for 3.7% of estimated damages, but the cases in which no auditor was named settled for only 2.9% of estimated damages. Similarly, in settlements in cases in which offering underwriters were named as additional defendants settled for 5.0% of estimated damages, compared to 2.7% in cases without offering underwriter defendants. In 2015, however, cases with third party defendants settled for lower percentages of “estimated damages,” and the difference between the median settlement amount with and without a third-party named defendant was at its lowest level in the last 10 years.


Settlements Involving Public Pension Plan Lead Plaintiffs: Public pension plans tend to become involved in the larger cases. The median settlement in 2015 for cases with a public pension as a lead plaintiff was $18 million, compared to $6.4 million for cases with a non-public pension institutional investor lead plaintiff, and $2.7 million for cases where the lead plaintiff was not an institutional investor.


Settlements With Companion Derivative Actions: Historically, securities suits with accompanying derivative actions have involved relatively larger settlements. In 2015, the median settlement for a case with a companion derivative action was $8.3 million, compared to $3.1 million for those without. It is worth noting that the median “estimated damages” in settlements of securities suits with companion derivative actions were two-and-a-half times greater than “estimated damages” in settlements of securities suits without companion derivative actions. In other words, the larger settlements in securities suits with companion derivative actions may simply reflect the fact that the companion derivative actions arise in the larger cases.


Settlements with Companion SEC Actions: Securities Suits involving companion SEC actions are associated with significantly higher settlement amounts and higher settlements as a percentage of “estimated damages.” The median settlement during the period 1996 to 2015 for cases with an SEC action is $12.1 million, which is nearly double the median for settlements without a companion SEC action ($6 million). However, in 2015, these historically patterns were less in evidence. In 2015, the median settlement for cases with an SEC action was only $5.3 million, where cases without an associated SEC action had a higher median of $6.1 million.


Time to Settlement: There is a relationship between the time to settlement and the size of settlement. In general, cases that settle within the first two years after filing settle for less than cases of longer duration. During the period 1996 to 2015, cases that settled within the first two years settled for a median of $6.0 million; the figure for 2015 alone is $2.7 million. By contrast, during the period 1996 to 2015, the median settlement for cases that settle more than five years after the filing date is $30 million; during 2015, the figure was $11.5 million. Obviously this relationship between duration and settlement size is due in part to the fact that the longer duration cases have survived dismissal motions and possibly even summary judgment motions. However, in general, cases that involve larger cases as a factor of “estimated damages” tend to take longer to reach settlement.