Aggregate, average, and median securities class action lawsuit settlement amounts all rose in 2018, according to the latest report from Cornerstone Research. The 2018 total settlement amount of just over $5 billion dollars is substantially higher than the prior year total and in fact is the third-highest total in the past 10 years. The $5 billion total was driven by a small number of very large settlements. The Cornerstone Research report, which is entitled “Securities Class Action Settlements: 2018 Review and Analysis” can be found here. Cornerstone Research’s March 26, 2019 press release regarding the report can be found here.
Total Settlement Amounts
There were 78 securities class action settlements approved in 2018, down slightly from the 81 settlements approved in 2017. But while the number of settlements during the year was down slightly, the total settlement value of $5.064 billion was more than three times above the near record low total settlements of $1.511 billion in 2017. The $5 billion total in 2018 was 50 percent higher than the annual average of the prior nine years.
The higher total settlement amount in 2018 was a result of the number of settlements of over $100 million (what the report calls “mega settlements”), and in particular the massive $3 billion settlement in the Petrobras securities class action lawsuit.
Interestingly, according to the report, during the period 1997 to 2017, there was a total of $96.982 billion in settlements, meaning that with the addition of the $5 billion in 2018 settlements, the aggregate of all settlements since the PSLRA was enacted is now over $100 billion.
Average Settlement Amounts
The average settlement amount in 2018 was $64.9 million, which also was more than triple the average settlement amount in 2017 of $18.7 million. The 2018 average was 44 percent higher than the average for the prior nine years. The average settlement amount in 2018 was also 14 percent higher than the $57.1 average settlement amount for all prior post-reform act settlements. Obviously, the number of mega settlements (and in particular the Petrobras settlement) was an important factor in the increased average settlement level in 2018. In addition, the number of settlements under $5 million declined by nearly 40 percent during the year, from 40 cases in 2017 to 25 in 2018, which was another factor in the increased average settlement amount in 2018.
Median Settlement Amounts
The median settlement amount more than doubled in 2018 to $11.3 million, compared to $5.1 million in 2017. The $11.3 median settlement amount in 2018 is also 31 percent above the 1996-2017 median settlement amount of $8.6 million. The drop in the number of smaller settlements noted in the preceding paragraph also contributed to the increased median settlement as well as to the increased average settlement amount.
A Comment on the Increased Settlement Amounts in 2018
The Cornerstone Research press release accompanying the report includes a statement from Stanford Law Professor Joseph Grundfest in which Professor Grundfest is quoted as saying “Publicly traded corporations have reason to be concerned over the data. Increased payouts may pressure insurance carriers to raise the rates they charge and the retentions they impose—which could be challenging developments for corporations, boards, and executives.”
Reasons for 2018 Settlement Increases
The report notes that 2018 was unusual in that the settlement amounts during the year increased compared to the prior year despite a decrease in certain factors typically associated with larger settlements. For example, there were fewer settlements in 2018 relative to both 2017 and to the previous nine years involving accounting allegations. There were also fewer settlements involving public pension fund lead plaintiffs.
The explanation for the increase in the settlements during 2018 seems to be that the 2018 settlements involved larger companies. The settling firms were 50 percent larger than in 2017 and over 20 percent larger than over the preceding five years. In addition, the number of settlements during 2018 involving delisted or bankrupt firms was the lowest in a decade. In other words, the increase in total, average and median settlements seems to be attributable “primarily to the potential resources available to fund the settlement.”
Settlements Relative to Damages Measures
The report also took a look at measure the report calls “simplified tiered damages” in 10b-5 cases as a way to measure the size of the cases involved in settlements. For brevity’s sake, I refer to the simplified tiered damages measure below as notional damages.
The average “simplified tiered damages” rose 45 percent to an average of $687 million in 2018, compared to an average of $472 million in 2017, while the median “simplified tiered damages” rose 88 percent to $250 million in 2018 compared to $133 million in 2017. As you might expect, higher “simplified tiered damages” are generally associated with larger company defendants. So another explanation for the increase in settlement amounts in 2018 compared to 2017 is that the 2018 settlements involved bigger companies and bigger notional damages.
Settlement Values Relative to Claims Alleged
The report also discusses a number of factors that can affect settlement size. For example, median settlement amounts are substantially higher for cases involving both ’33 Act claims and Rule 10b-5 claims compared to cases that involve only Rule 10b-5 claims and compared to cases that involve only ’33 Act claims, and the median settlement amount for cases that allege ’33 Act claims only are smaller than cases alleging 10b-5 claims. The 2009-2018 median settlement for the 76 cases during the 2009-2018 period alleging only ’33 Act cases was $5.2 million; the 2009-2018 median settlement for the 537 cases that alleged only Rule 10b-5 cases was $8.2 million; and the median 2009-2018 settlement for the 127 cases that alleged both ’33 Act and Rule 10b-5 claims was $14.8 million.
As you might also expect the settlements in cases that alleged only ’33 Act claims involved lower notional damages, but settled for a relatively higher percentage of the notional damages, whereas the cases that alleged both ’33 Act claims and Rule 10b-5 claims involved higher notion damages, and settled for a lower percentage of notional damages than the standalone ’33 Act claims, but a higher percentage than the claims that alleged Rule 10b-5 claims only.
Other Factors Typically Associated with Larger Settlements
The report looked at several other factors that generally are associated with higher settlements as a percentage of the notional damages: accounting allegations; institutional investor lead plaintiffs; and the presence of accompanying derivative and/or SEC enforcement actions.
The report identified three general types of accounting allegations: GAAP violations; restatements; and accounting irregularities. During the period 2009-2018, the cases associated with all three of these types of accounting allegations involved larger median settlements measured as a percentage of notional damages was larger.
Cases in which institutional investors act as lead plaintiffs also tend to settle for higher median settlement amounts than cases without an institutional lead plaintiff. For example, the median settlement amount of cases involving public pension fund plaintiffs was $21 million in 2018, compared to $6 million for cases without public pension fund lead plaintiffs. However, the cases in which the institutional investor plaintiffs get involved tend to the larger cases; the notional damages for 2018 settlements in which institutional investors were involved was $689 million, compared to $213 million without an institutional investor lead plaintiff.
The presence of parallel derivative cases and of corresponding SEC actions also tends to be an indicator of larger settlements both relative to nominal damages and in absolute dollar timers. There were more settlements in 2018 involving a parallel derivative lawsuit (43) than in any single year since 2009. The cases with corresponding SEC actions tend to involve larger companies.
Time to Settlement
In 2018, 21 percent of cases settled within two years of filing, 12 percent higher than the prior five years. Smaller cases tend to settle more quickly. On average, 2018 settled cases reached resolution more quickly than in prior years, but at the same time 15 percent of cases took more than five years to settle.
Litigation Stage and Settlements
The stage at which a case settled has a significant impact on settlement size. During the period 2014-2019 cases that settled before the filing of a motion to dismiss had a median settlement of $2.6 million; after the filing of the motion to dismiss but before ruling on the motion, a median settlement of $5. 3 million; after the dismissal motion ruling but before the class certification motion, a median settlement of $5.5 million; after the class certification motion was filed but before being ruled on of $12.6 million; after the ruling on the class certification motion but before summary judgment motion, a median of $18 million; after the filing of the motion for summary judgment but before it is ruled on, a median of $36.5 million; and after the ruling on the summary judgment motion, a median of $17 million.
The report notes a number of factors that may affect future securities class action lawsuit settlement. For example, the record level of market capitalization losses associated with the securities lawsuits filed in 2018 suggests that “large settlements will persist in upcoming years.”
The authors also noted the rise in recent months of “event-driven” securities suits – that is, suits arising from a setback in the company’s business operations rather than from accounting misstatements or financial reporting misrepresentations. The authors note that the law firms involved with filing these kinds of lawsuits are associated with lower settlement amounts, lower notional damages, and with the involvement of company defendants with lower assets, and their cases are less likely to involve institutional plaintiffs. The authors suggest they will separately track these cases to measure their settlement patterns, in future periods.
Finally, the authors note that the number of ’33 Act filings was 45 percent higher than the average over the prior five years. These 2018 cases likely will result in settlement over the next to two to three years, which will like contribute to an increase in the number of ’33 Act settlements in those years.