There were slightly fewer securities class action lawsuits and for fewer total dollars in 2019 compared to 2018, but the median settlement amount was unchanged in 2019 from the year prior, according to the annual securities suit settlement report from Cornerstone Research. The report, which is entitled “Securities Class Action Settlements: 2019 Review and Analysis,” states that the $11.5 million median securities class action settlement in 2019 was 34 percent higher than the 2010-2018 median. The report can be found here. Cornerstone Research’s February 26, 2020 press release about the report can be found here.
The Cornerstone Research report is based on a data set of 1,849 settlements entered between 1996 and 2019. The settlement date for any given settlement is the date on which the settlement is approved.
In 2019, there were 74 securities class action settlements for a total aggregate settlement value of $2.029 billion, compared to the 78 settlements in 2018 with a total value of $5.154 billion. (2018’s total was significantly increased by the $3 billion Petrobras settlement.)
The average settlement in 2019 was $27.4 million, compared to $66.1 million in 2018. (The 2018 average was also affected by larger settlements that year, especially Petrobras.) The 2019 average is 43% below the nine-year settlement average. If the settlements over $1 billion are excluded, the average settlement declined only 19 percent in 2019. The median settlement in 2019 was $11.5 million, unchanged from 2018 (adjusted for inflation).
The report also contains aggregate, average, and median numbers for the period 1996-2018, and also compares those long-term numbers with the 2019 figures. Interestingly, the 1,775 settlements between 1996 and 2018 total in aggregate over $103 billion. (Just in case anybody was thinking that these lawsuits don’t impose very real costs on our economy.) The average settlement during the period 1996 through 2018 was $58.8 million (compared to $27.4 million in 2019), and the median settlement during the period 1996-2018 was $9.1 million, compared to $11.5 million in 2019.
There were a total of four “mega settlements” (that is, settlement over $100 million) ranging from $110 million to $389.6 million. Even though the average settlement declined in 2019, the number of very small settlements (under $5 million) declined 36 percent to 16 cases in 2019. 57 percent of all cases settled between $5 million and $25 million.
The report contains a detailed analysis of settlement size relative to a measure of the putative class damages in 10b-5 cases (referred to as “simplified tiered damages”). The report details that as the simplified tiered damages levels increase, the settlement amounts represent a correspondingly smaller amount of the simplified tiered damages. Smaller cases typically settle more quickly than the larger cases; In 2019, cases with simplified tiered damages settled on average within two years, while cases with simplified tiered damages greater than $500 million settled on average in 3.5 years.
For Section 11 claims (by contrast to 10b-5 claims), the report uses a different damages estimate, called “simplified statutory damages.” Simplified statutory damages are typically smaller than simplified tiered damages. Section 11 only cases tend to settle for lower median amounts ($7.2 million for the period 2010-2019), compared to cases that combine both Section 11 and 10b-5 claims ($15.1 million median settlement for the period 2010-2019) and cases that have 10b-5 claims only ($8.5 million median during 2010-2019).
There are a number of factors that clearly affect the settlement size. For example, cases involving restatements settle for a larger share of “simplified tiered damages” than cases that do not involve restatements. In 2019, cases involving restatements settled for 5.2 percent of simplified tiered damages, while cases without restatements settled for 4.1 percent of simplified statutory damages. During the period 2010-2019, cases involving allegations of accounting irregularities, GAAP violations, or restatements all settled for greater amounts as a percentage of simplified tiered damages than cases without those allegations.
In the past, the involvement of a parallel derivative lawsuit was associated with larger settlements and larger settlements as a percentage of simplified tiered damages. However, that was not the case in 2019, in part because there were a significantly increased number of settlements with parallel derivative suits, many of them involving smaller companies.
Two other factors that historically are associated with larger settlements as a percentage of simplified tiered damages are the presence of a parallel SEC enforcement action and the involvement of an institutional investor.
This year’s report includes a spotlight on settlements involving companies in the pharmaceutical industry. As the report notes, filings against companies in the pharma industry reached an all-time high in 2019, both in the absolute number and as a percentage of all filings. While cases against pharma companies historically involved relatively large simplified tiered damages, in 2019, the median simplified tiered damages for pharma company defendants was 36 percent lower than for all company defendants.
The 2019 cases against pharma companies differ in a number of other ways from cases against other companies, particularly with respect to characteristics that can be important settlement determinants. For example, the cases against pharm companies are less likely to have a public pension fund lead plaintiff. The cases against pharma companies are much less likely to involve a GAAP violation allegation. Allegations of restatements are also lower against pharma companies. Pharma cases are also less likely to involve alleged ’33 Act violations.
These differences between the cases against the pharma companies tend to settle for a lower percentage of simplified tiered damages than do cases generally. The median settlement in cases against pharma companies over the last ten years is 3.7 percent, while the figure for non-pharma cases is 5.8%.
The report also includes a commentary from the authors on the increase in the size of the defendant companies. The size of issuer defendant companies (as measured by asset size) continued to grow in 2019, increasing by 59% compared to 2018 and 117 percent over the last ten years.
The authors speculate that this is a reflection that as the number of publicly traded companies has declined, the size of the remaining companies has increased. Large company defendants in turn mean that the plaintiffs fight harder – for example, the average number of docket entries (a proxy for case complexity) was the highest it has been in the last ten years, primarily in cases with large simplified tiered damages.
Another factor that can affect the measure of plaintiffs’-style damages is the length of the class period. The longer the class period, the greater the estimated damages. In 2019, the average class period length was 1.7 years, the longest average class period length in 10 years. In addition, between the time the plaintiffs filed their initial complaints and the time of settlement, the plaintiffs lengthened the class period. The class period length in the initial filings during the period 2015-2018 was just under one year, so in subsequent pleadings the plaintiffs managed the lengthen the class period.