The number of securities class action settlements increased only slightly in 2020 compared to 2019, but the aggregate total of all 2020 securities suit settlements doubled compared to the equivalent 2019 total, largely as a result of several “mega” settlements over $100 million, according to a March 17, 2021 report from Cornerstone Research. According to the report, which is entitled “Securities Class Action Settlements: 2020 Review and Analysis,” the average securities suit settlement in 2020 was larger than in 2019, but the median 2020 settlement decreased slightly compared to the 2019 median. Cornerstone Research’s March 17, 2021 press release can be found here and the report itself can be found here.
The Number of, Total, Average and Median Settlements
According to the report, there were 77 securities class action settlements in 2020, compared to 74 in 2019. The 77 settlements in 2020 was also slightly above the 2010-2019 average number of settlements of 72.
The total value of settlements in 2020 was $4.2 billion, which is double the 2019 total settlement amount of $2.0 billion. The increase in total settlements in 2020 was largely the result of the significant number of mega settlements in 2020. (At the end of this post, I have identified the largest of these mega-settlements.) If the 2020 settlements over $1 billion are excluded, the total settlement dollars actually declined 4% in 2020 compared to 2019
As a result of the number of very large settlements in 2020, the average securities settlement in 2020 doubled to $54.5 million from $27.8 million in 2019. Though the average settlement increased in 2020 relative to 2019, the 2020 average was below the 1996-2020 average of $58.1.
The median securities settlement in 2020 was $10.1 million, which was 13% below the 2019 median settlement of $11.6 but 12% above the 1996-2019 median settlement of $9.0. One factor in the decline in the 2020 median relative to 2019 was the increase in the number of settlements for less than $5 million; there were 24 settlements of $5 million and under in 2020 compared to 16 in 2019.
Comparing the 2020 Figures to 2019
The report notes that in several respects the 2020 securities class action lawsuit settlements “returned to patterns more consistent with historical trends than the results observed in 2019.” For example, the median settlement in 2019 was at a historically high level, “driven primarily by a reduction in the number of small settlements.” By contrast, in 2020 there were more smaller settlements, with over 30% of cases settling below $5 million. In addition, public pension plan involvement was at an all-time low in 2019, whereas in 2020 publci pension plans were involved in 40% of all settled cases, consistent with prior years.
Settlements Relative to “Simplified Tiered Damages”
In order to compare settlement amounts to potential investor losses, the report uses a measure called “simplified tiered damages’ to estimate per-share damages and trading behavior. In 2020, the median settlement or Rule 10b-5 cases as a percentage of “simplified tiered damages” was 5.3%, which was greater than the 2011-2019 median settlement of “simplified tiered damages” of 4.9%, representing an increase of 10%. By contrast in ’33 Act claims, median settlements relative to “simplified statutory damages” (which compares statutory purchase price and statutory sales price) was 32% lower than in 2019.
Factors Contributing to Larger Settlements
The report analyzes four factors that historically have contributed to larger settlements: the presence of alleged accounting violations; the presence of a parallel derivative lawsuit; the presence of a corresponding SEC Action; and the involvement of institutional investors.
- Accounting Violations: Median settlements as a percentage of “simplified tiered damages” in Rule 10b-5 cases involving financial restatements generally are higher than for non-restatement cases. However, only 14.5% of 2020 settlements involved cases regarding restatements, representing a 48% decline from the prior nine-year median.
- Derivative Actions: Settled cases involving an associate derivative lawsuit typically are larger cases (as measured by “simplified tiered damages”) and larger settlement amounts. 42 2020 settlements involved cases with accompanying derivative actions. The median settlement for these 42 cases was $15.3 million, compared to $8.5 million for cases without a derivative action.
- Corresponding SEC Actions: Cases with a related SEC action typically involve larger settlements. From 2011 to 2020, cases with a related SEC action settled 11% higher than did cases without a related SEC action. Significantly, from 2016 to 2020, 35% of settled cases with an SEC action had a related criminal action.
- Institutional Investors: Institutional investors tend to be involved in larger cases (based on higher “simplified tiered damages”) and involving larger companies (measured by asset size). “Simplified tiered damages” in 2020 cases with an institutional investor lead plaintiff were seven and a half times greater than in cases without an institutional investor lead plaintiff. Median total assets for 2020 cases with an institutional lead plaintiff were more than 15 times the median total assets for cases without an institutional lead plaintiff. 60% of the 2020 cases with an institutional lead plaintiff had a parallel derivative action, 22% had a corresponding SEC action, and 16% involved a criminal action. Cases with an institutional lead plaintiff also involved a significant larger median market capitalization decline.
’33 Act Settlements and D&O Insurance
Interestingly, the report notes with respect to ’33 Act settlements, that “among those cases with identifiable contributions, D&O liability insurance provided, on average, more than 90% of the total settlement fund … for ’33 Act claim cases from 2011 to 2020.”
Time to Settlement
The average time from filing to settlement for 2020 securities settlements was 3.3 years. Of the cases that took longer than five years to settle, the companies involved tended to be larger (as measured by assets size) and the “simplified tiered damages” tended to be significantly larger as well. In 2020, 21% of cases settled within two years of the filings date; of these 16 cases, nine settled before the motion to dismiss. Cases that settled in 2020 for more than $100 million took an average of 4.6 years from filing to settlement.
Given the general lag time between filing and settlements, the trends in case filings over the past few years are “relevant to anticipating developments” in settlements in the years ahead. In light of the significantly increase volume in securities class action lawsuit filings in the years 2017 to 2020 relative to prior years, “we anticipate relatively high settlements in upcoming years in terms of count and dollar amount, “ at least in the absence of increased dismissal rates or other developments that might affect settlement size.
There have also been a number of securities suit filing trends involving “nontraditional cases” in recent years, such as the filing of cases with allegations involving “cybersecurity, cryptocurrency, and special purposes acquisition companies (SPACs).” Relatively few of these cases have yet reached the settlement stage, but the likelihood is that cases involving these issues will settle in future years. In addition, “the emergency of cases with COVID-19-related allegations in 2020 may also affect settlement trends.”
The 2020 Mega Settlements: As noted above there were a number of mega settlements in 2020 by contrast to 2019. The 2020 settlements included two settlements over the $1 billion mark: the $1.21 billion settlement in the Valeant Pharmaceuticals securities suit, and the $1.025 settlement in the American Realty Capital securities suit. The 2020 settlements also included the $350 million settlement in the First Solar securities suit, and the $240 million settlement in the Signet Jewelers securities suit. By contrast the largest settlement in 2019 was the $389.6 million settlement in the Cobalt International Energy securities suit. Interestingly, 2020 was the first year since 2016 in which there were two settlements over $1 billion.