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Securities Class Action Settlements “Dramatically” Decline In Value Finds Cornerstone Research

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  • Posted on: Mar 16 2018

According to a new report by Cornerstone Research (“Cornerstone”), titled Securities Class Action Settlements—2017 Review and Analysis (the “Report”) (here), total settlement dollars from securities class action lawsuits declined “dramatically” in 2017, even as the number of settlements remained relatively steady.

Cornerstone’s March 14, 2018 press release about the Report can be found here.

In 2017, the total value of court-approved securities class action settlements was $1.5 billion, a substantial decline from the $6.1 billion tallied in 2016. According to the Report, the $1.5 billion in total value is the second-lowest since 2008.

There were 81 court-approved securities fraud class action settlements in 2017, down slightly from 85 settlements in 2016. The average settlement value, however, decreased 75 percent from $72.0 million in 2016 to $18.2 million in 2017. This decrease represents a 70% decline from the 1996-2016 average of $57.7 million. According to the Report, for the first time in more than five years, no settlement exceeded $250 million.

The Report found that the median settlement amount in 2017 was $5.0 million, over 40 percent lower than both the 2016 median ($8.7 million) and the median for all prior post-Reform Act settlements ($8.5 million).

“More than half of 2017 settlements were for $5 million or less. We also saw a significant decline in mid-range to large settlements,” said Dr. Laura E. Simmons, a co-author of the Report and a Cornerstone Research senior advisor. “A combination of lower estimates of the proxy for plaintiff-style damages and smaller issuer defendant firms contributed to this decrease.”

The authors of the Report “largely” attributed the decline in settlement value to the size of the cases – they are smaller than in previous years (as measured by Cornerstone’s own estimate of the plaintiff-style damages in the filed cases) – a combination of market volatility and shorter class periods, and “considerably smaller issuer defendants.” Also affecting settlement value was the decline in institutional representation. According to the Report, institutional investors served less frequently as lead plaintiffs, even in large cases.  The authors found that public pension funds served as lead plaintiffs in 32 percent of settled cases in 2017, compared to 41 percent in 2016 and 46 percent in 2012. Recent literature, they said, provided a possible explanation for the decline in institutional representation: there were fewer economic incentives for them, “other than the potential benefit … from political contributions by plaintiff attorneys.”

In 2017, there were only four settlements valued at $100 million or more, amounting to 43 percent of total settlement dollars during the year. By contrast, during the period 2008–2016, 70 percent of total settlement dollars were attributable to settlements of over $100 million. Compared to the four settlements over $100 million in 2017, there were ten settlements over $100 million in 2016.

“These data suggest that plaintiff counsel have recently been going after smaller fry claims where the issuers are not as large and there is less at stake. The mega-cases involving large firms appear to be in the rearview mirror for the moment,” observed Professor Joseph A. Grundfest of Stanford Law School, and a former Commissioner of the Securities and Exchange Commission.

The Report found that the proportion of shareholder derivative actions accompanying settled securities class actions “was among the highest … in more than 15 years.” The Report noted that nearly one-half of all settled cases, and more than one-half of all settlements valued at $5 million or less, were accompanied by a shareholder derivative lawsuit. The authors explained that these results were “unexpected” since shareholder derivative actions are most often associated with “larger class actions and larger settlement amounts.”

Not only were the settlement amounts smaller in 2017, but the cases also tended to settle more quickly than in the past. The Report found that 23 percent of the cases that settled in 2017 were resolved within the first two years of filing, compared to less than 16 percent during the period 2008-2016. The Report found that the average time to settlement from filing during 2017 was at its lowest level in ten years. The authors noted that the median settlement involving cases taking more than two years was more than double the median for cases that settled within two years.

Moreover, the proportion of settled cases alleging violations of Generally Accepted Accounting Principles was 53 percent in 2017, continuing a three-year decline from a high of 67 percent in 2014. Of the accounting cases settling in the preceding nine years, 23 percent involved named auditor co-defendants. In 2017, this dropped to 13 percent.

Finally, approximately 20 percent of the cases that settled in 2017 involved an accompanying enforcement action by the Securities and Exchange Commission (“SEC”), a modest increase over the percentage recorded in 2016 (18 percent). The authors noted that “[c]ompared to 2011-2014, the relatively high level of class actions settled over the last three years with corresponding SEC actions is consistent with the SEC’s stated focus on financial reporting and disclosure matters during this period.” Cases with corresponding SEC actions tended to involve larger issuer defendants. For approved settlements during the period 2008-2017, the average assets for issuer defendant firms were $135 billion for cases with corresponding SEC actions, compared to only $31 billion for cases without a corresponding SEC enforcement action. The Report also noted that corresponding SEC actions are “frequently associated with delisted firms.” Out of the total 159 settlements during 2008-2017 involving cases with corresponding SEC actions, 63 cases (40 percent) involved issuer defendants that had been delisted.

Looking forward, the authors opined that the number of cases filed in the prior two years suggested that “the high volume of settlements [would] continue.” However, the data also suggested that with the higher number of filings there may be a higher number of dismissals, which could offset the increase in settlement activity. The authors also noted that the continued reduction of institutional investor involvement in securities class actions could translate into lower overall settlement values in the foreseeable future.

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