Recent Trends in Shareholder Class Action Litigation: Filings Plummet, Settlements Soar
2 January 2007
By Dr. Ronald I. Miller and Dr. Stephanie Plancich et al.
Despite a surge in lawsuits alleging options backdating, shareholder class action filings were down dramatically in 2006, even as settlements of existing cases soared past last year's record levels, according to this newly released edition of NERA's semi-annual study. The authors find that average class action settlements paid by corporations to shareholder plaintiffs rose by 37% in 2006 -- an increase driven by "mega-settlements" exceeding $100 million. Four multi-billion-dollar settlements occurred in 2006, in addition to the partial settlement of $7.1 billion paid to shareholder plaintiffs in the Enron class action, which began in 2005 and continued into 2006. The largest payout to date in a shareholder class action, the Enron settlement is expected to grow even larger after the final payments are made to shareholders.
The study also notes that, despite 22 lawsuits over the issue of options backdating, shareholder class action filings plunged 36% during 2006 (based on filings through 15 December). This decline in filings continues a trend that began in the second half of 2005, and represents a 44% decline from the average rate of filings after the Private Securities Litigation Reform Act (PSLRA), passed in 1995 to curtail excessive securities litigation. According to NERA, only 129 federal shareholder class actions were filed from 1 January through 15 December 2006. A total of 135 are expected by year's end -- in contrast with 211 filings in 2005.
The study's key findings also include:
- The largest drop in filings occurred in the Ninth Circuit, despite its reputation for being friendly to plaintiffs. Every circuit court but two is expected to see filings decline by at least one third this year.
- With the drop in filings, the average corporation now faces less than an 8% probability of being the target of at least one such suit over a five-year period. The annual likelihood of a suit has fallen 9% since the period of 1993 to 1995, from 1.8% to 1.6%, prior to the PSLRA.
- Chances are also greater that shareholder class action cases will be dismissed. More than 38% of class action cases filed between 1999 and 2004 were dismissed. Dismissal rates have nearly doubled since the PSLRA.
- A significant portion of shareholder class action cases are dismissed within the first two years. The Second and Ninth Circuits, which together receive the most cases, dismiss approximately 20% within this time period. The Fourth Circuit has the highest rate, dismissing 31% of cases within two years, while the Tenth Circuit has the lowest, at 5%.
- Seven of the ten largest settlements occurred between 2005 and 2006. Enron's $7.1 billion partial settlement exceeds last year's record-setting $6.2 billion WorldCom settlement, which dwarfed the mammoth $3.6 billion Cendant settlement in 2000.
- The average shareholder class action settlement, including this year’s largest billion dollar cases, is $86.7 million -- up from the average of $73.6 million in 2005.
- More than 10% of shareholder class action settlements were "mega-settlements" of over $100 million, in contrast with an average of 3% reaching this threshold in prior years.
- Median settlements, which are more descriptive of typical cases, continued to rise in 2006, hitting a new peak of $7.3 million.
- There were also fewer class action settlements of $3 million or less. They made up 22% of 2006 settlements, compared with 26% in 205 and 44% in 1996.
- Investor losses constitute the single most powerful publicly available determinant of settlements. Average investor losses have ballooned from $140 million in suits settling in 1996 to $2.5 billion in 2003.
The authors note that other factors helping to determine the size of settlements are the class of securities involved (bonds and options boost the size of settlement values), the depth of defendant's pockets, and whether accounting improprieties are suspected. Their analysis also indicates that if an IPO is involved, settlements increase by approximately one-third.
