NERA Economic Consulting Releases Year End Report on Trends in Shareholder Class Action Litigation

21 December 2007

New York/21 December 2007 -- The 18-month decline in shareholder class action filings has definitively reversed course, with 2007 federal filings projected to increase by 58% compared to the previous year, according to NERA Economic Consulting's semi-annual benchmark study, released today.

The NERA report projects there will be 207 federal filings by year end, following just 131 filings in 2006. Despite widespread speculation that filings would continue to decline, the trend has reversed course and filings are back up to 2005 levels, as NERA predicted in its mid-year review of filings from January through June 2007.

The sharp increase in filings has been driven in part by litigation related to subprime lending. As of 15 December 2007, 38 subprime shareholder class actions had been filed this year. The first subprime-related shareholder class action was filed on 8 February 2007, and the pace of filings accelerated throughout the remainder of the year. In fact, by 15 December the total number of subprime cases filed had more than quadrupled compared to the first half of 2007.

However, subprime litigation is not the entire story. 2007 standard federal filings alone -- excluding the subprime and options backdating cases -- increased nearly 40% from 2006.

The new report, "Recent Trends In Shareholder Class Action Litigation: Filings Return to 2005 Levels as Subprime Cases Take Off; Average Settlements Hit New High," is authored by NERA economists Stephanie Plancich, Brian Saxton, and Svetlana Starykh, and includes data on filings and dismissals through 15 December 2007, and on settlements with the final settlement date through 31 December 2007.

The authors report that average settlements have also spiked this year, continuing an overall upward trend over the past five years. Still, 2007 marked a notable increase: The average settlement paid to resolve a shareholder class action case in 2007 was $33.2 million, up nearly 50% from 2006. The median settlement also reached a new high in 2007, at just under $10 million.

Looking ahead to 2008, the report suggests that market conditions indicate that filings are likely to remain high. "Subprime lending cases are already springing up across several Federal Circuits. As the crisis in the credit markets continues to deepen and the market for subprime mortgages continues to suffer accordingly, more litigation is likely to follow," note the authors.

Among other findings in the NERA study:

  • Filings in the Ninth Circuit continue to be a leading indicator for overall filing trends. Following a steep drop in 2006, the Ninth Circuit began to see an increase in filings early in 2007. NERA projects a total of 54 federal filings for the year, almost twice the number in 2006, and close to the 1998-2004 average of 56 filings per year.
  • Other Circuits are following suit. Second Circuit filings are on pace to exceed filing levels from each of the last four years as well as the 1998-2004 standard filings average. 2007 filings are higher than 2006 federal filing levels in all but the First and Eighth Circuits.
  • Subprime cases have been filed in at least seven of the 11 Circuits, plus the DC Circuit, but are concentrated in the Second and Ninth Circuits.
  • Filings have also increased against both US and non-US companies. Filings against non-US companies dropped to 15 in 2006, but are on pace to exceed the 26 cases already filed in 2007.
  • The NERA report also examines the current status of the 235 federal shareholder class actions filed in 2000. In the seven years since these cases were filed, over 90% have reached some kind of resolution. To date, approximately 60% of these cases have reached final settlement and more than 31% have been dismissed.
  • Mega-settlements (over $100 million) have been steadily growing as a percentage of all settlements over the past decade. Before 2000, no more than one or two percent of settlements fell into this category; by 2007, 8.1% of all settlements were more than $100 million.
  • Investor losses historically have been the single most powerful determinant of settlements, explaining approximately 50% of their variation. Average investor losses have grown dramatically over the last decade, in tandem with increasing average settlement values. To date, for cases settling in 2007, average losses are approximately $1.75 billion.

 

NERA provides practical economic advice related to highly complex business and legal issues arising from competition, regulation, public policy, strategy, finance, and litigation. Our more than 45 years of experience creating strategies, studies, reports, expert testimony, and policy recommendations reflects our specialization in industrial and financial economics. Because of our commitment to deliver unbiased findings, we are widely recognized for our independence. Our clients come to us expecting integrity and the unvarnished truth.

NERA Economic Consulting (www.nera.com), founded in 1961 as National Economic Research Associates, is a unit of the Oliver Wyman Group, an MMC company.

 

About NERA

NERA Economic Consulting (www.nera.com) is a global firm of experts dedicated to applying economic, finance, and quantitative principles to complex business and legal challenges. For over half a century, NERA's economists have been creating strategies, studies, reports, expert testimony, and policy recommendations for government authorities and the world's leading law firms and corporations. We bring academic rigor, objectivity, and real world industry experience to bear on issues arising from competition, regulation, public policy, strategy, finance, and litigation.

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