Subprime, Auction-Rate Securities Cases Driving Shareholder Class Action Filings toward Highest Level since 2002, while Settlement Values Remain Steady

29 July 2008

New York/29 July 2008 -- Driven in large part by the current subprime and credit crisis, shareholder class action filings continued to increase in the first half of 2008, according to a new study from NERA Economic Consulting. Filings are on pace to reach almost 280 by year's end, which would represent a 42% increase over 2007 and the largest annual total since 2002; at that rate filings will have more than doubled in just two years, from their recent low of 131 in 2006.

According to NERA's study, 2008 Trends: Subprime, Auction-Rate Cases Continue to Drive Filings, and Large Settlements Keep Averages High, the credit crisis is a significant factor contributing to the increase. In fact, 51% of 2008 filings through 30 June 2008 have allegations related to the subprime collapse (including auction-rate securities cases).

Market Volatility, Returns also Factor in Filings Increase

Market volatility and returns are also significant factors associated with filings. Specifically, the NERA study found that if market volatility is higher during a quarter, filings are likely to be higher as well. The authors also found:

  • The probability of a company facing a class action filing over the three months following a large one-day drop in its stock price increases with the size of the drop.
  • Nearly one-third of companies whose stock fell by 40% or more in a single day, net-of-market, were confronted with a federal filing within three months. Large price drops may trigger shareholder class action litigation because they often follow disclosures of adverse company-specific news that fuel allegations of fraud.

 

Settlement Values Remaining Steady

Although filings increased through the first half of the year, average settlement values remained roughly constant at around $30 million. However:

  • Excluding settlements of over $1 billion, the average settlement dropped to $10 million, representing a decline compared to recent years.
  • In part this is due to the lower incidence of so-called "mega-settlements" of at least $100 million. Only 2% of settlements in 2008 cross this $100 million mark, as compared to almost 7% in 2007 and nearly 10% in 2006.

 

However, the average settlement amount may begin to increase as more recently filed cases settle. Driven by the recent surge in subprime cases, median investor losses -- a powerful determinant of settlement size -- for cases filed in the first six months of 2008 are more than twice the level for cases settled from 2005 through 2007. Because of their unusually high investor losses, recently filed subprime cases can be expected to settle for unusually large amounts.

Shareholder Trends Report Series

NERA has been analyzing trends in shareholder class actions for more than 15 years. Two reports are published a year: one at mid-year and a second, annual review published at year's end. This year's mid-year report was authored by NERA Senior Consultant Dr. Stephanie Plancich, Consultant Svetlana Starykh, and former NERA Consultant Brian Saxton, and includes data on filings and settlements through 30 June 2008.


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.

NERA's clients value our ability to apply and communicate state-of-the-art approaches clearly and convincingly, our commitment to deliver unbiased findings, and our reputation for quality and independence. Our clients rely on the integrity and skills of our unparalleled team of economists and other experts backed by the resources and reliability of one of the world's largest economic consultancies. With its main office in New York City, NERA serves clients from more than 25 offices across North America, Europe, and Asia Pacific.