Credit Crisis Federal Securities Class Actions Decline

27 July 2010

Investor Losses and Settlement Values Soar

New York/27 July 2010 -- The pace of federal securities class action filings slowed in the first half of 2010, with filings on track to decline for a second consecutive year, according to NERA Economic Consulting’s biannual report, Trends 2010 Mid-Year Study, released today.

From January to June 2010, there were 101 fillings of securities class actions. If the pace of filings to date continues there will be a total of 202 federal securities class actions filed in 2010. This would represent a decline from the 221 filings observed in 2009 and the 248 filings in 2008.

A key factor in the decline of securities class action filings, according to the NERA Trends authors, was a decline in cases related to the global credit crisis. In the first half of 2010, there were 17 credit crisis cases filed; if the pace of such filings is maintained there will be 34 such cases filed in 2010. That would represent a sizeable drop from the 57 credit crisis-related cases filed in 2009 and the 103 filed in 2008.

The decline in credit crisis-related filings was partially offset by an increase in the frequency of other types of filings-such as cases alleging breaches of fiduciary duty and cases filed against companies in the life sciences and technology sectors. Recent developments such as the Gulf of Mexico oil spill also produced new filings.

Settlement Value Trends

The average securities class action settlement in the first half of 2010 was $209 million, higher than in any prior year. This average was greatly influenced by the $7.2 billion Enron settlement finalized in February 2010. Excluding this “outlier,” the average settlement was $24 million -- a significant drop from the $42 million average in 2009 but only slightly lower than the 2003-2010 average settlement of $28.7.

The median settlement in the first half of 2010 was considerably higher than in any prior year. At $11.8 million, the median settlement exceeded 2009’s value of $9 million by almost one-third, crossing the $10 million mark for the first time. According to the Trends authors, one factor driving the increase in median settlement values was a substantial increase in median investor losses-a variable which correlates strongly with settlement size. Median investor losses in cases settled in the first half of the year were $436 million, the highest level since 1996.

New Developments

Recent judicial and legislative developments may impact securities class actions filings and resolutions going forward. A recent Supreme Court decision, Morrison v. National Australia Bank, limits the extraterritorial reach of US securities laws. Morrison may lead to fewer filings against foreign companies and may affect dispositions of existing cases. On the other hand, a provision of the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act may reduce or ultimately reverse the impact of Morrison. Moreover, another provision in the Dodd-Frank Act may lead to the establishment of a private right of action for aiding and abetting in securities fraud cases.

“Although the impact of the Morrison decision and the Dodd-Frank Act on securities class actions is difficult to predict, these new developments could potentially have a substantial effect on class action filings and settlements,” said Robert Patton, NERA Senior Consultant and report co-author.

Commentary on Findings

“While the pace of federal securities class action filings slowed in the first half of 2010 partly due to a decline in new cases related to the global credit crisis, credit crisis cases are only just beginning to be resolved, with two-thirds of all credit crisis-related cases still pending,” said Dr. Jordan Milev, NERA Senior Consultant and report co-author. “Between January and June of this year, many more cases settled for amounts greater than $10 million. In fact, half of all settlements were for an amount higher than $11.8 million, a record; whether this shift is temporary or permanent remains to be seen.”
 
Additional Key Findings

  • Credit crisis-related cases have been dismissed at a slightly lower rate and more slowly than other types of cases. The average time from filing to dismissal has been roughly 15 months for credit crisis cases, compared to about 13 months for other types of cases.
  • For cases filed in the first half of 2010, there was a substantial decline in the average time to file-231 days versus 272 days in the second half of 2009.
  • In the first half of 2010, as in 2008 and 2009, there were more federal securities class actions against companies in the financial sector than any other sector, though the proportion of such suits has declined slightly.
    The 15.8% of filings naming a foreign company as a defendant exceeds the prior peak of 15% in 2004.
    In the first half of 2010, plaintiffs’ counsel have been awarded a total of $902 million in fees and expenses, including fees in connection with the Enron settlement recently approved by the court.

Securities Class Action Trends Report Series

NERA has been analyzing trends in securities class actions for more than 15 years. Two reports are published per year: a mid-year study and an annual review published at year’s end. This mid-year study was authored by NERA Senior Consultants Dr. Jordan Milev, Robert Patton, Dr. Stephanie Plancich, and Svetlana Starykh and includes data on filings, dismissals, and settlements through 30 June 2010.

For more details, and to read the full report, visit www.nera.com/recenttrends.

About NERA

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