Recent Trends in Shareholder Class Action Litigation: Filings Stay Low and Average Settlements Stay High -- But Are These Trends Reversing?

Thu Sep 13 16:24:38 EDT 2007
By Dr. Stephanie Plancich and Svetlana Starykh et al.

Headline-grabbing record shareholder class action settlements and low filings continued through the first half of 2007, but there are also several indications that these trends may be reversing, according to this newly released edition of NERA's semi-annual study. The study draws from more than 15 years of NERA research on case filings and settlements in shareholder class actions, and includes data through 30 June 2007.

In this latest edition, the authors find that average settlements hit record highs once again through the first half of 2007. For the first time, each of the top 10 shareholder class action settlements exceeded $1 billion. However, there is evidence to suggest that average settlement values may have peaked. An examination of cases filed since 2005 by the authors reveals that median investor losses are declining -- and investor losses are a strong predictor of settlement values. In addition, NERA's settlement prediction model reveals that filings with accounting allegations have historically been associated with higher settlements, and these filings are declining as well. In 2006, the percentage of cases involving accounting allegations was 57%. However, through June 30 the percentage of 2007 filings with such allegations has declined to 26%.

Although overall federal class action filings remain well below levels from 1998-2005, they are on pace to rise above 2006 totals. The projected total of 152 would mark a 12% increase over the previous year. However, these totals include options backdating cases, which emerged in 2005 and spiked in 2006 but have fallen off sharply in 2007. Standard filings in the first half of 2007 jumped 47% from the second half of 2006, and are at their highest level since the second half of 2005. This sharp rise combined with the decline in backdating cases suggests that the trend in filings may in fact be changing directions.

The NERA report also examines filing patterns in different Circuits as well as the pattern of shareholder class action filings against non-US companies, with new trends revealed for each. Looking forward, the authors suggest that a substantial market downturn could lead to an increase in filings. For example, if significant losses are sustained by stakeholders in the subprime meltdown, this could lead to a rise in shareholder class actions going forward. With seven subprime related claims filed through 30 June 2007, this suggests that the subprime fallout may be the source of a significant number of filings in the near future.