2008 Trends: Subprime and Auction-Rate Cases Continue to Drive Filings, and Large Settlements Keep Averages High

29 July 2008
By Dr. Stephanie Plancich and Svetlana Starykh et al.

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 this newly released edition of NERA's semi-annual study. Co-authored by Vice President  Dr. Stephanie Plancich, Senior Consultant Svetlana Starykh, and former NERA Consultant Brian Saxton, 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 2008.

The latest edition finds that 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, 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). Additional factors associated with filings include market volatility and returns. Specifically, the NERA study finds that, if market volatility is higher during a quarter, filings are likely to be higher as well.

The authors note that, although filings increased through the first half of the year, average settlement values remained roughly constant at around $30 million. Excluding settlements of over $1 billion, the average settlement dropped to $10 million, representing a decline compared to recent years. 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.