The annual study compares settlements in 2005 against earlier settlements of
cases filed since the passage of the Private Securities Litigation Reform
Act in December 1995.
The increase in the total value of cases settled in 2005 is due to an almost
10 percent increase in the number of cases settled compared to 2004
(124 vs. 113) and the average settlement size ($28.5 million in 2005 vs.
$26.4 million in 2004), as well as the number of "mega" settlements over
$100 million (nine in 2005).
Most striking is the upward trend in the median (midpoint) settlement
amount, which is an indicator of the more typical case. In 2005 half of all
settlements exceeded $7.5 million whereas historically, through 2004, the
median settlement amount has been only $6.3 million — a 19 percent increase.
"While in recent years we have been observing an increasing number of very
large settlements, never before have we observed such a large single-year
increase in the median settlement amount," commented Dr. Laura Simmons, a
principal in Cornerstone Research's Washington, DC office and an author of
the study.
Contributing to the increase may be a growing frequency of cases involving
accounting-related allegations, as well as institutional investors serving
as lead plaintiffs. The percentage of cases involving restatements of
financial statements grew to 40 percent in 2005, almost double the figure
for 2004. In addition, more than 35 percent of all 2005 settlements were
associated with an institutional investor lead plaintiff, compared to only
20 percent for the prior year. The median settlement amount for all cases
involving financial restatements is $7.5 million, compared to only $5.8
million for cases without restatements. Median settlements in all cases
with an institution as lead plaintiff are $10.7 million compared to only
$5.0 million for cases without an institutional lead plaintiff.
Settlements are significantly higher for suits involving either of these
factors, even when other variables such as the size of the case are
considered.
"The association between institutional investor lead plaintiffs and higher
settlements may partially be attributable to institutions choosing to
participate in stronger cases rather than a causal effect on settlement
amounts, though in at least one case this year an institutional lead
plaintiff had a significant influence on the settlement outcome," noted
Simmons. Namely, in the WorldCom matter, outside directors contributed
funds from their personal assets to the settlement fund, apparently at the
demand of the lead plaintiff, the New York State Common Retirement Fund.
By far, the most important determinant of settlements amounts is "estimated
damages." Interestingly, while average "estimated damages" remained at high
levels, for the first time in post-Reform Act history, they actually
decreased slightly from the prior year's average — from $2.3 billion in
2004 to $2.2 billion in 2005. For purposes of the study, "estimated
damages" are calculated based on a simplified version of a model often used
by plaintiffs to estimate the number of shares damaged and the amount of
alleged stock price inflation.
Some observers believe that lower damages may persist into future years as a
result of the 2005 unanimous landmark Supreme Court decision in Dura
Pharmaceuticals v. Broudo, where the court ruled that plaintiffs must show a
causal link between the alleged misrepresentations and the subsequent actual
losses suffered by plaintiffs.
"The Supreme Court's decision in Dura is clearly the most significant
decision in many years affecting the calculation of class action security
damages," said Stanford Law School Professor Joseph Grundfest, Director of
the Stanford University Securities Class Action Clearinghouse and former
Commissioner of the Securities and Exchange Commission. "It is now not
enough for plaintiffs to prove that a fraud caused them to pay too high a
price for a stock: they also have to prove that the fraud's disclosure, and
not other intervening factors, caused the stock's price to decline.
Dura will therefore cut back on plaintiff damage awards in some cases, but
the decision's full impact is impossible to predict until we see how the
lower courts interpret the decision's language."
Analyzing 735 cases that have settled since the passage of the Reform Act,
the study found several other leading factors that tend to influence
settlement amounts. For example, when the SEC also took action against the
defendants in the form of an administrative proceeding or litigation
release, the median settlement amount was $10.3 million vs. only $5.5
million when the SEC did not take action. Even more significantly, in cases
where corresponding derivative actions (e.g., suits filed against officers
and directors on behalf of the defendant corporation) were filed, the median
settlement was $15 million vs. $5.1 million in cases without
derivative actions. Companion derivative actions tend to be associated
with larger class action cases, as well as cases involving accounting
allegations, SEC actions, and institutions serving as lead plaintiff.
However, even considering these factors, they are still associated with
higher class action settlements.
Leading the charge in the actual number of settlements secured were the law
firms of Lerach Coughlin Stoia Geller Rudman & Robbins and Milberg Weiss
Bershad & Schulman (firms that previously composed the now defunct Milberg
Weiss Bershad Hynes & Lerach). The two firms were responsible for securing
more than half of the settlements in 2005 - 32 percent and 25 percent,
respectively.
Finally, while the Cornerstone study finds a significant increase in
settlement amounts in 2005, a report recently issued by the Stanford Law
School Securities Class Action Clearinghouse in cooperation with Cornerstone
Research found decreases in 2005 in both the number of case filings, as well
as the amount of investor losses associated with case filings. Since there
is a delay between case filings and case resolutions, these results suggest
— along with the effects of the Dura decision — potential lower settlement
values in the future.
A full copy of this report is available at
Post-Reform Act Securities Settlements: 2005 Review and Analysis. Additionally, Dr. Simmons and Professor
Grundfest are available for interviews.
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