A roller coaster ride in securities class actions

A look at last year’s filing activity and a prediction for 2012

Identifying and detailing trends in securities class action filings and settlements is like any roller coaster ride worth its weight in thrills—we anticipate what might be right around the corner. Will it be a slow, steep climb up or are we headed into a blind loop-the-loop?

The Private Securities Litigation Reform Act of 1995 was implemented to stem frivolous securities fraud class actions brought under Section 10b and Rule 10b-5 of the Securities and Exchange Act of 1934. Since the Reform Act was enacted, a larger portion of filings have included allegations of accounting fraud and insider trading as well as, in recent years, objections to mergers and acquisitions. Post–Reform Act settlement dollars had been on the increase, particularly for settlements of “mega-cases,” but that trend has reversed. For the past four years, no securities class action settlement has exceeded $1 billion. Details on the latest trends in securities class action filings and settlements follow.

The median settlement amount for the 65 court-approved settlements decreased substantially in 2011 to $5.8 million, an almost 50 percent decline from the $11.3 million median in 2010, and represents the lowest median settlement amount in more than 10 years. While the decrease in the median settlement amount is surprising, there were several factors in 2011 that contributed to this decline. For example, accompanying Securities and Exchange Commission (SEC) actions tend to be associated with higher class action settlements, and while cases accompanied by corresponding SEC actions were down this year, the SEC has actually increased its level of enforcement activity in recent years. This suggests that all else equal, the number of class actions with corresponding SEC actions likely will increase.

For the second consecutive year, more than 60 percent of accounting case filings included allegations of internal control weaknesses. Only 17 percent of initial filings with these claims were accompanied by company announcements reporting the presence of internal control weaknesses over financial reporting. Accounting cases with internal control allegations that were accompanied by announcements of internal control weaknesses by the company tended to settle for higher amounts.

Contributing Author

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Adel Turki

Adel Turki is a senior vice president in the Washington, DC, office of Cornerstone Research and heads the firm’s securities practice. Dr. Turki serves...

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