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.
Filings in 2011
Research of federal securities fraud class action filing activity, performed by Cornerstone Research in cooperation with the Stanford Law School Securities Class Action Clearinghouse, identified a slight increase in filings in 2011. Consistent with a trend first observed in 2010, filings related to merger and acquisition transactions continued to constitute a large percentage of total filings, accounting for nearly 23 percent of 2011 activity. Litigation against Chinese issuers listed on U.S. exchanges through reverse mergers represented a major component of filings activity—more than 17 percent—during 2011, although evidence indicates that this type of litigation is subsiding. Credit crisis-related filings, as one might expect, did decline in 2011.
Of the 188 securities class actions filed in 2011, 70 included accounting allegations, compared with 46 in 2010. This increase can be attributed in part to the number of Chinese reverse merger filings in 2011, which are significantly more likely to involve restatements of financial statements and, as a result, include alleged violations of generally accepted accounting principles.
In 2011, 60 class actions were filed against firms listed on NYSE or Amex and 105 against firms listed on NASDAQ. However, the market capitalization losses in filings related to issuers listed on NYSE or Amex continued to be larger than filings related to issuers listed on NASDAQ. Overall, the market capitalization declines associated with end-of-class-period announcements have increased from 2010 levels but remain below the historic average. The total disclosure dollar loss of $106 billion in 2011 represented a 47.2 percent increase from 2010.
Settlements in 2011
In 2011, Cornerstone Research found that the number of securities class action settlements approved in 2011 was the lowest in more than a decade. In 2011, there were 65 court-approved securities class action settlements involving $1.4 billion in total settlement funds—the lowest number of approved settlements and corresponding total settlement dollars in more than 10 years. The change in the number of settlements from 2010 to 2011 is one of the two largest year-over-year declines. The trend in the declining number of settlements parallels the decrease in claims of traditional securities fraud against U.S. issuers over the past decade.
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.
Accounting cases continue to be dismissed less frequently than non-accounting cases. For example, of the securities class actions filed in 2006, only 38 percent of accounting cases were dismissed by the end of 2011, compared with 46 percent of non-accounting cases.
First half of 2012
What is in store for 2012? From a settlements perspective, there are strong indications that settlement dollars in 2012 will be up from 2011 totals, buoyed by a few large settlements (in excess of $100 million) with final approvals in the first half of 2012. Filings, however, may not exceed 2011 levels, based on filing activity recorded during the first six months of this year. The SEC published its annual report on the Dodd-Frank Whistleblower Program in November 2011, indicating that the SEC had received 334 tips in the first six weeks after the rules were finalized on Aug. 12, 2011. These tips spanned 37 states and 11 foreign countries. We may, therefore, continue to see trends in filings associated with Dodd-Frank reforms. In recent years, such trends included increased credit crisis-related filings and filings targeting Chinese reverse mergers. Whatever the outcome, however, we know that anticipating developments in securities class action filings and settlements will be a thrilling ride.
Read additional information on Cornerstone Research’s analysis and research of securities class action filings and settlements here.
The views expressed in this article are solely those of the author, who is responsible for the content, and do not necessarily represent the views of Cornerstone Research.