Risk Management

Settlements Skyrocket in Securities Class Actions

The aggregate $6 billion in settlement dollars last year was almost double the 2015 total.
David McCannMarch 15, 2017
Settlements Skyrocket in Securities Class Actions

U.S. courts approved more securities class-action settlements in 2016 than in any year since 2010, according to a report from Cornerstone Research.

The 85 settlements reached last year were just five more than the previous year. However, the aggregate dollar amount in the cases, just under $6 billion, was nearly double the 2015 total and the second-most in the past decade.

As reported in “Securities Class Action Settlements—2016 Review and Analysis,” the dollar increase was fueled by 10 mega-settlements ($100 million or more), which accounted for 81% of all settlement dollars. The number of mega-settlements was the highest in 10 years and included two cases that were settled for more than $1 billion.

The concentration of settlements’ dollar volume in a few cases is not unusual. “Class-action securities fraud litigation is a hit-driven business,” observes Joseph Grundfest, a professor at Stanford Law School. However, the number of mega-settlements as a percentage of all settlements was the highest in a decade.

At the same time, an approximately 40% increase in the median settlement amount, to $8.6 million, indicates a shift for more typical securities class actions as well. Driving that result, defendant firms overall were substantially larger in 2016 than those that settled class actions the prior year.

(Click on the chart below to make it larger.)

Settlement-StatisticsAn increase in “estimated damages,” a simplified calculation representing a proxy for damages, was another important factor in 2016 totals. Average estimated damages increased to $4.8 billion, up from $4.4 billion, while median estimated damages rose to $361 million from $335 million. (In the report, all dollar amounts for years prior to 2016 were adjusted for inflation to 2016-equivalent dollars.)

Indeed, estimated damages is the most important determinant of settlement amounts, according to the report. Still, settlement dollars as a percentage of estimated damages increased over 2015, indicating that other factors contributed to the rise in settlement amounts as well, the report notes.

In particular, the percentage of settlements with public pension plans as lead plaintiffs and the number of cases based on financial restatements both increased in 2016. In addition, the average size of issuer defendants (as measured by total assets) was substantially higher last year than in 2015. All of those factors are associated with higher settlement amounts.

Meanwhile, the record number of case filings in 2016, and the fact that it was the fourth consecutive year of increased filings, may fuel continued growth in the coming years, according to the report.

Still, Cornerstone Research notes, the most recent data indicate a potential upcoming decline in very large cases, based on market capitalization losses for companies sued in securities class actions.

Why is that?

A metric known as “dollar disclosure loss” (DDL) captures the price change for a defendant company’s stock from the trading day immediately preceding the end of the class period — the specific time period during which unlawful conduct is alleged to have occurred — to the trading day immediately following the end of the class period.

Total DDL associated with settlements approved in 2016 was about $81 billion, or about 20% below the average from 2007 through 2015. Lower overall stock losses as a result of securities class actions may translate to a downtick in mega-settlements over time.

On an industry-by-industry basis, trends have fluctuated over the last 20 years. However, the report states, “health care and related sectors, such as biotech and pharmaceuticals, may play a growing role in both the number and total dollar amounts of settlements.”

Interestingly, cases were wrapped up more quickly last year. The percentage of cases settled within two years of their filings was the highest since 2006. However, those cases brought the smallest settlements.