Risk Management

Shareholder Settlements Leveling Off?

The average class action lawsuit settlement hit a record high in 2005, but a new study suggests they've peaked and may even begin to drop.
Helen ShawMay 2, 2006

Shareholder class action settlements hit a new peak in 2005. Excluding the Enron and WorldCom settlements, the average settlement value was $24.3 million, surpassing the previous high of $23.7 million in 2002. Yet, settlements may be stabilizing and may fall in the next two years, according to a recent report by NERA Economic Consulting.

“It appears that settlements have reached a plateau that began in 2002 as opposed to being on a continually rising trend,” noted the report, which was based on over 10 years of research on case filings and settlements in shareholder class actions.

Median settlement values jumped to $7.0 million in 2005, compared to $5.3 million in 2004. NERA expects that average settlements will not increase further in the next few years and could decline because the high value of settlements between 2002 and 2005 were due to higher investor losses, not changes in the litigation environment. Additionally, while controlling for other factors, including investor losses, the study found no statistically significant change in settlement values since the passage of the Sarbanes-Oxley Act in 2002.

Investor losses, measured as what was lost over a class period relative to an investment in the S&P 500, were the single largest factor in settlement values. The median investor losses in 2005 totaled $332 million, which was only slightly higher than the 2004 median of $329 million—an indication that investor losses are stabilizing.

Furthermore, expected settlements will rise more slowly than investor losses, project the report’s authors Ronald Miller, Todd Foster, and Elaine Buckberg. On average, a 1.1 percent increase in investor losses results in an approximately 0.4 percent increase in the size of the expected settlement. As a result, as investor losses grow, the ratio of settlement to investor losses declines.

Another measurement indicates a leveling off in settlements. Last year witnessed 209 federal filings, a drop from 247 in 2004 and the lowest number of federal filings since 1997. Interestingly, the dip isn’t evenly distributed across the board—the difference results mostly from a decline in filings in the Ninth Circuit, possibly due to a decline in filings against high-tech companies on the West Coast. The decline is not necessarily a trend, but it further suggests a stabilization.

While a number of the top settlements are tentative or partial settlements, the top ten shareholder class action settlements in 2005 and the first two months of 2006 are: Enron, $7.1 billion; WorldCom, $6.2 billion; Cendant, $3.5 billion; AOL Time Warner, $2.7 billion; Nortel Networks, $2.5 billion; Royal Ahold, $1.1 billion; McKessson HBOC, $960 million; Lucent Technologies, $517 million; BankAmerica Corp. and NationsBank Corp. $490 million; and Dynegy $474 million.

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