Are shareholders becoming less litigious? That may be one explanation for the recent drop in the number of lawsuits filed. According to a new report from PricewaterhouseCoopers, for example, the number of private securities cases filed in the United States plunged to its lowest level in nine years, to 168 in 2005.
That finding tracks fairly closely with an earlier study published by Stanford Law School and Cornerstone Research, which counted 176 securities-fraud class actions for 2005, down from 213 a year earlier and nearly 10 percent below the 1996-2004 average of 195.
There may be other reasons for the decrease, however, than shareholder reluctance to go to court. PwC theorized that there’s a backlog of major cases—Enron, WorldCom, Adelphia, and others—already being handled by the plaintiffs’ bar. All that work may be consuming the time and resources of securities plaintiffs’ lawyers and causing them to delay new case filings.
Another possible explanation is that the stiff penalties under Sarbanes-Oxley are working as a deterrent, as corporate executives fear the long prison sentences handed out to top managers involved in the Enron, Dynegy, WorldCom, and Tyco cases.
Although the number of cases being brought is dropping, the average value of shareholder class-action settlements hit a new peak in 2005, according to a recent report by NERA Economic Consulting. Excluding the Enron and WorldCom settlements, the average settlement value was $24.3 million, surpassing the previous high of $23.7 million in 2002. NERA suggested, however, that settlement amounts may be stabilizing and that they might even fall in the next two years.
That, of course, would make sense, given the recent decline in new cases filed.
Indeed, PwC researchers a found a much steeper rise in the average cost of a private securities litigation settlement than did NERA. According to the Big Four firm’s study, the average settlement was worth $71.1 million in 2005, excluding the “mega-settlements” involving Enron and WorldCom. That represents a whopping 156 percent increase from the $27.8 million average value of settlements in 2004.
The PwC report offered three explanations for the surge in settlement sums. First, the provision of the Private Securities Litigation Reform Act (PSLRA) of 1995 that calls for the lead plaintiff to be the investor with “the largest financial interest in the relief sought by the class” helps spawn larger settlements.
The study also cites the enormous economic damages that can result when stock-price drops of 20 percent or more collide with multi-billion dollar market capitalizations.
Third, the expansion of securities litigation cases to include more third-party defendants, including auditors, investment bankers, financial institutions, fund managers, and financial advisors.