Risk Management

Class-Action Settlement Size Is Surging

While the number of cases declines, payouts — and investor losses — climb.
Stephen TaubJanuary 3, 2007

Two studies published this week—>one from Stanford Law School, the other from NERA Economic Consulting—found that the number of shareholder class action suits were down dramatically in 2006. Even so, the size of settlements of existing cases soared past last year’s record levels, according to NERA, which produces an annual study of the topic.

NERA’s report concluded that class action settlements paid by corporations to shareholder plaintiffs rose by 37 percent over the past year. The average shareholder class action settlement is now $86.7 million, up from the average of $73.6 million in 2005. But the economists point out that the soaring average has been skewed by large settlements that exceeded $1 billion in total payouts, says NERA. If those big payments are excluded, the average settlement drops to $34 million, according to NERA calculations, that track activity through December 15.

Four multi-billion-dollar settlements occurred in 2006. They were: the $2.7 billion settlement paid to shareholders in the AOL Time Warner class action suit; the $1.1 billion Royal Ahold NV settlement, and two separate $1.1 billion settlements resulting from two Nortel Networks class action cases. In addition, there was the partial of $7.1 billion paid to shareholder plaintiffs in the Enron class action—which began in 2005 and continued into 2006. The Enron settlement, the largest payout to date in a shareholder class action, is expected to grow even larger after the final payments are made to shareholders.

“This is an astonishing development given that before 2006 only three settlements had ever exceeded $1 billion,” noted NERA economists and study authors Todd Foster, Ronald I. Miller, and Stephanie Plancich. In fact, the study found that seven of the 10 largest settlements occurred between 2005 and 2006. In addition, more than 10 percent of shareholder class action settlements were “mega-settlements” of over $100 million, in contrast with an average of 3 percent reaching this threshold in prior years. Median settlements, which NERA asserts are more descriptive of typical cases, also continued to rise in 2006, hitting a new peak of $7.3 million.

NERA explains that settlement size is influenced by a number of factors, including the class of securities involved. For example, bonds and options boost the size of settlement values, according to the study. Other key determinants are whether there are allegations of accounting improprieties and whether the case concerns an initial public offering. The single most powerful determinant of settlement size, however, is the losses experienced by investors. Average investor losses have ballooned from $140 million in suits settling in 1996 to $2.5 billion in 2003, according to the study.