Risk Management

Class Action Settlements Past Their Peak

''Aggregate settlement amounts have only one way to move, and that's down,'' according to a new study.
Stephen TaubMarch 22, 2007

The size of securities class action settlements mushroomed in 2006, according to a new study from Cornerstone Research.

Excluding last year’s $6.6 billion partial settlement of the Enron litigation (and the prior year’s $6.2 billion WorldCom settlement fund), the total value of settled cases grew to $10.6 billion in 2006, from $3.5 billion in 2005.

The findings echo those of an earlier study by NERA Economic Consulting. Last year’s oversized settlements may diminish in years to come, however, Cornerstone suggested. “With the largest part of the WorldCom and Enron settlements now wrapped up, and with fewer huge pieces of litigation in the pipeline waiting to be resolved, aggregate settlement amounts have only one way to move, and that’s down,” asserted Prof. Joseph Grundfest of Stanford Law School. Grundfest is also director of the Securities Class Action Clearinghouse, a joint project of Stanford and Cornerstone Research.

The year-on-year increase in total value of settled cases was due to a fivefold increase in the average settlement size rather than to a increase in the number of cases, according to the study.

The average settlement in 2006 was $106.6 million, compared with $22.6 million for the period from 1995 (and passage of the Public Securities Litigation Reform Act) through 2005. The averages exclude the Enron and WorldCom settlements as well as the $3.1 billion Cendant settlement in 2000.

Last year, the average settlement size was skewed by 14 “mega-settlements” of $100 million or more, including five that surpassed $1 billion each. Mega-settlements numbered only nine in 2005 and seven in 2004, Cornerstone reported.

Other findings:

• institutions served as a lead plaintiff in more than half of all cases settled in 2006, up from 35 percent in 2005 and 20 percent in 2004
• accounting allegations were made in 55 percent of settled cases, and settlements in these lawsuits represented a significantly higher percentage of “estimated damages” than settlements in lawsuits without accounting allegations
• derivative actions accompanied more than 45 percent of settled cases in 2006, an increase over 2005
• class-action settlements accompanied by monetary settlements with the SEC for related actions, a trend that began in earnest in 2004, continued to proliferate in 2006

An earlier study from Cornerstone found that securities fraud class action filings plunged to a record low of 110 in 2006, compared with 178 filed in 2005 and far below the 10-year historical average of 193.1.