Risk Management

Securities Suits Spike in 2007

Volatile financial markets and the subprime blame game reverse the litigation trend.
Alan RappeportDecember 21, 2007

The lawyers must be loving it. The number of securities class-action lawsuits rose sharply in 2007, after an 18-month decline that some had called a “permanent shift” away from such litigation.

A report published Friday by NERA, an economic consultancy, found that federal filings in 2007 are expected to increase by 58 percent, to 207 from 131 the previous year. That figure takes into account filings made through December 15 and estimates the number for the final two weeks of the year, which usually is typified by slow activity. As recently as September, NERA forecast only a 12 percent increase in overall filings for this year.

Legal fallout from the subprime-mortgage crisis has been driving much of the litigation surge, with shareholders looking for someone to blame. According to NERA, 38 subprime-related class actions were filed in 2007. The bulk of those came in the last six months of the year — quadruple the number from the first six months.

“As the crisis in the credit markets continues to deepen and the market for subprime mortgages continues to suffer accordingly, more litigation is likely to follow,” the report stated.

The spike was not entirely the result of subprime-related lawsuits and options-backdating cases, another popular category of filings this year. Even excluding those, federal class-action filings still rose by nearly 40 percent compared with 2006, NERA said.

Payouts for settlements also have jumped significantly, up 50 percent compared with 2006. NERA found that the average settlement this year was $33.2 million, while the median was slightly less than $10 million. Big-ticket settlements continued to proliferate — 8.1 percent were worth more than $100 million. In class actions settled before 2000, just 2 percent were worth that much. Rising settlements can be an incentive for lawyers to pursue more lawsuits and make them less likely to negotiate.

Filings in the Ninth Circuit courts, which handle western states, will nearly double in 2007, NERA found. The Ninth Circuit traditionally has a strict standard for taking and dismissing cases, so a rise there is indicative of a broader trend, says Kevin LaCroix, a director of Bloomfield, Connecticut-based OakBridge Insurance Services and a close observer of securities litigation.

Investor losses due to settlements also jumped in 2007, to an average of $1.7 billion, according to NERA. “Volatility has returned to the financial markets and there are much more dramatic swings in the stock markets, giving lawyers the incentive to file suits,” LaCroix told CFO.com. “Investors are jittery right now, and companies are paying for bad news.”