Risk Management

Class-action Values Plunging, but Not for Long

Study of 2008 derivative litigation trends shows a 50-percent fall in the average settlement, to $31.2 million. Here come the cash crunch and subpr...
Stephen Taub and Roy HarrisMarch 11, 2009

Both the number of federal securities class action settlements and their avergage value fell in 2008 — with the dollar amount plunging 50 percent, in fact. But the declines probably will be short-lived, the latest annual report by Cornerstone Research forecasts.

Cornerstone, which said that the number of settlements fell 10 percent, to 99 from 110 in 2007, suggested instead that the ongoing financial crisis is causing increases in litigation activity that could boost settlement volume within the next year or two. Such cases often will involve both damage from the liquidity freeze and from the subprime mortgage collapse.

In the volatile world of derivative litigation, filings declined a few years ago when stock-option backdating cases became rarer, and the filing of such suits took more hits after the prosecutions of marquee plaintiffs attorneys such as William Lerach and Melvyn Weiss. The number of suits recovered, however, thanks to subprime-mortgage related issues and stock-option backdating damage claims, although premiums for director-and-officer insurance generally has remained low.

But last year, average settlement volumes fell to $31.2 million from $62.7 million, with Cornerstone attributing the decline to a sharp drop in the multibillion-dollar “mega­settlements” that have been recorded in recent years. In 2008, in fact, there were no approved settlements in excess of $1 billion.

“This decline in the number of securities class-action settlements does not come as a surprise,” said Professor Joseph Grundfest, director of the Stanford Law School Securities Class Action Clearinghouse, which compiles the information each year in cooperation with Cornerstone Research. “The inventory of cases waiting to be settled had been depleted by recent vigorous settlement activity.”

He also said that settlement figures may bounce back over the next few years as cases associated with potentially large damages related to the current financial collapse work their way through the judicial system.

“Settlements of pending actions against TARP recipients will raise novel public policy issues,” Grundfest added. “Taxpayer dollars will, one way or another, fund these settlements. This simple fact could set off a debate about whether taxpayers should pay for these settlements, and about the effectiveness of the class action litigation mechanism altogether.”

 In 2008, accounting-related allegations, specifically alleged violations of GAAP, were included in almost 70 percent of settled cases. Cornerstone said cases with GAAP allegations had larger settlement amounts and a higher percentage of estimated damages compared to cases not involving accounting allegations. 

The study also found the average estimated damages for all cases settled in 2008 was $1.5 billion. This was much lower that the roughly $2 billion for settlements in 2003 through 2005, and was significantly lower than the high of over $6.5 billion recorded in 2006.