The number of class-action securities settlements dropped in 2011, reached a ten-year low. Median and average settlements were also well below historical levels.
The report published by Cornerstone Research shows that 65 cases reached court-approved settlements in 2011, amounting to $1.4 billion in total funds—more than 50 percent below the next lowest value ($2.8 billion in 2003) for any of the years in the period from 2002 to 2010. In comparison, 86 settlements were reached in 2010, amounting to $3.1 billion in total funds.
Laura Simmons, senior research adviser at Cornerstone Research and a business professor at the College of William & Mary, attributes the trend in declining settlements to the decrease in claims of traditional securities fraud against U.S. issuers over the past decade.
The median amount for cases settled in 2011 declined by nearly half, from $11.3 million in 2010 to $5.8 million in 2011, representing the lowest median settlement amount in more than 10 years. “The decrease in the median settlement amount is surprising,” says Simmons. Nonetheless, several factors occurring in 2011 contributed to this decline. “Some of these factors are not likely to persist, suggesting that settlement amounts may rise in the future,” she adds.
For example, accompanying actions from the Securities and Exchange Commission tend to be associated with higher class action settlements and—even though cases accompanied by corresponding SEC actions decreased to less than 10 percent in 2011 compared with nearly 30 percent in 2010—the SEC actually has increased its level of enforcement activity in recent years. This suggests that the number of class actions with corresponding SEC actions will likely increase, says Simmons.
The most significant contributor to the increase in median settlements is associated damages, and that figure decreased in 2011 by more than 40 percent from the median reported for cases settled in 2010. As a result, Simmons says the decrease in associated damages likely affected the decline in average settlement amounts.
The average reported settlement amount also decreased from $36.3 million in 2010 to $21 million in 2011 and remains substantially below the 1996-2010 average of $55.2 million. The absence of very large settlements in 2011 may be a factor. In addition, the average for settlements of $100 million or greater declined more than 27 percent from 2010 to 2011.
Other factors often associated with larger settlements also declined. For example, according to the study, allegations related to violations of generally accepted accounting principles were included in only about 45 percent of settled cases compared with nearly 70 percent of settled cases in 2010 and 68 percent for the prior five years.
Settlements that included instances of a financial restatement, or an announcement of one, declined by 45 percent for cases in 2010, and by more than 40 percent for cases from 2006 to 2010.
Institutional involvement as lead plaintiffs declined in 2011 to approximately 60 percent of settled cases compared with 2010. The number of settled cases involving companion derivative actions also decreased in 2011 compared with 2010. Slightly less than 40 percent of cases settled in 2011 were accompanied by a derivative action filing compared with more than 45 percent of cases settled in 2010. The 2011 percentage is still higher than the post–Reform Act average of approximately 30 percent.
As these factors “tend to be associated with higher settlement amounts,” the drop in the number of cases with these characteristics “may explain the lower 2011 settlement values,” according to the study.
Factors that contributed to lower settlement figures during 2011 may only be temporary. As the report points out, in light of the $725 million AIG settlement approved in February 2012, “it appears likely that the total dollar amount of settlements will return to more typical levels in 2012.”