Cornerstone Research: Securities Class Action Settlement Dollars Dip Dramatically in 2017

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Number of settlements remain at relatively high levels

Total settlement dollars from securities class actions fell dramatically in 2017, even as the number of settlements remained steady. According to a new report by Cornerstone Research, Securities Class Action Settlements—2017 Review and Analysis, the total value of securities class action settlements approved by courts in 2017 was $1.5 billion—the second-lowest amount since 2008—and a substantial drop from $6.1 billion in 2016.

The total of 81 securities fraud class action settlements approved in 2017 represented a slight decline from 85 settlements in 2016. The average settlement value, however, decreased 75 percent from $72.0 million in 2016 to $18.2 million in 2017. For the first time in more than five years, no settlement exceeded $250 million.

“More than half of 2017 settlements were for $5 million or less. We also saw a significant decline in mid-range to large settlements,” said Laura E. Simmons, a coauthor of the report and a Cornerstone Research senior advisor. “A combination of lower estimates of the proxy for plaintiff-style damages and smaller issuer defendant firms contributed to this decrease.”

The decline in case size is also consistent with other trends. Historically, smaller cases tend to settle faster than larger cases. In 2017, more than 23 percent of cases settled within two years of the date they were filed, compared to less than 16 percent between 2008 and 2016.

“These data suggest that plaintiff counsel have recently been going after smaller fry claims where the issuers are not as large and there is less at stake. The mega-cases involving large firms appear to be in the rearview mirror for the moment,” observed Professor Joseph A. Grundfest of Stanford Law School, a former Commissioner of the Securities and Exchange Commission.

Key Trends

  • Mega settlements decline: A decrease in the number of mega settlements (settlements of $100 million or more) also contributed to the dramatic drop in total settlement dollars. In 2017, there were only four mega settlements, comprising just 43 percent of total settlement dollars. In contrast, during 2008–2016, 70 percent of total settlement dollars were attributable to mega settlements.
  • Small settlements jump to record levels: Both the number and proportion of settlements for less than $5 million rose to the highest level in the last 10 years. In 2017, 15 cases settled for $2 million or less (historically referred to as “nuisance suits”).
  • “Simplified tiered damages” decrease: This proxy for potential shareholder losses is an important factor in predicting settlement amounts. In 2017, the decline in median settlement amount was primarily driven by a reduction in “simplified tiered damages.” “Simplified tiered damages” is based on the dollar value of a defendant’s stock price movements on the specific dates detailed in the plan of allocation in the settlement notice.
  • Size of defendant firms shrinks: In 2017, the median value of issuer defendant total assets was $547 million, 37 percent lower than for cases settled during 2008–2016.
  • Accounting allegations continue downward trend: The proportion of settled cases alleging GAAP violations in 2017 was 53 percent, continuing a three-year decline from a high of 67 percent in 2014. Of cases with accounting allegations settling in the preceding nine years, 23 percent involved named auditor codefendants. In 2017, this dropped to 13 percent.
  • Institutional investors as lead plaintiffs at low levels: The proportion of settlements with a public pension plan as lead plaintiff declined to the lowest level in 10 years. This decline in part reflects the smaller cases involved. However, even in larger cases, public pension plans were less frequently involved in 2017 than in prior years.
  • Derivative actions reach record levels: The percentage of settled cases involving an accompanying derivative action was one of the highest in the last 10 years, driven by a surge in derivative cases corresponding to relatively small settlements. Of cases settling for $5 million or less in 2017, 51 percent were accompanied by derivative actions, compared to 37 percent for the prior nine years.
  • Corresponding SEC actions remain consistent: Approximately 20 percent of cases settled in 2017 involved an accompanying SEC action, comparable to 18 percent in 2016.

About the Securities Class Action Settlements Report
Securities Class Action Settlements—2017 Review and Analysis examines cases alleging fraudulent inflation in the price of a corporation’s common stock. The sample includes only cases alleging Rule 10b-5, Section 11, and/or Section 12(a)(2) claims brought by purchasers of a corporation’s common stock. This report’s sample includes 1,697 securities class actions filed after passage of the Reform Act (1995) and settled from 1996 through 2017. These settlements are identified based on a review of case activity collected by Securities Class Action Services LLC (SCAS). For purposes of this report, the designated settlement year corresponds to the year in which the hearing to approve the settlement was held.

About Cornerstone Research
Cornerstone Research provides economic and financial consulting and expert testimony in all phases of complex litigation and regulatory proceedings. The firm works with an extensive network of prominent faculty and industry practitioners to identify the best-qualified expert for each assignment. Cornerstone Research has earned a reputation for consistent high quality and effectiveness by delivering rigorous, state-of-the-art analysis for over 25 years. The firm has 700 staff and offices in Boston, Chicago, London, Los Angeles, New York, San Francisco, Silicon Valley, and Washington.

Please visit Cornerstone Research’s website for more information about the firm’s capabilities in economic and financial consulting and expert testimony.
Twitter: @Cornerstone_Res

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