Cornerstone Research Report Finds Securities Class Action Settlement…

Based on the observable data, our results suggest that the increase is, at least in part, driven by economic factors rather than case merits. - Laura E. Simmons, a report coauthor and a Cornerstone Research senior advisor

The total settlement value of securities class actions rose sharply to $5 billion in 2018, driven by five settlements of at least $100 million, according to a report released today by Cornerstone Research.

The report, Securities Class Action Settlements—2018 Review and Analysis, found that the total settlement amount approved by courts dramatically surpassed 2017’s near-historic low of $1.5 billion and was 50 percent higher than the annual average for the prior nine years. A single $3 billion settlement accounted for much of the increase in 2018. There was also a notable uptick in settlements valued between $10 million and $50 million.

At the same time, the number of settlements declined slightly to 78 from 81 settlements in 2017. The average settlement amount, however, increased from $18.7 million to $64.9 million, and the median amount (representing the typical case) rose from $5.1 million in 2017 to $11.3 million in 2018.

“It was unusual to see the significant increase in average and median settlement amounts in 2018, as a number of factors typically associated with higher settlements actually decreased,” said Laura E. Simmons, a report coauthor and a Cornerstone Research senior advisor. “Based on the observable data, our results suggest that the increase is, at least in part, driven by economic factors rather than case merits.”

The increase in settlement dollars also was accompanied by an increase in the ratio of settlement amounts to a proxy for plaintiff-style damages, referred to in the report as “simplified tiered damages.” The median ratio increased to 6 percent in 2018, compared to a median of 5.1 percent for the prior nine years.

“Publicly traded corporations have reason to be concerned over the data,” observed Stanford Law School Professor Joseph A. Grundfest, a former commissioner of the Securities and Exchange Commission. “Increased payouts may pressure insurance carriers to raise the rates they charge and the retentions they impose – which could be challenging developments for corporations, boards, and executives.”

Key Trends

  • The number of midsize settlements increased in 2018, with 32 cases settling from $10 million up to $50 million, representing an approximate 60 percent increase over 2017.
  • Small settlements (below $5 million) declined by nearly 40 percent, from 40 cases in 2017 to 25 in 2018.
  • Average “simplified tiered damages” – a measure of potential shareholder losses based on the dollar value of a defendant’s stock price movements on specific dates and an estimate of the number of shares traded during the class period – rose 45 percent to $687 million. Median simplified tiered damages rose 88 percent to $250 million, compared to the 2017 low of $133 million.
  • Consistent with the increases in settlement amounts, defendant firms in settled cases in 2018 were 50 percent larger than in 2017, and more than 20 percent larger than the prior five years when measured by total assets prior to the settlement.
  • The proportion of settled cases involving alleged GAAP violations in 2018 was 45 percent, continuing a four-year decline from a high of 67 percent in 2014.
  • The proportion of settlements involving a public pension plan as lead plaintiff continued to decline in 2018. Public pension involvement was at its lowest level in the last 10 years.
  • The percentage of 2018 settlements with a companion derivative action rose to 55 percent, up from 47 percent in 2017.
  • The level of corresponding actions brought by the Securities and Exchange Commission has remained relatively stable, as 21 percent of the 78 cases settled in 2018 involved an accompanying SEC action (the same rate as in 2017).
  • The median settlement amount in 2018 for cases taking more than two years to settle was almost five times the median settlement amount for cases that settled within two years.

About the Securities Class Action Settlements Report
Securities Class Action Settlements—2018 Review and Analysis examines cases alleging fraudulent inflation in the price of a corporation’s common stock. The sample included 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 1,775 securities class actions filed after passage of the Private Securities Litigation Reform Act (1995) and settled from 1996 through 2018. These settlements are identified based on a review of case activity collected by Securities Class Action Services LLC. 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 30 years. The firm has 700 staff and offices in Boston, Chicago, London, Los Angeles, New York, San Francisco, Silicon Valley and Washington.

See 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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