The number of securities class action settlements approved by U.S. courts dropped in a “weak year” to the lowest point in a decade as the average amount of each accord fell by 42 percent in 2011, according to a report.
Sixty-five such cases were resolved last year for a total of $1.4 billion, the fewest settlements and lowest aggregate dollar value in more than 10 years, Cornerstone Research, an economics and financial consulting firm, said in a study released today. The average settlement amount fell from $36.3 million in 2010 to $21 million last year, according to the annual report.
“The class action securities fraud market is a business, just like any other, and the 2011 settlements data indicate that the plaintiffs and their counsel are coming off a weak year,” Joseph Grundfest, a Stanford University law professor, said in a statement accompanying the report’s release.
The settlement value fell 58 percent, from $3.2 billion in 2010 to $1.4 billion last year, according to the report. The 2011 total is half that of 2002, the next lowest year.
The declining numbers reflect the weakness of cases filed three to five years ago, tougher standards of proof imposed upon by the U.S. Supreme Court and market instability that has made it more difficult for shareholders filing suit to say they weren’t aware of the inherent risk of investing, Grundfest said.
“You couldn’t prove that you lost money because of anything related to fraud,” said Grundfest, who was a commissioner on the U.S. Securities and Exchange Commission from 1985 to 1990.
Attorney Gerald Silk, a partner in the New York-based firm Bernstein Litowitz Berger & Grossman LLP, agreed in part with Grundfest.
“All of these things have, in some respects, made it more difficult to bring these cases,” he said in a phone interview. Still, he said, “numbers don’t tell the whole story.”
Silk called the Cornerstone figures a “snapshot” of securities litigation at a particular moment that doesn’t take into account all the cases for which agreed-on settlements were near final approval at the end of the calendar year.
One of those cases handled by Bernstein Litowitz, Silk said, was a $516 million accord in litigation involving Lehman Brothers Holdings Inc. directors and officers that was submitted to a federal judge in Manhattan in December. That case will be counted in the 2012 annual report.
Laura Simmons, a co-author of the Cornerstone report, said in a phone interview that last year’s cases were a weak crop. She cited a drop-off in the number of cases sparked by accounting-related allegations such as financial restatements, and a decline in the number of parallel SEC enforcement actions.
“Certainly, one could point to improved governance,” she said. Reforms imposed by the Sarbanes-Oxley Act of 2002 would have had time to take effect by the time the cases covered by this latest report were filed, she said.
According to the Cornerstone report, the median settlement value for the 65 cases resolved last year was $5.8 million, the lowest in 10 years and a drop of almost 50 percent from 2010.
“We’re seeing historic lows in the number and value of cases settled,” she said.
Cornerstone has settlement data dating back to 1996. It began tracking the results after the U.S. Congress passed the Private Securities Litigation Reform Act.
Fewer new cases are being filed too, Simmons said.
In 1997, the first year Cornerstone published a report, more than 200 cases were being filed annually. Since 2006, the average has been lower than 150, she said.
“From everything I’ve seen to date, the peak activity in this area appears to have passed,” Grundfest said.
“To the extent that recent history is a guide, the data appears to suggest that there’s not as much money to be made from plaintiffs’ class action securities fraud litigation,” he said.
While plaintiffs’ lawyers will say court rulings have made it harder to bring cases, defense attorneys will counter that large parts of corporate America are now run with more transparency and integrity, Grundfest said.
“That doesn’t mean there isn’t fraud,” he said, “just not as much.”
Silk said even plaintiffs are still filing “good” cases even if they aren’t filing as many complaints.
“Those cases are not going away,” he said. “They haven’t gone away.”