Securities class-action lawsuits, including claims against auditing firms, have reached a five-year high, according to a new report by Cornerstone Research titled “Securities Class Action Settlements – 2015 Review and Analysis.” A total of 80 securities class-action settlements gained approval in 2015, the highest number since 2010. Total settlement dollars also rose to more than $3 billion last year, an increase of 184 percent over the historic low in 2014. The report found that total settlement dollars in 2015 were 9 percent higher than the average for the prior five years. The average settlement size increased from $17 million in 2014 to $37.9 million in 2015 (an increase of 123 percent), while the median settlement amount (representing the typical case) remained relatively flat ($6.0 million in 2014 and $6.1 million in 2015).
In 2015, 35 percent of accounting-related cases had a named auditor Defendant, representing a 50 percent increase over the previous 10-year average. That same report noted that underwriter Defendants were named in 76 percent of cases with Section 11 claims. Laura Simmons, a senior advisor of Cornerstone Research and a co-author of the report, stated:
The surge in securities class-action settlements in 2015 can be attributed in part to three consecutive year-over-year increases in the number of case filings. The increases in case filings may suggest that higher numbers of settlements will persist in the near future. While settlement volume fluctuates from year to year, the size of the typical settlement tends to remain fairly consistent.
There were eight mega settlements ($100 million or greater) last year, compared to only one in 2014. The increase was probably due to a corresponding rise in cases with very high “estimated damages,” a simplified calculation representing a proxy for damages. The median “estimated damages” for mega settlements in 2015 was the second highest in the past 10 years. Average “estimated damages” increased 151 percent from 2014. Since “estimated damages” is the most important factor in predicting settlement amounts, this increase contributed to the substantially higher average settlement amounts in 2015. Median settlements as a percentage of “estimated damages” decreased to historically low levels last year.
Class-action litigation – and especially cases involving securities’ issues – are always difficult and require both experience, ability and a good work ethic. Professor Joseph A. Grundfest, Director of the Stanford Law School Securities Class Action Clearinghouse, stated:
Settlements in class-action securities litigation can be viewed as rather predictable phenomena. You can only get a high settlement value for a strong case that alleges substantial damages, and those factors can often be assessed relatively early in the litigation process. When the number of mega filings is up, you can expect an increase in mega settlements three or more years down the road, with the larger settlements taking longer to reach, and that’s the process that seems to be at work in the 2015 settlement data.
While larger damages appear to have driven up settlement values for some cases in 2015, other factors associated with higher settlements were less prevalent. For example, the proportion of settlements of $50 million or greater involving financial statement restatements, public pension plan lead Plaintiffs, and/or SEC actions was lower than most years since the passage of the Private Securities Litigation Reform Act of 1995.
While the proportion of securities class-action settlements involving financial sector firms was lower in 2014 and 2015 compared to prior years, these cases continue to be some of the largest when measured by “estimated damages.” In 2015, 55 percent of financial sector cases had “estimated damages” greater than $1 billion. The Second and Ninth Circuits continued to lead all circuits in the number of settlements of securities class-action lawsuits.
The study indicates, overall, an increase in successful resolutions benefiting consumers. Consumer advocates and investors alike should be pleased with the progress of these claims. Because of the typically low individual damages, class actions in the financial sector are the best and most efficient means of correcting corporate misconduct and fraud. The upswing in settlements is considered to be a boon to investors.
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