Category Archives: Lies, Damn Lies, And Statistics

Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse have released a report on federal securities class action filings in 2007. The findings include:

(1) There were 166 filings in 2007 (as of 12/17/07). Note that there is a significant difference between the Cornerstone (166) and NERA (198) totals over the same time period. Both numbers, however, represent a large increase over the number of filings in 2006.

(2) The report is skeptical that the increase in filings suggests a trend back to historical filing levels, noting that 32 of the filings were related to the subprime crisis. Increased stock market volatility in the second half of 2007 also may have played a role in the increase.

(3) Because of subprime-related litigation, filing activity in the financial sector nearly quadrupled to 47 filings (as compared to 11 filings in 2006).

(4) The report examines the outcome of post-PSLRA cases in Cornerstone’s database (2,646 cases). The report finds that of the resolved cases, 41 percent were dismissed and 59 percent settled.

The press release announcing the issuance of the report can be found here. The D&O Diary has an interesting post breaking down the 2007 statistics and challenging some of the report’s conclusions.

Quote of note (press release): “Professor Grundfest commented that ‘the JDS trial is an important landmark in modern securities litigation. These cases rarely go to trial, and for the defendants to win a total victory in a case that claimed $20 billion in damages demonstrates that not every case that makes it past summary judgment has merit. The interesting question is how and whether this trial result might cause plaintiffs to modulate their settlement demands or embolden defendants to take cases to trial.'”

It is not the end of the year, but that has not stopped NERA Economic Consulting from releasing its annual study on securities class actions. The 2007 report is entitled “Recent Trends In Shareholder Class Action Litigation: Filings Return to 2005 Levels as Subprime Cases Take Off; Average Settlements Hit New High.”

The study reaches the following notable conclusions:

(1) NERA predicts that there will be 207 filings by year end (a 58% increase as compared to 2006). The increase in filings has been driven in part by subprime-related litigation (38 filings as of Dec. 15).

(2) The value of the average settlement finalized or proposed to be finalized in 2007 (excluding mega-settlements greater than $1 billion) was $33.2 million, a jump up from $22.7 million in 2006.

(3) The post-PSLRA dismissal rates for securities class actions can be difficult to accurately calculate given the long-term nature of these cases, the ability to replead, appeals, etc. Interestingly, the study examines the current status of the 235 securities class actions filed in 2000 and finds that over 90% of these have reached some kind of final resolution. To date, approximately 60% of the cases have reached final settlement and 31.5% of the cases have been dismissed.

NERA Economic Consulting has released a study entitled “Recent Trends In Shareholder Class Action Litigation: Filings Stay Low and Average Settlements Stay High – But Are Those Trends Reversing?” The study reaches the following notable conclusions:

(1) The number of filings have increased, with 76 new filings through the first half of 2007. The projected annual total of 152 would be a 12% increase over last year.

(2) The average settlement value during the first half of 2007 (excluding settlements over $1 billion) hit a new high of $30 million. There is evidence, however, that this trend may reverse direction based on a decline: (i) in the investor losses associated with recent filings; and (ii) in the prevalence of accounting allegations in recent filings.

(3) Eight of the top ten settlements of all time have resolved in 2006 or 2007, or are pending. Tyco’s announced preliminary settlement of $2.975 billion would be the largest amount ever paid by a single settling defendant.

Securities Litigation Watch has posted the SCAS 50, which “lists the top 50 plaintiffs’ law firms ranked by the total dollar amount of final securities class action settlements occurring in 2006 in which the law firm served as lead or co-lead counsel.” At the head of the list this year is Lerach Coughlin.

The race to release annual data on securities class action filings has heated up to the point where the two major players both have decided not to wait for the final numbers to come in. This week saw the publication of “2006: A Year in Review” from Cornerstone Research/Stanford Law School Securities Class Action Clearinghouse and “Recent Trends in Shareholder Class Action Litigation: Filings Plummet, Settlements Soar” from NERA Economic Consulting. The reports use filing data through mid-December 2006.

The findings include:

(1) Filings plunged to a record low since the passage of the PSLRA in 1995. As usual, the reports differed in their calculation of the exact number of filings. Cornerstone found that there were 110 filings (as compared to a post-PSLRA average of 193), while NERA found there were 129 filings (as compared to a post-PSLRA average of 239).

(2) The average settlement, excluding settlements over $1 billion, was $34 million (up 37% over 2005). The increase is driven almost entirely by the growth in settlements over $100 million. (NERA)

(3) There has been a dramatic decrease in the total market capitalization losses associated with filings (44% decline in losses measured as of the last day of the class perod), which is a product of fewer filings and lower market capitalization losses per filing. (Cornerstone)

(4) A significant portion of cases are dismissed within the first two years. The Second and Ninth Circuits, which together receive the most cases, dismiss approximately 20% within this time period. The Fourth Circuit has the highest rate, dismissing 31% of cases within two years, while the Tenth Circuit has the lowest, at 5%. (NERA)

Why the decline in filings this past year? Possible reasons put forward by the reports include better corporate governance (Cornerstone and NERA), a strengthened federal enforcement environment (Cornerstone), a strong stock market combined with lower stock price volatility (Cornerstone), and distraction on the part of the plaintiffs’ bar (NERA).

Addition: Point of Law and D&O Diary present some thoughts on the filings decline.

Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse have released an interim report on federal securities class action filings in 2006. The findings include:

(1) The number of filings in the first half of 2006 is at the lowest level for any six-month period in the last ten years. There have been 61 filings to date, which would annualize to 123 filings (as compared to a post-PSLRA average of 194 per year).

(2) The filings that have been made in 2006 are associated with significantly lower market capitalization losses as compared to 2005 and historical averages.

(3) Options backdating suits have not contributed significantly to the number of filings, with most of the litigation activity in that area focused on derivative actions. (Securities Litigation Watch is keeping a running total on the number of options backdating securities class actions, which currently stands at eleven.)

Hard on the heels of the NERA study, PricewaterhouseCoopers has released its own review (free regist. req’d) of the year in securities class actions. A few highlights:

(1) The average settlement value, excluding the Enron and WorldCom settlements, increased dramatically to $71.1 million in 2005. (Note that there is a significant discrepancy between PwC and NERA on this point, with NERA reporting a much lower number.)

(2) The number of filings was down significantly last year (from 203 cases to 168 cases), but PwC finds that a “seesaw pattern has occurred somewhat regularly during the period from 1996 through 2005, and it is likely that 2005’s drop in filings of private securities litigation cases is only a respite.”

(3) For the first time since 1996, the number of cases alleging accounting violations dropped below 50%. PwC suggests that two factors may be at work: (a) improved internal accounting and financial reporting controls; and (b) the continued growth of “product-efficacy” cases, especially against pharmaceutical and healthcare companies, which made up 10% of all cases in 2005.

(4) The study finds little correlation between financial restatements and filings, noting that “many restatements do not result in significant stock-price drops.”

NERA Economic Consulting has released a study entitled “Recent Trends In Shareholder Class Action Litigation: Beyond the Mega-Settlements, is Stabilization Ahead?” The study reaches the following notable conclusions:

(1) The average settlement value hit a new high in 2005 (even excluding WorldCom and Enron) of $24.3 million. Nevertheless, NERA believes that “average settlements will not rise further over the next two or three years and, instead, could even fall” given that most of the cases associated with the stock market crash of 2000-2002 have been resolved.

(2) The study examines various factors that can raise settlement values – e.g., presence of accounting allegations (+20%), related official investigation (+25%), and lead plaintiff is an institutional investor (+33%).

(3) There were 209 filings in 2005. Although this is the lowest number since 1997, most of the difference is due to a sharp fall in filings in the 9th Circuit and “it is far too early to conclude there is a downward trend.”

The Cornerstone/Stanford report on securities class actions filings in 2005 has been the subject of press commentary, primarily focused on the “sharp decline” in cases. The New York Times has a Legal Beat column discussing the report in today’s edition.

There are two interesting questions that arise out of the report’s findings.

First, is the decline actually significant? Securities Litigation Watch has done a great job of pointing out that commentators are ignoring the actual statistical trend – perhaps because they are merely relying on the press release that accompanied the report. In the context of post-PSLRA filings (i.e., since 1996), last year’s 175 filings is entirely consistent with the normal up-and-down pattern.

Second, and perhaps more interestingly, why was there no rise in the number of securities class action filings last year given the astonishing increase in financial restatements? There were an estimated 1200 financial restatements in 2005, nearly twice as many as in 2004. Although not every financial restatement brings a lawsuit, there is little doubt that the correlation is significant. The Cornerstone/Stanford report found that 89% of securities class actions filed in 2005 alleged misrepresentations in financial documents.

The New York Times column states that restatements are becoming more commonplace and may not indicate misconduct, but then quotes some experts suggesting that the real reason for the decline in filings is a combination of the PSLRA and judicial decisions (including Dura) that have made it more difficult for investors to bring cases. One missing link, however, is the relationship between restatements and stock price declines. The announcement of a restatement that is not accompanied by a significant stock price decline is unlikely to engender a securities class action (not enough damages). So it would appear that we need at least one more piece of the statistical puzzle: how many of last year’s restatements led to a significant stock price decline?