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 2005. The findings include:

(1) The overall number of securities class actions filed in 2005 decreased more than 17%, falling from 213 filings to 176 filings. This year’s filing rate is nearly 10% below the post-PSLRA historic average. Moreover, the alleged investor losses associated with the cases decreased significantly.

(2) Filing activity declined in the technology and communications sectors (down 32% from 2004). The consumer non-cyclical sector (e.g., biotechnology, commercial services, cosmetics, food, healthcare products) gave rise to the most securities class action litigation.

(3) There was a substantial increase in the number of securities class actions alleging misrepresentations in financial reporting (from 78% in 2004 to 89% in 2005) and false forward-looking statements (from 67% in 2004 to 82% in 2005).

The authors of the report suggest that the decrease in overall filings may be the result of the large majority of suits related to the boom-and-bust cycle of the late 1990s-early 2000s having already been filed, improvements in corporate governance, and less stock market volatility.

NERA Economic Consulting has released a study entitled “Recent Trends In Shareholder Class Action Litigation: Are WorldCom and Enron the New Standard?” The study reaches the following notable conclusions:

(1) In the first half of 2005, the median settlement value of securities class action cases jumped nearly 30% to $6.8 million from $5.3 million last year. The study states that the driving factor behind this increase is a sharp reduction in “nuisance” settlements of under $3 million.

(2) While bigger settlements have yielded lower percentage fees for plaintiffs’ counsel, the average settlement in 2005 will result in over $6 million in fees (as compared to $3.6 million five years ago).

(3) Securities class action filings are down by 17 percent in the first half of 2005. The study finds that the slowdown is attributable to a drop in filings in the 9th Circuit, where plaintiffs’ firms may have delayed filing cases pending the Dura decision.

(4) Dismissal rates have nearly doubled after the passage of the PSLRA and account for 39.3% of dispositions of securities class actions filed 1996-2002. This increase offsets the increased likelihood that a public company will be sued in a securities class action. As a result, the annual probability of a company facing a suit that survives a motion to dismiss has remained roughly constant at 1.2%.

The statistics on dismissal rates are surprising, especially since an earlier NERA study found that the PSLRA had not significantly increased the likelihood of a securities class action being dismissed.

The 2004 Securities Litigation Study from PricewaterhouseCoopers contains a number of interesting statistics. A few highlights:

(1) Securities class actions were filed against 29 foreign companies listed on U.S. exchanges. This is the highest number of cases against foreign companies ever filed in one year.

(2) Securities class actions alleging accounting-related securities fraud versus securities class actions alleging non-accounting-related securities fraud divided roughly 60/40 percent. This has been a relatively constant statistic since the passage of the PSLRA.

(3) Public retirement and investment funds and other institutional entities comprised 47 percent of the lead plaintiffs in all securities class actions filed through June 30, 2004. This compares to 41 percent of all cases with such lead plaintiffs in 2003 and 51 percent in 2002.

Quote of note: “Exactly what 2004 securities litigation statistics, trends and events are telling us is that the future will be more challenging. Look for steady, or somewhat increasing, trends in the number of private securities litigation class actions and regulatory enforcement actions on average over the next several years. Expect continuing significant increases in the dollar-values of private securities class action settlements of the average, median, and ‘high-dollar’ values of settled cases for years to come. Contemplate the knock-on effects of Sarbanes-Oxley, increased regulatory enforcement actions, and enhanced vigilance by independent auditors (regarding accounting irregularities and financial frauds), and expect a significant increase in ‘Section 10A’ matters, SEC (and other regulators) investigations, and internal corporate investigations leading to more restatements, more regulatory enforcement actions, and more private securities litigation. And, assume that a few bad management of a number of some publicly-listed companies will continue to try to game the system and securities markets.”

Cornerstone Research has released an updated report on post-Reform Act settlements of securities class actions through December 2004. The findings include:

(1) The value of securities class action settlements in 2004 was a record $5.5 billion (the previous record was $4.5 billion in 2000). Even excluding Citigroup’s $2.6 billion settlement of WorldCom-related claims, the year-to-year increase was substantial.

(2) For cases settled in 2004 (as compared to 2003), there was a 40% increase in the length of the class period and larger market capitalization losses. Cornerstone attributes this development to the fact that many cases settling in 2004 were originally filed during the bear market that began in 2000.

(3) Despite the increase in overall settlement values, more than 65% of all settlements in 2004 were for less than $10 million and approximately 80% were for less than $30 million.

Cornerstone’s press release on the study can be found here.

NERA Economic Consulting has released a study entitled “Recent Trends In Shareholder Class Action Litigation: Bear Market Cases Bring Big Settlements.” The study reaches the following notable conclusions:

(1) There was a 33% increase in the mean settlement value of securities class actions in 2004 ($27.1 million in 2004, up from $20.3 million in 2003). NERA found that this increase was fueled by cases dealing with higher investor losses and is likely to continue for the next several years.

(2) On average, a 1% increase in investor losses results in a .4% increase in the size of an expected settlement.

(3) Although a number of very large settlements caused the increase in the mean settlement value, the dollar value of the typical settlement is actually falling. Over 70% of the settlements in 2004 were valued at $10 million or less.

(4) Over a five-year period, a public corporation faces a 10% probability of facing a securities class action. This probability has risen since the passage of the PSLRA.

(5) The Sarbanes-Oxley Act of 2002 does not appear to have had an impact on the number of securities class action filings or the size of settlements.

Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse have released a report on federal securities class action filings in 2004. The findings include:

(1) Securities class action filings increased by 17% from 2003 to 2004, rising from 181 companies sued to 212 companies sued (the post-PSLRA annual average is 190 filings).

(2) The total decline in market capitalization from the beginning to the end of the purported class periods nearly tripled from $58 billion to in 2003 to $169 billion in 2004. This increase is attributable to a small number of cases with unusually large market capitalization declines.

(3) The top three circuits in terms of number of filings in 2004 were the Ninth Circuit (64 filings), the Second Circuit (45 filings), and the Eleventh Circuit (20 filings).

(4) The number of issuers sued in the technology sector nearly doubled, fueling the rise in the number of filings in the Ninth Circuit (primarily California).

PricewaterhouseCoopers has released its 2003 Securities Litigation Study, which contains a number of interesting statistics. A few highlights:

(1) Of the 175 securities class actions filed in 2003, 107 were accounting-related. The primary allegation in accounting-related cases continues to be revenue recognition issues, alleged in over 50% of these cases.

(2) The percentage of cases with union/public pension funds as lead plaintiffs has grown steadily from 1996 (less than 3% of cases) to 2003 (28% of cases).

(3) Average settlement values for all cases settled in 2003 was $23.2 million, up 20% from 2002. There were an increasing number of large settlements, including 6 settlements of more than $100 million.

(4) PwC has begun to track “triple jeopardy” cases, where companies are subject to securities class actions along with SEC and DOJ investigations. There was an all-time high of over 40 of these cases in 2002, but last year saw this number fall to 8 cases (closer to historic norms).

Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse have released a report on federal securities class action filings in 2003. The findings include:

(1) Securities class actions (not including IPO allocation, analyst research, or mutual fund trading practices cases) declined by 22% between 2002 and 2003, falling from 225 to 175 filings.

(2) Companies sued in 2003 lost more than $540 billion in market capitalization, down from $1.9 trillion in 2002.

(3) There were fewer huge cases. In 2003, there were 14 filings in which the defendant companies lost more than $10 billion in market capitalization. In 2002, there were 40 filings with this type of market capitalization loss.

(4) The top three circuits in number of filings in 2003 were the Second Circuit (37 filings), the Ninth Circuit (34 filings), and the Eleventh Circuit (21 filings).

(5) Insider trading by corporate defendants was alleged in 33% of the 2003 filings (as compared to 26% in 2002).

(6) Auditors and underwriters were named as defendants in a very small percentage of all filings both in 2002 and 2003.