CORNERSTONE RESEARCH ECONOMIC AND FINANCIAL CONSULTING AND EXPERT TESTIMONY. Securities Class Action Settlements 2013 Review and Analysis - PDF

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CORNERSTONE RESEARCH ECONOMIC AND FINANCIAL CONSULTING AND EXPERT TESTIMONY Securities Class Action Settlements 2013 Review and Analysis Total settlement dollars at highest level since 2007 Larger settlements
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CORNERSTONE RESEARCH ECONOMIC AND FINANCIAL CONSULTING AND EXPERT TESTIMONY Securities Class Action Settlements 2013 Review and Analysis Total settlement dollars at highest level since 2007 Larger settlements capture major share as median drops First year-over-year increase in number of settlements since 2009 Securities Class Action Settlements 2013 Review and Analysis i TABLE OF CONTENTS Highlights... 1 Developing Trends... 2 Number and Size of Settlements... 3 Total Settlement Dollars... 3 Mega Settlements... 4 Settlement Size... 5 Damages Estimates and Market Capitalization Losses... 7 Estimated Damages... 7 Disclosure Dollar Loss Tiered Estimated Damages Analysis of Settlement Characteristics Nature of Claims Accounting Allegations Third-Party Codefendants Institutional Investors Derivative Actions Corresponding SEC Actions Comparison of Settlement Characteristics by Size Time to Settlement Litigation Stages Industry Sectors Federal Court Circuits Cornerstone Research s Settlement Prediction Analysis Research Sample Data Sources Endnotes About the Authors... 26 Securities Class Action Settlements 2013 Review and Analysis ii TABLE OF FIGURES Figure 1: Settlement Statistics... 1 Figure 2: Total Settlement Dollars... 3 Figure 3: Mega Settlements... 4 Figure 4: Cumulative Ten-Year Settlement Distribution... 5 Figure 5: Settlement Percentiles... 6 Figure 6: Median and Average Estimated Damages... 7 Figure 7: Median Settlements as a Percentage of Estimated Damages... 8 Figure 8: Median Settlements as a Percentage of Estimated Damages by Damages Ranges... 9 Figure 9: Median and Average Disclosure Dollar Loss Figure 10: Tiered Estimated Damages Figure 11: Settlements by Nature of Claims Figure 12: Median Settlements as a Percentage of Estimated Damages and Accounting Allegations Figure 13: Median Settlements as a Percentage of Estimated Damages and Third-Party Codefendants Figure 14: Median Settlement Amounts and Public Pensions Figure 15: Frequency of Derivative Actions Figure 16: Frequency of SEC Actions Figure 17: Comparison of Settlement Characteristics by Size Figure 18: Median Settlements by Duration from Filing Date to Settlement Hearing Date Figure 19: Litigation Stages Figure 20: Settlements by Select Industry Sectors Figure 21: Settlements by Federal Court Circuit... 22 Securities Class Action Settlements 2013 Review and Analysis 1 HIGHLIGHTS Total settlement dollars in 2013 increased substantially 46 percent over 2012 and 60 percent above the average for the prior five years. (page 3) There were 67 settlements in 2013 (up from 57 in 2012), the first yearover-year increase since (page 3) Mega settlements pushed settlement dollars up in 2013, accounting for 84 percent of total settlement dollars, the second highest proportion in the last decade. (page 4) While mega settlements drove up the 2013 average settlement amount, the median settlement amount declined, reflecting a reduction in the size of more typical cases. (page 5) For 2013, the median estimated damages declined 48 percent from 2012 and is 17.5 percent lower than the median for post Reform Act settlements in the prior five years. Since estimated damages are the most important factor in determining settlement amounts, this decline was likely a major factor contributing to the substantially lower median settlement in 2013 compared with (page 7) The proportion of settled cases in 2013 involving accounting allegations dipped to a ten-year low, but the settlement as a percentage of estimated damages for these cases was much higher than for cases not involving such allegations. (page 13) The median settlement in 2013 for cases with a public pension as a lead plaintiff was $23 million, compared with $3 million for cases without a public pension as a lead plaintiff. (page 15) New analyses reveal that settlements of $50 million or lower are far less likely to involve accompanying SEC actions or a public pension as a lead plaintiff. (page 18) FIGURE 1: SETTLEMENT STATISTICS (Dollars in Millions) Minimum $0.7 $0.1 Median $6.5 $8.3 Average $71.3 $55.5 Maximum $2,425.0 $8,358.2 Total Amount $4,773.9 $73,740.2 Note: Settlement dollars adjusted for inflation; 2013 dollar equivalent figures used. Securities Class Action Settlements 2013 Review and Analysis 2 DEVELOPING TRENDS The year 2013 saw the highest total dollar value of settlements approved over the last six years. This was due in part to an uptick in the number of cases settled (compared with the prior two years), as well as the relatively high average shareholder losses associated with cases settled in 2013 (the second highest in the last six years). The surrounding economic events are an important backdrop to understanding the settlement trends. Settlement sizes in 2013 were affected by the resolution of a number of credit crisis cases, which tend to involve relatively large settlement amounts and related investor losses. Pharmaceutical industry sector settlements also contributed to the overall increase. At the opposite end of the settlement spectrum were settlements of Chinese reverse merger cases. These matters tend to be relatively small. According to Securities Class Action Filings 2013 Year in Review released earlier this year by Cornerstone Research, the majority of these cases were filed in 2011 and thus, not surprisingly, a relatively large number (14 cases) were settled in All but one of these settlements were for amounts less than $10 million. Despite record enforcement activity by the SEC in the last couple of years, there has not been an increase in securities class action settlements accompanied by SEC actions. This is due in part to the potential lag between the underlying class action settlement and resolution of activity commenced by the SEC. Furthermore, the SEC s enforcement activity includes matters outside the scope of this research. Nevertheless, it is possible there will be an increase in securities class actions accompanied by disclosure-related SEC enforcement actions in the future. In addition, securities class action filings (i.e., new cases) involving Rule 10b-5, Section 11, and/or Section 12 allegations have been relatively high over the last few years, including a surge in the second half of 2013 (see Securities Class Action Filings 2013 Year in Review). Thus, it is unlikely there will be any significant decline in the overall number of cases settled in upcoming years. Looking ahead, it would be remiss not to mention the Halliburton Co. v. Erica P. John Fund matter currently before the U.S. Supreme Court. As has been widely discussed, the case challenges the fraud-on-the-market presumption that was established in 1988 through Basic Inc. v. Levinson. The suit has the potential to dramatically affect the entire landscape surrounding securities class actions, including issues that are the focus of this report, such as the damages associated with securities cases, the progression of these cases through the litigation process, and ultimately, the settlement amounts involved. This report analyzes a sample of securities class actions filed after passage of the Private Securities Litigation Reform Act of 1995 (Reform Act) and settled from 1996 through year-end 2013, and explores a variety of factors that influence settlement outcomes. This study focuses on cases alleging fraudulent inflation in the price of a corporation s common stock (i.e., excluding cases with alleged classes of only bondholders, preferred stockholders, etc., and excluding cases alleging fraudulent depression in price). See page 24 for a detailed description of the research sample. Securities Class Action Settlements 2013 Review and Analysis 3 NUMBER AND SIZE OF SETTLEMENTS TOTAL SETTLEMENT DOLLARS In 2013, there were 67 court-approved settlements, a 17.5 percent increase from 2012 and a reversal of the year-over-year decline in the number of settlements observed since The increase in the number of settlements is likely due, in part, to increased securities class action filings during 2010 through (See page 19 for a related discussion of time from filing to settlement.) The increase in total settlement dollars in 2013 was largely driven by six mega settlements (settlements at or above $100 million). Total settlement dollars in 2013 increased 46 percent over FIGURE 2: TOTAL SETTLEMENT DOLLARS (Dollars in Millions) $19,887 $10,925 $8, Average Total Settlement Value ($2,986) $3,867 $2,989 $4,030 $3,238 $3,264 $4,774 $1, N= N= N= N= N= N= N= N= N= N=67 Note: Settlement dollars adjusted for inflation; 2013 dollar equivalent figures used. Securities Class Action Settlements 2013 Review and Analysis 4 MEGA SETTLEMENTS The percentage of settlement dollars from mega settlements (settlements at or above $100 million) was the second highest proportion in the last ten years. As noted, there were six mega settlements in 2013, including one settlement for more than $2 billion. The remaining five cases settled for between $150 million and $600 million. Three mega settlements involved pharmaceutical companies, and three involved financial institutions. In 2013, six settlements accounted for 84 percent of total settlement dollars. FIGURE 3: MEGA SETTLEMENTS % Total Mega Settlement Dollars as a Percentage of All Settlement Dollars Number of Mega Settlements as a Percentage of All Settlements 82% 79% 73% 73% 84% 56% 52% 60% 41% 16% 6% 8% 7% 5% 9% 8% 5% 11% 9% Securities Class Action Settlements 2013 Review and Analysis 5 SETTLEMENT SIZE In 2013, the settlement size in approximately 60 percent of settled cases was $10 million or less, slightly higher than the cumulative tenyear percentage of about 56 percent. This high number of smaller settlements contributed to a 37 percent decline in the median settlement size in 2013 compared with 2012 ($6.5 million in 2013 versus $10.3 million in 2012). Roughly 32 percent of settlements less than $10 million in 2013 were for cases involving Chinese reverse mergers. 2 A total of 44 cases related to the subprime credit crisis are included in this study. 3 The median settlement for credit crisis related cases was $30 million and the average settlement was over $140 million. These cases generally settle for higher amounts compared to cases not associated with the credit crisis. The vast majority of securities class actions settle for less than $50 million. FIGURE 4: CUMULATIVE TEN-YEAR SETTLEMENT DISTRIBUTION (Dollars in Millions) 87.4% 92.5% 97.0% 100.0% 78.8% 55.5% 35.0% 12.5% $2 $5 $10 $25 $50 $100 $250 All Settlements Note: Settlement dollars adjusted for inflation; 2013 dollar equivalent figures used. Securities Class Action Settlements 2013 Review and Analysis 6 SETTLEMENT SIZE continued Overall, 50 percent of post Reform Act cases have settled for between $3.6 million and $20.6 million. Despite recent swings in annual median settlements, the range of settlement values between the 25th and 75th percentiles, with few exceptions, has fluctuated moderately with no discernible trend. Annual median settlement values have ranged between $6 and $12 million in recent years. FIGURE 5: SETTLEMENT PERCENTILES (Dollars in Millions) Year Average 10th 25th Median 75th 90th $42.0 $1.7 $3.6 $8.1 $20.6 $ $71.3 $1.9 $3.0 $6.5 $21.5 $ $57.3 $1.3 $2.8 $10.3 $35.5 $ $21.7 $1.9 $2.6 $6.0 $18.6 $ $38.1 $2.1 $4.5 $12.0 $26.7 $ $40.7 $2.6 $4.2 $8.7 $21.7 $72.1 Note: Settlement dollars adjusted for inflation; 2013 dollar equivalent figures used. Securities Class Action Settlements 2013 Review and Analysis 7 DAMAGES ESTIMATES AND MARKET CAPITALIZATION LOSSES ESTIMATED DAMAGES For purposes of this research and prior Cornerstone Research reports on securities class action settlements, these analyses use simplified calculations of shareholder losses, referred to as estimated damages. Application of this consistent method allows for the identification and analysis of potential trends. Estimated damages are not necessarily linked to the allegations included in the associated court pleadings. 4 Accordingly, damages estimates presented in this report are not intended to be indicative of actual economic damages borne by shareholders. Average estimated damages for 2013 were the third highest in the post Reform Act era, due in part to a small number of extremely large cases, two of which related to the credit crisis. Median estimated damages for 2013 declined 48 percent from The decline in median estimated damages was likely a major factor contributing to the substantially lower median settlement in 2013 relative to FIGURE 6: MEDIAN AND AVERAGE ESTIMATED DAMAGES (Dollars in Millions) $8,681 Median Estimated Damages Average Estimated Damages $5,680 $4,274 $2,804 $2,882 $3,174 $2,136 $2, Median Estimated Damages ($434) $2,037 $2,105 $434 $438 $476 $275 $334 $305 $581 $339 $687 $ Note: Estimated damages are adjusted for inflation based on class period end dates. Securities Class Action Settlements 2013 Review and Analysis 8 ESTIMATED DAMAGES continued In 2013, the median settlement as a percentage of estimated damages rebounded slightly from a historic low of 1.8 percent in Median settlements as a percentage of estimated damages remained relatively low compared to levels observed over the past decade. Two factors contributed to this: the increased number of extremely large cases and the presence of credit crisis cases. - Traditionally, cases with large estimated damages have settled for a smaller proportion of those damages. - For credit crisis cases settled in 2013, the median settlement as a percentage of estimated damages was 0.7 percent, compared with 2.3 percent for all other cases settled in Settlements as a percentage of estimated damages observed over the last three years are the lowest in the past decade. FIGURE 7: MEDIAN SETTLEMENTS AS A PERCENTAGE OF ESTIMATED DAMAGES % 3.1% 2.6% 2.8% 2.9% 2.4% 2.9% 2.1% 1.8% 2.1% Securities Class Action Settlements 2013 Review and Analysis 9 ESTIMATED DAMAGES continued Settlement amounts are generally larger when estimated damages are larger. Yet, as previously mentioned, settlements as a percentage of estimated damages tend to be smaller when estimated damages are larger. In 2013, relatively small cases those with estimated damages of less than $50 million had a median settlement as a percentage of estimated damages of 15.1 percent, compared with 2.1 percent for all 2013 settlements. In 2013, smaller cases settled at a much higher percentage of estimated damages. FIGURE 8: MEDIAN SETTLEMENTS AS A PERCENTAGE OF ESTIMATED DAMAGES BY DAMAGES RANGES (Dollars in Millions) 15.1% 10.7% % 4.5% 3.2% 3.6% 2.1% 2.4% 1.9% 2.0% 0.7% 1.9% 1.2% 1.2% 1.2% 1.0% Total Sample Less Than $50 $50 $124 $125 $249 $250 $499 $500 $999 $1,000 $4,999 $5,000 or Greater Securities Class Action Settlements 2013 Review and Analysis 10 DISCLOSURE DOLLAR LOSS Disclosure Dollar Loss (DDL) is another simplified measure of shareholder losses and an alternative measure to estimated damages. DDL is calculated as the decline in the market capitalization of the defendant firm from the trading day immediately preceding the end of the class period to the trading day immediately following the end of the class period. 6 In contrast to the median DDL, average DDL increased 44 percent from 2012 to $1.8 billion, reflecting the influence of a few very large cases. The median market capitalization at the time of settlement for issuers in the top 10 percent of DDL was dramatically higher than the median market capitalization for the next tier of DDL ($133.8 billion compared with $9.2 billion). The relationship between settlements and DDL is similar to that between settlements and estimated damages settlements are larger when DDL is larger, yet settlements as a percentage of DDL are generally smaller when DDL is larger. The median DDL associated with settled cases in 2013 decreased 45 percent from FIGURE 9: MEDIAN AND AVERAGE DISCLOSURE DOLLAR LOSS (Dollars in Millions) $2,831 Median DDL Average DDL $1,811 $1,087 $1,255 $809 $676 $770 $770 $449 $580 $134 $130 $119 $175 $140 $157 $211 $122 $196 $ Note: DDL adjusted for inflation based on class period end dates. Securities Class Action Settlements 2013 Review and Analysis 11 TIERED ESTIMATED DAMAGES The landmark decision in 2005 by the U.S. Supreme Court in Dura Pharmaceuticals Inc. v. Broudo (Dura) determined that plaintiffs must show a causal link between alleged misrepresentations and the subsequent actual losses suffered by plaintiffs. As a result of this decision, damages cannot be associated with shares sold before information regarding the alleged fraud reaches the market. Accordingly, this report considers the influence of Dura on securities class action damages calculations by exploring an alternative measure of damages in settlements research. This alternative measure, referred to here as tiered estimated damages, is based on the stock-price drops on alleged corrective disclosure dates as described in the plan of allocation for the settlement. 7 It utilizes a single value line when there is only one alleged corrective disclosure date (at the end of the class period) or a tiered value line when there are multiple alleged corrective disclosure dates. This alternative measure has been calculated for a subsample of cases settled after As noted in past reports, tiered estimated damages has not yet surpassed the traditional measure of estimated damages used in this series of reports in terms of its power as a predictor of settlement outcomes. However, it is highly correlated with settlement amounts and provides an alternative measure of investor losses for more recent securities class action settlements. FIGURE 10: TIERED ESTIMATED DAMAGES (Dollars in Millions) $700 $600 Median Settlements as a Percentage of Tiered Estimated Damages Median Tiered Estimated Damages Median Estimated Damages 10% 9% 8% $500 7% $400 $300 Median Settlements as a Percentage of Estimated Damages 6% 5% 4% $200 3% 2% $100 1% $ % Securities Class Action Settlements 2013 Review and Analysis 12 ANALYSIS OF SETTLEMENT CHARACTERISTICS NATURE OF CLAIMS The number of cases settled in 2013 involving only Section 11 and/or Section 12(a)(2) claims is consistent with the increased activity in the U.S. IPO market in recent years. 8 There were eight such cases in 2013 compared with only four in The median settlement as a percentage of estimated damages is higher for cases involving only Section 11 and/or Section 12(a)(2) claims compared with cases involving only Rule 10b-5 claims. Estimated damages are typically smaller for cases involving only Section 11 and/or Section 12(a)(2) claims. FIGURE 11: SETTLEMENTS BY NATURE OF CLAIMS (Dollars in Millions) Number of Settlements Median Settlements Median Estimated Damages Median Settlements as a Percentage of Estimated Damages Section 11 and/or 12(a)(2) Only 80 $3.4 $ % Both Rule 10b-5 and Section 11 and/or 12(a)(2) 246 $11.7 $ % Rule 10b-5 Only 1,049 $6.8 $ % All Post Reform Act Settlements 1,376 $7.0 $ % Securities Class Action Settlements 2013 Review and Analysis 13 ACCOUNTING ALLEGATIONS This research examines three types of accounting allegations among settled cases: (1) alleged GAAP violations, (2) restatements, and (3) reported accounting irregularities. 9 Cases involving accounting allegations are typically associated with higher settlement amounts and higher settlements as a percentage of estimated damages. Cases alleging GAAP violations settled for only a slightly higher percentage of estimated damages than cases not alleging GAAP violations. Restatement cases settled for a higher percentage of estimated damages compared with GAAP cases not involving restatements. In 2013, 55 percent of settled cases alleged GAAP violations, 21 percent were associated with restatements, while only 4 percent involved reported accounting irregularities. The proportion of settled cases in 2013 involving accounting allegations dipped to a ten-year low. Although relatively few settlem
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