A severe case of rising settlements: securities class actions persist as one of the most significant litigation threats to companies and executives.

• Author: Meyer, Scott
• Position: RISK MATTERS

HUNDREDS OF securities class actions are filed annually, with an estimated 239 cases filed in 2010, an increase of 19 over 2009 and an increase of 8 over an average of 231 cases filed each year from 1996 through 2004. This average, from NERA Economic Consulting, excludes the one-time events of IPO laddering, mutual fund market timing, and research analyst cases. Exacerbating any increase in securities class actions is a concomitant increase in other types of actions, such as derivative actions--which according to Advisen data increased a whopping 39% from 2009 to 2010.

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Cases arising out of the credit crisis have brought with them unique allegations of wrongdoing. More traditional allegations of accounting irregularities, improper earnings guidance, insider trading, and illegal "Ponzi" schemes decreased in 2010, per the NERA data, replaced by growing allegations of product and operational defects and breaches of fiduciary duty. Breach of fiduciary duty allegations have more than doubled, spawned in part by a 20% increase in mergers and acquisitions in 2010, resulting in pleadings of unfair acquisition pricing and a variety of improper process allegations surrounding the transactions. In fact, 40 cases contained merger and acquisition-related allegations in 2010, up from only 7 cases in 2009, according to the annual review done by Cornerstone Research.

Severity of settlements is increasing. NERA tracked the average settlement value of a securities class action as $109 million in 2010, a dramatic increase from only $13 million in 2009. If the $7.2 billion Enron class action settlement is removed from the 2010 average, and if 309 small IPO laddering case settlements are removed from the 2009 numbers, the adjusted average settlement value for each year is $42 million. That is well above the 1996 through 2001 adjusted average of $11.9 million, and even well above the 2003 through 2010 adjusted average of $30.4 million. Cornerstone's study finds that the average settlement for 2010 was $36.3 million. As such, both studies show an average or adjusted average of over $36 million a case, which is significant by any calculation. Moreover, the two studies found that the 2010 median case value was $11.1 million and $11.3 million, substantial increases from 2009 median values of only $8.5 million and $8 million, respectively.

Public pension plans drive severity when they are lead plaintiffs. Cornerstone finds that cases with public...