2005 Saw Highest Levels of Securities Class-Action Settlements

According to a news release, even after throwing out WorldCom and Enron mega-settlements, the total value of cases settled during 2005 grew to an all time high of $3.5 billion, surpassing 2004’s over $2.9 billion tally by more than 17%.

The number of cases settled in 2005 was an almost 10% increase from 2004 (124 vs. 113), and the average settlement size grew to $28.5 million in 2005 from $26.4 million in 2004.   The number of “mega” settlements over $100 million increased as well (nine in 2005), according to the release.

The median settlement amount also reached a record level, $7.5 million, in 2005.   Historically, through 2004, the median settlement amount has been $6.3 million.

Cornerstone said, contributing to the increase may be a growing frequency of cases involving accounting-related allegations, as well as institutional investors serving as lead plaintiffs.   The percentage of cases involving restatements of financial statements grew to 40% in 2005, almost double the figure for 2004, and more than 35% of all 2005 settlements were associated with an institutional investor lead plaintiff, compared to only 20% for the prior year.

The median settlement amount for all cases involving financial restatements is $7.5 million, compared to only $5.8 million for cases without restatements. Median settlements in all cases with an institution as lead plaintiff are $10.7 million compared to only $5 million for cases without an institutional lead plaintiff. Settlements are significantly higher for suits involving either of these factors, even when other variables such as the size of the case are considered, Cornerstone reported.

Securities and Exchange Commission (SEC) actions and companion derivative actions (e.g., suits filed against officers and directors on behalf of the defendant corporation) also drove up the settlement amounts.   When the SEC also took action against the defendants in the form of an administrative proceeding or litigation release, the median settlement amount was $10.3 million compared to only $5.5 million when the SEC did not take action.   In cases where corresponding derivative actions were filed, the median settlement was $15 million versus $5.1 million in cases without derivative actions.

The annual study compares settlements in 2005 against earlier settlements of cases filed since the passage of the Private Securities Litigation Reform Act in December 1995.   A full copy of Cornerstone Research’s “Post-Reform Act Securities Settlements: 2005 Review and Analysis” is available at  http://securities.cornerstone.com .