NERA Releases Mid-Year 2010 Securities Litigation Study

Largely as a result in the decline of the number of new credit crisis related cases, the number of new securities class action lawsuits filings is "on track to decline for a second successive year from their 2008 peak," according to a NERA Economic Consulting report entitled "Trends 2010 Mid-Year Study: Filings Decline as the Wave of Credit Crisis Cases Subsides, Median Settlements at Record High," released on July 27, 2010. The report can be found here and NERA's July 27, 2010 press release about the report can be found here.

According to NERA, there were 101 securities class action lawsuit filings in the first half of the year. That filing level projects to 202 filings for the year, which would represent a decline from the 221 filings in 2009 and the 221 filings in 2008, as well as the 1997-2004 average of 231.

A note about how NERA counts filings - as reflected in a footnote in the report, NERA counts multiple filings in separate circuits that may relate to the same fraud as separate filings until they are consolidated. It addition, NERA reports multiple filings if different cases are filed on behalf of securityholders. These counting protocols may result in NERA's filings figures appearing slightly higher than those in other reports published by other observers who may count each of these types of filings only once.

Though NERA's numbers may differ in the details, its figures are directionally consistent with other published analyses of mid-year filing levels, including the Advisen's recent report (about which refer here). My own analysis of mid-year filing can be found here.

According to the report, the drop off in securities class action lawsuits has been partially offset by an increase in other types of lawsuits, including cases alleging breaches of fiduciary duties. And though the numbers of credit crisis related cases have declined compare to recent years, the credit crisis "continues to generate a substantial volume of litigation" beyond just securities class action litigation, including state court derivative litigation, ERISA litigation and other types of cases.

Despite the decline in credit crisis cases, companies in the financial sector remained the most frequent securities class action lawsuit target in the first half of 2010, though the health technology sector saw the largest percentage increase in filings between 2009 and annualized 2010. The report notes in particular the growth in the first half of 2010 in cases alleging product and operational defects. This category encompasses both traditional, tangible goods and financial products like ETFs and CDOs, but the more traditional allegations (such as those relating to the Gulf of Mexico oil spill and the Toyota vehicle recall) were most frequent.

According to the NERA report filings against foreign-domiciled companies represented about 16% of all first half filings, a larger share than any year since the PSLRA's enactment. However, the report also notes that the U.S. Supreme Court's Morrison v. National Australia Bank case could substantially affect these filing levels going forward.

The average time to filing from the end of the proposed class period to the date of the first filing was 231 days, which though below the 272 day average during the second half of 2009, is still well below the average of 141 days during the period 2007 to mid-2009. However, more than half of the first have filings were made within 66 days, which the report notes that the filing lag may have been attributable to plaintiffs' attorneys catching up on a filing backlog.

Though average securities class settlements, when factored for outlier settlements, were slightly down in the year's first half, the median settlement in the first six months of 2010 was $11.8 million, which continues in the generally upward trend in median settlements. The median in 1996 was $3.7 million, and only exceeded $6 million once between 1996 and 2004. However, since 2005, the median has exceeded $7 million every year, and the first half 2010 median is more than three times the 1996 median.

The report contains a number of other interesting analyses, including a detailed study of the amount of time required for securities class action case resolutions and the percentage of plaintiffs' attorneys' fees as proportions of settlement amounts. The analysis of plaintiffs' attorneys' fees shows that the percentage of fees is markedly smaller for larger cases - though the fees represent as much as a third for settlements below $5 million, they represent only about 8.8% of settlements over $500 million.

The report notes that median investor losses for cases filed in the first half of 2010 fell for the first time since the credit crisis began. The lower median losses "indicate that the typical settlement may eventually fall from its current high level," though the higher investor losses involved in the many pending credit crisis cases "suggests that there may be a number of large settlements in the pipeline."

Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.