NERA Releases Mid-Year 2012 Securities Litigation Report

NERA Releases Mid-Year 2012 Securities Litigation Report

According to NERA Economic Consulting's mid-year 2012 report, securities class action lawsuit filings were at or above historical levels in 2012, and though average securities class action lawsuit settlements during the year's first half approached all times highs, the pace of securities suit settlements is "slowing down markedly." NERA's Report, which is entitled "Recent Trends in Securities Class Action Litigation: 2012 Mid-Year Review," can be found here. NERA's July 24, 2012 press release regarding the report can be found here. My own analysis of the first half filings can be found here.

According to the NERA report, and largely driven by merger objection cases, there were 116 class action lawsuit filings in the year's first half, which suggests an annualized rate of 232 filings. (Please see the note below regarding NERA's counting methodology.) This rate is slightly above the 217 average annual number of filings that NERA calculates for the period 1996 to 2011.

However, the report makes a point that I have also made on this site, which is that while the annual number of filings has fluctuated around the same annual figure since the mid-90s, the number of public companies has declined significantly. According to the NERA report, the number of publicly traded companies has decreased by about 45% since 1996, and so "the average company listed in the US is significantly more likely to be the target of a securities class action now than it was in 1996." This is an important observation that is often overlooked; all too often commentators, referring only to fluctuations in the absolute number of lawsuits, conclude that filings are up and down, without considering the relation of the number of filings to the potential number of lawsuit targets.

Merger objection cases remained an important component of securities class action filings in the year's first half, although at a slightly diminished level from 2010 and 2011. (NERA counts only the merger objection cases filed in federal court; many more merger objection cases are filed in state court.) The NERA report notes that over recent years there have been a number of temporary phenomena that have briefly inflated the number of securities suit filings. However, and nlike these other short term developments, the merger objection cases "may continue indefinitely, in the absence of substantial changes in the legal environment, their number fluctuating with market cycles in M&A activity." The decline in the number of publicly traded companies may be contributing to the growth in the number of non-traditional securities class action lawsuits, as plaintiffs' lawyers seek business alternatives in a shrinking market.

The NERA report also shows that the number of filings against non-U.S. companies is well off the record pace for such filings in 2011, although the filings against foreign issuers still remains above historical levels and remains disproportionately high relative to the number of foreign issuers listed in the U.S. Thus, foreign issuers represent only 16.4% of all U.S. listed companies, but lawsuits against non-U.S. companies represented 19.8% of all first half 2012 filings (which is down from 2011, when filings against non-U.S. companies represented 28.1% of all filings.).

The report also contains a detailed analysis of the status of cases with respect to motions to dismiss, motions for class certification and motions for summary judgment at the time of settlement. Among the  interesting facts that come out of this analysis is that in cases in which a motion to dismiss has been filed, 22% settle before the motion is heard. Another interesting observation is that there are settlements in 10% of the cases in which the dismissal motions have been granted.  

For cases filed in 2001, about 35% of all cases were dismissed. However, as more recent filing years have matured, it looks as if the dismissal rate may be increasing. The report notes that "for each annual cohort from 2003 to 2006, the dismissal rate has been 43% or more."  These figures will ultimately change somewhat, because some cases are not yet resolved and other cases that have been dismissed may see reversals on appeal. The most recent years are still too undeveloped to draw any conclusions. Analysis of the year of dismissal motion resolution (as opposed to year of filing) suggests a similar uptick in dismissal grants. Importantly this analysis of dismissal motion resolution omits merger objection cases, because they are resolved quickly and often are dismissed voluntarily.

The majority of cases (58%) settle before a motion for class certification has been filed, and of 46% of the cases in which a motion for class certification has been filed settle before the class certification motion is resolved. For those cases in which the class certification motion is heard, over three-quarter of the class certification motions are heard within there years of the lawsuit filing date. Interestingly, for cases in which the class certification motion has been granted at the time of settlement, the median settlement value is $16.5 million, compared with $9.1 million for all cases.

Motions for summary judgment are filed in only a small minority of cases (11%), and of those, nearly half (48.8%) settle before the motion is heard. Less than ten percent (9.8%) of summary judgment motions are granted.

Continuing a trend that began to emerge in 2011 (at least of the merger objection cases are removed from the analysis), the pace of settlements so far this year is on pace for the lowest level of settlements since 1998. However, the average value of a settlement in the first half of 2012 was $71 million, a sharp rise from the average value of $46 million over the period 2005-2011. This average is pulled upward by a few very large settlements. If the settlements over $1 billion and the IPO laddering cases are removed from the calculation, this year's average settlement amount is $41 million. (The 2005-1022 equivalent average is $32 million.) 52% of settlements this year settled for below $10 million. The median settlement amount so far this year is $7.9 million, compared to $7.5 million for all of 2011.

So far in 2012, the median settlement amount represents about 1.3% of median investor losses (this figure has declined as claimed investor losses have increased over time, because, as the NERA report shows, the settlement as a percentage of investor losses declines as the amount of investor losses increases). Median attorneys' fees as a percentage of settlement amounts also declines as the size of the settlement increases. The median plaintiffs' attorneys' fees as a percentage of the settlement amount so far in 2012 is 20% (down from 30% in 1996).

A final note about counting. There are at least two factors identifiable from the face of the NERA Report to suggest reasons why its published lawsuit filing count may differ (specifically, may be larger than) other published counts. The first is that, as NERA says in the footnotes to its report "If multiple ... actions are filed against the same defendant, are related to the same allegations, and are in the same circuit, we treat them as a single filing. However, multiple actions filed in different circuits are treated as separate filings. If cases filed in different circuits are consolidated, we revise our count to reflect that consolidation." At least as an initial reporting matter, this counting methodology may result in the NERA account appearing higher than other published counts.

In addition, it seems that NERA is counting all merger objection suits filed in federal court in its tally. This also may result in the NERA tally appearing higher than lawsuit filing counts published elsewhere, at least where the other tallies include only merger objection suits that affirmatively allege a breach of the federal securities laws (as opposed to alleging only a breach of fiduciary duties or similar allegation). Given how numerous the merger objection filings have been in recent years, this method of counting could significantly affect the reported filing numbers as well as the analysis of the number of filings relative to prior filing periods.

This last commentary about filing counts is just another way of saying that when all the reports about the first half filings are in, they are going to reflect seemingly disparate reports. This is a direct reflection of the counting methodology used in preparing the separate reports. It is critically important when you are looking at any analysis of securities class action filing trends that you consider and understanding the counting methodology used, and how the methodology might affect the reported results (particularly by contrast to other reported results).

Eleventh Circuit Reverses Trial Court Ruling, Affirms the Ultimate Result in BankAtlantic Securities Case: Many readers will recall the long-running Bank Atlantic subprime-related securities suit saga. Unusually, the case went all the way to trial, resulting in a verdict for the plaintiff (about which refer here), although following the verdict the trial judge entered judgment as a matter of law in the defendants' favor (about which refer here). A detailed description of the case, the jury verdict, and the post-trial proceedings can be found here. The plaintiff appealed.

In a July 23, 2012 opinion (here), the Eleventh Circuit held it was error for the trial court to consider anything the determination the defendants' motion other than the sufficiency of the evidence. However, because the Eleventh Circuit held that the plaintiffs' had not established loss causation as a matter of law, the trial court's ultimate ruling was affirmed.

Jan Wolfe has a good summary of the tortured procedural history in the case and of the Eleventh Circuit's holding in a July 23, 2012 post on the Am Law Litigation Daily (here).

Libor Scandal Criminal Charges Coming This Week?: As I reported in a prior post about the Libor scandal, authorities in several countries are conducting criminal investigations into the scandal. A July 23, 2012 Reuters article (here) reports that prosecutors are close to arresting individual traders that participating in manipulating the rates. Charges may come as early as this week. Although this will not directly affect the regulatory actions against the banks themselves, it could shed significant light on which banks are involved and how they are involved in the scandal. Stay tuned.

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.

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