U.S. class-action securities settlements fewer but more costly in 2012 after IPO slump, credit crisis; Libor looms

March 26, 2013

By Stuart Gittleman, Compliance Complete

NEW YORK, Mar. 26 (Thomson Reuters Accelus) – Court-approved securities class action settlements reported in 2012 were at a 14-year low and 18 percent fewer than in 2011 but they cost defendants twice as much as the prior year, a report released Wednesday said.

The study by the Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research associated settlement values with factors including the presence of enforcement actions related to the lawsuits. This may hold clues to the outcomes in recently litigation over alleged manipulation of the global lending benchmark LIBOR, the London Interbank Offered Rate. 

The study explained that the low number of settlements in 2012 – 53, 45 percent less than the 2002-2011 average – may be due in part to the relatively low number of filings in 2009 and 2010 because of a drop in IPOs, or initial public offerings.

“Based on the volume of recent securities class action filings, the unusually low number of settlements reported in 2012 is unlikely to persist in the future,” Cornerstone senior advisor Dr. Laura E. Simmons said.

The report said the fact that settlements over $100 million – a significant portion of which were related to the credit crisis – made for nearly 75 percent of the $2.9 billion total in 2012 may have skewed the results over the $1.45 billion in 2011, and that cases can take several years from filing to resolution.

“Class action securities fraud litigation is, like many other lines of business, ‘hit driven’ in that a small number of settlements often account for a large percentage of the dollar flow. That fact of life can make annual settlement data quite lumpy,” said Professor Joseph Grundfest, director of the Stanford clearinghouse and a former Securities and Exchange Commission member.

“Settlement trends are often best viewed over time periods longer than a year, and by carefully analyzing settlement data to reflect the underlying characteristics of the cases being settled. So, just as a lull in last year’s data suggested a pickup for this year in the aggregate statistics, it is always possible that this year’s bump could cause total settlement dollars to tick downward next year,” Grundfest added.

One third of the settlements in 2012 were with issuers in the financial services industry, followed by the technology and pharmaceutical industries, the report noted.

Institutional investors are playing an increasingly active role as lead plaintiffs, the report said, adding that 49 percent of the cases that settled in 2012 were led by public pensions

Cases with related SEC actions were associated with significantly higher settlements that obtain a higher percentage of their “estimated damages,” a measure the report said is the most important factor in determining settlement amounts. Other important determinants of settlement amount include:

  • the defendant’s assets;
  • whether the defendant was an underwriter in the offering;
  • whether the complaint alleged intentional misconduct by the defendant; and
  • whether charges/indictments were brought with similar allegations to the class action.

Some of these factors are present in the LIBOR cases, so future reports may show more and larger settlements if the expected litigation defenses give way.

Plaintiffs including community banks and local governments have sued Bank of America, JPMorgan Chase & Co and others for allegedly manipulating Libor.

Libor, which has been the focus of a global investigation by regulators, is used to set interest rates on more than $350 trillion of securities from mortgages to complex derivatives.

The cases include proposed class action lawsuits alleging violations of antitrust law and the Commodities Exchange Act, which regulates the trading of commodity futures in the United States.

(This article includes material from Reuters)

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus (http://accelus.thomsonreuters.com/). Compliance Complete (http://accelus.thomsonreuters.com/solutions/regulatory-intelligence/compliance-complete/) provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges. Follow Accelus compliance news on Twitter at: http://twitter.com/GRC_Accelus)

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