Good News, Bad News

A report released yesterday by Cornerstone Research finds that the number of securities class-action cases settled last year rose 21 percent, from 92 in 2006 to 111 in 2007. The total value of these settlements, however, plummeted 60 percent from the all-time high of $17.2 billion reported in 2006 to $7 billion in 2007. [Directorship reported on the preliminary results of this study in its February/March issue in a story headlined “The Litigation Storm.”]

More than 70 percent of this drop was due to the largest settlement in history, the now $7.2-billion Enron case settlement, the majority of which was approved in 2006.

"It seems clear that the aggregate dollar value of settlements over the next two or three years is likely to decline significantly because the inventory of large cases in the pipeline just isn't there. The interesting open question is whether the subprime crisis will cause an uptick in securities fraud settlement activity that might, given settlement cycles in the litigation industry, only become apparent three to five years from now," said Stanford Law School Professor Joseph Grundfest, director of the Securities Class Action Clearinghouse (sponsored in cooperation with Cornerstone Research), co-director of the Rock Center on Corporate Governance, and former commissioner of the Securities and Exchange Commission.

Until 2007, prominent plaintiff class-action firms--Lerach Coughlin Stoia Geller Rudman & Robbins (now Coughlin Stoia Geller Rudman & Robbins) and Milberg Weiss Bershad & Schulman  (now known as Milberg) had served as lead or co-lead plaintiff counsel in more than half of securities class-action settlements, but their combined share slipped to 46 percent last year.

Aggregate settlements in 2007 were influenced by the $3.2 billion Tyco International settlement, which accounts for almost 45 percent of the total value of settlements approved in 2007, and is the third largest case settlement in history behind Enron and WorldCom ($6.2 billion).

Tyco was the only settlement approved in 2007 to exceed $1 billion (compared with four in 2006, excluding Enron) and is only the seventh settlement in history above $1 billion. While the number of new suits filed declined last year many are concerned that fallout from the credit crisis could bring a new wave of securities class-action suits. The study's other key findings:

• The $3.2-billion Tyco International settlement was the third largest case settlement in history and the only settlement approved in 2007 to exceed $1 billion.

• The median settlement amount spiked to $9 million, an all-time high, owing to the rise in "middle-range" settlements valued between $10-20 million.

• Only 24 percent of settlements (twenty-seven cases) in 2007 involved estimated damages of $1 billion or more--the lowest percentage since 2003.