Securities Class Actions Steady in 2011; Surge Against Chinese Firms

By | January 3, 2012

The pace of filings of class actions under federal securities and commodity laws held relatively steady in 2011 as compared to the previous three years, according to a new report.

But there has been a substantial shift in the composition of suits filed, according to NERA Economic Consulting’s semi-annual report, “Recent Trends in Securities Class Action Litigation: 2011 Year-End Review.”

The report says there has been a surge in cases involving Chinese companies listed in the U.S. and in merger and acquisition (M&A) objection suits, along with a waning of credit-crisis cases.

The report also found that the average settlement values of securities class actions fell to $31 million in 2011, well below the 2010 average of $108 million but still the third-highest on record.

NERA Trends authors project there will be 232 shareholder class action filings in 2011, broadly in line with levels observed in 2010 (241), in 2009 (218), and 2008 (245). Suits objecting to a merger or an acquisition have accounted for 29 percent of filings so far in 2011, and filings against Chinese companies have accounted for approximately 18 percent.

That pace is a bit slower than NERA projected in June when it forecast there would be 260 filings for all of 2011. There were 130 filings of securities class actions from January to June of this year.

Foreign-Domiciled Firms

Filings against foreign-domiciled issuers reached 64 in 2011, more than double the annual count observed in recent years. This surge in suits is largely attributed to the surge in filings against Chinese companies. So far in 2011, there have been a total of 29 filings against Chinese-domiciled firms. However, this number understates the number of Chinese firms targeted, as not all companies based in China are legally domiciled there. When the authors included Chinese companies that are either domiciled in China or have their principal executive offices in the country, there have been 39 suits against Chinese companies in 2011.

Settlements

Average settlement values of securities class actions fell to $31 million in 2011, well below the 2010 average of $108 million. However, the annual average settlement figure can be significantly affected by large settlement outliers. Excluding settlements in excess of $1 billion, as well as 309 small settlements related to IPO laddering cases that were approved in October 2009, shows there is still a substantial decline in average settlements from 2010 to 2011—from $40 million in 2010 to $31 in 2011. An alternative metric Trends authors use is median settlements. In 2010, the median settlement reached an all-time high of $11 million, but in 2011, this figure fell to $8.7 million—below the previous two years but still the third highest on record.

Additional Settlement Trends
  • The number of settlements in 2011 also declined as compared to previous years.
  • 54 percent of cases that settled or have a scheduled court approval date in 2011 did so for less than $10 million, well up from the 41 percent observed in 2010.
  • Only 6 percent of 2011 settlements were for more than $100 million, down from 8% in the previous year.
  • Aggregate amount paid out in settlements ($2.6 billion) is at its lowest level since 2004.

“The year 2011 may be remembered as the year that saw the explosion of Chinese company-related lawsuits, the continued dominance of M&A cases alleging breach of fiduciary duty, and the sunset of credit crisis-related litigation,” said NERA Senior Vice President and report co-author Dr. John Montgomery. “Looking ahead, it will be interesting to see how the level of filings may change or whether new categories of litigation will predominate.”

The number of settlements has declined, with the median settlement in 2011 falling below last year’s high on $11 million, but still the third-highest on record,” said NERA Senior Consultant Robert Patton. “Settlement amounts also reflect the stage of litigation,” said NERA Senior Consultant Jordan Milev. “Settling after a motion for summary judgment is denied could drive up the settlement amount by an estimated 62%, on average.”

Additional Trends

• Filings by sector: Securities class actions against financial sector companies accounted for roughly 16% of cases in 2011, as contrasted with nearly half in 2008 and 2009. Filings against companies in the electronic technology and technology services sector accounted for the largest percentage in the year, with 21% of filings. Health technology and services companies accounted for 15% of filings.

• Filings of credit crisis-related class actions largely subsided in 2011, with 11 cases filed. Such litigation is approximately a third of its level last year, when it had already declined by about two-thirds from its 2008 peak.

• Aggregate plaintiffs’ attorney fees, at $594 million, fell in 2011 to their lowest level since 2004. This decline is largely attributed to the combination of the lower average and median settlement size, and fewer settlements occurring in 2011.

• Cases were filed considerably more quickly in 2011 — the average time to file in 2011 was 109 days, as compared to 175 days last year.

Consulants at NERA Economic Consulting apply economic, finance, and quantitative principles to business and legal challenges. To read the full report, visit here.

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