A new study shows investor losses in investment-related, class-action lawsuits tripled in 2016. Given those figures, why are settlement rates at an all-time low?
The report, issued by NERA Economic Consulting, tallied investment losses from securities-linked, class-action suits at $468 billion.
Altogether, 300 securities-related, class-action lawsuits were filed in 2016, according to the report. That’s a 32 percent hike over 2015, and the highest annual figure “since the aftermath of the 2000 dot-com crash,” the report found.
Lawsuits tied to corporate merger cases topped the class-action lawsuit financial categories list, although that may be due to state-to-state court rulings on how class-action suits are structured.
The record number of securities class-action cases in 2016 was largely driven by merger-objection cases, with 88 such filings, said David Tabak, NERA’s managing director. Federal merger-objection cases, which allege a breach of fiduciary duty by directors and officers, grew at the fastest rate since 2010.
“This recent growth is more likely due to state court decisions limiting ‘disclosure-only’ settlements, rather than due to increased merger-and-acquisition activity,” Tabak added. “Plaintiffs have begun to shift merger-objection cases to venues outside of Delaware, though the full extent of this trend remains to be seen.”
Don't Ignore Delaware
Securities experts say the impact of the “Delaware” scenario shouldn’t be understated.
“These securities class-action figures are driven, in part, by the recent trend in Delaware and other venues scrutinizing and limiting so-called ‘disclosure-only’ settlements in merger-objection cases,” noted John Q. Lewis, business litigation chair at Tucker Ellis in Cleveland.
What could be raising eyebrows among financial industry insiders is that, while financial damage claims rose significantly in 2016, lawsuit settlement amounts, such as insider trading and securities class-action suits, were in decline. Almost 33 percent more class-action suits were dismissed than litigated and settled, the NERA report noted.
“The increased scrutiny of settlements has had a butterfly effect, while case filings may be up, settlement rates are down and dismissal rates are at an all-time high,” Lewis stated. “More of these cases are being litigated and fewer are ending with quick-strike settlements.”
While average class-action settlement figures rose by 35 percent in 2016, that figure is likely skewed by a few “top heavy” settlement amounts.
The average securities class-action settlement in 2016 was $72 million, more than 35 percent greater than the inflation-adjusted 2015 average settlement of $53 million.
But when you exclude the cases that settled for more than $1 billion, the average securities’ lawsuit settlement in 2016 was $43 million, about 19 percent below the 2015 average of $53 million, wrote Kevin M. LaCroix, an attorney and executive vice president, at RT ProExec, an insurance intermediary firm, in a recent research note.
Aside from the rise in class-action suits and declining settlement amounts, NERA offers some additional data takeaways from its study:
* Section 11 allegations accounted for 20 filings in 2016, which is approximately equal to the average rate since 2010, but 23 percent lower than the rate of such filings in 2015.
* Filings continued to be concentrated in the Second and Ninth Circuits—with 87 case filings in the Ninth Circuit (a 20 percent increase) and an all-time high of 72 filings in the Second Circuit. Third Circuit filings reached 34, up from 21 in 2012. In the Fifth Circuit, 17 class actions were filed, the fewest in four years.
* The 300 federal securities class-action suits filed in 2016 involved approximately 5.2 percent of U.S. publicly traded companies. The average probability of a firm being targeted by a “standard” securities class action was 3.4 percent in 2016, only slightly higher than the recent average.
* 28 percent of the total securities class-action cases filed in 2016 (85 cases) were brought against firms in the health technology and services sector, almost double that of 2015. Finance sector filings made up 16 percent of total filings.
* In 94 percent of securities class actions filed in 2000-2016, a motion to dismiss was filed. Only 15 percent of class actions filed during this period reached a decision on a motion for class certification.
* 674 securities class actions are pending in the federal system, a decrease from the high of 717 in 2005.
No doubt, securities class-action lawsuits are impacted by a laundry list of items, including state court decisions, regulatory issues, and the reliable ebbs and flows of securities trading and asset losses, which all factor into the process.
But in 2016, at least, those investors looking for justice from U.S. courts should get used to disappointment in the form of fewer dollars headed their way. But at least they’ll have plenty of company.
Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at firstname.lastname@example.org.
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