Securities Fraud Settlements Dropped in 2011: Study

By Jonathan Stempel | March 15, 2012

Angry investors are seeing far fewer financial benefits from lawsuits accusing corporate America of securities fraud, but may be on the cusp of a turnaround.

The number and size of securities fraud settlements that won final U.S. court approval fell in 2011 to the lowest in a decade, amid a drop in cases linked to accounting problems and U.S. Securities & Exchange Commission enforcement activity.

According to a study being released on Wednesday by Stanford Law School and Cornerstone Research, courts in 2011 approved 65 such settlements totaling a mere $1.36 billion, down from 86 settlements totaling $3.21 billion a year earlier.

The dollar amount is less than half the $2.78 billion recovered in 2003, which had been the lowest since the adoption the prior year of the Sarbanes-Oxley corporate governance law.

Still, Laura Simmons, a business professor at the College of William & Mary and co-author of the study, said large settlements involving American International Group Inc. and other companies, as well as increased SEC enforcement activity, may make 2012 a more rewarding year for investors.

“As we look at the potential impact of whistleblower lawsuits, we expect a further increase in SEC activity, which could result in a greater amount of private settlements,” she said in an interview.

Last year, the SEC filed 735 enforcement cases, up 8.6 percent from 2010 and the most in its history, according to the regulator’s annual report.

The largest 2011 settlement in Cornerstone’s study was a $208.5 million accord by officers, directors, underwriters and an auditor for Washington Mutual Inc., the largest U.S. bank or thrift to fail.

“Lawyers will debate whether this decline is a result of plaintiffs having brought weaker claims or pro-defendant changes in the legal regime, or some combination,” Joseph Grundfest, a Stanford University law professor who works with Cornerstone, said in a statement. “The really big litigation bucks were not in the class-action securities fraud market in 2011.”

Simmons said the drop in accounting-related cases may stem from fewer restatements, which in turn may be attributed in part to improved corporate governance under Sarbanes-Oxley.

She also said that some plaintiffs’ lawyers may have focused more in recent years on housing-related litigation, including the sale of risky mortgage-backed securities, rather than more traditional securities fraud cases.

Cornerstone’s study excludes settlements challenging mergers. Such cases accounted for 43 of the 188 new securities fraud lawsuits filed last year.

Settlement totals for 2012 will include AIG’s $725 million settlement to resolve claims accusing the insurer of accounting fraud and stock price manipulation.

Other accords topping $100 million that may also be included are with Lehman Brothers Holdings Inc.; wireless equipment company Motorola Solutions Inc.; National City Corp., a bank now owned by PNC Financial Services Group Inc.; and private education company Apollo Group Inc.

The peak years for settlements were 2005 and 2006, when settlements over WorldCom Inc.’s and Enron Corp.’s collapses contributed to respective total payouts of $10.5 billion and $19.19 billion, Cornerstone said.

[Additional Key Findings
  • Among settlements in 2011, allegations related to violations of generally accepted accounting principles were included in only about 45 percent of settled cases compared with nearly 70 percent of settled cases in 2010 and 68 percent for the prior five years. Settlements that included instances of a restatement (or announcement of a possible restatement) of financials also declined substantially from more than 40 percent for cases from 2006 to 2010 (and more than 45 percent for cases in 2010) to 25 percent in 2011.
  • Class action settlements involving accompanying SEC actions decreased to less than 10 percent in 2011 compared with nearly 30 percent in 2010.
  • Compared with 2010, institutional involvement as lead plaintiffs declined in 2011 to approximately 60 percent of settled cases.
  • The number of settled cases involving companion derivative actions also decreased in 2011 compared with 2010. Slightly less than 40 percent of cases settled in 2011 were accompanied by a derivative action filing compared with more than 45 percent of cases settled in 2010. The 2011 percentage is still higher than the post–Reform Act average of approximately 30 percent.
  • In 2011, the average class period length for cases settled was 1.3 years, 32 percent shorter than the average class period for the prior five years and the lowest average for any single year during that period.
  • The median Disclosure Dollar Loss—the dollar value decrease in the defendant firm’s market capitalization at the end of the class period—decreased to $112 million in 2011, representing a 39 percent year-over-year decline and a 22 percent decline compared with the median for the preceding five years.
  • The percentage of settlements involving underwriters in 2011 matched the all-time high of 26 percent reached in 2010. As 60 percent of those cases that settled in 2011 had filing dates in 2007 and 2008, this increased level can be attributed to the higher number of case filings involving Section 11 claims and underwriter defendants during those years. The percentage of underwriter defendants also remained high among cases filed in 2009; thus, we expect that the presence of an underwriter defendant will continue to be a significant factor among settlements in the near future as these cases reach the settlement stage.
  • While filings of cases related to the credit crisis declined in 2011, settlements of these cases increased. Included in the study were 10 settlements in 2011 related to the credit crisis. Overall, these cases continue to settle at a slower rate than traditional cases.]

The full text of the report is available at the Cornerstone Research website at

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