According to a report released by Cornerstone Research, securities class action settlements in 2014 were collectively at their lowest dollar amount in 16 years. Total settlement value fell from $4.8 billion in 2013 to $1.1 billion due primarily to the lower number of unusually large settlements. The 2014 figure is 84 percent below the average for the previous nine years. The number of settlements, however, did not significantly change from 2013. The database used for the report focused on cases in which purchasers of common stock claimed fraudulent inflation of the stock price and alleged violations of Rule 10b-5 and/or Sections 11 or 12(a)(2) of the Securities Act of 1933.
Cornerstone indicated that the average settlement for these cases in 2014 was $17 million. While that number reflects a significant decrease from the $73.5 million average in 2013, the median settlement amount declined only slightly, from $6.6 million to $6 million. Most years have multiple settlements at or above $100 million, but there was only one such settlement in 2014, and there were no cases that settled for an amount in excess of $500 million.
The report found that for the cases settled in 2014 the “estimated damages”—a simplified calculation of potential shareholder losses Cornerstone uses as a factor in predicting settlement amounts—decreased significantly from 2013. In 2014, there were only five settlements with estimated damages over $5 billion, compared to an average of nine cases for each of the preceding nine years. The report suggested that this lower number may reflect reduced stock volatility in the years that these cases were filed, typically two to four years before settlement—and given the recent relative stability of the market, this trend may continue.
Only 10 of the 63 securities class action settlements in 2014 involved Section 11 and/or Section 12(a)(2) claims, and all but three of these also involved Rule 10b-5 claims. Median settlement amount as a percentage of estimated damages tends to be higher in cases involving only Section 11 and/or Section 12(a)(2) claims than it is for cases involving only Rule 10b-5 claims.
For all cases that settled in 2014, the median and average time from filing to settlement was three years. Matters with larger estimated damages generally took longer to reach settlement.
Notably, there was an overall decline in settlements involving financial firms, likely reflecting the smaller amount of credit-crisis litigation still ongoing.
The number of newly filed securities class actions (defined as cases involving Rule 10b-5, Section 11, and/or Section 12(a)(2)) increased in 2014, for the second year in a row.