Recently, a number of studies have been published analyzing case filing trends for securities class actions as of mid-year 2010. Such studies include those conducted by Advisen (report here), Cornerstone Research/Stanford Law School (report here), and NERA (report here). While these studies use different sources and, in some cases, different methodologies to track and analyze data, they all point to a similar observation: that securities class action filings have been on a downward trend since late 2009 and that trend appears to be due in large part to the drying-up of credit crisis class action litigation.
It tends to makes sense. The overvaluation of mortgage-backed securities driven by an unregulated lending market created an unprecedented global recession with stock prices plummeting into the abyss. Naturally, one would expect this to result in a boom of securities fraud litigation, but would eventually burn itself out as the economy recovers and the number of defendants dwindles. Simply put, securities class actions tend to track the ebb and flow of world events, especially events such as a global recession. See e.g. the class action fall-out of the BP oil spill with lawsuits against BP, Transocean, and others.
Trends in securities class action filings have gone through ups and downs. And, it is no surprise that the credit crisis class action bubble would rise and fall as the class action wheel turns. In his analysis of the Advisen mid-year report, Kevin M. LaCroix of the D&O Diary provided valuable insight into the cyclical nature of securities class action filings:
...as has always been the case in the past, the litigation cycle will eventually turn and filing activity levels will revert to the mean. There is an entrenched industry of highly entrepreneurial plaintiffs' securities class action lawyers who have every incentive to continue to file lawsuits. I suspect strongly that one factor in the current relative downturn in new securities class action filings is that the plaintiffs' lawyers are simply swamped trying to keep up with the massive wave of complex lawsuits they filed in the wake of the subprime meltdown and the credit crisis. Eventually the decks will clear and they will resume their normal activities, particularly if there are headline-grabbing events that provide litigation fodder.
Although the trends noted in recent studies on case filings are not surprising, do they show the whole picture? For institutional investors with eligible settlement claims one must conclude that statistics on case filings are just the tip of the iceberg. If there is a boom in case filings resulting from the credit crisis there is bound to be a boom in case settlements as a result of the credit crisis. The good news for investors is that settlement dollars that can be recovered from all of the credit crisis litigation that began in early 2007 have only begun to roll in.
Using data compiled from the Securities Class Action Services, LLC database, the following graphs show the number of securities class action cases that reached a final settlement from 2000 to 2009.
As the above demonstrate, case settlements spiked dramatically in 2009. And, settlements in the first half of 2010 have already come close to eclipsing the total number of settlements for the year 2006, 2007, and 2008. This makes sense as credit crisis litigation began in early 2007. It can take up to 2-4 years for a securities class action to reach a settlement with an additional 1-2 years for the claims filing and disbursement process to be completed. In fact, the very first of the credit crisis suits to settle (New Century Financial Corp.) did so only weeks ago. Thus, if we use January 1, 2008 as a benchmark for credit crisis securities class actions, we can expect investors to be making claims on settlement dollars related to the credit crisis well into 2014.
The NERA mid-year 2010 study found that the size of the typical securities class action settlement rose substantially in the first half of 2010 with the median settlement reaching nearly $12 million, "considerably higher than in any prior year since the passage of the PSLRA." Similarly, securities class action settlement dollars awaiting disbursement reached $23.7 billion at the end of July 2010. And, more than 400 securities class action suits filed after January 1, 2008 have not yet come to a settlement. Of course, many of those cases will settle and, therefore, will provide relief to institutional investors who are savvy enough to file on all of their eligible claims.
While it is true that securities class action filings are on a relative downward trend as plaintiff lawyers work through the credit crisis cases, there are some things that will never change. When it comes to filing claims on securities class actions, it pays to play.