Pace of Federal Securities Class Actions Filings at Historic Levels; Settlement Values Decline

New York -- Federal securities class action lawsuits in the first half of 2011 were filed at the second highest semi-annual rate in eight years, according to NERA Economic Consulting’s biannual Recent Trends in Securities Class Action Litigation: 2011 Mid-year Review, released today. There were 130 filings of securities class actions from January to June of this year.

If this pace of filings is maintained, there will be 260 fillings by year-end in 2011—the highest level since 2002 and the fourth highest in the 16 years since the passage of the Private Securities Litigation Reform Act (PSLRA).

While filings have been brisk, average settlement size in the first half of 2011 has fallen sharply to $23 million, down from $108 million in 2010. The median settlement also fell substantially, to $6.3 million from an all-time high in 2010 of $11 million.

Foreign-Domiciled Firms Targeted

Over a third of federal securities class action lawsuits filed in the first half of 2011 were against foreign-domiciled issuers, a historical high and more than double the prior peak in 2004. In prior editions of NERA’s Trends report, the authors observed that foreign companies listed in the US are less likely to be sued than domestic issuers. Recently, however, there has been a sharp reversal of this pattern. Results for the first half of 2011 show that US-listed foreign-domiciled companies are now twice as likely to be sued as their US-domiciled counterparts.

Driving this trend are the 27 suits filed against companies domiciled in China—making up 60 percent of all suits against foreign-domiciled issuers. The majority of the securities class actions targeting Chinese-domiciled companies have focused on issues relating to financial reporting, including revenues, costs, profits, and cash.

“The increase in filings against foreign defendants is especially surprising in light of the June 2010 Supreme Court decision in Morrison v. National Australia Bank, which limits the scope of litigation against non-US companies,” said co-author and NERA Senior Consultant Dr. Jordan Milev. “Any effect of Morrison on the incentive to file has been more than offset by the rapidly growing number and changing circumstances of US-listed Chinese companies,” added co-author and NERA Senior Consultant Robert Patton.

Credit Crisis Litigation Continues to Decline

The downward trend of credit crisis securities class action litigation observed in 2010 by NERA Trends authors continued in the first half of 2011, with only eight cases tied to credit crisis litigation observed. Ponzi scheme filings have also declined from nine in 2010 to two so far in 2011.

Of the 245 credit crisis-related federal securities class actions filed in the past few years, as of June 2011, 79 have been dismissed and 23 have settled.

Additional Trends for the First Half of 2011
• 37 suits were filed in the first half of 2011 challenging the pricing of a merger or acquisition. While fewer than the 50 M&A pricing objection suits filed in the second half of 2010, this type of suit still comprised nearly 30 percent of all cases filed.
• 47 percent of securities class actions were filed within two weeks of the end of the proposed class period—compared to 29 percent in the previous four years.
• Accounting allegations were most frequent, characterizing 30 percent of recent filings. Breach of fiduciary duty was the second most common allegation, present in approximately 20 percent. Allegations involving product and operational defects (14 percent) and company-specific earnings guidance (12 percent) rounded out the top four allegations in first half of 2011 filings.
• The aggregate settlement value for 2011 is projected to be $1.7 billion, which would be the first time since 2001 that aggregate settlements have fallen below $2 billion.
• 58 percent of cases settled from January to June 2011 did so for less than $10 million, up from 41 percent in 2010.

Securities Class Action Trends Report Series

NERA has been analyzing trends in securities class actions for more than 15 years. Two reports are published per year: a mid-year study and an annual review at year’s end. This mid-year study was authored by NERA Senior Consultants Dr. Jordan Milev, Robert Patton, and Svetlana Starykh and includes data on filings, dismissals and settlements through 30 June 2011.

For more details, and to read the full report, visit: www.nera.com/recenttrends.

About NERA

NERA Economic Consulting (www.nera.com) is a global firm of experts dedicated to applying economic, finance, and quantitative principles to complex business and legal challenges. For half a century, NERA’s economists have been creating strategies, studies, reports, expert testimony, and policy recommendations for government authorities and the world’s leading law firms and corporations. We bring academic rigor, objectivity, and real world industry experience to bear on issues arising from competition, regulation, public policy, strategy, finance, and litigation.

NERA’s clients value our ability to apply and communicate state-of-the-art approaches clearly and convincingly, our commitment to deliver unbiased findings, and our reputation for quality and independence. Our clients rely on the integrity and skills of our unparalleled team of economists and other experts backed by the resources and reliability of one of the world’s largest economic consultancies. With its main office in New York City, NERA serves clients from more than 20 offices across North America, Europe, and Asia Pacific.