Severity of U.S. class actions increases

There have been dramatic increases in the severity of U.S. securities class actions over the last five years, panelists have told 18th Annual PLUS International Conference attendees. At the same time, the frequency of class actions remains manageable and is showing signs of decreasing.
The Professional Liability Underwriting Society (PLUS) is an international, non-profit association with over 6,000 members worldwide. It has chapters in the United States, England and Canada.
In 2002, the first year after the Enron debacle, there were 231 classic security actions filed, according to PLUS International panel moderator Dan Bailey of Bailey, Cavelleri LLC. He noted the number dropped to 214 in 2004. “If you project out the filing for 2005, it looks like it will come in somewhere around 190, a pretty significant decrease from 2004 and 2002,” he said.
Some of the reasons may include less egregious wrongdoing, compliance to the Sarbanes-Oxley Act, and the new Dura Pharmaceuticals case out of the U.S. Supreme court, which eliminated some of the cases that would otherwise be brought to trial, Bailey said. “We don’t know for sure, and whether it’s going to stay down at that level is anyone’s guess.”
This good news doesn’t carry over to the severity side of the picture, however. Bailey noted there continues to be dramatic increases in the size of settlements in security class actions over the last five years. According to a recent Nuera survey, the average settlement in a classic security class action case is at an all time high of $25.8 million.
“The median drops to around $7 million, which says there are a lot of real big settlements and there are still a number of small cases that go away with no dollars at all, which explains why the median number is so much lower,” said Bailey.
“The big driver for the dramatic increase in severability is the emergence of institutional investors taking control of this litigation. According to the Neura survey, they calculate if an institutional investor comes in as lead plaintiff in a case, they estimate the settlement of that case will increase one-third if that person was an individual rather than an institutional investor.”