February 16, 2005 by Canadian Underwriter
While the number of shareholder class action lawsuits has not increased since the passage of Sarbanes-Oxley in mid-2002, the value of settlements has skyrocketed to reach record levels in 2004, says NERA Economic Consulting in its annual study of shareholder class action litigation.
Overall, mean settlement value increased 33% to US$27.1 million in 2004, up from US$20.3 million in 2003, says NERA. Of the 119 settlements made in 2004, nine were valued at US$100 million or more, while 16 exceeded US$50 million. This includes high-profile settlements such as WorldCom, Raytheon and Bristol-Myers Squibb, which combined were valued at US$3.3 billion alone.
NERA says the settlements represent fallout from the recent bear market. “We find that these higher settlements can be explained by higher investor losses, the single most powerful publicly available predictor of settlement value,” the study notes. NERA economists add they predict the value of settlements will only continue to increase. “Increasing numbers of cases with class periods ending in the bear market of 2000-2002 are reaching settlement As a results several more years of higher average settlements are likely.”
SOX corporate governance legislation has not impacted the number of filings thus far, with 238 federal class action filings made in 2004, versus 234 in 2003. The study does note that many settlements now include companies agreeing to institute corporate governance reforms, including high-profile cases involving AON Corp., HCA Inc. and Ingersoll-Rand.
The likelihood of a publicly-traded company facing a class action lawsuit at least once over a five-year period is 10%.