Press Release April 04, 2011

Goodwin Procter Attorney Brian Pastuszenski Analyzes Cornerstone Report Findings

Last month, Cornerstone Research released its annual Securities Class Action Settlements – 2010 Review and Analysis report. According to the report, the 86 securities class action settlements represented the lowest level in 10 years, a 15% drop from 2009. Total settlement value decreased as well, dropping 17% from $3.8 billion to $3.1 billion.

Goodwin Procter partner Brian E. Pastuszenski, who co-chairs the firm’s Securities Litigation & SEC Enforcement Practice, was asked by publications BNA, Law360 and Compliance Week to analyze and comment on the report’s findings.

According to Pastuszenski, the decline probably does not indicate a long-term trend, as he noted that the decrease in both settlements and settlement value is likely due to the recent economic downturn.  The complexity of credit crisis-related cases, Pastuszenski said, has slowed down the process, but he expects many of these cases to eventually reach court-approved settlements. Another factor leading to the drop in total settlements has been the weakness of the capital markets, particularly the initial public offering market.  “IPOs are always a favorite of the plaintiffs’ bar,” Pastuszenski told Compliance Week.

Settlement values have also been affected.  “Judges have seen what’s actually happened to the economy and how persistent and deep the economic problems have been” and are showing “a greater amount of receptiveness to arguments from defense lawyers related to causation issues,” Pastuszenski commented to Law360.  “At least in the aggregate, it will have a downward pressure on settlement amounts.”

Other key findings of the Cornerstone Research report include:

  • The percentage of settled cases that involved a remedy of a corresponding SEC action prior to the settlement of the class action increased to 30% in 2010 compared with 20% for all cases settled through 2009. 
  • The median inflation-adjusted Disclosure Dollar Loss – the dollar value decrease in the defendant firm’s market capitalization at the end of the class period – increased to $158.1 million in 2010, representing more than a 10% increase from 2009.
  • In 2010 institutional investors served as lead plaintiffs in more than 67% of settlements – the highest proportion to date among post-Reform Act settlements.  According to Pastuszenski, these institutions purchased billions in market-sensitive securities (including mortgage-backed securities), and saw those securities drop in price as the housing and capital markets collapsed.  Having to mark these securities to market created incentives for these institutions to sue and seek to become lead plaintiff.   
  • In 2010 allegations related to violations of generally accepted accounting principles were included in approximately 70% of settled cases compared with 65% for cases settled in 2009.
  • Slightly more than 40% of cases settled in 2010 were accompanied by a derivative action filing compared with more than 45% of cases in 2009. The 2010 percentage is still higher than the post-Reform Act average of 30%.
  • The Ninth Circuit (California, Alaska, Arizona, Hawaii, Idaho, Montana, Nevada, Oregon and Washington) had the highest number of approved settlements with 32, followed by the Second Circuit (New York, Connecticut and Vermont) with 21.