A study released by Cornerstone Research (“Cornerstone”) and reported by Reuters earlier this month has identified a trend where securities class action settlements are increasingly tied to SEC investigations and enforcement actions, which is driving up settlement amounts.  Although the total number of class action settlements decreased in 2010, the percentage of settlements that were associated with SEC enforcement actions rose to 30% compared to 20% in 2009.  This trend resulted in the overall median settlement amount increasing more than 20% over 2009 at least in part because settlements that follow SEC enforcement actions are generally larger.  In fact, the study showed that the median settlement amount for cases associated with enforcement actions was more than double the settlement amount in cases where the SEC was not involved. 

The study by Cornerstone also identified other statistically significant factors that may increase the settlement value of a securities class action.  One of these factors – alleged violations of Generally Accepted Accounting Principles (“GAAP”) – is typically used by plaintiffs to enhance settlement leverage.  Frequently, GAAP violations are associated with a restatement announcement by the issuer.  Plaintiffs can then use the existence of the restatement along with any associated details disclosed by the issuer to enhance their ability to meet the specificity requirements set forth in the Private Securities Litigation Reform Act.  This detailed ammunition not only provides additional potential “staying” power, but also may pique the interest of the SEC.  That interest, in turn, may lead to an investigation which provides additional leverage to plaintiffs. 

In any event, expect the SEC’s efforts to become even more pronounced in coming years.  The SEC has publicly stated that it intends to increase enforcement activities and Robert Khuzami, Director of the Enforcement Division, testified before Congress on March 10 that the SEC has taken action to carry through with this promise by significantly restructuring the Enforcement Division to streamline operations and expedite the investigation and filing of actions.   The results are already showing – the total number of enforcement actions have increased each of the past two years.  In addition, the SEC acquired a broader enforcement mandate through the Dodd-Frank Act, and is scheduled to have its budget doubled by 2015.  As the SEC ramps up its new initiatives, we will likely see more class action settlements influenced by parallel enforcement actions.

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