SEC

Class-action settlements tied to SEC cases grow

Reuters News
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Posted: Mar 22, 2011 11:04 AM
Class-action settlements tied to SEC cases grow

By Jonathan Stempel

NEW YORK (Reuters) - Settlements of securities fraud lawsuits are increasingly tied to U.S. Securities and Exchange Commission cases, a trend likely to continue as the agency increases enforcement activity, a new report shows.

Thirty percent of class-action settlements in 2010 involved cases where the SEC had previously announced enforcement activity, up from an average 20 percent in the previous 14 years, according to an annual study by Cornerstone Research.

Laura Simmons, a business professor at the College of William & Mary and co-author of the study, said the SEC's involvement typically results in a 30 percent boost to the average settlement size for investors.

"SEC enforcement activity gives investor plaintiffs extra bargaining power," she said. "There is no reason to believe SEC enforcement activity will decline, and it should remain a 'plus' factor to increase future settlement amounts."

Overall, the number of securities class-action settlements that U.S. courts approved fell last year to 86, the fewest in more than a decade, from 101 in 2009.

The total value of the settlements fell to $3.12 billion from $3.79 billion, while the average size dipped to $36.3 million from $37.6 million.

Cornerstone attributed the declines to a dearth of "mega-settlements," those worth more than $100 million.

There were also no giant settlements such as the $7.2 billion accord in 2006 for energy company Enron Corp, and $6.2 billion accord a year earlier for phone company WorldCom Inc.

It typically takes four years to reach a settlement, Cornerstone said.

According to the report, the largest approved settlement in 2010 was a $624 million accord with mortgage lender Countrywide Financial Corp and its auditor, KPMG LLP. Countrywide is now owned by Bank of America Corp.

Simmons gave two reasons that settlements may grow in 2011 and beyond.

First, she said many lawsuits filed in 2008 and 2009 that involved large alleged losses tied to the financial crisis have yet to be resolved.

Second, she said public pension funds are serving more often as lead plaintiffs, and their involvement boosts the size of a typical class-action settlement by 40 percent.

(Editing by Steve Orlofsky)