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Settlements in class action securities fraud cases showed their first decline in seven years in 2003, according to a new study. Cornerstone Research, an economics and finance consultant to law firms, in conjunction with Stanford Law School’s Securities Class Action Clearinghouse, reported that settlements totaled $2 billion in 2003, down from $2.5 billion the previous year. But the study, released last week, cautions that public companies and other defendants such as accountants and law firms may not have turned a corner. The downturn may be the delayed effect of a drop in the number of filings in 2001, according to Cornerstone’s Laura Simmons, who led the study. Filings in 2002 reversed that trend, rising by 31%. The study, “Post-Reform Act Securities Lawsuits,” also suggested that the decline was due to “an increase in the length of time that cases are taking to settle.” Trends and predictors The study’s authors not only reported aggregate data, but performed analyses to identify trends and predictors of success in securities fraud cases.
Securities Class Action Top 10 Plaintiffs’ firms with the most securities class action settlements, Dec. 22, 1995, to Dec. 31, 2003.
Law firm % of settlements Median settlements as a % of est. damages
Milberg Weiss Bershad Hynes & Lerach 53 3.9
Berger & Montague 8 3.4
Stull, Stull & Brody 8 4.7
Abbey Gardy 7 3.9
Wolf Popper 7 6.1
Berman DeValerio & Pease 7 3.1
Bernstein Litowitz Berger & Grossmann 7 3.6
Weiss & Yourman 6 3.6
Barrack, Rodos & Bacine 5 4.1
Bernstein Liebhard & Lifshitz 4 3.6

Source: Cornerstone Research, Post-Reform Act Securities Lawsuits

Much of that analysis relies on what the report calls “plaintiff-style” estimated damages. Simmons said that Cornerstone estimated damages with a methodology similar to one used by plaintiffs’ experts, taking into account factors such as stock market behavior following an allegedly fraudulent act. The report makes clear that this “highly simplified” approach was chosen to make year-to-year trends visible, and not as a means of accurately calculating the actual damages suffered by shareholders. According to the report, Milberg Weiss Bershad Hynes & Lerach of New York, which split into two firms on May 1, has been lead counsel in 53% of all settled cases since the 1995 enactment of the Private Securities Litigation Reform Act [see chart]. Milberg Weiss only ties for fourth place if firms are ranked by settlement amount as a percentage of estimated damages. Simmons warned, however, that the rate of return tends to go down as the aggregate estimated damages become larger. Milberg Weiss’ lower ranking on that scale may just be an indicator that it takes the lead on the biggest cases, she said. The study found a number of “factors that significantly affect settlement values.” Settlements tend to be higher when the defendant company has large assets; when it has had to restate its financial reports or has been accused of failing to follow Generally Accepted Accounting Principles procedures; when the Securities and Exchange Commission has launched a related investigation; when an accountant or underwriter has been named as a co-defendant; when a related derivative action has been filed; when there is a noncash component to the settlement; and when an institutional investor is a lead plaintiff. While some of those correlations may seem obvious, others factors that would appear equally obvious were not found to be significant. Cases in which there were allegations of insider trading had higher settlement amounts. But those settlements were a lower percentage of estimated damages than cases in which there were no insider-trading allegations. “When we controlled for all factors, we found that insider trading did not have much weight,” Simmons said. Settlements tended to be low if the target company recently filed bankruptcy or if the securities-fraud class action complaint was filed in a court within the ambit of the 4th or 7th U.S. circuit courts of appeals. The report noted that settlements occur most frequently in the 9th Circuit. But when other factors were considered�such as the concentration of the technology sector in California�the 9th Circuit did not emerge as any more hospitable to settlements than other circuits. But the 4th and 7th circuits’ dampening effects on settlements survives such analysis, Simmons said. This is the first year that such a correlation appeared, she said, adding that the researchers did not know its cause. Young’s e-mail is [email protected] .

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