Expert Commentary

D&O Litigation Trends in 2009

From 2008 to 2009, the number of securities class action filings dropped, the median settlement slightly rose, and the 2009 average settlement significantly fell. However, the average settlement—when adjusted to eliminate aberrational settlements—increased markedly.

Professional, D&O, and Fiduciary Liability
March 2010

The number of securities class actions filed in 2009 was the second lowest for annual filings in the past 13 years, falling sharply from 2008. As in 2008, nearly one-third of the class action filings involved the credit crisis, although the number of such filings declined from 2008 by nearly 47 percent. Few of the credit crisis cases have been dismissed or settled.

The median value of securities class action settlements for 2009 was $9.0 million, slightly more than the median value in 2008, but consistent with the median value for the prior 5 years. Because many of the credit crisis cases remain, it is unclear how those cases will be resolved and how they will affect future settlements. However, given that investor losses tend to be the primary determinant of settlement size, and median investor losses were 40 percent higher in 2008 and 2009 than in prior years, the median value of future settlements of class actions may increase.1

The average settlement value of securities class action settlements in 2009 dropped to $12 million. The average was depressed by the settlement in 2009 of 309 initial public offering (IPO) laddering cases, each of which settled for approximately $2 million. However, if the IPO laddering settlements and any settlement above $1 billion were eliminated from the computation, the average settlement value for 2009 would have been $42 million—significantly more than the average settlement, similarly adjusted, over the prior 6 years.

These and other trends from 2009 are discussed below.

The Number of Securities Class Action Filings Drop

In 2009, the number of federal securities fraud class actions fell from 2008. Cornerstone reported 169 federal securities fraud class actions were filed in 2009, a 24 percent decrease from 223 filings in 2008 and 14 percent below the annual average of 197 filings between 1997 and 2008.2 Advisen and NERA also reported a decrease in the number of filings from 2008, although both companies used different approaches for counting filings than Cornerstone and produced differing figures.3 Thus, Cornerstone, NERA, and Advisen disagree on the severity of the drop in filings from 2008 to 2009, with Advisen reporting the smallest percentage decrease.

The number of filings that Cornerstone, NERA, and Advisen have counted in the last 14 years since the passage of the Private Securities Legislation Reform Act (PSLRA) is shown in Figure 1. As reflected in Figure 1, although the number of filings reported by these industry analysts varies slightly, the ebb and flow from year to year of the filings parallel each other.

Figure 1:

Filings Comparison by Industry Analysts

Interestingly, as reflected in Figure 1, Advisen tracks not only securities class action suits filings (SCAS), which Cornerstone and NERA also follow, but other actions against directors and officers. The category in Figure 1 for Advisen Securities is a broader category that includes securities class action lawsuits, suits alleging violations of securities fraud laws by regulators or law enforcement agencies, private (non-class) securities lawsuits, derivative actions, and collective actions.4

Of particular interest is the growth in nonsecurities class action claims against directors and officers. As noted by Advisen, the percentage of nonsecurities class action claims is growing as compared to the securities class actions. The number of securities fraud cases has grown since 2007—340 suits in 2009, 280 in 2008, and 250 in 2007. Likewise, the average settlement or award in such cases has grown—$16 million in 2009, $5 million in 2008, and $8 million in 2007. This trend will likely continue, particularly as the Securities and Exchange Commission (SEC), with its additional funding, plans to become more active.

In 2009, cases related to the credit crisis and Ponzi schemes continued to constitute a substantial portion of the securities class action filings, with Cornerstone reporting 53 filings related to the credit crisis. NERA reported a higher number of reporting of credit crisis filings (61), although the percentage of total filings related to the credit crisis reported by NERA (30 percent of filings) is consistent with the percentage reported by Cornerstone. Also, as a result of the revelations of the alleged schemes perpetrated by Bernard Madoff and others, more cases involving Ponzi schemes were filed in December 2008 and continue to be filed throughout 2009. According to NERA, there were 7 filings in the second half of 2008 and 35 in 2009 involving Madoff and Ponzi schemes.5 Cornerstone, on the other hand, reported 18 filings related to Madoff and Ponzi schemes. The majority of such filings were on behalf of investors in Madoff funds, with most lawsuits brought against hedge funds, feeder funds, and other financial intermediaries that invested their clients' money with Madoff.

Although the number of cases related to the credit crisis and Ponzi schemes have increased, the number of filings related to auction-rate securities, which first started in 2008, has decreased in 2009. Also, while options backdating cases made up almost 20 percent of all filings in 2006, there have been no cases alleging options backdating in 2009.

Given the nature of the credit crisis, it is not surprising that approximately 50 percent of the 2009 filings were against companies in the financial sector.6 Although the percentage of filings against companies in the financial sector continues to increase, the percentage of filings against companies in the electronic technology and technology services sector has decreased and, in fact, over the last 4 years, the percentage of securities class actions filed against companies in that sector has dropped. After the financial sector, the next highest sector for filings in 2009 was health technology.7

Through the first half of 2009, for the first time since 1996, the percentage of filings against foreign companies was greater than the number of foreign companies listed on U.S. exchanges. In the first half of 2009, 15 percent of cases named a foreign defendant, but only 13 percent of companies traded on U.S. markets were foreign. However, in the second half of 2009, as the filings related to the credit crisis slowed, the percentage of filings against foreign companies also declined and, as result, the percentage for 2009 was 12.4 percent. Since 1996, Canadian companies are the most frequently named defendant, with Chinese companies, Swiss companies, and English companies comprising the majority of the remaining foreign companies.8

In 2009, there were three filings that involved a $5 billion or greater "disclosure dollar loss (DDL)," and one involved the credit crisis. This is the second lowest number of mega DDL filings for any year, according to Cornerstone. "Disclosure dollar loss" is defined as the total decline, i.e., the dollar value change, in the market capitalization of the defendant company from the trading day immediately preceding the end of the class period to the trading day immediately following the end of the class period.9 There were eight such filings in 2004, five in 2005, and one in 2006. The number of filings in 2007 jumped to 9 and to 12 in 2008.

There were 12 filings that involved a $10 billion or greater "maximum dollar loss." "Maximum dollar loss (MDL)" is defined as the dollar value change in the defendant company's market capitalization from the trading day during the class period with highest market capitalization to the trading day immediately following the end of the class period.10 The 12 filings accounted for $477 billion of maximum disclosure loss and represented 75 percent of the total amount of the maximum disclosure loss. In 2008, by comparison, there were 26 such filings that accounted for $682 billion and 78 percent of the maximum dollar loss. Consistent with the last several years, a few filings continue to comprise a significant share of the total market capitalization losses, as 7 filings exceeded $25 billion in maximum dollar loss, which accounted for $403 billion of the total maximum dollar loss, or 64 percent of its total.11 Despite the difference in the number of filings over the last few years, approximately half of those filings in 2008 and 2009 were related to the credit crisis.

Average Settlement Size Continues To Increase

The median settlement size of $9.0 million in 2009 remains consistent with the settlement size in 2008. There has been a slight increase in median settlement size over the last 14 years, but since the PLSRA, the median settlement values have remained under $10 million. Importantly, the median settlement size over the last 5 years has remained relatively steady, with $7.8 million in 2005, $7.5 million in 2006, $9.4 million in 2007, and $8.0 million in 2008.12 Figure 2 provides a chart detailing the average settlement value.13

Figure 2:

Average Settlement Value

The average settlement value in 2009 was $12 million, a marked decrease from the average settlement in 2008 of $41 million. However, the average settlement in 2009 appears to have been skewed by an aberration—an unusually high number of small settlements caused by the resolution of 309 IPO laddering cases. These cases, which had been filed in 2001 and 2002, settled in 2009 for approximately $568 million—less than $2 million per case.14 Removing the IPO settlements yields an adjusted average settlement of $42 million.

Interestingly, there were no mega-settlements in 2009 (i.e., over $1 billion), which also could have skewed the average settlement value. This is a departure from 2008, when there were 2 mega-settlements (Enron settled for $7.2 billion, and McKesson settled for $1 billion). If the average settlements for 2008 and 2009 are adjusted to eliminate mega-settlements as well as the IPO laddering settlements, the adjusted average settlement in 2009 ($42 million) was approximately 35 percent higher than in 2008 ($31 million). Indeed, the adjusted average settlement in 2009 of $42 million was substantially higher than the adjusted average settlement for the last 7 years, which was $29.0 million.15

Although there were no settlements in 2009 in excess of $1 billion, 10 percent of the settlements were in excess of $100 million, which is the highest percentage of settlements in that range since 2006. Also, approximately half of the settlements were below $10 million (even while excluding the settlements of the IPO laddering cases), also consistent with the last several years. There appears to have been a modest increase in the percentage of settlements in the range of $20–$50 million, but a decrease in the percentage of settlements in the range of $50–$100 million.16

When analyzing potential settlement value, investor losses continue to be the single most important determinant. There is not a direct correlation between investor losses and settlement value, but instead, expected settlement value rises more slowly than investor losses. For instance, ignoring other characteristics of the case, it appears that the expected settlement value is $5.1 million for cases involving investor losses of $100 million, while the expected settlement value is $11.5 million for investor losses of $1 billion.17

Increased Enforcement Activity

The failures of Wall Street institutions, the ensuing credit crisis, and the Madoff scandal led to serious concerns with the SEC's ability to protect investors. As a result, the Barack Obama Administration promised a tougher regulatory and enforcement agenda, and the SEC, in turn, changed the enforcement process to empower the Enforcement Division staff to act more quickly, including its ability to negotiate a civil money penalty against a public company for alleged securities fraud without approval of the Commission and to approve formal orders of investigation so that the staff could issue subpoenas.

In 2009, there was a greater increase in law enforcement activity from 2008, when the SEC brought the second-highest number of enforcement actions in agency history, and, from 2007, when insider trading cases increased more than 25 percent, and market manipulation cases increased more than 45 percent. Comparing enforcement activity between February and March 2009 with 2008, the number of emergency cases seeking temporary restraining orders has nearly tripled, investigations opened has increased from 292 to 358, and the number of formal orders has more than doubled. In addition, there has been a significant increase in the number of injunctive actions filed and number of defendants, while the percentage of defendants whose charges were settled at the time of filing was down. This reflects an increased enforcement activity and the SEC's willingness to file against defendants in the absence of settlements.18 This increased activity does not appear likely to slow in the next few years, especially because Congress and the Administration provided increased funding to the SEC, the Department of Justice (DOJ), and other law enforcement agencies for the investigation and prosecution of fraud involving financial institutions.

In 2009, the SEC's and the DOJ's activity in pursuing foreign bribery by directors and officers also continued. The Federal Corrupt Practices Act (FCPA) prohibits providing money or anything of value to foreign government officials to try to obtain or retain business. In 2009, the SEC and DOJ brought more FCPA prosecutions than in any other full year.19 Moreover, this trend appears likely to continue as the SEC has received more funding and, in turn, has rolled out aggressive new enforcement theories, which has resulted in ongoing investigations of at least 130 companies.

In criminal prosecutions of FCPA cases, very few criminal defendants since 1991 have rejected plea agreements and opted to try their cases before juries. Nonetheless, in 2009 there were four FCPA prosecutions of criminal defendants, two in June 2009 (Frederic Bourke and William Jefferson) and two in September 2009 (Gerald and Patricia Green). All were convicted of violations of the FCPA. Frederic Bourke and William Jefferson have been sent to prison, and the DOJ is seeking substantial prison terms for the Greens, including a life sentence for Mr. Green. The trial of the Greens was unique as it was the first enforcement action involving the film industry (which may indicate the government is interested in broadening the scope of its investigations).20 The government used several proactive investigative methods to obtain crucial evidence, which may indicate the government is willing to dig deeper in each case, expend more resources, and adopt more sophisticated practices. That the government is seeking prison terms also appears to be a departure from its prior practice.

Verdicts for Plaintiffs Entered in Two Securities Class Actions

In 2009, two securities class action suits went to trial: the Household International and Vivendi securities fraud class actions, continuing a notable trend discussed in our recap of 2007–2008 trends. (See D&O Litigation Trends in 2007–2008.)

In May 2009, the jury in the Household International securities fraud class action, which involved allegations about residential real estate lending practices, entered a verdict in favor of plaintiffs (the purchasers of Household International's securities) on several counts.21 The jury ruled that the defendants' misleading statements resulted in an inflated share price, but the court has not yet determined the amount of damages. Trials in subprime related class actions are very rare—only 21 cases have been tried since the PSLRA was enacted in 1995, and only 7 of those 21 involved conduct that occurred after the PSLRA's enactment. As a result of the Household verdict, plaintiffs may be encouraged to litigate allegedly deceptive predatory lending practices and may prosecute other subprime-related cases.

On January 29, 2010, the jury ruled that Vivendi, a French media group, misled investors 57 times from 2000 to 2002, and recklessly inflated the company's stock.22 The jury held that, as a result of those 57 false statements, the company's stock was inflated, at times, by as much as $11 per share. The jury ruled, however, that Mr. Jean-Marie Messier (former Vivendi CEO) and Mr. Guillaume Hannezo (former Vivendi CFO) were not liable. The jury is currently calculating damages, which may depend on the class size and those that seek payouts, but one of plaintiffs' lawyers estimated that damages could be $9.3 billion.23 Vivendi plans to appeal the ruling. Although the verdict in Vivendi was entered in 2010, we include the trial in this article as it commenced in late 2009.

Securities class action cases seemingly are being tried with increasing frequency, as eight cases have been tried to a verdict since the beginning of 2005.24 Since 1996, 6 cases were tried involving conduct prior to the adoption of the PSLRA, and 14 cases have been tried involving post-PSLRA conduct. The Household Securities and Vivendi matters were the last two and resulted in verdicts for the plaintiffs with damages that are yet to be determined.

Other Notable Developments—Bank Failures, U.S. Supreme Court To Hear Securities Cases

Based in part on subprime and commercial real estate issues, banks failed in 2009 at an alarming rate. This trend began in the second half of 2008, when 21 banks failed, and failures dramatically increased in 2009, as over 140 U.S. banks failed and were taken over by the Federal Deposit Insurance Corporation (FDIC).25 The number of bank failures mounted throughout 2009, as 95 of the 140 failures happened in the second half of 2009, and it appears likely that the number of bank failures will continue to grow in 2010, given that a quarterly report from the FDIC shows 552 "problem institutions," an increase of 136 from 3 months prior.

During the third quarter of 2009, "50 insured institutions with combined assets of $68.8 billion failed," which represents "the largest number [of bank failures] since the second quarter of 1990 when 65 insured institutions failed." The FDIC reports that the numbers and assets of those failed institutions are the highest since 1993. This puts significant strain on the FDIC, which insures individual deposits up to $250,000 in the Deposit Insurance Fund. During the third quarter of 2009, the Deposit Insurance Fund decreased by $18.6 billion, to negative $8.2 billion, "primarily because of $21.7 billion in additional provision for bank failures."

With the increasing number of bank failures and the number of troubled financial institutions, it appears likely that banks will continue to fail in 2010. Although the FDIC has yet to show that it will pursue directors and officers of failed financial institutions and related professionals with the vigor the RTC and the FDIC pursued directors, officers, and other professionals during the savings and loan (S&L) crisis, the FDIC pursued some directors and officers in the last 18 months and may yet increase its efforts to recoup bank losses from former management.

In 2009, the U.S. Supreme Court agreed to hear two more cases involving securities litigation. In May 2009, the Court granted Merck's petition for writ of certiorari relating to Merck's disclosures about Vioxx.26 The Supreme Court will consider what is required to establish "inquiry notice," which triggers the 2-year statute of limitations for private securities suits under the 1934 Act. In November 2009, the Supreme Court granted certiorari in the National Australia Bank (NAB) case in which the Court will address when a U.S. court can properly exercise jurisdiction over a lawsuit brought by foreign investors who bought their shares in foreign-domiciled companies on foreign exchanges (otherwise referred to as foreign-cubed or f-cubed litigation).27

The Supreme Court's decisions in these cases, which are expected in 2010, may have a material impact on securities litigation procedure and jurisdiction, and may also affect the SEC's ability to investigate those companies. There are, however, Congressional initiatives that may clarify a federal court's jurisdiction and the SEC's investigative powers, and could minimize or supersede any decision in the NAB case. Nevertheless, it is very possible that foreign-domiciled companies with minimal contacts with the U.S. will become subject to U.S. laws and regulations, and could face increased exposure.

Rick H. Cavaliere, an associate with Boundas, Skarzynski, Walsh & Black, LLC, has experience with professional liability claims and insurance policies, particularly directors and officers liability, employment practices liability, and insurance company and broker errors and omissions. Mr. Cavaliere received his BBA degree from Loyola University in Chicago and his JD from the University of Illinois. He has been admitted to practice in Illinois. He may be reached by phone at (312) 946-4233 or by e-mail at <%=Irmi.Common.WebHttpRequest.CreateJavaScriptEmailLink("[email protected]")%>.

1"Recent Trends in Securities Class Action Litigation: 2009 Year-End Update." Stephanie Plancich and Svetlana Starykh, NERA (Dec. 2009) ("2009 NERA Report").

2"Securities Class Action Filings—2009: A Year in Review." Cornerstone Research (Jan. 2009) ("2009 Cornerstone Report").

3The studies generated by Advisen, NERA, and Cornerstone do not explain the methodology used to count the number of securities class action filings. The numbers may vary for a number of reasons, including access to different information or differing approaches for counting duplicate complaint filings in separate circuits or states. See Kevin LaCroix, "A Closer Look at the 2009 Securities Lawsuits" (Jan. 4, 2010), for an excellent discussion of possible reasons for the differences among these analysts in counting securities class claims.

4"Securities Suits Abound in a Harsh 2009: An Advisen Quarterly Report—2009 Review." John W. Molka III, Advisen ("2009 Advisen Report").

52009 NERA Report.


72009 Cornerstone Report.





122009 NERA Report.






18"A Mid-Year Review of SEC Enforcement in 2009." Mark Schonfeld, and others, The Harvard Law Sc hool Forum on Corporate Governance and Financial Regulation (July 2009) ("SEC Enforcement Review for 2009").

19"2009 Year-End FCPA Update." Gibson, Dunn & Crutcher, LLP (Jan. 4, 2010) ("2009 FCPA Update").


21Jury Verdict Form entered May 7, 2009, Jaffe v. Household Int'l, Inc., (N.D. Ill., Jury Verdict dated May 7, 2009).

22Associated Press, "Court Finds Vivendi Liable for Misleading Investors," The New York Times, January 29, 2010.

23David Glovin and Don Jeffrey, "Vivendi Found Liable on All 57 Counts in Investors' Class Suit,", January 29, 2010.

242009 NERA Report.

25Failed Bank List, Federal Deposit Insurance Corporation.

26Greg Stohr, "Merck Gets High Court Hearing on Investor Vioxx Suit,", May 26, 2009.

27 "Overseas Reach of U.S. Securities Law Gets Hearing,", Nov. 30, 2009.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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