Expert Commentary

D&O Litigation Trends in 2010

Securities class action filings gained momentum in 2010 as settlement values continued to rise. Meanwhile, 2010 also saw the increased involvement of foreign companies in securities class action litigation, both in the United States and abroad.

Professional, D&O, and Fiduciary Liability
March 2011

The number of securities class actions filings increased during 2010, particularly in the second half of the year. Nevertheless, the total number of securities class actions filed in 2010 was nearly 10 percent lower than the average number for the years 1997 through 2009. New filings relating to the credit crisis and Ponzi schemes plunged, while new filings relating to mergers and acquisitions surged.

The average securities class action settlement also reached a record high in 2010, as did the median settlement amount. As the credit crisis wanes, however, future settlement values may fall.

The level of foreign involvement in U.S. securities class actions expanded during 2010 as the number of cases against foreign—particularly Chinese—issuers rose substantially. At the same time, investors in foreign companies not listed on a U.S. stock exchange began looking for alternative forums after the Supreme Court held, in June 2010, that so-called f-cubed securities cases cannot proceed in the U.S. courts.

We discuss these and other 2010 directors and officers (D&O) litigation trends below.

Securities Class Action Filings Increase Slightly

While the number of federal securities fraud class actions filed during 2010 increased only slightly from the year before, filing activity picked up steam during the second half of the year. According to Cornerstone Research, a total of 176 federal securities fraud class actions were filed during 2010, a 4.8 percent increase over the 168 filings in 2009. While the first half of 2010 saw a modest 72 filings, the second half saw 104 filings—an upward trend that could carry over into 2011. At 176, however, the total number of filings for the year remained relatively low, 9.7 percent below the annual average of 195 filings between 1997 and 2009.1

NERA Economic Consulting saw a similar uptick, reporting that, after a slow first half of 2010, the pace of federal securities class action filings accelerated in the second half of the year. According to NERA—whose approach to counting filings differs somewhat from Cornerstone's—96 federal securities class actions were filed during the first 6 months of 2010, and 123 were filed between July 1, 2010, and November 30, 2010 (NERA's cutoff date). Based on those numbers, NERA projected an additional 20 filings during December 2010 and a year-end total of 239.2 If realized, that number would be 19 (or nearly 10 percent) more than the 220 filings NERA counted for 2009.

Meanwhile, Advisen, which, unlike the other industry analysts, includes both federal and state court securities class actions in its tallies, reported that the number of securities class action filings fell from 233 in 2009 to 193 in 2010. At the same time, Advisen reported that the number of "securities suits"—including not only securities class actions, but also regulatory, enforcement, and individual actions alleging securities fraud, collective actions, and breach of fiduciary duty claims—increased from 1171 in 2009 to a "record high" of 1196 in 2010. According to Advisen, the number of securities class action filings, as a proportion of all securities suit filings, has been "steadily trending downward" over the past several years. Before 2006, securities class action suits constituted about a third of all securities lawsuits; this percentage fell to 20 percent in 2009 and 16 percent in 2010 (14 percent in the fourth quarter).3

New filings relating to Ponzi schemes, including filings relating to the Bernard Madoff scandal, dropped precipitously in 2010, from 38 filings in 2009 to only 7 in 2010.4 The number of filings relating to the credit crisis also declined sharply. Cornerstone reported that there were 13 credit crisis–related filings in 2010, representing a 76.4 percent decrease from the 55 filings in 2009 and an 87 percent decrease from the 100 filings in 2008.5 NERA reported a similar downward trend, counting 31 credit crisis–related filings in 2010, as compared to 57 in 2009 and 103 in 2008.6 Despite the dramatic decrease, new lawsuits relating to the subprime meltdown and the credit crisis continue to be filed.

In early February 2011, for example, an institutional investor filed a securities class action in the Southern District of New York against Bank of America Corporation and its directors and officers. The complaint charges that, in various public statements made during the class period (January 20, 2010, to October 19, 2010), the defendants concealed defects in the recording of mortgages and improprieties with respect to preparing foreclosure paperwork, causing the bank's stock to trade at artificially high prices. According to the complaint, when corrective information became public in October 2010, the bank's stock price suffered a 1-day decline of 5 percent and fell nearly 42 percent from the high price during the class period.

Filings against financial sector companies decreased during 2010, probably due to the waning of the credit crisis. Cornerstone reported that financial companies were named as defendants in 47 percent of 2009 filings but in only 24.4 percent of 2010 filings.7 NERA similarly reported that, during 2010, financial sector suits declined to below one-third of all federal securities class actions filed.8 At the same time, filings targeting firms in other sectors increased. In particular, there was a large increase in filings against health technology and services firms, and the number of filings against electronic technology and other (nonhealth) technology firms nearly doubled.

Interestingly, the second half of 2010 saw a noticeable increase in the number of securities class actions filed against for-profit educational companies. Analysts attribute this increase to an investigation by the U.S. Government Accounting Office into marketing practices by such entities and to a U.S. Department of Education report concluding that, in 2009, loan repayment rates were significantly lower at for-profit colleges than at public colleges and universities and private nonprofit institutions.9

M&A Class Actions Increase Dramatically

The year 2010 also saw an enormous increase, 471 percent, in the number of securities class actions stemming from merger and acquisition (M&A) transactions: from 7 filings in 2009 to 40 filings in 2010.10 The 2010 increase may be attributable, at least in part, to the 20 percent jump in the number of mergers and acquisitions during the year.11 If M&A activity continues to rise, the number of M&A-related securities class actions could swell again in 2011.

Another trend that became more pronounced during 2010 was the geographical shift in securities class action filings. Between 2006 and 2009, the Second Circuit (which includes New York) saw, by far, the most filings among the 12 federal circuits.12 Between January 1, 2010, and November 30, 2010, however, 26 percent more securities class actions were filed in the Ninth Circuit (which includes California) than were filed in the Second Circuit. This shift may be due, at least in part, to the decreasing prominence of filings targeting financial sector companies (many of which are headquartered in New York) and to the increasing prominence of filings targeting technology sector companies (many of which are headquartered in California).

Two measures of market capitalization losses—disclosure dollar loss (DDL) and maximum dollar loss (MDL)—both decreased slightly in 2010. (DDL is the dollar value change in a defendant firm's market capitalization between the trading day immediately preceding the end of the class period and the trading day immediately following the end of the class period; MDL is the dollar value change in a defendant firm's market capitalization from the trading day with the highest market capitalization during the class period to the trading day immediately following the end of the class period.) DDL for all class actions filed during 2010 totaled $72 billion, which was 14.3 percent lower than total 2009 DDL ($84 billion) and 45.9 percent below the annual average DDL for the years 1997 through 2009 ($133 billion). Credit crisis–related DDL fell 56 percent (from $29 billion in 2009 to $12 billion in 2010), while non–credit crisis–related DDL rose 10.9 percent (from $55 billion in 2009 to $61 billion in 2010). Meanwhile, 2010 MDL totaled $474 billion, which was 13.8 percent lower than the 2009 MDL total ($550 billion) and 31.9 percent below the annual average MDL for the years 1997 through 2009 ($696 billion). Credit crisis–related MDL declined to $31 billion in 2010, an 86.8 percent drop from the prior year.13 It remains to be seen, of course, whether market capitalization losses will continue to decline as the credit crisis fades.

As in years past, a handful of "mega" filings accounted for a majority of the total market capitalization losses associated with securities class actions. In 2010, four filings, including one related to the credit crisis, involved a DDL of at least $5 billion. These 4 megafilings accounted for 49.6 percent of the total DDL for all of the filings during the year.14 By comparison, in 2009, three mega–DDL filings, including one related to the credit crisis, represented 49.3 percent of the total DDL for the year. Similarly, 14 2010 filings, including two related to the credit crisis, involved an MDL of at least $10 billion. These 14 mega–MDL filings accounted for 79.1 percent of the total 2010 MDL for all filings during the year. By comparison, in 2009, 11 mega–MDL filings, including six related to the credit crisis, accounted for 72.6 percent of the total MDL for the year.15

A Record Year for Settlements

The average securities class action settlement hit a record high in 2010, rising to $109 million.16 This far exceeds the previous mark of $80 million set in 2006, and the 2002–2010 average of $42.8 million. The 2010 number is skewed somewhat by the $7.2 billion Enron class action settlement, which received final court approval in February 2010.17 If this and other aberrational settlements—those over $1 billion and those relating to initial public offering laddering cases filed during 2001—are set aside, the average securities class action settlement for 2010 was $42 million. This is in line with the 2009 average of $42 million, itself a record high.18

The median settlement amount also reached an all-time high in 2010, rising to $11.1 million. This represented a $2.6 million increase from 2009 and was the first time the size of the typical securities class action settlement exceeded $10 million.19

The top 10 securities class action settlements now total over $28 billion. For the first time, each one of the top 10 settlements exceeds $1 billion, ranging from a low of $1.01 billion (AIG) to a high of $7.2 billion (Enron).

Top 10 Securities Class Action Settlements (as of December 12, 2010)

Top 10 Securities Class Action Settlements (as of December 12, 2010)

In 2010, median investor losses rose to a record high of $604 million. This was over $200 million more than the $371 million figure for 2009 and the previous record high of $398 million (set in 2006).21 According to NERA, investor losses have historically been a useful predictor of settlement size, explaining more than half of the variation in settlement amount, controlling for other characteristics of the case. If investor losses for cases filed in a particular year are greater than investor losses for cases that settled during that same year, settlements can be expected to increase once the newly filed cases are resolved.

Between 2007 and 2009, the peak credit crisis years, median investor losses for filed cases exceeded median investor losses for settled cases. In 2010, however, median investor losses for filed cases fell substantially, to pre–credit crisis levels, and were well below median investor losses for cases settled that year.22 Thus, as the credit crisis passes, future median settlements may be expected to decline. It should take about 3 years for this to materialize (if it does), assuming that, in the next few years, the median time to settlement holds true to recent experience. For cases filed between 1996 and 2007 and resolved by the end of 2010, the median time to settlement was 36 months.23

Stepped-Up Enforcement Activities

In 2010, the Federal Deposit Insurance Corporation (FDIC) announced that it will pursue litigation against 109 directors and officers of failed banks in an effort to recover $2.5 billion. This trend toward more regulatory securities litigation promises to continue in 2011. Indeed, during the first 2 months of 2011, 23 banks failed across 12 different states—one more than during the first 2 months of 2010. If historical patterns hold true, the FDIC actions can be expected to spawn parallel private actions against the failed banks' directors and officers for, among other alleged wrongs, breach of fiduciary duty.

The U.S. Securities and Exchange Commission (SEC) likewise stepped up its enforcement activities during 2010, and that upsurge appears almost certain to carry over into 2011. The fiscal 2011 federal budget calls for the hiring of an additional 400 SEC employees, whereas the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") provides funding for an additional 800 employees and much enhanced SEC authority. In addition, the SEC, the U.S. Department of Justice (DOJ), and state law enforcement officials are now coordinating investigations and sharing evidence and information. In fact, the Federal Bureau of Investigation has assigned an agent to the SEC's Office of Market Intelligence to monitor financial fraud and coordinate interagency cooperation. The SEC is also coordinating with regulatory agencies in Europe, including, most prominently, the U.K.'s Financial Services Authority.

In 2010, the SEC and the DOJ increased their efforts to enforce the Federal Corrupt Practices Act (FCPA), which makes it illegal to provide money (or anything else of value) to foreign government officials for the purpose of securing or retaining business. By year's end, the number of FCPA enforcement actions had reached an all-time high of 74 (48 by the DOJ, 26 by the SEC), an 85 percent increase over the prior year.24 At the same time, the monetary penalties imposed for FCPA violations were higher than ever, as eight of the top 10 monetary settlements in FCPA history were reached during 2010. For example, Alcatel-Lucent settled with the SEC for $45.4 million and paid the DOJ a criminal fine of $92 million in connection with telecommunications contracts obtained in Costa Rica.25 Meanwhile, Panalpina World Transport (a freight company) settled with the SEC and the DOJ for $81.9 million for business affairs in Brazil, Russia, and other developing countries. The Panalpina case is notable because, in it, the SEC charged that Panalpina had aided and abetted its U.S.-issuer customers (six oil and oil services firms) in their violations of the statute—a theory that could bring many more companies within the sweep of the SEC's enforcement powers.26

Dodd-Frank could also have a significant impact on future enforcement activities, as it authorizes both rewards and protections for whistle-blowers. Specifically, the Act prescribes a whistle-blower reward of between 10 percent and 30 percent of any monetary sanction in excess of $1 million collected in an enforcement action by the SEC or any related action by another agency, including the DOJ. Given the incentives and protections Dodd-Frank offers, it seems inevitable that the SEC's and the DOJ's enforcement activities will increase—if not explode—during 2011.

Regulatory enforcement of the securities laws, including the FCPA, often sparks collateral private litigation against the targeted company's officials for, among other things, securities fraud, breach of fiduciary duty, and corporate waste. In August 2010, for example, a class action lawsuit was filed in the Northern District of California against SciClone Pharmaceuticals and some of its directors and officers. In their complaint, the putative class plaintiffs allege that the price of their shares plummeted 40 percent (in a single day) after it was reported that the SEC and the DOJ were investigating the company for violations of the FCPA. This sort of collateral litigation may well proliferate in 2011.

Foreign Involvement in Securities Class Actions

The year 2010 saw a wave of securities class actions against Chinese companies listed on a major U.S. stock exchange. Twelve such actions were filed during 2010, accounting for a record high of 42.9 percent of all filings against foreign issuers.27 This increase seems even more noteworthy given that, during 2010, filings against foreign issuers accounted for 15.9 percent of all filings, one of the highest percentages ever reported. Seeing as there are over 200 Chinese companies currently listed on the New York Stock Exchange, American Stock Exchange, and NASDAQ, however, the 12 filings during 2010 would not appear to signal that securities actions against Chinese issuers are becoming commonplace—at least not yet. So far, most of the suits against Chinese issuers involve large discrepancies between the financial information reported to Chinese authorities and to the SEC. In addition, the SEC recently launched a number of investigations into the practice of using a "reverse takeover"—a merger between a Chinese company and a dormant U.S. shell company listed on a U.S. exchange—as a back-channel way of listing a Chinese company in the United States. U.S. accountants, lawyers, and bankers who have helped facilitate such transactions are among the subjects of these ongoing federal probes. Of the 12 Chinese companies sued during 2010, nine were listed on a U.S. exchange using a reverse takeover.28

In June 2010, in Morrison v. National Australia Bank, the U.S. Supreme Court held that so-called f-cubed cases—claims brought by foreign claimants who bought their shares of foreign companies on foreign exchanges—are not cognizable under the American securities laws. As a result of that landmark decision, the number of securities class actions against foreign entities filed in the United States is likely to drop, while the number of securities class actions or similar representative actions filed in foreign jurisdictions may well increase.

Canada could become a preferred jurisdiction. During 2010, eight new securities class actions were filed in Canadian courts, as compared to nine filed in 2009 and 10 filed in 2008.29 Nevertheless, 28 Canadian securities class actions, representing approximately $15.9 billion in outstanding claims, are currently pending. This is a record high. Of the eight securities class actions filed in 2010, several include claims under "Bill 198," a provincial statute that imposes U.S.-style civil liability on certain corporate officials for misrepresentations that affect stock market values. One such action involves the Ontario-based entertainment company IMAX Corporation. In February 2011, an Ontario court denied IMAX leave to appeal an earlier ruling establishing a relatively low pleading threshold and certifying the action as a class action. Significantly, the IMAX court certified a global, not just a Canadian, class—which may make it easier for foreign investors to bring securities class actions in Canada. This ruling will likely come as welcome news to foreign investors now that Morrison has curtailed their access to the U.S. courts.

Notably, in January 2011, two U.S. law firms filed an action in the Netherlands against Fortis, a Belgium-based financial services company, on behalf of a foundation formed for the specific purpose of bringing a collective action for the benefit of Fortis investors. That Dutch action may reflect that, in the wake of Morrison, securities claimants or their attorneys have already begun looking beyond U.S. shores for hospitable jurisdictions.

Other Noteworthy Developments

In June 2010, the U.S. Supreme Court agreed to hear arguments in a 2004 class action against Matrixx Initiatives Inc. and its senior executives for allegedly concealing from investors that the company had received a number of adverse event reports (AERs) that users of its Zicam nasal spray had lost their sense of smell. In 2006, a federal district judge in Arizona dismissed the case, finding that the allegations of materiality were insufficient because plaintiffs had not alleged that the number of AERs was sufficient to establish a statistically significant risk that the product was causing the adverse events. (Matrixx argued that the 20 or so AERs the company received were statistically insignificant in relation to the millions of units of Zicam sold.) In 2009, the Ninth Circuit Court of Appeals rejected the district court's statistical significance standard and held that, under the Twombley "plausible on its face" standard, the plaintiffs' allegations of materiality were sufficient to state a claim of securities fraud. Thus, the central question presented to the Supreme Court was whether a plaintiff can state a securities claim based on the nondisclosure of AERs without alleging that the number of AERs is statistically significant.

On March 22, 2011, the Supreme Court rejected the bright-line "statistical significance" test advocated by Matrixx and adopted by the district court. See Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 2011 (2011). The court held that a securities fraud complaint based on nondisclosure of AERs may state a claim even if it does not allege that the number of AERs known to the company was statistically significant. Writing for the court, Justice Sonia Sotomayor disagreed with Matrixx's theory that statistical significance is the only reasonable indicator of causation. She explained, "Given that medical professionals and regulators regularly act on the basis of evidence of causation that is not statistically significant, it stands to reason that in certain cases reasonable investors would as well." According to the court, the proper test for materiality is whether the existence of one or more AERs would "significantly alter the total mix of [available] information"—a fact-intensive inquiry that requires consideration of the source, content, and context of the AERs. Applying this "total mix" standard to the facts at hand, the court concluded that plaintiffs' allegations concerning the AERs Matrixx had received were sufficient because they suggested the company was aware of a significant risk to the commercial viability of its leading product at a time it told the market that revenues were going to rise 50 and then 80 percent. In addition, the court held that plaintiffs had adequately pleaded scienter because their allegations gave rise to a "cogent and compelling" inference that Matrixx had elected not to disclose the AERs because it understood the likely effect disclosure would have on the market.

Notably, the Matrixx decision was unanimous, which only goes to show that, even in securities cases, the Supreme Court can sometimes be decidedly pro-plaintiff. Indeed, the effect of the decision is to relieve securities plaintiffs of the burden of having to plead sufficient facts to establish statistical significance. As at least one observer has already predicted that the lack of the bright-line "statistical significance" test will likely leave product manufacturers in a bind as to when a disclosure should be made.30 Manufacturers receive AERs and other types of customer complaints all the time, so it would have been helpful to them for the Supreme Court to have clarified when the number of reports or complaints becomes significant enough such that they should be disclosed to investors. Matrixx provides little clarification. All it suggests is that, for there to be an obligation to disclose, something more than the mere existence of an AER is needed, but that something more is not limited to statistical significance—a result that provides additional encouragement to publicly traded companies to err on the side of disclosure.

1"Securities Class Action Filings 2010 Year in Review." Cornerstone Research (Jan. 2011) ("2010 Cornerstone Report").

2"Trends 2010 Year-End Update: Securities Class Action Filings Accelerate in Second Half of 2010; Median Settlement Value at an All-Time High." Dr. Jordan Milev, Robert Patton, and Svetlana Starykh. NERA Economic Consulting (Dec. 14, 2010) ("2010 NERA Report").

3"2010 a Record Year for Securities Litigation an Advisen Quarterly Report—2010 Review." John W. Molka III, Advisen (Jan. 2011) ("2010 Advisen Report").

42010 NERA Report.

52010 Cornerstone Report.

62010 NERA Report.

72010 Cornerstone Report.

82010 NERA Report.

92010 Cornerstone Report; "The Latest Securities Litigation Target." K. LaCroix, The D&O Diary (Aug. 17, 2010).

102010 Cornerstone Report.

11Ibid. (citing Thompson Reuters data)

122010 NERA Report.


142010 Cornerstone Report.


162010 NERA Report.

17Ibid. NERA assigns each class action settlement to the year in which it received final court approval. Where a class action involves multiple settlements, NERA assigns the entire settlement amount paid by all defendants to the year in which the court approves the last such settlement.



20Ibid. The 2010 NERA Report contains an expanded and more detailed version of this table.



232010 Cornerstone Report.

24"2010 Year-End FCPA Update." Gibson Dunn (Jan. 3, 2011).

252010 Advisen Report.

26"2010 FCPA Enforcement Shatters Records." Melissa Aguilar, Compliance Week (Feb. 28, 2011).

272010 Cornerstone Report.


29"Trends in Canadian Securities Class Actions: 2010 Update Climbing to New Heights—The Number of Active Cases Is at Its Highest." Mark L. Berenblut, Bradley A. Heys, and Tara K. Singh. NERA (Jan. 31, 2011).

30"Supreme Court Rejects "Statistical Significance' Requirements for Securities Suit Materiality." K. LaCroix, The D&O Diary (March 22, 2011).

Ellen D. Jenkins, a principal with Boundas, Skarzynski, Walsh & Black, LLC, has extensive experience with professional liability claims and insurance policies, including directors and officers liability, insurance company liability, and insurance brokers' errors and omissions claims and policies. Ms. Jenkins received her B.A. degree and her J.D. from The College of William & Mary in Williamsburg, Virginia. She has been admitted to practice in Maryland (1993) and Illinois (1996). She can be reached by telephone at (312) 946–4253 or by e-mail at

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