The year 1995 marked a critical turning point in cyber history. Netscape's public offering not only paved the way for illustrating the kind of riches (however sometimes illusory) that lay ahead for the savvy investor. Beyond that, the Internet was transforming itself from a tool for the military to one for, among other things, allowing movie fans to avoid standing on line for tickets.

Also that year, Congress passed the Private Litigation Securities Reform Act--in part, to provide the brave new Silicone Valley start-ups with some degree of protection from shareholder wrath when not every sow's ear turned into a silk purse.

The Reform Act raised procedural hurdles for bringing securities class actions to federal court and pleading standards in an attempt to end the so-called "race to the courthouse" in which plaintiffs lawyers brought allegedly frivolous lawsuits as soon as stock prices fell.

In a review of shareholder claims settlement history in the act's 10th anniversary year, Washington-based Cornerstone Research noted that securities class-action settlements reached unprecedented levels in 2005, growing to an all-time high of $3.5 billion, compared with the previous year's tally of $2.9 billion. (And that is not counting the $6.1 billion settlement for WorldCom litigation and $7.1 billion-and-counting for Enron claims.)

Not only did the number of cases settled rise to 124 from 113, but the average settlement size rose to $28.5 million.

According to Cornerstone, most striking is the upward trend in the midpoint settlement amount, which they believe is more of an indicator of the typical kind of case. Last year, half of all settlements exceeded $7.5 million, compared with $6.3 million the year before.

Laura Simmons, a principal in Cornerstone Research, said "never before have we observed such a large single-year increase in the median settlement amount."

Analyzing 735 cases that have settled since the passage of the reform act, the study found several other leading factors that tend to influence settlement amounts

"For example, when the SEC also took action against the defendants in the form of an administrative proceeding or litigation release, the median settlement amount was $10.3 million, versus only $5.5 million when the SEC did not take action," the report noted.

However, there are some shifts in the wind in the form of fewer filings in the past year and more dismissals overall in the post PSLRA era.

Last year, plaintiffs filed 209 cases in federal courts--substantially below the 10-year average, according to a study conducted by NERA Economic Consulting.

"It also represented the lowest number since 1997, when the total was depressed by a move to state courts to avoid PSLRA limitations," the study noted--referring to "standard filings," which exclude cases against analysts and mutual fund market timing cases.

(While other sources, Cornerstone and PricewaterhouseCoopers, report slightly different filing totals for 2005--179 and 168, respectively--all three reports show declines from 2004 levels in the 15-to-17 percent range.)

Among the factors possibly contributing to the drop are the impact of Sarbanes-Oxley reforms and a less volatile stock market in the past few years, experts said.

"The most likely explanation for the remainder of the drop is simply random year-to-year variation," the study said.

Dismissal rates have doubled since PSLRA, accounting for 19.4 percent of the dispositions for cases filed between 1991 and 1995, compared with 40.3 percent between 1998 and 2003. But since some of the dismissals were such that they could be refiled when better prepared, that doubling could be a chimera, according to NERA.

"There is no indication that dismissal rates have continued to rise after an initial adjustment to the tougher pleading provisions of PSLRA," NERA's study said.

One area where Congress succeeded in passing the PSLRA was the law's aim of involving institutional investors as lead plaintiffs--but it has taken time. The figure for such cases rose from 14 percent in 2000 to 38 percent five years later.

"Controlling for other case characteristics, cases with an institutional investor lead plaintiff settle for a statistically significant one-third more," NERA noted.

While the impact of PSLRA on company fortunes may be questionable, one positive factor on the landscape is the potential impact of the 2005 Supreme Court decision of Dura Pharmaceuticals v. Broudo, which requires plaintiffs to prove that the purported fraud was the sole cause of a stock price's decline and not other intervening factors.

"Dura will therefore cut back on plaintiff damage awards in some cases, but the decision's full impact is impossible to predict until we see how the lower courts interpret the decision's language," said Joseph Grundfest, a former SEC member now holding a Stanford law professorship.

John Rafferty, vice president and national D&O manager for The Hartford, said that, in hindsight, PSLRA has proved to be a "speed bump that temporarily slowed the overall number of filings and case settlements."

The act encouraged the plaintiffs' bar to align with large institutional investors in pursuit of their litigation strategy.

"Interestingly, by seeming to protect corporate America, the PSLRA may have provided a false sense of armor that emboldened certain directors and officers to engage in or overlook aggressive accounting or bad behavior," Mr. Rafferty said.

The Sarbanes-Oxley Act--enacted seven years later in the aftermath of the Enron and WorldCom debacles--provided some balance in the equation on the part of Congress. "The jury is still out on whether the laws together will strike the right balance," he said.

Special Reports /

Reform Act 10 Years Later: Settlements Still Soar

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