Securities Suit Settlement Costs Are Soaring

NEW YORK–The cost of federal securities class action settlements this year is averaging $80.3 million, and the number of suits filed this year is expected to exceed last year by more than 33 percent, a new report finds.

The data in PricewaterhouseCoopers Securities Litigation Mid-Year Update was unveiled yesterday at a New York briefing.

Grace Lamont, a partner in the PwC office doing corporate and forensic investigations, noted there were 106 federal securities class actions last year and this year through September there have already been 104 filed, so the company is projecting a final figure of 139 suits.

Last year average value of settlements in such cases was $62.3 million. “Settlements every year get bigger and bigger,” she said, noting that this year's $80.3 million average figure included the $3.2 billion Tyco settlement.

Of this year's cases filed, nine are foreign cases, which in 2006 totaled 13 for the full year, PwC's study found.

However, PwC's midyear update analysis suggests that even if the number of cases filed continues to rise through the second half of this year, the overall total for 2007 is likely to fall below the ten-year average of 187.

According to the study, the decline in the total number of federal class action cases over the past two years was most likely due to the deterrent effects of the Sarbanes-Oxley Act of 2002, more rigorous involvement of regulators and the relative stability of the stock market.

Ms. Lamont noted that a lot of the newest cases being filed dealt with the subprime mortgage activities of companies, 25 at last count.

Regarding settlements, she said PwC found that when pension funds join suits the settlements are generally higher.

She noted that the biggest targets for suits are the pharmaceutical and telecommunications sectors. She said the firm had thought the pharmaceutical sector cases had been exhausted, but “we're going around the horn again.”

Breaking down suits by another classification, PwC said this year 48 percent involve firms' accounting and 52 percent did not. Last year 60 percent of the suits involved companies' accounting. Last year 13 cases involved criminal investigations.

The decrease in accounting cases was attributed to the increase in the pharmaceutical efficacy cases, which represent a larger proportion of the total number of cases. The pharmaceutical efficacy cases reached a total of seven for the half-year, surpassing the total amount of six during the full year in 2006.

The profile of accounting cases also changed in the first half of 2007, the survey found. Revenue recognition allegations dropped from approximately 41 percent in 2006 to 17 percent in midyear 2007, and allegations of estimate-related issues are at 30 percent in midyear 2007 as compared with a total of 9 percent in 2006, PwC said.

Additionally, their findings show allegations involving internal controls increased significantly to 70 percent of the cases filed in midyear 2007 as compared with 48 percent in all of 2006.

The number of cases filed each year is also influenced by stock market volatility and other economic and regulatory forces, according to Ms. Lamont.

She said, “Any increase in market volatility will likely lead to corresponding increases in the volume of cases filed. How such increases will be tempered by the continuing impact of Sarbanes-Oxley, legal decisions in recent class action cases, and any new or pending regulatory requirements remains to be seen.”

The full PricewaterhouseCoopers Securities Litigation Mid-Year Update is online at http://www.10b5.com .