More On Legal & Compliancefrom The Advisor's Professional Library
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
Total settlement dollars from securities class actions jumped by 46% in 2013, largely driven by six mega-settlements (those at or above $100 million), which accounted for 84% of total settlement dollars, according to Securities Class Action Settlements — 2013 Review and Analysis, a report issued Thursday by Cornerstone Research.
There were 67 settlements in 2013, up from 57 in 2012 — the first year-over-year increase since 2009, the report found.
“In 2013, total settlement dollars, at $4.8 billion, reached the highest level since 2007, driven by both the increase in the number of settlements overall, as well as the increase in extremely large settlements,” said report co-author Laura Simmons, a senior advisor in Cornerstone Research’s Washington office.
Simmons said the largest settlements in 2013 were associated either with pharmaceutical firms or financial institutions involved with subprime credit crisis allegations.
In contrast, median “estimated damages,” a key measure of investor losses, declined 48% from 2012. Since “estimated damages” are the most important factor in determining settlement amounts, this decline was likely a major factor contributing to the substantially lower median settlement amount of $6.5 million in 2013, the report states.
The report also notes that the landscape for securities class actions and their settlements may "shift dramatically" depending on the outcome of Halliburton Co. v. Erica P. John Fund, a case pending in the U.S. Supreme Court that could make it much more difficult for shareholders to band together and sue companies for fraud.
“If the ruling in Halliburton severely limits investors’ ability to get large-scale class actions certified, the future of such cases is up in the air,” added Joseph Grundfest, director of the Stanford Law School Securities Class Action Clearinghouse. “This past year’s data also represent the fading echoes of the financial crisis, as some of the largest settlements resolve claims of fraud surrounding transactions in mortgage-backed securities. These lawsuits won’t be around in the coming years to drive aggregate settlement values.”
Other highlights from the report include:
Total settlement dollars in 2013 were 60% above the average for the prior five years.
The proportion of settled cases in 2013 involving accounting allegations dipped to a 10-year low, but the settlement as a percentage of “estimated damages” for these cases was much higher than for cases not involving such allegations.
The median settlement in 2013 for cases with a public pension as a lead plaintiff was $23 million, compared with $3 million for cases without a public pension as a lead plaintiff.
Cases reaching more advanced stages of litigation were associated with median “estimated damages” of more than three and a half times the median for cases settling in an early stage.
Settlements of $50 million or lower were far less likely to involve accompanying SEC actions or public pensions as lead plaintiffs.
In 2013, 32% of settlements less than $10 million were for cases involving Chinese reverse mergers.
Check out Securities Class Actions Hit 14-Year Low on ThinkAdvisor.