SEC Settlements Compared to Settlements in Private Shareholder Class Actions

NERA Economic Consulting has just published a report on SEC Civil Enforcement Settlements over the past few years. The study, SEC Settlements: A New Era Post-SOX, provides an overview of trends NERA has identified in the number of settlements and settlement values in the six years since the enactment of SOX. The data stems from a database of litigation releases and administrative proceedings published from 31 July 2002 through 30 September 2008. 

Of interest is a comparison of some of the SEC settlements with those achieved by private securities fraud class actions. While the comparison is not made in the report, NERA also published a report entitled 2008 Trends: Subprime and Auction-Rate Cases Continue to Drive Filings, and Large Settlements Keep Averages High.  

Each report contains a chart of top 10 settlements, which is set out below. The first is a chart of the top 10 settlements for SEC settlements for the period of July 2002 - September 2008. The second is for the top 10 private class-action settlements. Interestingly, the lowest of the top ten settlements in private shareholder class actions starts out higher than the highest SEC settlement ($895 million versus $800 million).  

The settling companies are not the same either, except for a few. For example, the SEC disgorged no funds for investors in WorldCom. While it accessed a $750 million civil penalty, civil penalties do not necessarily go to investors. Since enactment of the Sarbanes-Oxley Act of 2002, penalties may be added to disgorgement funds for the benefit of investors. Section 308 of Sarbanes-Oxley (the Fair Funds provision) allows the Commission to take penalties paid by individuals and entities in enforcement actions and add them to disgorgement funds for the benefit of victims. Penalty moneys no longer always go to the Treasury, but there is no hard and fast rule. By way of contrast, the private shareholder class action against WorldCom recovered more than $6 billion for investors, not including institutional investors who opted-out of the securities fraud class action and received their own substantial recoveries.  

Similarly, the SEC accessed penalties of $300 million from Time Warner, and received no disgorgement for investors. By way of contrast, the private shareholder class action against AOL Time Warner recovered more than $2.6 billion for investors. This recovery does not include the recoveries of institutions that opted-out of the class action and pursued their own suits.  

The SEC Settlement report also states that the number of SEC enforcement actions with recoveries relating to misrepresentation claims for the six-year period totals 197 settlements. The Private Shareholder Class Action report, by way of contrast reveals that more than 200 class actions are filed per year with a 60% settlement rate -- or more than 1200 suits with 720 settlements.  

Our comparisons, here, are rough. Hopefully, NERA will do a more in depth statistical and case by case comparison that would stand up to expert review. But even based on this rough comparison, what do we conclude?  

• Private class actions remain the most important vehicle for investor recovery, and dollar-wise provide the biggest deterrent to securities fraud in the area of public company misstatements or omissions. 
• The SEC report, however, remains the primary watch dog for actions involving boiler room operations, pump and dump schemes, Ponzi schemes, financial services (brokers) misappropriation of funds and misrepresentations to clients, and insider selling, and recoveries against individuals. NERA's report has statistics covering each of these areas too. 

This first chart is from the SEC Settlements: A New Era Post-SOX:

The following is a list of top settlements in Private Securities Class Actions from the NERA Shareholder Class Action Report: