(CN) - A group of academics have developed a model they say can predict securities fraud settlements in class action lawsuits.
The paper, " Predicting Securities Fraud Settlements and Amounts ," published in the September 2012 issue of the Journal of Empirical Legal Studies, presents "the first predictive model of securities fraud class action lawsuits," according to authors Blakeley McShane of Northwestern University Kellogg School of Management, Oliver Watson of Juridigm Inc., Tom Baker of University of Pennsylvania Law School, and Sean Griffith of Fordham University School of Law.
"Our model is predictive of settlement incidence (i.e., likelihood of dismissal) and outcome (i.e., expected settlement amount) at the time a case is filed," the paper states. "As such, it only uses variables whose values can be calculated on the day of the filing, distinguishing it from other models such as those estimated by Cornerstone Research and NERA [National Economic Research Associates] that use variables that are known only after the filing date. Overall, both of our models provided accurate fits to the data."
The model could predict if a securities fraud class action would reach a settlement or be dismissed, the paper suggests.
"Factors that indicate a case will most likely settle include a greater number of classes or types of securities associated with the case, a higher return on the S&P 500 during the class period, whether or not GAAP violations were alleged, and having an individual plaintiff listed," according to the study. "Factors that indicate a case is less likely to settle include longer filing times, higher market capitalization, a higher company return during the class period, having an institutional plaintiff listed, and greater public notoriety (as measured by the number of Google hits in the year prior to filing)."
The model was also used to predict settlement amounts, and the paper cites several factors that might lead to a positive settlement including "the total number of securities, the length of the class period, the market capitalization of the company, the company return during the class period, whether or not earnings were restated, whether or not the case was a Securities Act Section 11 case, whether or not insider trading was alleged, the existence of an institutional plaintiff, and the number of Google hits."
Lower settlements were caused by longer filing times or the lack of a lead institutional investor plaintiff, the paper states.
"Interestingly, we found that those cases predicted to be more likely to settle were not predicted to settle for greater amounts," the paper states. "Cases coded as alleging GAAP [generally accepted accounting principles] violations are more likely to settle but those that do settle do not have higher settlement amounts. This result is likely due to the fact that an allegation of a GAAP violation significantly bolsters the merits of the case. This in turn increases the plaintiff's chances of surviving a motion to dismiss, making it more appealing for the plaintiff to take on such a lawsuit even if the potential damage award is relatively low."
The study also found that Securities and Exchange Commission Rule 10b-5 class actions, which bar fraudulent acts or omissions in connection with the sale of securities, were "less likely to settle," but won higher amounts if they did.
"Our findings are also consistent with the plaintiff selection effect. That is, plaintiffs will generally attempt to pick cases that will survive a motion to dismiss but they are rationally more willing to pursue cases with lower likelihoods of settlement when such cases are likely to have large settlements (provided they were to survive a motion to dismiss)," the paper states. "Because institutional plaintiffs are given priority under the PSLRA [Private Securities Litigation Reform Act], they appear to be able to choose cases with larger settlement potential. Cases without an institutional plaintiff are more likely to survive the motion to dismiss. It is possible that this pattern results not only from institutional plaintiffs selecting the high potential value cases but also from plaintiffs' lawyers exercising more care regarding the merits of cases with only an individual plaintiff."
In his article " Why Securities Litigation Is A Safe Moneymaker For Lawyers ," Forbes staff writer Daniel Fisher wrote that the study of more than 1000 securities fraud lawsuits showed that "plaintiff lawyers are fairly predictable when it comes to which cases they'll file and how much they'll settle for."
"The study found a predictable relationship between the type of case and whether and how much it settled for, with suits involving big companies with ugly facts around them generally garnering the biggest settlements," Fisher wrote, noting elsewhere in his article that the "results could be of great interest to corporations and insurance companies, which constantly wrestle with how much to offer to settle securities suits."
"Securities class actions represent 35-40 percent of all class actions and 75 percent of all money paid out to settle such cases, running to billions of dollars a year," Fisher added.