SEC Enforcement Boosts Settlement Value: Study

New York, NYOne small, but persistent ray of sunshine in an otherwise bleak oversight culture in this country is the Securities and Exchange Commission (SEC), which continues to watch over the investment and financial traffic in the US as resources will allow. A sign that the SEC is effective, according to a yearly study undertaken by Cornerstone Research, is that SEC enforcement activity often ups the ante when it comes to the value of securities settlements.

And while the number of class-action settlements together with the overall value of settlements declined in 2010 from a year earlier, analysts note that the brief trend should reverse once class-action lawsuits stemming from the 2008 and 2009 financial meltdowns go through the system.

It takes about four years for a lawsuit to navigate through the legal process to conclusion.

Co-author of the annual study is Laura Simmons, a business professor at the College of William & Mary. Her study noted that the number of class-action securities settlements fell to 86 last year from 101 in 2009. Value overall fell from $3.79 billion that year, to $3.12 billion for 2010.

Average settlement size also dipped, from $37.6 million for 2009, to $36.3 million last year. There were some big ones, however…

According to the study, the largest approved settlement in 2010 was a $624 million accord with mortgage lender Countrywide Financial Corp and its auditor, KPMG LLP. Countrywide is now owned by Bank of America Corp.

That said, there were no mega settlements akin to the $7.2 billion reached in 2006 over the Enron debacle or the $6.2 billion WorldCom Inc. settlement in 2005.

But take heart. A rebound of sorts could be on the way.

In comments published March 10 by Reuters, Simmons noted that public pension funds are beginning to step up to the plate to serve as lead plaintiffs. When that happens, the size of a typical class-action settlement can rise by as much as 40 percent.

Then there's SEC enforcement, which can boost settlement value by 30 percent.

"SEC enforcement activity gives investor plaintiffs extra bargaining power," she said. "There is no reason to believe SEC enforcement activity will decline, and it should remain a 'plus' factor to increase future settlement amounts."