Payouts by companies to settle shareholder lawsuits fell sharply last year, according to a new study by a pair of professors. But a boom in litigation over losses on bad mortgage investments by financial companies may mean that big increase is right around the corner.
"The results this year are the lull before the storm that we'd expect to see as a result of the recent case filing activity," said Laura Simmons of the College of William and Mary's Mason School of Business, a co-author of the report.
Companies paid $3.1 billion to settle class-action securities suits last year, a big drop from the three previous years. Indeed, from 2005 to 2007, total settlements averaged more than $11.8 billion as cases against notorious corporate fraudsters WorldCom, Enron and Tyco wrapped up.
It's far too soon to say whether settlements reached this year can approach that level. But there's plenty of reason to believe companies, particularly ones that lost money on holdings linked to subprime mortgages and other assets that fell in value during the still-deepening financial crisis, could spend a lot of money in 2009 and beyond.
Investors are already taking aim at financial companies, according to research by Simmons and Joseph Grundfest, a professor at Stanford University Law School.
Of the 210 securities class actions brought by investors in 2008, about half were against financial firms, Simmons and Grundfest found. Of those, some 88 percent involved allegations related in one way or another to the corporate credit crunch that roiled Wall Street last year.
Because such lawsuits typically take a long time to make their way through the legal system, it's difficult to say how many of the actions filed last year may be settled in 2009, Simmons said.
In addition to hurting companies' bottom lines, new settlements could fuel the debate over how financial firms receiving funds from the federal government's bailout program should use that money.
"Taxpayer dollars will, one way or another, fund these settlements," Grundfest said in a statement accompanying the study. "This simple fact could set off a debate about whether taxpayers should pay for these settlements, and about the effectiveness of the class action litigation mechanism altogether."
Surge in Wall Street lawsuits is coming