Despite a surge in lawsuits alleging options backdating, shareholder class action filings were down dramatically in 2006, even as settlements of existing cases soared past last year’s record levels, according to NERA Economic Consulting’s annual benchmark study, Recent Trends In Shareholder Class Action Litigation: Filings Plummet, Settlements Soar, released on Tuesday.

Class action settlements paid by corporations to shareholder plaintiffs rose by some 37% — an increase driven by more “mega-settlements” exceeding US$100 million. Four multi-billion-dollar settlements occurred in 2006. They were: the US$2.7 billion settlement paid to shareholders in the AOL Time Warner class action, the US$1.1 billion Royal Ahold NV settlement and two separate US$1.1 billion settlements resulting from two Nortel Networks class action cases. These four settlements are in addition to the partial of US$7.1 billion paid to shareholder plaintiffs in the Enron class action – which began in 2005 and continued into 2006. The largest payout to date in a shareholder class action, the Enron Corp. settlement is expected to grow even larger after the final payments are made to shareholders.

“This is an astonishing development given that before 2006 only three settlements had ever exceeded US$1 billion,” write NERA economists Todd Foster, Ronald I. Miller and Stephanie Plancich, co-authors of the report. Settlement size is influenced by variety of factors, including the class of securities involved, whether there are allegations of accounting improprieties, and whether the case
concerns an IPO. “The single most powerful” determinant of settlement size, according to the study, is the losses experienced by investors.

The NERA study also noted that, despite some 22 lawsuits in 2006 over the issue of options backdating, shareholder class action filings are projected to plunge 36% (the data for the study tracks 2006 filings through Dec. 15, 2006). This decline in filings continues a trend that began in the second half of 2005, and represents a 44% decline from the average rate of filings after the Private Securities Litigation Reform Act, passed in 1995 to curtail excessive securities litigation.

According to NERA, only 129 federal shareholder class actions were filed from Jan. 1 through Dece. 15, 2006. A total of 135 are expected by year’s end in contrast with 211 filings in 2005.

“It is not yet clear what is driving this precipitous decline. One hypothesis is that Sarbanes-Oxley, passed in July of 2002, has now had enough time to cause improvements in corporate governance that have limited fraud and resulting class actions,” the authors write. However, for a number of reasons, they call this scenario “unlikely.”

“Another possibility is that the decline is the result of distraction on the part of some of the largest plaintiffs’ law firms,” such as Milberg Weiss, due to federal indictment and personnel changes. They conclude: “If limitations in the resources of the plaintiffs’ bar turn out to be the cause of the trend in filings then we would expect filings to return to higher levels in the future.”