• Report: Impact of Enron, Sarbanes-Oxley Minimal on Class-Action Litigation: Consulting Firm Study Analyzes Trends in Filings
  • August 5, 2003
  • Law Firm: Berman DeValerio Pease Tabacco Burt & Pucillo - Office
  • The Enron scandal and the Congressional legislation designed to reduce corporate fraud have had little to no impact on the number of securities class actions filed, according to a recent report.

    NERA, an international economic consulting firm, found that the filing rate appears to be unaffected by the 2001 Enron scandal and the 2002 passage of the Sarbanes-Oxley legislation. The report also found minimal impact on the average value of litigation settlements.

    The study, released July 10, analyzed class action filings, settlements and dispositions between January 1991 and late June of this year. While the report identified an overall increase in securities litigation during that period, it found little connection to Enron and the passage of Sarbanes-Oxley.

    "Many people expected that the angry public mood, combined with tough Sarbanes-Oxley standards and penalties, would bring on a spate of new securities litigation -- in addition to increasing the bargaining power of plaintiffs and eventual case settlements," said NERA economist Elaine Buckberg, co-author of the study. "But if you look closely at the numbers, these predictions have not come true."

    According to the study, there were 214 securities class actions filed between passage of Sarbanes-Oxley on July 25, 2002, and late June 2003. This is comparable to the average rate of 208 annual filings between 1996 and 2001. The number of filings after the Enron scandal surfaced in October of 2001 remained steady, too, occurring at an annual rate of 212.

    The report did find that case dismissals have fallen sharply since Sarbanes-Oxley, with only half as many cases dismissed since its passage as in the previous 11-month period. The report said further monitoring is necessary to determine how great an impact the legislation has on fraud deterrence and litigation outcome.

    Average settlement values, meanwhile, fell only slightly (and statistically insignificantly) in the months after Sarbanes-Oxley passed, dropping from $25.5 million for the period of January 1996 through July 2002 to $22.7 million for the period of August 2002 to June 2003. The settlements remained unchanged following the Enron scandal.

    According to NERA, average settlements more than tripled from $8.6 million in 1996 to $27 million in the first half of this year. Still, the settlements have not kept pace with rising investor losses, and the median settlement has increased only modestly, from $3.9 million to $5.5 million. In settlements where institutional investors were the lead plaintiffs, the payout was 20 percent higher.

    The study also examined the effect of the Private Securities Litigation Reform Act of 1995 (PSLRA), which attempted to reduce frivolous lawsuits by placing additional restraints on plaintiffs. Class action filings increased between 1995 and 2002. The study's authors suggested two primary reasons for this increase: a rise in corporate fraud and more aggressive pursuit of cases by the plaintiffs' bar.