2

Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 1 of 32 PageID 62833
UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

FLOWSERVE CORPORATION, et aI.,

JERRY RYAN, On Behalf of Himself and All § Others Similarly Situated, §

§

§

§

§

§

§

§

§

§

Plaintiff,

Civil Action No. 3:03-CV -01769-B

(Consolidated with 3:03-CV-01827-M; 3:03-

CV -01846-M; 3:03-CV -02079-M)

ECF

vs.

Defendants.

DECLARATION OF JOY ANN BULL IN SUPPORT OF PLAINTIFFS' MOTION FOR

AN A WARD OF ATTORNEYS' FEES AND EXPENSES

514218_1 Exhibit 2

69

Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 2 of 32 PageID 62834
I, JOY ANN BULL, declare as follows:

1. I am a member of the firm of Robbins Geller Rudman & Dowd LLP. I am submitting

this Declaration in support of an award of attorneys' fees and expenses.

2. Attached hereto is a true and correct copy ofthe following:

Exhibit 1: Stephanie Plancich, Ph.D., Svetlana Starykh, 2008 Trends in Securities Class

Actions (NERA Dec. 2008); and

Exhibit 2: Ronald 1. Miller, Ph.D., Todd Foster, Elaine Buckberg, Ph.D., Recent Trends

in Shareholder Class Action Litigation: Beyond the Mega-Settlements, is

Stabilization Ahead? (NERA Apr. 2006).

I declare u.rider penalty of perjury u.rider the laws of the State of California that the foregoing

is true and correct. Executed this 7th day of April, 2010, at San Diego, California.

sf Joy Ann Bull

JOY ANN BULL

- 1 -

514218_1 70

Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 3 of 32 PageID 62835
EXHIBIT 1

71

Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 4 of 32 PageID 62836
NERA

Economic Consulting

2008 Trends

in Securities

Class Actions

Annual Filings Are at the Highest Level in

Six Years, Driven by the Credit Crisis, While

Median Settlement Values Stay Steady

Stephanie Plancich, PhD

Svetlana Starykh

December 2008

How MarketsWorkSM

72

Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 5 of 32 PageID 62837
Annual Filings Are at the Highest Level in Six Years, Driven by

the Credit Crisis, While Median Settlement Values Stay Steady

Stephanie Plancich, PhD, and Svetlana Starykh'

December 2008

Introduction

As the securities markets continued to exhibit extraordinary volatility and the economy suffered

through a recession in 2008, securities class action litigation intensified. For the year 2008 (through

December 14, 2008), 255 securities class actions were filed, up from a 12-year low of only 131 filings

in 2006 and 195 in 2007.

The credit crisis drove the surge in filings: 110 cases filed in 2008 had some tie to the credit crisis,

up from 40 in 2007. Of the 110 cases related to the credit crisis, 20 were cases related to failures in

the auction-rate securities market, and most of these cases were filed in the first half of the year.

In addition, almost 50% of the 2008 cases were filed against defendants in the financial sector, up

from about 16% of cases in the 2005-2006 period.

While filings have steadily increased from 2006 through 2008, a similar pattern has not been

observed in median settlement values. Median settlements have remained relatively stable, staying

below $10 million. In 2008, the median settlement resolved for $7.5 million, slightly below the 2007

median of $9.4 million, and above the 2006 median settlement of $7.0 million. As always, a small

number of large settlements causes average settlements to exceed median settlements; the 2008

average settlement of $38 million is substantially higher than the median.

Given the surge in credit crisis-related filings, are average and median settlement sizes also likely to

grow in the future as these cases begin to resolve? Two opposing factors may come into play with

regard to these credit crisis case resolutions. On one hand, the investor losses associated with credit

crisis cases filed in 2008 are very large-the median investor loss for such a case is almost $3.5

billion, compared to a median loss of only $387 million for a non-credit crisis case filed this year.

Historically, investor losses have been positively correlated with settlement size, so big losses may be

an indicator of big settlements to come. On the other hand, defendants with" deep pockets" are the

ones who can afford big settlements, and the credit crisis has dramatically shrunk the size of many

defendants' pockets.

This edition of NERA's research on recent trends in shareholder class action litigation expands on previous work by our colleagues Lucy

Allen. Elaine Buckberg, Frederick C. Dunbar, Todd Foster, Vinita M. Juneja, Denise Neumann Martin, Ronald '- Miller, and David '- Tabak.

We gratefully acknowledge their contribution to previous editions as well as this current version. The authors also thank Jake George,

John Montgomery. and David '- Tabak for helpful comments on earlier drafts of the paper. In addition, we thank Nicole Roman,

Carlos Soto, Nii Nookwei Tackie, Maria Tarasyuk. Steven D. Towler. and many other NERA researchers for further assistance. These

individuals receive credit only for improving this paper; all errors and omissions are ours.

www.nera.com

73

Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 6 of 32 PageID 62838
Securities Class Action Filings

Through December 14, 255 federal securities class

actions had been filed in 2008, continuing last

year's substantial rebound from the recent low

of 131 cases in 2006.2 In fact, if we exclude the

unusual cases-those that are related to the IPO

securities litigation, analyst cases, and mutual fund

market timing cases (i.e., the "Other Cases" in

Figure 1)-filings in 2008 are at a 10-year high. If

filings continue to come in over the last two weeks

of 2008 at the same pace, the total number of CBses

would reach 267.

The first cases related to the subprime meltdown

were filed in February 2007. By the second half

of 2007, subprime cases were being filed at an

increasing pace, and, as the economy moved into

a full-blown credit crisis in 2008, other creditrelated cases were filed as well (Figure 2). For

example, within the broader category of cases

related to the crisis, auction-rate securities-related

cases peaked in the first half of 2008, with seven

filed in the first quarter and nine in the second

quarter of the year following the massive failure

of auctions in late February.' Although the pace of

auction-rate securities-related filings has slowed

since then, these cases have not disappeared, with

four filed in the second half of 2008. While the first

surge of these cases was filed against the banks

and broker-dealers involved in the creation of

Credit crisis-related cases made up approximately

one-fifth of all filings in 2007, but make up almost

half of the 2008 filings. Options backdating cases

peaked in 2006, but still continue to appear, with

five brought in 2008.

Figure 1. Federal Filings

January 1, 1996 - December 14, 2008

550

500

450

400

III

tn

~ 350 ¡¡:

¡;;

..

CII

"C 300

Æ....0

.. 250

CII

..Q

E

::i 200 :2

150

100

50

Standard Cases II Other Cases II Options Backdating Cases Cases Related to Credit Crisis

516

1997 - 2004 Average Standard Filings: 230

1996 1997 1998 1999 2000 2001 2002 2003 2004

Note: Other Cases include IPO laddering, mutual fund market timing. and analyst cases.

255

189

131

2005 2006 2007 2008

Data on filings come from multiple sources. including RiskMetrics Group/Securities Clas; Action Services (SCAS), Factiva, Bloomberg,

FactSet. SEC filings, and the public press. In compiling our data, we seek information 'on all unique class actions alleging damages with

regard to the purchase, ownership. or sale of securities. Most of our summary statistics below are based on data for cases filed in US

Federal Courts. Until cases are consolidated. we report multiple filings that potentially are related to the same alleged fraud if complaints

are filed in different Circuits. Similarly, until cases are consolidated. we report multiple filings if different cases are filed on behalf of

investors in common stock and other securities. If cases are ultimately consolidated. the data are adjusted..

2 www.nera.com

74

Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 7 of 32 PageID 62839
Figure 2. Federal Filings: Six-Month Intervals

January 1, 2002 - December 14, 2008 Standard Cases . Other Cases . Options Backdating Cases

160 155

140

120

VI

01

:§

ü: 100

~Q)

"P

il

'+- 80

0

...

Q)

~

E

'" 60 2

40

20

Cases Related to Credit Crisis Excluding ARS Auction-Rate Securities (ARS) Cases

Hl, '02 H2, '02 Hl, '03 H2, '03 Hl, '04 H2, '04 Hl, '05 H2, '05 Hl, '06 H2, '06 Hl, '07 H2. '07 Hl. '08 H2, '08

Note: Other cases include IPO laddering, mutual fund market timing, and analyst cases.

markets for auction-rate securities, at least one

"indirect" case has subsequently been filed against a

non-bank company, NextWave Wireless Inc., which

held these securities in its portfolio. This indirect

channel may be a source of additional filings in the

weeks to come.

Credit crisis-related cases

made up approximately

one-fifth of all filings in 2007,

but make up almost half of

the 2008 filings.

Filings by Circuit

In this year, as in prior years, cases have been

concentrated in the Second and the Ninth

Circuits (Figure 3).

The particular spike in the Second Circuit cases

in 2008 stems directly from the credit crisis:

both auction-rate securities cases and other credit

crisis-related cases have been clustered in this

Circuit, which includes New York, Connecticut,

and Vermont.

See NERA working paper, "Auction-Rate Securities: Bidder's Remorse?" by Stephanie Lee. This NERA study can be found at: Iittp://www.

nera. com/image/PUB _Auction_ Rat e_Securities _ 0708. pd f

www.nera.com 3

75

Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 8 of 32 PageID 62840
Figure 3. Federal Filings by Circuit, Year, and Type of Case

January 1, 2006 - December 14, 2008

100

90

OIl 80

ci

:§

ü:

~

70

OJ

"0

OJ

u.

.... 60

0

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40

30

20

10

97

2006 Standard Cases 2007 Standard Cases 2008 Standard Cases

II Options Backdating Cases Cases Related to Credit Crisis Excluding ARS Auction.Rate Securities (ARS) Cases

The first bar in each set represents 2006, the second 2007, and the third 2008

DC 1st 2nd 3rd 4th 5th 6th 7th 8th 9th

Figure 4. Cases Related to Credit Crisis by Circuit

January 1, 2007 - December 14, 2008

70

60

50

40

30

20

10

II 2007 Cases Related to Credit Crisis 2008 Cases Related to Credit Crisis Excluding ARS 2008 Auction-Rate Securities (ARS) Cases

22

.3

10th 11th

The first bar (if any) in each set represents 2007. the second bar 2008 63

1

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DC 1 st 2nd 3rd 5th 6th 7th 8th 9th

4 www.nera.com

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10th 11th

76

Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 9 of 32 PageID 62841
While in 2007 only eight Circuits had been affected

by the subprime meltdown, in 2008 all Circuits have

had at least one credit crisis-related case (Figure 4).

Filings by Sector

In 2005 and 2006, securities class action filings

were spread widely across a number of industrial

sectors. As the subprime lending markets

experienced a meltdown and a full-blown credit

crisis began to emerge in 2007, an increasing

fraction of all filings were made against firms in the

financial sector.

This year, a huge spike in filings occurred against

companies in the finance sector, as the credit crisis

continued and a number of firms in the finance

industry collapsed. Over 120 filings in 2008-almost

50% of all filings-named a company in the finance

sector as the primary defendant.

Figure 5. Percent of Filings by Sector

January 1, 2005 - December 14, 2008

50%

40

30

20

10

o

",'" ~,c 4

o?r

i)

t"(:'

CO

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Although the most dramatic trend in filings has

been in the finance sector, other sectors also saw

continued filing activity. For example, even though

the health technology sector has lost ground to

the finance sector as a percentage of all filings, the

level of filings in this sector has slightly increased

over the past few years: there were only 19 filings

against health technology firms in 2006 and

29 filings in 2008.

For the electronic technology and technology

services sectors combined, on the other hand, both

the number of filings and the percentage of all

filings in that sector are lower in 2008 than in the

prior three years.

D

For some cases, the primary defendant may not

be in the financial sector, but a co-defendant in

that sector may also be named. Thus, the financial

services sector is likely to be even more embroiled

in securities class action litigation in 2008 than

indicated by the pattern in Figure 5.

II 2005 2006 II 2007

I

lj(l

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www.nera.com 5

77

Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 10 of 32 PageID 62842
Nearly 50% of all filings in

2008 named a company in

the finance sector as the

primary defendant.

Specifically, 65 cases filed in 2008 so far have

had some financial institution co-defendant named

in the complaint. This is a substantial increase from

the number of cases with a financial sector

co-defendant from the prior year: 9% in 2007 had

a financial institution co-defendant, while 25% of

cases filed in 2008 name a financial institution as a

~?-defendant.

Types of Allegations.

Approximately 25% of the allegations in cases filed

in 2008 are related to accounting, which has been

a fairly steady proportion of allegations over the

past few years (Figure 6). On the other hand, over

40% of the allegations in 2008 involve product and

operational defects, an increase from prior years.

Again, this shift is driven by the credit crisis, because

a number of these cases relate to alleged failures of

financial products to perform as promised.

Trends in Resolutions

While filings have increased over the last two years

due to the credit crisis, there has been no clear

increasing or decreasing trend in the pattern of

resolutions. In fact, most credit crisis-related cases

have not yet reached any final resolution, since

it can take months or even years for cases to be

dismissed, tried, or settled.

D

Figure 6. Allegations in Federal Filings

January 1, 2008 - December 14, 2008

Industiy-Related

3.4%

Merger

Integration Issues

1.3%

Customer I

Vendor Issues

4.7%

Figure 7. Status of 235 Federal Shareholder

Class Actions Filed in 2000

Partially

Settled (2)

1%

Most securities class action complaints have multiple allegations. All allegations are included in this analysis. such that the total number

of allegations exceeds the total number of filings.

6 www.nera.com

78

Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 11 of 32 PageID 62843
Of the 1,121 cases filed between December 14,

2001 and December 14,2006, 729 have

resolved. Almost 45% of these resolved

cases ended with a dismissal, and 55% reached a

settlement. However. 392 of the filings from this

time period remain pending, so these statistics

may differ from the ultimate mix of resolutions

for all cases.

Because it may take several years for cases to reach

a resolution, we have tracked a single cohort of

filings over time to see how they ultimately are

resolved (Figure 7) Of the cases filed in 2000, 59%

have reached final settlement, 1 % have reached a

partial settlement, and 33% have been dismissed.

Note that 7% of these 2000 filings either remain

pending or have been abandoned by the plaintiffs,

so even after eight years it is impossible to tell the

final mix of resolutions for these cases.

Verdicts

While the vast majority of securities class action

cases result in dismissal or settlement, a tiny

fraction of cases ultimately go to triaL. For example,

only four of the cases filed in 2000 have gone to

trial. and all settled with at least one defendant

during the triaL. A full list of securities class actions

that went to trial following the PSLRA is included

in Table 1. A brief summary of outcomes for these

cases is illustrated in Figure 8.

Once cases go to trial, they do not always reach an

unambiguous plaintiff or defense verdict. Instead,

one or more of the defendants might settle during

the trial, or a verdict may be reached for one party

but later overturned.

For example, in January 2008 the case against

Apollo Group resulted in a jury verdict for the

plaintiffs of approximately $280 million. In August

of this year, however, this verdict was overturned by

US District Court Judge Teilborg, who ruled that the

plaintiffs had "failed to prove that the company's

actions caused any harm."S

Figure 8. Twenty-One Shareholder Class Actions

That Went to Trial After PSLRA

The vast majority of securities

class action cases result in

dismissal or settlement; a tiny

fraction ultimately go to triaL.

"Apollo Group Wins Reversal of $2S0M Verdict,"' by Christine Caulfield, Law 360, Portfolio Media, Inc. August S, 200S.

www.nera.com 7

79

Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 12 of 32 PageID 62844
8 www.nera.com

Table 1. Twenty-One Shareholder Class Actions That Went to Trial after PSLRA

Case

Federal

Circuit

File Trial

Year Year'

2004 2007

1994 1998

1992 2002

1996 1999

2002 2007

2003 2005

1994 1997

1998 2002

1991 2000

1994 2000

1998 2002

1994 1997

2001 2005

1987 1996

.._...._...~.-....__._. '_""'"MM..__.__.._._.__

2000 2004

2000 2003

2001 2005

2000 2005

2002 2005

2000 2005

1997 1998

1. Verdict for Defendants

1 Apollo Group, Inc'

2 Biogen Inc

3 Everex Systems Inc;

4 Health Management. Inc

S 10S Uniphase Corp.

6 Thane International, Inc.4

7 Tricord Systems, Inc

9

1

9

2

9

9

8

11. Verdict for Plaintiffs

1 Claghorn i Scorpion Technologies, Inc

2 Computer Associates International. Inc

3 Helionetics. Inc

4 Real Estate Associates, LP

5 US Banknote Corp.'

9

2

9

9

2

111. Mixed Verdict

1 Clarent Corp.6

2 ICN Pharmaceuticals, Inc'

9

2

IV. Settled During Trial'

I AT&T

2 First Union National Bank I First Union Securities I Cyprus Funds

3 Globalstar Telecommunications, Ltd.

4 Heartland High-Yield I Short Duration High-Yield Municipal Bond Funds

5 WoridCom

6 Safety-Kleen çorp. (Bondholders Litigation)'

3

11

2

7

2

4

V. Default Judgment

1 Equisure Inc. 10 8

Notes.

Until otherwise noted, all these cases went to a jury triaL. Data are from case dockets.

Trial year represents a year in which a jury trial began.

On 8/4/2008 judge overturned a 1116/2008 jury verdict for plaintiffs. On 8129/2008 plaintiffs filed an appeaL.

1998 verdict for defendants was reversed and remanded by the Ninth Circuit Court of Appeals; retrial again yielded a verdici for defendants.

Bench trial verdict was reversed and remanded by the Ninth Circuit Court of Appeals; has not yet been retired.

Judge subsequently vacated the jury verdict and approved a settlement.

Chairman of Clarent liable, Ernst & Young not liable.

Hung jury.

At least one defendant settled after the trial began, but prior to judgment.

Some director-defendants settled during the trial; default judgment against CEO and (Fa who failed to show up for triaL.

Default judgment against Equisure Inc. who failed to show up for triaL.

80

Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 13 of 32 PageID 62845
Settlements

While filings have .been increasing sharply over the

past two years, median settlements have been

relatively steady (Figure 9) Looking over the longer

history starting in 1996, median settlements have

increased from around $4 million up to $8 million

in 20086

Over the 2005-2008 year period, median

settlements ranged from $ 70 million to $9.4 million.

While median values increased between 2006 and

2007, they dropped between 2007 and 2008, so, at

this time, there is no evidence of an increasing trend

in median settlements.

Figure 9. Median Settlement Value ($MM)

January 1, 1996 - December 31, 2008

$10

9

8

7

6

5

4

3

2

o

1996 1997 1998 1999 2000

While filings have been increasing

sharply over the past two years,

median settlements have been

relatively steady. ... at this time, there

is no evidence of an increasing trend

in median settlements.

2001 2002 2003 2004 2005 2006 2007

Unless otherwise noted, tentative settlements and cases in which not all non-dismissed defendants have settled are not included in

settlement statistics. We define settlement year as the year in which the first court hearing related to the fairness of the settlement

occurred. For cases with multiple partial settlements. a settlement year is determined by a court fairness hearing date of the last partial

settlement that concludes the case.

2008

www.nera.com 9

81

Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 14 of 32 PageID 62846
There has been substantially

more variation in average

settlements. The annual average

has ranged from $21 million to

$82 million during 2003-2008.

Figure 10. Average Settlement Value ($MM), All Cases

January 1, 1996 - December 31, 2008

$90

80

70

Although median settlements have been relatively

stable in recent years, there has been substantially

more variation in average settlements (Figure 10).

The average settlement over the years from 2003 to

2008-the post-Sarbanes-Oxley-Act period-has

been $45 million, notably higher than the preSarbanes-Oxley average of $17 million and also

above the 2008 average of $38 million. The annual

average has ranged from $21 million to $82 million

over this six-year period.

2003-2008 Average: $45.1

60

50

40

1996-2001 Average: $17.1

30

20

4~~---_~.~~m'~~~"~'~"-"-"__-'_'W_""~~W~"W.'.'~.'WN~"'=~~

10

o

1996 1997 1998 1999 2000 2001 2002

10 www.nera.com

2003 2004 2005 2006 2007

-po2008

82

Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 15 of 32 PageID 62847
These average values can be extremely sensitive to

the inclusion of large outlier settlements. Removing

all settlements of over $1 billion, the 2003-2008

average settlement drops to $26 million, and the

range of settlement averages across years becomes

much tighter (Figure 11).

The 2008 final settlement of $1.04 billion for

McKesson HBOC, Inc. is an example of such

an outlier. Removing this settlement from the

calculation drops the 2008 average from $38 million

down to $29 million, below the 2007 average of

$31 million.

Figure 11. Average Settlement Value ($MM), Excluding Settlements Over $1 Billion

January 1, 1996 - December 31, 2008

$35

30

25

20

15

1996-2001 Average: $11.5

10

~------_..__._._.

5

o

1996 1997 1998 1999 2000 2001

2003-2008 Average: $25.9

.ø¿--_._-~_._..,._-"------

2002 2003 2004 2005 2006 2007 2008

Note: Average settlement shown without final settlements over $1 billion: the 2000 Cendant, 200S WorldCom, 2006 Royal Ahold, AOL Time Warner. two Nortel Networks,

and 2008 McKesson HBOC Inc. settlements.

www.nera.com 11

83

Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 16 of 32 PageID 62848
More generally, the distribution of settlement values

has a fairly consistent shape over the past few years

(Figure 12). Over 50% of cases have settlements for

less than $10 million, and 10% or less have settled

for more than $ 100 million. In 2008, only 6% of

cases settled for more than $100 million

single most powerful determinant of

settlements, explaining approximately 50% of

their variation, controlling for other characteristics

of the case.'

While investor losses are strongly correlated

with settlement amounts, the two do not move

together at a one-to-one ratio. Instead, as investor

losses increase, settlements increase at a much

lower rate: a 1.0% increase in investor losses results

in an approximately 0.4% increase in the size of

the expected settlement, other factors being

held constant (Figure 13)8

Investor Losses and Settlements

NERA has examined the relationship between

settlement size and various case attributes for

cases filed since the passage of the PSLRA. We find

that investor losses, which can be calculated using

publicly available data, historically have been the

Figure 12. Distribution of Settlement Values ($MM)

January 1, 2006 - December 31, 2008

50

VI

OJ

VI

ni U

'C 40

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VI

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20

2006 . 2007 2008

70%

60

59%

10

o

Less Than $10 $10-$19.9 $20-$49.9 $50-$99.9 $100 or Greater

Size of Settlement Value

Investor losses are measured by comparing a company's return to the return on the S&P 500 over the class period. and by using the

proportional decay trading model to estimate the number of affected shares of common stock. We use investor losses as a crude proxy

for plaintiff-style damages. The relationship between settlement values and investor losses is estimated in logs.

This relationship between investor losses and settlements is based on NERA's settlement prediction model, controlling for other case

characteristics and overall price inflation. This model explains almost 64% of the variation in settlements, across almost 800 cases filed

after January 1, 1996 and settled through June 30, 2008.

12 www.nera.com

84

Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 17 of 32 PageID 62849
Another way to l:iok at the relationship between

investor losses and settlement values is to compare

the ratio of these two numbers for cases with

losses of different amounts. Holding all other case

characteristics constant, at their respective means,

a case with investor losses of $100 million is

expected to have a settlement that is around

$5.1 million, or 5.1 % of investor losses. A case with

$1 billion in investor losses is expected to settle for

$12 million, only 1.2% of losses (Figure 14).

Figure 13. As Investor Losses Rise, Expected Settlements as a Percent of Those Losses Decline

15%

111 12

Q)

111 111 0

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111

III 6

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$0 100 200 300 400 500 600 700 800 900 1,000

Investor Losses ($MM)

Figure 14. Expected Settlement Rises More Slowly Than Investor Losses

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Investor Loss $1,000 MM

Expected Settlement $11.5 MM (1.2%)

Investor Loss $300 MM

Expected Settlement $7.5 MM (2.5%)

Investor Loss $100 MM

Expected Settlement $5.1 MM (5.1 %)

o

$0 100 200 300 400 500 600 700 800 900 1,000

Investor Losses ($MM)

www.nera.com13

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Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 18 of 32 PageID 62850
D

Over a longer horizon, there has been a gradual

increase in the investor losses of settled cases. A

decade ago, the median investor loss estimate for a

settled case was around $120 million. This year, the

median investor loss estimate for a settled case has

been almost $340 million (Figure 15).

A decade ago, the median investor loss estimate

for a settled case was around $120 million. This

year, the median investor loss estimate for a

settled case has been almost $340 million.

Figure 15. Median Investor Losses and Median Ratio of Settlement to Investor Loss

January 1, 1996 - December 31, 2008

~

2 300

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1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

14 www.nera.com

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86

Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 19 of 32 PageID 62851
Focusing on very recent trends, we do not see

any increase in the median investor loss for cases

resolved in 2008 compared to the 2005-2007

period. Like median settlement amounts, median

investor losses have been relatively stable over

the past few years. Thus, the ratio of median

settlements to investor losses, which had been as

high as 7% back in 1996, has also stayed relatively

steady in the 2-3% range over the past few years.

Table 2. All but one of these settlements

exceeded $1 billion.

Three of the settlements on the top 10 list are

shown with 2008 as a settlement year, but only one

of these-McKesson HBOC, Inc.-was finalized in

2008. The other two 2008 settlements have not

yet been finalized: although many parties have

reached partial settlements in the Enron case, not

all defendants have finalized settlements at this

time, and the $925 million UnitedHealth Group

Top 10 Settlements settlement is still a tentative settlement.

While the majority of settlements over the past

decade have been less than $10 million, a small

number of "mega-settlements" have dominated

the news and had a significant impact on annual

average settlement values. The top 10 securities

cíass action settlements of all time are listed in

In total, these top 10 settlements add up to more

than $28 billion. Note that over $13 billion, or

47%. of this aggregate settlement amount was

paid by the "deep pockets" of financial institution

co-defendants.

Table 2. Top 10 Shareholder Class Action Settlements

Settlement

Total with Financial Institution

Settlement Settlement Co-Defendant(s) 1

Ranking Company Year Value Value Percent

($MM) ($MM)

------------_.__.._---_..__.._._.- ----

1 Enron Corp.' 2008 $7,242 $6,903 95%

2 WoridCom, Inc.' 2005 6,158 6,004 98%

3 Cendant Corp.' 2000 3,561 342 10%

4 Tyee International, Ltd.' 2007 3,200 n.o. n.o.

5 AOL Time Warner Inc. 2006 2,650 n.o. n.o.

6 Nortel Networks (I) 2006 1,143 n.o. no.

7 Royal Ahold, NV 2006 1.100 n.o. no.

8 Nortel Networks (II) 2006 1,074 n.o. n.o.

9 McKesson HBOC Inc. 2008 1,043 10 1%

10 UnitedHealth Group' 2008 925 no. n.o.

Total $28,096 $13,259 47%

Note that for this summary table only, tentative and partial settlements are included for comparison, and ..Settlement Year" in this table

represents the year in which the last settlement-whether partial or final-had the first fairness hearing. For partial tentative settlements

"Settlement Year" is the year in which this settlement was announced.

i If "n.o.," either the case did not have an underwriting co-defendant. or none of the settlement value in column (n) was paid by 

an

underwriting co-defendant.

, This settlement includes seven partial settlements and one tentative partial settlement

The settlement value incorporates a $1.6 million settlement in the MCI WoridCom TARGETS case.

4 The settlement value incorporates a $374 million settlement in the Cendant PRIDES cases.

Settlement in the Cendant PRIDES I case was a non-cash settlement valued at $341.5 million.

S This settlement is a partial settlement.

6 This settlement includes two partial tentative settlements.

D

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Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 20 of 32 PageID 62852
16 www.nera.com

Looking Forward

While filings over the last 18 months have been

dominated by credit crisis-related cases, it is too

soon for many of these cases to have reached

resolution. When these cases do start to resolve,

what are the settlements likely to be?

Figure 16. Median Investor Losses ($MM) for

Cases Related to the Credit Crisis and Other

Cases Filed in 2008

Cases Related

to Credit Crisis

Other Cases

Note: Cases related to the credit crisis include one auction-rate securities

case. Other cases include standard and options backdating cases.

Two forces may pull these future settlements

in opposite directions. First, the investor losses

associated with credit crisis cases are high.

As mentioned above, investor losses historically

have been the single most important predictor

of settlement size. For the median credit crisis

case filed in 2008, the investor losses are almost

$3.5 billion, compared to a median of $387 million

for other, non-credit crisis cases filed this year

(Figure 16)

For context, median investor losses for cases settled

in the past four years have been in the $300 to

$400 million range-corresponding to median

settlements of less than $10 million-similar to the

range of median investor losses on all cases filed in

2005 and 2006. Overall median investor losses for

filed cases have grown in the last two years. Median

investor losses for cases filed in 2007 were over

$400 million, and the median investor losses for all

cases filed in 2008 are $490 million (Figure 17).

The second force, which may reduce future

settlements, is the extent of the" deep pockets"

of defendant companies. Historically, indicators of

the financial wherewithal of the defendant have

been positively and significantly correlated with

settlement values: controlling for a number of other

factors (although not the merits of a particular

case), defendants with higher market capitalization

have higher settlements, and companies that are

bankrupt or have share prices of less than $1 have

significantly lower settlements. As noted above,

a substantial fraction of the top 10 settlement

payouts have been made from the deep pockets of

financial institution co-defendants.

88

Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 21 of 32 PageID 62853
Figure 17. Federal Filings

Median Investor Losses ($MM) by Settlement and Filing Year

$600

Settlement Year . Filing Year

$490

500

$408

400

300

200

100

0

2005 2006 2007 2008

In the wake of this current credit crisis, many of the

named defendants and co-defendants, particularly

in the finance sector, may be bankrupt or have

much smaller pockets at the time of settlement. This

factor may put downward pressure on settlement

values. As an early hint about this type of settlement

pressure, rumors of a $700 million settlement for

the IPO litigation against investment banks have

circulated, down substantially from the $3 or $4

billion settlement allegedly on the table-and

rejected by plaintiffs.,--in 2006.9

Conclusion

The credit crisis and turmoil in the financial

sector have been correlated with a notable increase

in securities class action filings, beginning in

2007 and continuing throughout 2008. Year to

date, filings are at a six-year high, with 110 cases

related to the credit crisis. But few of these credit

crisis cases have yet to move very far through the

resolution process, so it is too early to tell what

impact these filings may have on settlement values

and dismissal rates.

For now, median settlements remain relatively

stable and below $10 million. Only time will tell

if the huge investor losses for credit crisis filings

may put upward pressure on median settlements

in the future, or if the financial distress faced by

defendant companies may pull median settlement

values down.

Specifically. "The investors' case was led by a six-attorney executive committee, headed by IMel! Weiss. One committee member.

Howard Sirota, said in an interview today that he pressed Weiss to accept a possible settlement of $3 billion or $4 billion. which.

Sirota said. the banks appeared willing to pay. Weiss refused to consider anything less than $12.5 billion, Sirota said." David Glavin,

"Financial Firms Near $700 Million IPO Suit Settlement". Bloomberg.com, October 28, 2008 (http://www.bloomberg.com/apps/

news'pid=20601103&sid=a_k3emz_zIYI&refer=news). See also "Will $700 Million Finally Settle Decade-Old IPO Suit'" by Zach Lowe,

The AMLow Doily. October 29. 2008 (http://amlawdaily.typepad.com/amlawdaily/2008110/will-700-millio.html).

D

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EXHIBIT 2

90

Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 23 of 32 PageID 62855
Top Ten Shareholder Class Action Settlements

As of March 1, 2006

Settlement

Value

Ranking Company Year ($MM)

Enron Corp. 2005 $7,144

3 Cendant Corp. * * 2000 3,528

S Nortel Networks * * * 2006 2,474

7 McKessson HBOC Inc. * * * 2005 960

9 BankAmerica Corp.; NationsBank Corp. 2002 490

* This is a partial settlement including only some defendants.

· * The seitlement value incorporates a 5341 mi/fion settfement in the Cendont PRIDES cose

* * * This is a tentative settlement.

Recent Trends in Shareholder Class

Action Litigation: Beyond the MegaSettlements, is Stabilization Ahead?

Ronald i. Miller, Ph.D., Todd Foster, Elaine Buckberg, Ph.D.'

April 2006

Settlement Records Keep Toppling

With CIBe's $2.4 billion settlement, the total settlement pool for the

Enron shareholder class action became the largest ever at $7.1 billion,

passing the $62 billion mark set by WorldCom only months earlier.'

CIBe's contribution exceeded its 2004 earnings. Because sorne

of the other Enron defendants, including more of Enron's bankers,

have not yet reached settlements the final tally may rise much

higher. The Enron settlement, though still incomplete, nearly doubles

the pre-2005 record in Cendant, which reached $3.5 billion'

In the remarkable cases of both Enron and WorldCom, outside

co-defendants have financed nearly the whole settlement.

The WorldCom and Enron settlements share a common characteristic

of the recent mega-settlements: they compensate enormous investor

losses. In the case of WoridCom, the investor losses are larger by a

substantial multiple than for any other settled case filed since 1991.

Investor losses. a simplified plaintiffs' style measure of damages, is

the single most powerful predictor of settlement size.' The recent

huge settlements have been associated with huge losses.

In 2005 and the first two months of 2006, the list of the ten largest

shareholder class action settlements was almost completely rewritten.

Seven slots on the list are now filled by 2005 and 2006 settlements.

As of 2004, Cendant was the only settlement larger than one billion

dollars. Now there are six. In what will surely be chilling news to

non-United States issuers already wary of being embroiled in U.S.

litigation, two of those six settlements, those of Nortel Networks of

Canada and Royal Ahold NV of the Netherlands, involved foreign

companies' The Nortel settlement exceeds the previous record for a

foreign issuer, Daimler-Chrysler, by a factor of more than eight.

911

Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 24 of 32 PageID 62856
Federal Filings

January 1991 - December 2005

Ii Standard Filings II Laddering Cases Analyst Cases

5S0

SOO

4S0

400

3S0

300

2S0

200

150

100

so

1991 1992 1993 1994 1995 1996 1997

Filings Fall in 2005: A Dip or a Trend?

In 2005, plaintiffs filed 209 cases in Federal Courts, substantially fewer

than the 247 standard filings in 2004 and the post-Private Securities

Litigation Reform Act ("PSLRA") average of 238 standard filings each

year.' This is the lowest number of federal filings since 1997, when

filings were depressed by a move to state courts by plaintiffs seeking

to avoid the constraints of the PSLRA.

The low rate of filings in 2005 is evidence that the surge in filings that

started in the late 1990s has lost momentum, but it is far too early

to conclude that there is a downward trend. First, statistical testing

finds that the 2005 dip is not statistically different from either the

post-PSLRA average or from a longer-term trend. Second, the drop is

far from evenly distributed: almost all of the difference between the

2004 and 2005 totals is accounted for by a sharp fall in filings in

the Ninth Circuit.

2

Market Timing Cases

516

1998 1999 2000 2001 2002 2003 2004 200S

One possible cause of this drop is that Sarbanes-Oxley ("SOX"), passed

in July 2002, has had enough time to induce an improvement in

corporate governance, prevented fraud, and thus reduced the number

of resulting shareholder class actions. But if the beneficial effects of

SOX were really the root cause of the slowdown in filings, we would

have expected the fall in filings to be much more evenly distributed

across the circuits. It seems unlikely that corporate governance was

much more improved on the West Coast than in the rest of the

country. Some of the drop may be accounted for by the collapse of

the high-tech bubble. Reflecting the mix of industries on the West

Coast, many Ninth Circuit filings are against issuers in high-tech

industries. There has been some drop in filings against high-tech

issuers as compared to 2004, but insufficient to explain the overall

drop in filings. The most likely explanation for the remainder of the

drop is simply random year-to-year variation.

92

Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 25 of 32 PageID 62857
Based on the 2003-2005 filing rate, we estimate that over a five-year

period, the average public corporation has nearly a 10% probability

that it will face at least one shareholder class action lawsuit.' The

annual likelihood of a suit has risen approximately 8% from prePSLRA levels, from 1.8% to 19%. However, the increased likelihood

of a suit is more than offset by the increased dismissal rate. The

probability of a company facing a suit that survives a motion to

dismiss has fallen from 1.4% in 1993-1995 to 1.2% over 2003-2005.

There has been some

drop in filings against

high - tech issuers as

compared to 2004, but

insufficient to explain

the overall drop in filings.

Companies Face a 2% Chance of Suit Each Year

1993-1995 2003-2005 Change

No. of Publicly Traded Companies 11,688 12,287 5.1%

Annual Filings 210 238 13.7%

Probability of Dismissal 19.4% 40.3% 107.7%

3

93

Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 26 of 32 PageID 62858
45%

Dismissal Rates By Circuit Within Two Years Of Filing

40

3S

30

2S

20

1 S

10

S

1st 2nd 3rd 4th Sth

Dismissals

Dismissal rates have doubled since PSLRA' Dismissals accounted for

only 19.4% of dispositions for cases filed between 1991 and 1995.

More recently, for ca~es filed between 1998 and 2003, dismissals have

accounted for 40.3% of dispositions' Our post-PSLRA dismissal rate

may be slightly overstated, as it may include some dismissals without

prejudice that will be reversed by amended and better-pled complaints

or dismissals with prejudice that will be successfully appealed. There is

no indication that dismissal rates have continued to rise after an initial

adjustment to the tougher pleading provisions of PSLRA.

Dismissal rates vary by circuit. Both the Second and Ninth Circuits,

which together receive the majority of cases, dismiss approximately

25% of cases within two years of the filing date. The Fourth Circuit has

the highest rate, dismissing more than 40% of filings within two years.

4

6th 7th 8th 9th 10th 11th

Although high, it

appears that settlements

have reached a plateau

as opposed to being on a

continually rising trend.

94

Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 27 of 32 PageID 62859
Average Settlement Value ($MM)

$30

2S

20

1 S

10

S

1996 1997 1998 1999 2000 2001 2002 2003 2004 200S

Average: $13.3MM

. .__..__._._._____.__.w__.. _"'_"_"',w,___._._. ~

Average: $22.3MM

Median Settlement Value ($MM)

$8

3

7

6

5

2

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

. .. ............................... ....................................)- .....__...._.._--_..__.... .._....

Median: $4.6MM Median: $S.8MM

Settlements Reached New Highs in 2005

Average settlement values hit a new peak in 2005, even excluding

WorldCom and Enron. '" The mean settlement value reached $24.3

million, barely exceeding the prior high of $237 million in 2002."

inciuding WorldCom would bring the average to nearly $ 71 million.

Although high, with the addition of the results from 2005 it appears

that settlements have reached a plateau that began in 2002 as

opposed to being on a continually rising trend. Just as for filings, for

average settlements there is some stabilization occurring, underneath

the biggest of the mega-settlements

The Median Settlement Surged

Median settlement values in 2005 hit $7.0 million, exceeding the past

record by more than 15% and the 2004 level by one-third. The

average settlement value tends to be dominated by the very largest

settlements, while the median is more descriptive of typical cases.

The driving factor behind this increase is the sharp reduction in

settlements under $3 million, which accounted for nearly 45% of

settlements in 1996 but constituted only 27% of settlements in 2005.

5

95

Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 28 of 32 PageID 62860
Settlements May Fall From Their Peak

There is good reason to expect that apart from the biggest of the

mega-settlements, average settlements will not rise further over the

next two or three years and, instead, could even falL. Our analysis

indicates that the high value of settlements in 2002-2005 is due to

higher investor losses, not due to changes in the litigation

environment. Many of the largest suits in this recent period have class

periods ending during the collapse of the stock market bubble in

2000-2002. The large market losses that came with the end of this

bubble have led to large settlements.

Median Investor Losses

By End-of-Class Period Year ($MM)

$4S0

400

350

300

2S0

200

150

100

so

1996 1997 1998 1999 2000 2001 2002 2003

6

Median investor losses for

cases with class periods

ending in 2000-2002 are far

higher than for any other

period, peaking at $402

million in 2000.

The high settlements of recent years are likely to continue for several

more years, as cases from the bear market proceed to settlement.

Our analysis of median investor losses by end-of-c1ass-period year for

settled cases shows the point. Median investor losses for cases with

class periods ending in 2000-2002 are far higher than for any other

period, peaking at $402 million for class periods ending in 2000. For

settled cases with class periods ending in 2003, of which there are 40

through 2005, median investor losses are only $194 million. As time

passes we expect to see more settlements with more recent class

periods which are likely to be smaller than those from the end of the

bubble. But the backlog of earlier cases will keep settlements high for

at least a few more years.

We find no statistically significant change in settlement values since

the passage of Sarbanes-Oxley, once we control for other factors

including investor losses." Higher investor losses explain the rise in

settlements, as we will discuss further below.

9 6

Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 29 of 32 PageID 62861
2S% V Settlement as a % of Investor Losses

Expected Settlements Rise More Slowly Than Investor Losses ($MM)

20

Investor Settlement as

loss % of Selected

($MM) Investor Loss

lS

300 25%

10

ri. Investor Losses ($MM) $100 200 1000

Explaining Settlements

NERA has estimated a statistical model for predicting settlements that

explains over 60% of the variation in settlements, using data on cases

filed after 1 January 1996. This model allows us to assess the impact

of various lawsuit characteristics on settlement values. All the

sensitivity measures described below are calculated controlling for

other characteristics of the suit and consumer price inflation.

If the defendant firm is in

bankruptcy or has a stock

price of less than $1 per

share at settlement, the

settlement will typically be

approximately 25% lower.

300 400

By far the biggest single driver of settlement values is investor losses,

a measure of what investors lost over a class period relative to an

investment in the S&P500. High investor losses in recent years

completely explain the high average settlements we have seen. On

average, a 1.0% increase in investor losses results in an approximately

0.4% increase in the size of the expected settlement, meaning that as

investor losses rise, the ratio of settlement to investor losses falls."

In 1996, the investor losses in an average settled suit were only

$140 million. By 2005, average investor losses had ballooned to

$2.6 billion. As well, median investor losses have been rising rapidly

since 1996 and set a new record in 2005 at $332 million. But that

was only a shade above the 2004 median of $329 million. Investor

losses appear to be stabilizing, consistent with our analysis by end-ofclass period. Similarly, the median share of settlements to investor

losses also appears to be stabilizing after a long declining trend: in

the early 1990s the median share was in excess of 5%, but since

2002 it has hovered between 2.5% and 3.0%.

Our investor loss measure covers only losses faced by holders of

common stock. Settlement values increase dramatically in cases in

which holders of other classes of securities-bonds, options,

preferred stock-share in the settlement. Effectively, the claims of the

holders of these other securities represent losses above and beyond

those measured by investor losses.

7

97

Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 30 of 32 PageID 62862
Median Investor Losses ($MM)

Investor Losses Have Risen More Rapidly Than Settlements-But May Be Stabilizing

".~- Median Ratio of Settlement to Investor Losses

$3S0

300

2S0

200

1S0

100

50

1991 1992 1993 1994 1995 1996 1997

Settlements are greater when defendants have deeper pockets. For

each 1 % increase in the company's market capitalization on the day

after the end of the class period, the typical settlement will increase

by more than 0.1 %. If the company's fortunes change before

settlement, there may be less money to go around. If the defendant

firm is in bankruptcy or has a stock price of less than $1 per share at

settlement, the settlement will typically be approximately 25% lower.

In addition, the involvement of outside co-defendants can lead to

larger settlements. In cases with an accounting firm co-defendant,

settlements increase by more than three-quarters, controlling for all

other characteristics of the case.

Cases with accounting allegations result in higher settlements for

other reasons too. The presence of allegations regarding accounting

issues will raise average settlement values by approximately 20%.

Settlements in cases in which accounting irregularities are admitted

increase by a further half.

8

8%

6

4

3

2

1998 1999 2000 2001 2002 2003 2004 200S

When the allegations of a suit are subject to official investigation, for

example by the SEC or the New York Attorney General's Office, or

result in a consent agreement or official punishment; settlements are

higher. This outside evidence of the merits of a case leads to an

approximately 25% increase in expected settlement value.

One of Congress's major goals for the PSLRA was to involve

institutional investors as lead plaintiffs. In this the PSLRA has been

effective, though the effect has taken time. In 2000, 14% of settled

cases had an institutional lead plaintiff. In 2005, the figure was 38%.

Controlling for other case characteristics, cases with an institutional

investor lead plaintiff settle for a statistically significant one-third

more. It is possible that institutional investors are more likely to

choose to be involved in cases with greater merit, although we are

controlling for other easily observable features of the suit.

Alternatively, institutional investors as lead plaintiffs may retain more

effective counseL, supervise counsel more effectively, and provide an

independent contribution to strategy.

98

Case 3:03-cv-01769-B Document 944-3 Filed 04/07/10 Page 31 of 32 PageID 62863
Our model also indicates that settlements increase by more than

one-third if an IPO is involved. All such cases involve potential

Section 11 claims, which may result in higher alleged damages

than the accompanying 10b-5 claims and are also governed by

different liability standards.

Only the health services sector pays markedly different settlements

than do other industries. Settlements involving companies in the

health services sector are typically one-third higher than settlements

involving any other industry, controlling for other case characteristics.

This finding may relate to the existence of concurrent billing fraud

allegations against health services companies brought under the

federal False Claims Act.

Cone/usion

The huge settlements from the Enron and WorldCom suits have

grabbed attention in 2005, far surpassing any previous settlements.

Another wave of mega-settlements has already begun in 2006. But

for the greater mass of shareholder class action defendants, the

situation appears to be stabilizing. We see evidence of stabilization in

several key areas. An increase in federal filings followed passage of

the PSLRA, but that trend has leveled. Average settlements reached a

new high this year, but already cases with class periods ending after

the end of the bubble-deflation are starting to bring the average

down. Along with that leveling off, the share of settlements in

investor losses has also stabilized after a long period of rapid

decrease. It may be that for all the record-breaking settlements and

all the headlines, shareholder class action litigation is entering a new

period of normalcy.

End Notes

,..

1 This edition of NERA's research on recent trends in shareholder class actian

litigation expands on previous work by our colleagues Lucy Allen, Frederick C.

Dunbar. Vinita M. Juneja, Denise Neumann Martin. Stephanie Plancich and

David I. Tabak. We gratefully acknowledge their contribution to previous editians

as well as this current version. In addition, the authors thank Christopher Enright

and Christopher Lyon for supervising the research effort. These individuals receive

credit only for improving this paper; all errors and omissions are ours.

2 ClBCs settlement, as well as JPMorgan Chase's for $2.2 billion and Citigroup's

for $2.0 billion, all in the Enron litigation, have not yet received court approval.

3 Including the $347 million Cendant PRIDES settlement.

4 Investor losses are calculated in a standardized fashion and do not take into

account the specific facts of any case apart from the stock price movements.

Actual damages claimed by plaintiffs may be very different from investor losses

in any particular case. Nonetheless, we have consistently found investor losses

to be a powerful predictor of settlement values.

5 Neither of these settlements is yet court approved.

6 The post-PSLRA average is calculated for 7998-2005, thus excluding 7996 and

7997. There was a large drop in federal filings in 1996 and 7997. as plaintiffs filed

in state courts to avoid the restrictions of PSLRA. As such, filings in those years are

atypical. Standard filings are defined to exclude the laddering, analyst and mutual

fund market timing cases.

7 The probability of not facing a suit is 97.9% per year. Assuming that the

probability of facing a suit in each year is independent and compounding over

five years yields a 90.7% chance of no suit, or a 9.3% chance of at least one suit.

in five years.

8 Our dismissal statistics include summary judgments but exclude partial dismissals.

9 Because it is not uncommon for judges to take up to two years from the filing

date to rule on motions to dismiss. it would be premature to evaluate

dismissal rates of cases filed in 2004-2005. The increase in dismissals is

statistically significant.

10 Enro.n is excluded because it is still incomplete and, for the purpose of

calculating statistics, we date a settlement by the year it became complete

and finalized.

71 Excluding Cendant from the 2000 average.

12 This is true for cases settled after SOX as well as for cases filed after sox.

73 The illustrated figures represent the expected settlement as a percentage of

investor loss. when all other predictive variables are at their mean levels.

The expected settlement percentage may be very different for any particular

settlement. NERA's statistical model of settlements allows calculation of

the expected settlement percentage for individual cases with any specific

set of characteristics.

9

99

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