Securities Class Actions and Bankrupt Companies

Abstract

This is the first extensive empirical study of securities class actions involving bankrupt companies. It examines 1466 securities class actions filed from 1996 to 2004, of which 234 (16%) involved companies that were in bankruptcy proceedings while the securities class action was pending. The study tests the hypothesis that securities class actions involving bankrupt companies (“bankruptcy cases”) are more likely to have merit than securities class actions involving companies that are not in bankruptcy (“non-bankruptcy cases”). It finds that bankruptcy cases were more likely to involve restatements than non-bankruptcy cases, but not more likely to have other indicia of merit. Bankruptcy cases were more likely to be successful in terms of dismissal rates, significant settlements, and third party settlements than non-bankruptcy cases. This bankruptcy effect fades with respect to settlements of $20 million or more, likely reflecting the influence of D&O insurance policy limits. The bankruptcy effect is evidence that courts and parties assess the merits of securities class actions differently based on the context of the suit.