Particularly with regard to securities class action lawsuits, the size of D&O settlements has increased dramatically over the past several years. For example, since mid-1999, there have been more than a dozen settlements or judgments in excess of $100 million, with at least one-third of those being in excess of $200 million.

Perhaps even more troubling than the size and frequency of these enormous settlements and judgments is the fact that this level of settlement inflation is occurring in securities class actions of all sizes. Even smaller cases are often settling for as much as 30 percent to 50 percent more than what would have been expected in 1999.

This rather sudden explosion in the size of D&O settlements is attributed to a combination of several factors: • Financial Restatements. A disproportionate number of large settlements involve companies that restated their financial statements for several reporting periods, resulting in a large drop in the companies' stock price. Restatement cases are inherently very difficult to defend because the defendants, by announcing the restatement, concede that they misrepresented to investors material information concerning the company's financial condition and performance. Frequently, the only issues debated in such cases are whether the defendants were sufficiently reckless in issuing the false financial statements and the amount of damages caused by the false financial statements.