Cornerstone Research Report: Accounting Class Action Filings Rise to Highest Level Since 2008

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Settlement values for accounting-related cases were the highest in last nine years

Securities class action filings with accounting allegations rose to 93 in 2016, 33 percent above the previous year and the fourth consecutive annual increase, according to a new report from Cornerstone Research.

As reported in Accounting Class Action Filings and Settlements—2016 Review and Analysis, an unprecedented number of federal filings of class actions involving merger and acquisition (M&A) transactions drove the increase in accounting-related cases. “Traditional” accounting case filings, those with Rule 10b-5, Section 11, and/or Section 12(a)(2) claims, remained relatively stable, although those filings were much larger as measured by the defendant firms’ market capitalization losses.

“In 2016, total accounting case filings exceeded the historical average for the third year in a row,” said report co-author Elaine Harwood, a Cornerstone Research vice president and head of the firm’s accounting practice. “In nearly one-third of the M&A filings, plaintiffs alleged that the company failed to provide a reconciliation of non-GAAP measures to GAAP measures. This is the first time we have seen so many M&A filings with GAAP-related allegations.”

The number of accounting case settlements fell from 50 to 46. Total settlement value, however, reached $4.8 billion, nearly 80 percent greater than in 2015 and the highest since 2007. The increase was attributable to a relatively large number of approved settlements, as well as an increase in the average settlement amount. Nine accounting case mega settlements (those over $100 million) represented $4.4 billion of the total accounting case settlement value in 2016.

“Accounting cases often represent the majority of the total value of all settlements reached in a given year, typically with just a few settlements contributing much of the value,” said report co-author Laura Simmons, a Cornerstone Research senior advisor. “In 2016, almost 75 percent of the total value of cases settled was associated with a handful of accounting case settlements, including two over $1 billion. The presence or absence of a few settlements of this size can have a dramatic impact on the overall numbers for a given year.”

Highlights

  •     The Disclosure Dollar Loss Index® (DDL Index®) for accounting cases filed in 2016 rose 38 percent from 2015 to nearly $48 billion, the highest level in the last eight years.
  •     Accounting case filings against companies in the consumer, non-cyclical sector (e.g., biotechnology, pharmaceutical, and healthcare firms) exceeded the historical level for the third year in a row. The value of accounting case settlements in this sector has also grown substantially over the last few years.
  •     Both the number and proportion of accounting case settlements involving restatements increased markedly compared to recent years.
  •     For the past seven years, the majority of accounting case filings have included allegations of internal control weaknesses. This trend continued in 2016, with 59 percent of accounting case filings containing these allegations. An even larger share of 2016 accounting case settlements, 70 percent, included allegations of internal control weaknesses.
  •     The median settlement value for cases involving write-downs spiked to $18.6 million in 2016, compared to $10.5 million for 2007–2015.

About Accounting Cases
Cases are considered “accounting cases” if they involve allegations related to Generally Accepted Accounting Principles (GAAP) violations, auditing violations, or weaknesses in internal control over financial reporting.

About Cornerstone Research
Cornerstone Research provides economic and financial consulting and expert testimony in all phases of complex litigation and regulatory proceedings. The firm works with an extensive network of prominent faculty and industry practitioners to identify the best-qualified expert for each assignment. Cornerstone Research has earned a reputation for consistent high quality and effectiveness by delivering rigorous, state-of-the-art analysis for over 25 years. The firm has 700 staff and offices in Boston, Chicago, London, Los Angeles, New York, San Francisco, Silicon Valley, and Washington. Please visit Cornerstone Research’s website for more information about the firm’s capabilities in economic and financial consulting and expert testimony.

http://www.cornerstone.com
Twitter: @Cornerstone_Res

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