Cornerstone Research: Accounting-Related Securities Class Action Filings Continue to Rise in 2020

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Accounting case settlement value more than tripled, driven by increase in mega settlements.

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Accounting issues remain at the forefront of the largest securities class action settlements, and recent trends in case filings suggest that is unlikely to change in the near future.

Against the backdrop of a worldwide pandemic and a decline in overall securities class action filing activity, the number of securities class action filings involving accounting allegations increased in 2020 for the third consecutive year, according to a report released today by Cornerstone Research.

The report, Accounting Class Action Filings and Settlements—2020 Review and Analysis, found that accounting allegations continue to have a substantial impact on securities class actions. Accounting allegations were present in more than 30% of all federal securities class action filings, and accounting cases made up 84% of total settlement dollars in 2020.

Plaintiffs filed 70 securities class action lawsuits involving accounting allegations in 2020, up from 67 the previous year and the second-highest number in the last 10 years.

There were 38 accounting case settlements in 2020, more than the 34 settlements in the previous year but still lower than in the peak years of 2015 to 2017. The number of accounting case settlements represented almost 50% of all securities class action settlements in 2020.

Total accounting case settlement dollars rose to $3.5 billion in 2020, more than triple the total of $932 million in 2019. This increase was driven by a small number of mega settlements (those valued at $100 million or higher). The median accounting case settlement value was $10.8 million, comparable to the median settlement value of $10.6 million in 2019.

For defendant companies named in accounting case filings, the Disclosure Dollar Loss Index® (DDL Index®), a measure of market capitalization losses, reached its highest level in the last 10 years. Market capitalization losses for accounting case filings were 77% higher than the 2011–2019 annual average DDL for accounting cases.

Author Commentary
Elaine M. Harwood, Senior Vice President: “Despite the COVID-19 pandemic, accounting class action filings reached their highest level since 2011. More than one-third of accounting cases filed in 2020 included allegations of improper revenue recognition, nearly double the proportion in 2019.”

Frank T. Mascari, Principal: “The trend of accounting case filings against larger companies observed in 2019 continued in 2020. The 10 largest issuer defendants accounted for almost 70% of the market capitalization losses for accounting cases in 2020.”

Laura E. Simmons, Senior Advisor: “Accounting issues remain at the forefront of the largest securities class action settlements, and recent trends in case filings suggest that is unlikely to change in the near future.”

Highlights

  • Defendant firm size, filings: At $1.3 billion, the median market capitalization of issuer defendants in 2020 was almost 18% higher than the 2019 median market capitalization of $1.1 billion, and 56% greater than the 2011–2019 average.
  • Defendant firm size, settlements: The median market capitalization of $934.1 million in accounting case settlements was 41% higher than the average annual median for 2011–2019.
  • Dismissals: The first-year dismissal rate of accounting cases filed in 2020 was 3%, the lowest percentage of current-year dismissals over the last 10 years.
  • Restatements: There were 11 accounting case filings involving financial statement restatements in 2020, the lowest level in 10 years. In 2020, the proportion of settled accounting cases involving restatements was also the lowest over the last 10 years.
  • Internal control weaknesses: There were 25 accounting case filings containing an allegation, but no announcement, of internal control weaknesses, the highest level since 2015. Of the 19 settlements in 2020 that involved a company announcement of an internal control weakness, 42% also involved a restatement.
  • Industry: For the third year in a row, there were as many or more accounting case filings and accounting case settlements in the Consumer Non-Cyclical sector (including biotechnology, healthcare, and pharmaceutical companies) than any other industry sector.

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

This year’s report focuses on federal securities class action filings containing Rule 10b-5, Section 11, or Section 12(a) claims, previously referred to as “core” filings.

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 more than 30 years. The firm has over 700 staff and offices in Boston, Chicago, London, Los Angeles, New York, San Francisco, Silicon Valley, and Washington.

See 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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Zinie Sampson
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