Cornerstone Research: Accounting-Related Securities Class Action Filings Rise to Unprecedented Levels

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Accounting case settlement size declines

Securities class action filings containing accounting allegations rose to unprecedented levels in 2017, according to Accounting Class Action Filings and Settlements - 2017 Review and Analysis, a new report by Cornerstone Research. There were a record 165 accounting filings during 2017, nearly twice the 88 filed in 2016.

According to the annual report, the number of accounting-related settlements rose from 46 to 49, the highest number since 2010. Total accounting settlement value, however, declined substantially in 2017, from $4.9 billion in 2016 to $861.6 million.

The overall increase in accounting case filings was driven by 107 “nontraditional” filings that related to mergers and acquisitions (M&A). All of these nontraditional filings contained accounting disclosure allegations. The number of “traditional” (or non-M&A) filings dipped from 64 in 2016 to 58 in 2017 but involved larger defendant firms.

“Relatively larger defendant issuers have been the subject of traditional accounting class action filings in each of the past four years,” noted Elaine Harwood, a Cornerstone Research vice president and head of the firm’s accounting practice. “We have not seen class action filings against firms of this size since 2008.”

“While event-driven litigation has gained recent attention, we find that accounting-related claims continue to be prevalent allegations and are a significant determinant of settlement outcomes,” said Laura Simmons, a Cornerstone Research senior advisor and a report co-author.

Highlights

  • Industrial sector spiked: The Industrial sector saw 22 percent of traditional accounting case filings in 2017, double the historical average. The Disclosure Dollar Loss (DDL) for accounting case filings in this sector was the largest among all sectors for the first time in the last 10 years.
  • Restatements declined: For the third consecutive year, the number of traditional accounting case filings involving restatements declined. The number of 2017 restatement cases was 35 percent lower than the historical average; restatement case DDL was 49 percent lower than the historical average. 
  • No auditor defendants named: There were no auditor defendants named in traditional accounting case filings during 2017—the first year that has happened since enactment of the Private Securities Litigation Reform Act of 1995 (PSLRA).
  • Total settlement value declined: The total settlement value attributable to accounting cases was the lowest since 1999, with only two accounting-related settlements reaching $100 million or more.
  • Larger defendant firms observed as settlement size shrinks: Despite smaller settlement sizes, issuer defendants involved in accounting settlements were the largest observed over the past five years.
  • Restatement cases garnered higher settlements: Cases involving financial statement restatements settled for substantially higher amounts than non-accounting cases.

About Accounting Cases

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

“Traditional” accounting cases are filings that include alleged violations of Rule 10b-5, Section 11, and/or Section 12(a)(2). “Nontraditional” accounting cases do not include these allegations and are specifically related to M&A accounting cases.

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.

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

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