Value of Accounting Securities Class Action Settlements in 2018 Reaches Second-Highest Level in 10 Years

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Cornerstone Research report: Accounting-related securities class action filings also remain uncharacteristically high

The trends we have observed over the past few years indicate that accounting allegations continue to be an important part of both securities class action filings and settlements. - Elaine Harwood, Cornerstone Research Vice President

Securities class action settlements involving accounting allegations reached the second-highest total in the last 10 years. At the same time, accounting case filings dropped slightly in 2018 but still remained at uncharacteristically high levels, according to a report released today by Cornerstone Research.

The report, Accounting Class Action Filings and Settlements—2018 Review and Analysis, found that while the number of accounting case settlements declined to 41 in 2018 from 49 in the previous year, total settlement value increased by more than five times to almost $4.5 billion, compared to $883 million in 2017. The dramatic increase was due to a handful of large settlements.

There were 143 accounting case filings during 2018, down from 165 in 2017, but still nearly 86 percent higher than the 20092017 historical average. The total was driven by the filing of 79 M&A-related accounting cases alleging failure to reconcile a non-GAAP measure to a GAAP measure.

Author Commentary

Elaine Harwood, Vice President: “The trends we have observed over the past few years indicate that accounting allegations continue to be an important part of both securities class action filings and settlements.”

Frank Mascari, Principal: “Market capitalization losses for core accounting case filings rose to its highest level in the last 10 years, corresponding with the trend of cases being filed against larger issuer defendants.”

Laura Simmons, Senior Advisor: “2018 was a milestone year in that the total value of all cases settled since the passage of the Private Securities Litigation Reform Act in 1995 surpassed $100 billion—accounting cases have represented the vast majority of those settlements, totaling over $86 billion.”

Highlights

  •      Accounting case filing and settlement activity. There were 64 core accounting case filings in 2018, an increase of 10 percent from 2017. Accounting case settlements comprised 88 percent of the total value of securities settlements.
  • Defendant firm size. At $1.5 billion, median market capitalization of issuer defendants in core accounting case filings was more than double the 2009–2017 average. The median market capitalization of issuer defendants in accounting case settlements was the second largest in the last 10 years.
  • Large accounting case settlements. Out of the five settlements in 2018 that were $100 million or more (mega settlements), all involved alleged weaknesses in internal controls, and four involved allegations of GAAP violations.
  • Restatements. Cases involving financial statement restatements were 20 percent of the total number of core accounting case filings. Three out of the five mega settlements in 2018 involved restatements.
  • GAAP allegations. Median settlement amounts for cases involving GAAP allegations almost doubled, from $5.5 million in 2017 to $10 million in 2018.
  • Industry. The number of accounting cases filed in the Financial sector increased by 83 percent in 2018. The value of Energy sector accounting case settlements represented nearly 70 percent of the total for all accounting settlements in 2018.

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.

“Merger and acquisition (M&A)” filings are securities class actions that have Section 14 claims, but no Rule 10b-5, Section 11, or Section 12(2) claims, and involve M&A transactions. “Core” filings are all federal securities class actions excluding those defined as M&A 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 30 years. The firm has 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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