In its recently released annual analysis of securities class action litigation, PricewaterhouseCoopers observes that while 2013 may not have been a particularly noteworthy year in the securities class action litigation arena, “significant events and announcements in 2013 have set the stage for potentially sweeping changes in the future.” The PwC report, which is entitled “Are Changes on the Horizon?: 2013 Securities Litigation Study” can be found here. PwC’s April 11, 2014 press release about the report can be found here.
In making its suggestion that there may be significant changes ahead, the PwC report is relying on a number of factors, including first and foremost the U.S. Supreme Court’s reconsideration of the “fraud on the market” theory in the Halliburton case currently pending before the Court. The report cites a number of other factors as well, most particularly be the SEC’s July 2013 creation of the Financial Reporting and Audit Task Force.
The SEC’s new Task Force is dedicated to identifying and prosecuting those involved in accounting and financial reporting. The Task Force’s efforts will be substantially aided by the many whistleblower reports flooding into the agency, as well as the analytic tools at the Task Force’s disposal, such the agency’s Accounting Quality Model. The PwC report notes that “an SEC Task Force dedicated to financial fraud, this is equipped with modern tools and a potential army of whistleblowers waiting in the shadows to report misconduct, will inevitably lead to a greater number of financial fraud cases.”
As companies announce their involvement in SEC investigations or enforcement actions, “securities litigation will inevitably follow.” The PwC report suggests that while there may be a delay before the litigation impact, “it may only be a matter of time before the number of accounting related cases returns to previous highs.”
The PwC report also notes that during 2013, there was an increase in the number of companies completing initial public offerings compared to the immediately preceding years and that many of the IPO companies are completing their listings by taking advantage of the JOBS Act provisions for Emerging Growth Companies. The PwC report states that the companies taking advantage of the JOBS Act provisions “may be at a heightened risk of becoming the subject of litigation.” The reduced level of financial information that EGCs are required to provide “may increase the potential for allegations of omissions and/or inadequate disclosures regarding factors detrimental to the current financial position and future prospects.”
According to the PwC report, there were 160 securities class action lawsuits filed in 2013, up from 149 in 2012 but below the annual average number of filings (179) since the enactment of the Private Securities Litigation Reform Act. The report also notes that in 2013 there were the fewest numbers of accounting fraud cases during the 18 years that PwC has been completing its annual securities litigation survey. The low levels of accounting fraud allegations held both with respect to the absolute numbers of accounting fraud filings (46) and to the percentage of all cases filed (29%).
The report notes that with respect to the accounting cases that were filed, allegations of internal control deficiencies are cited more frequently than any other type of allegation. In 2013, 70% of all accounting-related cases alleged inadequate internal controls, or controls that were inappropriately designed, overridden or ineffective. The 70% figure for 2013 accounting-related cases is higher than the 6) of accounting cases in 2012, and represents the highest percentage of accounting cases citing internal control allegations in over ten years.
The report also notes that companies should be wary of any notion that they are “too small “to attract the attention of the plaintiffs’ lawyers. According to the PwC report, in 2012 and in 2013 respectively, 61% and 67% of all companies named in securities class action lawsuits had market capitalizations under $2 billion.
As was the case in 2012, the industry that attracted the highest percentage of securities class action lawsuit filings was the health industry, which was hit with 23% of all filings in both 2012 and 2013. The report notes a number of factors that cause the health industry to attract litigation. First, at least with respect to pharmaceutical companies and medical device companies, “both are heavily dependent on the successful launch of new drugs and products.” Because of marketplace pressure to keep investors apprised of product developments throughout the produce development life cycle, inevitably if problems later emerge investors may question the accuracy of prior statements about the products.
The health industry is also heavily regulated by multiple government agencies. As the report notes, “from research and development, to manufacturing, marketing, selling and billing, companies in the health industry are under intense government scrutiny – with securities litigation as a bi-product if allegations of non-compliance with regulations are made or investigations are initiated.”
Of non-U.S. companies named in securities class action lawsuits in 2013, the country with the most companies sued was Canada. The report notes that this may be due to the fact that in general companies in the mining sector – an important part of the Canadian economy—attracted significant litigation activity in 2013.
The PwC report notes that the number of securities class action settlements in 2013 (69) was roughly the same as the number in 2012 (70). However, the average securities class action settlement in 2013 of $49.6 million was 32% greater than the 2012 average and 21% greater than the five year average. The 2013 average was pulled upward by a number of significant settlements during the year of large cases relating to the financial crisis. The report cautions that these larger settlement figures “should not be viewed as the new ‘normal’ by the plaintiffs’ bar and by mediators” and notes that as the financial crisis cases filter out “total settlement value and average settlement amount will likely decrease in coming years, barring any new trend or industry practice that leads to increases in case filings and the resulting settlements.”
While the average securities class settlement in 2013 was higher than in 2012 and when compared to the average of the preceding five years, the median settlement was unchanged. The median settlement in 2013 was $9.1 million, the same as in 2012, and above 2011 ($8.9 million) but below 2010 ($10.8 million).