According to Cornerstone Research’s latest annual survey of accounting-related securities suits, the number of accounting-related securities suit filings rose to the highest level in years in 2016, largely as a result of the number of federal court merger objection lawsuit filings involving accounting-related allegations during the year. The total value of accounting settlements during the year was also at the highest level in years. The Report, entitled “Accounting Class Action Filings and Settlements: 2016 Review and Analysis,” can be found here. Cornerstone Research’s April 5, 2017 press release about the report can be found here.
The annual Cornerstone Research report examines accounting-related securities class action lawsuit filings and settlements. Accounting-related suits are those involving allegations related to Generally Accepted Accounting Practices (GAAP) violations, auditing violations, or weaknesses in internal controls over financial reporting.
According to the report, there were 93 securities class action filings with accounting allegations, compared with 70 in 2015, representing a 32.8% year-over-year increase. This increase is largely attributable to the “unprecedented” number of federal filings involving merger and acquisition transactions that included accounting-related allegations. The 93 accounting-related securities suit filings in 2016 was the highest annual number of these kinds of lawsuit filings since 2008. The number of accounting-related securities suit filings has increased every year since 2012.
The 93 accounting-related securities suit filings is well above the 2007-2015 annual average number of accounting-related securities suit filings of 67, representing an increase over the average of 38.8%. Total accounting related filings exceeded the historical average in 2016 for the third year in a row.
While the overall number of accounting-related securities suit filings increased substantially in 2016, the number of “traditional” accounting-related securities suits (that is alleging violations of Rule 10b-5, Section 11, or Section 12(a)(2)) remained unchanged in 2016 – there were 69 traditional securities suits with accounting-related allegations in 2016, as well as in 2015 and 2014.
Of the total of 270 securities class action lawsuits filed in 2016, there were a total of 78 merger objection related lawsuits, of which 24 involved accounting allegations. In the merger-related cases involving accounting allegations, the plaintiffs alleged that the defendant company failed to provide a reconciliation of non-GAAP measures to GAAP measures. Report co-author Elaine Harwood is quoted in the press release as saying “This is the first time we have seen so many M&A filings with GAAP-related allegations.”
The aggregate disclosure dollar loss (DDL) that the 2016 accounting-related securities suit filings represented was also at its highest level in three years. DDL is the dollar value change in change in the defendant firm’s market cap between the trading day immediately before the end of the class period and the trading day immediately after the end of the class period. The aggregate DDL for accounting-related cases was $47.7 billion in 2016, compared to $34.6 billion in 2016, and compared to a 2007-2015 annual average for accounting related cases during the period 2007-2015 of $37.2 billion.
The number of accounting-related securities suit settlements dipped slightly from 50 such settlements in 2015 to 46 settlements in 2016. The number of settlements in 2016 was also below the 2007-2015 annual average number of settlements of 53. The report notes that the number of accounting case settlements as a percentage of the annual number of all securities suit settlements is consistently higher than the percentage of all filings that the accounting-relates suits represent, because the accounting cases are less likely to be dismissed (and thus more likely to settle). The report also notes that accounting allegations are often added as a case progresses beyond the initial complaint, which would also explain the larger percentage of accounting-related case settlements as a portion of all securities suit settlements.
While the number of accounting-related securities suit settlements decreased slightly in 2016, the value of those settlements increase substantially during the year compared to the prior year. In 2016, accounting-related securities suit settlements totaled $4.8 billion, compared to $2.7 billion in 2016, an increase of nearly 80 percent. The average and median accounting-related settlements also increased in 2016 compared to 2015. The average accounting-related securities suit settlement during 2016 was $104.2 million, compared to $53.3 billion. The median accounting related settlement in 2016 was $8.9 million, compared to $6.8 billion.
The aggregate, average, and median settlement values for accounting-related cases in 2016 was also higher than the equivalent values for non-accounting cases. Thus the 2016 aggregate value of accounting-related securities suit settlements of $4.8 billion was substantially higher than the $1.2 billion aggregate value of the nonaccounting-related settlements during the year. The 2016 average of $104.2 million for accounting settlements was substantially higher than the $30.6 million average for nonaccounting-related settlements during the year, and the 2016 median of $8.9 million for accounting-related settlements was slightly higher than the $8.5 million median settlement for nonaccounting-related securities suits in 2016.
The press release quotes report co-author Laura Simmons as saying that accounting cases often represent the majority of the total value of all settlements reached during a given year, noting that in 2016, almost 75 percent of the total value of cases settled during the year was associated with accounting case settlements.
The number of accounting-related securities suit filings involving restatements stayed flat in 2016 compared to 2015. There were 20 cases alleging restatements in 2016 and in 2015, compared to an annual average of 22 restatement cases during the period 2007-2015. There were, however, 26 restatement case settlements in 2016, compared to only 18 in 2015. The increase in the number of restatement case in settlements is due in part to the number of filings involving restatements in 2014.
For the past several years, the majority of accounting-related securities suit filings have included allegations of internal control weaknesses. This trend continued in 2016, with 59 percent of accounting cases involving internal control weakness allegations. Seventy percent of 2016 accounting case settlements involved allegations of internal control weaknesses.