Driven by a general overall increase in the number of securities class action lawsuit filings, as well as by an increase in the number of M&A-related lawsuits involving accounting allegations, the total number of securities class action lawsuits involving accounting allegations filed in 2018 was well above historical levels, according to a newly released Cornerstone Research report. Also consistent with overall securities suit settlement patterns during the year, the value of settlements of securities suits with accounting allegations during 2018 was at second-highest level in in the last ten years. The Cornerstone Research report, entitled “Accounting Class Action Filings and Settlements: 2018 Review and Analysis,” can be found here. Cornerstone Research’s April 17, 2019 press release about the report can be found here.
Background: Cornerstone Research’s latest is the third of three reports Cornerstone Research has issued regarding 2018 securities suit developments. The first of the three, discussed here, reported that when both state and federal securities class action lawsuit filings are taken into account, the 2018 securities suit filings were at highest-ever levels. The second report, discussed here, showed that aggregate, average, and median securities suit settlements increased in 2018. The latest report, focused on the 2018 filings and settlements in cases involving accounting allegations, is consistent with the two prior reports and show that accounting case filings and settlements in 2018 were at levels above those of recent years.
Meaning of Terms Used: The report examines “accounting filings,” which it defines as securities class action lawsuit filings involving allegations related to Generally Accepted Accounting Principles (GAAP) violations, violations of other reporting standards, auditing violations, or weaknesses in internal controls over financial reporting. The report examines the total number of accounting filings, the number of accounting filings as percentage of all securities suit filings, and the number and percentage of “core” securities suits involving accounting allegations. “Core” filings are the securities lawsuits that do not involve merger objection allegations.
The report also uses the term Disclosure Dollar Loss (DDL) to describe the loss of market capitalization alleged in securities suit filings. DDL describes the dollar value change in a defendant company’s market capitalization between the last trading day before the end of the class period and the trading day immediately following the end of the class period.
Total Number and Proportion of Accounting Filings: There were 143 total accounting filings in 2018, the second highest number on record, behind only the 165 total accounting filings in 2017. The decrease in 2018 relative to 2017 represents a decline of about 13%. The 143 accounting filings in 2018 was 86 percent higher than the 2009-2017 annual average number of accounting filings of 77. While the total number of accounting filings was at record high levels in 2017 and 2018 (consistent with the overall increase in the number of securities class action lawsuits in those years), the proportion of accounting cases to total cases (35%) remained consistent with the historical average proportion (36%).
Number and Proportion of “Core” Accounting Filings: There were 64 core accounting filings in 2018, representing a 10% increase over the 58 core accounting filings in 2017. The 64 core accounting filings in 2018 were slightly higher than the 2009-2017 average number of core accounting filings of 61. The core accounting filings represented 29% of all core securities suit filings, the lowest percentage in the last ten years, other than the 28% percentage in 2017. The lower percentage of core accounting filings in 2017 and 2018 as a proportion of all core filings suggests that as the number of core securities suit filings increased during those two years, the proportion of cases involving accounting allegations has declined.
The fact that the number of core accounting filings in 2018 was roughly the same as the number of annual core accounting filings over the last ten years suggests that the overall increase in the total number of accounting filings described in the preceding paragraph is largely due to an increase in the number of non-core (that is, M&A-related) securities suit filings.
Accounting Cases Involving Restatements: There were 13 accounting filings in 2018 involving restatements, the same number as in 2017, but down from the 2009-2017 annual average number of accounting cases involving restatements (19). The 2018 restatement cases as a percentage of all core accounting filings (20%) was the lowest level in the last ten years. Both the number (14) and the percentage (34%) of accounting case settlement in 2018 were the lowest since 2013, consistent with the general overall decline in the number of accounting restatements. However, three of the five largest securities class action lawsuit settlements in 2018 involved financial restatements.
Market Cap Size of Core Accounting Case Defendants: The median market capitalization of core accounting case defendants in 2018 filings was roughly $1.5 billion, the highest level in the last ten years more than double the 2009-2017 average annual median market capitalization of $652 million. Over the past five years, accounting cases have been filed against larger issuer defendants than in prior years. Larger issuer defendants firms are generally associated with higher accounting case settlement amounts.
Market Capitalization Losses in 2018 Core Accounting Case Filings: The core accounting filings in 2018 represent an aggregate total of $53.9 billion in DDL, which is 68 percent greater than the average annual DDL for all accounting cases during the period 2009-2017 ($32 billion), and in fact the highest annual level in ten years. The increase in DDL is consistent with the increase in the size of the issuer defendants as measured by market capitalization.
Number and Proportion of Accounting Case Settlements: The number of accounting case settlements in 2018 (41) declined relative to the number of accounting case settlements in 2017 (49), and relative to the 2009-2017 annual average number of accounting case settlements (48). The proportion of 2018 accounting case settlements as a percentage of all securities suit settlements (53%) was at the second lowest level in the last ten years. The proportion of accounting case settlements as percentage of all settlements is higher than the proportion of accounting cases among all securities suit filings, suggesting that accounting cases are less likely to be dismissed and thus more likely to settle. The report notes that accounting allegations are often added as cases progress, including even with respect to event-drive securities litigation.
The Value of Accounting Case Settlements: The total value of accounting case settlements in 2018 was $4.48 billion, representing 88% of all securities suit settlement value during the year, and also representing the second highest total over the last ten year. The increase during 2018 was largely attributable to a number of very large settlements during the year; all five of the settlements of over $100 million during the year involved accounting allegations.