Among the more significant securities class action filing trends in recent years has been the rise in event-driven litigation – that is, lawsuits based on adverse developments in the defendant company’s business operations, as opposed to allegations based on alleged financial or accounting misrepresentation. But while event-driven suits arguably have garnered the most attention, the reality is that the number of federal court securities class action lawsuits involving accounting allegations was at “record levels” in 2019, at least when merger-related accounting suits are taken into account. According to a new report from Cornerstone Research, the number of securities suit filings in 2019 involving accounting allegations was nearly double the historical average. The March 25, 2020 report, entitled “Accounting Class Action Filings and Settlements: 2019 Review and Analysis” can be found here. Cornerstone Research’s press release describing the report can be found here.
What is an “Accounting Filing”?: In classifying cases, the report considers a securities suit filings as an “accounting filing” if the complaint 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.
The Total Number of Accounting Case Filings (Inclusive of M&A Related Accounting Case Filings): According to the report, there were 169 federal court securities class action lawsuits filed in 2019, representing 42% of the 404 federal court securities suit filings during the year. The number of accounting suit filings is at the historically highest level and the proportion of accounting cases relative to total filings is at the second highest in the last ten years. (In 2011, the proportion of accounting cases to total filings was 43%).)
The number of accounting cases in 2019 (169) increased by 18% over the 143 accounting cases filed in 2018, driven by increases both in “core” filings and in increased in M&A-related filings. The total number of accounting case filings in 2019 (169) was nearly double the 2010-2018 average number of accounting case filings of 86.
The Number of Core Accounting Case Filings: The picture looks a little bit different when core filings only are taken into account (i.e., when M&A-related lawsuit are removed from the analysis). While the numbers of core federal court filings raising accounting allegations are up slightly compared both to 2018 and compared to long term averages, the numbers both year over year and compared to historical averages are not as significantly higher as when the M&A filings are taken into account.
There were 67 core federal court securities suit filings involving accounting allegations in 2019, slightly more than the 64 in 2018. The 67 core accounting suit filings in 2019 was also slightly above the 61 annual average number of core accounting-related securities suit filings during the period 2010-2018. The number of core federal court accounting-related filings increased for the second consecutive year and was approximately 10 percent higher than the 2010-2018 average.
However, the 67 core accounting-related securities suit filings in 2019 represented only 27% of the 244 total core filings during the year, down from 29% of total core filings in 2018. Indeed the core accounting-related lawsuits as a proportion of total core lawsuit filings was at its lowest level in 2019 of any year since 2010.
Market Capitalization Losses Alleged in Accounting Cases: The Disclosure Dollar Losses reflected in core accounting-related cases was up significantly in 2019 relative to long-term measures, although down slightly from record levels in 2018. (Disclosure Dollar Losses reflects the dollar value change in the defendant firm’s market capitalization between the trading day preceding the end of the class period and the trading day following the end of the class period.) The aggregate of Disclosure Dollar Losses for core accounting-related federal court lawsuits was $54.2 billion in 2019, compared to $54.8 billion in 2018 and compared to the 2010-2018 annual average of $34.2 billion.
The significant 2019 total was in part a reflection of the fact that there were two core accounting-related filings in 2019 with Disclosure Dollar Losses of at least $5 billion. Excluding these mega cases, the Disclosure Dollar Losses for core accounting-related filings was at the third-highest level in the last three years, “consistent with a continued trend of filings against larger issuer defendants as measured by market capitalization.”
Dismissal Rates for Accounting Cases: From 2010 through 2018, 45 percent of core accounting cases settled, 40 percent were dismissed, 14 percent are ongoing, and 1 percent were remanded. While more recent years are as yet not fully developed, the 2016 core accounting-related filings will have a dismissal rate of 47 percent, suggesting a higher dismissal rate for more recently filed cases.
The percentage of core accounting cases dismissed in the first three years increased from 2014 through 2016. The percentage of core 2016 accounting cases dismissed within the first three years is the highest in the last ten years.
Dismissal rates for M&A-related accounting-related suits, by contrast to core accounting-related suits, are dismissed at a much higher rate. Over the last three years, 84% of M&A-related accounting cases have been dismissed.
Lead Plaintiffs in Accounting-Related Cases: Individual investors are being appointed as lead plaintiff in core accounting-related securities suits more frequently than institutional investors. On average, over the last ten years, individual investors were appointed as lead plaintiff in 60% of core accounting cases. Institutional investors were appointed as lead plaintiffs more often than institutional investors in only three of the last ten years and not since 2014.
Accounting Cases by Market Cap Size of Defendant Company: During 2019, the average annual median market capitalization of the issuer defendants in core accounting-relates securities suits was $1.1 billion, down slightly from $1.5 billion, but well above the 2010-2018 average annual median market capitalization of $790.3 million (representing an increase of 43 percent). Over the last six years, core accounting cases have been filed against larger defendants; the size of issuer defendants in 2019 core accounting-related securities suit filings was the third largest in ten years.
Accounting Cases by Industry: For the second consecutive year, there were more core accounting-relates securities suit filings in 2019 against Consumer Non-Cyclical sector (which included biotechnology, healthcare and pharmaceutical companies) than any other sector. There were twice as many cases in 2019 against companies in this sector as were in the Financial sector, the second-largest sector. The number of core accounting cases filed in 2019 against companies in the Consumer Non-Cyclical sector increased by 57 percent in 2019.
Core Accounting Cases Involving Restatements: The number of core accounting-related securities suits filings in 2019 was at its highest level since 2015. There were 19 core accounting cases involving restatements in 2019, representing 28% of all accounting-related securities suit filings. The 19 restatement related securities suit filings in 2019 was level with the 2010-2018 annual average of 19. Over 75% of cases involving a restatement over the last ten years included allegations of internal control weaknesses.
The Number and Value of Accounting Case Settlements: There were fewer securities class action lawsuit settlements overall in 2019 (74) than in 2018 (78), and fewer accounting related securities suit settlements in 2019 (34) compared to 2018 (41). There were also fewer accounting related settlements in 2019 (34) than compared to the 2010-2018 average annual number of accounting-related settlements (46). As a percentage of all settlements (46%), the proportion of accounting-related settlements relative to the total number of securities suit settlements decreased to its lowest level in ten years.
Settlement Aggregates, Averages, and Medians: The value of all securities suit settlements in 2019 ($2 billion) shrank considerably compared to 2018 ($5.2 billion) largely due to the absence during the year of any settlements over $500 million. 45%, or $920 million, of the $2 billion in aggregate 2019 settlements represented settlements of accounting-related securities suits (the second lowest proportion over the last ten years). The median settlement of accounting related cases in 2019 was $10.6 million, compared to $9.7 million in 2018. The average settlement of accounting-related cases in 2019 was $27.1 million, compared to $111.3 million (largely a reflection of the lower number of mega settlements in 2019 compared to the year prior).