New accounting class-action lawsuit filings declined sharply last year after a spike in 2011, according to a new report, but settlement amounts in such cases have grown since 2011.
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A slowdown in filing activity in the second half of the year also contributed to the sharp decline in class action filing activity overall, and in the share of filings that include accounting allegations.
The drop in Chinese reverse merger cases alone accounted for approximately two-thirds of the decline in new accounting cases from 2011 to 2012. For the third consecutive year, the majority of new accounting cases that were filed included allegations of internal control weaknesses. Approximately one in three new cases involved a financial statement restatement.
Despite the decline in new case filings, accounting case settlement dollars represented over 90 percent of all settlement dollars for securities class actions in 2012, and the average and median settlements for accounting cases were higher than for non-accounting cases. For cases with GAAP allegations, settlements in relation to shareholder losses were highest for those that involved a financial statement restatement and/or accounting irregularity. Cases involving company announcements of internal control weaknesses increased to almost 45 percent of all settled cases in 2012 from 34 percent in 2011, and were associated with higher settlements.
“Accounting cases have had high settlements for a number of years,” said Cornerstone Research vice president Elaine Harwood. “Despite the ups and downs, that continues. Accounting cases account for a greater percentage of the total value of all settlements. They are also less likely to be dismissed. More of them settle, so you have a greater number of accounting cases each year that are being settled.”
Cornerstone found that the number of settlements in accounting cases is greater than in non-accounting cases, and they typically settle for higher dollar amounts. The median settlement amount for an accounting case in 2012 was $15 million, compared to $6 million for non-accounting cases. That’s up from 2011, when the numbers were $12 million for accounting cases and $4 million for non-accounting cases.
During 2012, there were six settlements that Cornerstone would classify as “mega-settlements,” defined as over $100 million, compared to three mega-settlements in 2011. The top five “mega-settlements” were all accounting cases, in which either violations of GAAP or weaknesses in internal controls over financial reporting were alleged. AIG was the top settlement, at about $822 million, followed by Lehman Brothers and Bear Stearns in the top three.
Cornerstone also found that financial restatements by accelerated filers increased in 2012. “We know that holding everything else constant, if you have a case with a restatement, there is approximately a 15 percent increase in the settlement amount,” said Harwood. “We also know that there are a number of whistleblowers. The Dodd-Frank whistleblower program led to 3,001 tips to the SEC during fiscal year 2012, and the number one category of tips was related to corporate disclosures and financials.”
Factors such as the whistleblower program in the Dodd-Frank Act, a recent increase in restatements of financial statements by accelerated filers, and the JOBS Act extension of the exemption from auditor reports on internal controls for emerging growth companies are watch areas for future accounting-related litigation trends, according to the report.
Harwood noted that 2012 was the first year of the Dodd-Frank whistleblower program. “We’ll have to wait to see what might happen next year, but what we saw in the first year was that 18 percent of the tips—the number one category—was in the area of corporate disclosures and financials.”
Separately, PricewaterhouseCoopers released its own
The number of cases that alleged accounting fraud decreased from 74 in 2011 to 51 in 2012, a 31 percent decline. According to PwC, the decline reflects a dwindling number of cases against financial institutions.
