Accounting class-action suit settlement size jumped last year
By Michael Cohn
The total value of securities class-action settlements involving accounting allegations reached the second-highest level in the past 10 years, according to a new report.
The report, from Cornerstone Research, found uncharacteristically high levels of case filings, although the number of accounting case filings dropped a bit last year, as did the number of case settlements.
The number of accounting case settlements declined to 41 in 2018 from 49 in 2017, but the total settlement value jumped more than five times to nearly $4.5 billion, compared to $883 million in 2017.
The dramatic increase was thanks to a handful of large settlements. Out of the five mega-settlements last year that were $100 million or more, all involved alleged weaknesses in internal controls, while four involved allegations of violations of GAAP.
The median settlement amounts for cases involving GAAP allegations nearly doubled, from $5.5 million in 2017 to $10 million in 2018.
While there were 143 accounting case filings last year, down from 165 in 2017, that was still nearly 86 percent higher than the 2009-2017 historical average. The total was driven by the filing of 79 M&A-related accounting cases alleging failure to reconcile a non-GAAP measure to a GAAP measure.
“The trends we have observed over the past few years indicate that accounting allegations continue to be an important part of both securities class-action filings and settlements,” said Cornerstone Research vice president Elaine Harwood in a statement.
Cases involving financial statement restatements made up 20 percent of the total number of core accounting case filings. Three out of the five mega-settlements in 2018 involved restatements.
There were 64 core accounting case filings in 2018, an increase of 10 percent from 2017. Accounting case settlements made up 88 percent of the total value of securities settlements.
The size of the defendants in such cases also went up dramatically last year. At $1.5 billion, the median market capitalization of issuer defendants in the core accounting case filings was more than double the average for 2009 to 2017. The median market capitalization of the issuer defendants in accounting case settlements was the second largest in the past decade.
“Market capitalization losses for core accounting case filings rose to its highest level in the last 10 years, corresponding with the trend of cases being filed against larger issuer defendants,” said Cornerstone Research principal Frank Mascari.
By industry, the number of accounting cases filed in the financial sector increased 83 percent in 2018. The value of accounting case settlements in the energy sector represented nearly 70 percent of the total for all accounting settlements last year.
“2018 was a milestone year in that the total value of all cases settled since the passage of the Private Securities Litigation Reform Act in 1995 surpassed $100 billion,” said Cornerstone Research senior advisor Laura Simmons in a statement. “Accounting cases have represented the vast majority of those settlements, totaling over $86 billion.”