September 28, 2021

Volume XI, Number 271

Advertisement

September 28, 2021

Subscribe to Latest Legal News and Analysis

September 27, 2021

Subscribe to Latest Legal News and Analysis
Advertisement

Accounting-Related Securities Class Action Filings Continue to Rise in 2020

Accounting case settlement value more than tripled, driven by an increase in mega settlements.

Against the backdrop of a worldwide pandemic and a decline in overall securities class action filing activity, the number of securities class action filings involving accounting allegations increased in 2020 for the third consecutive year, according to a report released by Cornerstone Research.

The report, Accounting Class Action Filings and Settlements—2020 Review and Analysis, found that accounting allegations continue to have a substantial impact on securities class actions. Accounting allegations were present in more than 30% of all federal securities class action filings, and accounting cases made up 84% of total settlement dollars in 2020.

More than one-third of accounting cases filed in 2020 included allegations of improper revenue recognition, nearly double the proportion in 2019.

Plaintiffs filed 70 securities class action lawsuits involving accounting allegations in 2020, up from 67 the previous year and the second-highest number in the last 10 years.

There were 38 accounting case settlements in 2020, more than the 34 settlements in the previous year but still lower than in the peak years of 2015 to 2017. The number of accounting case settlements represented almost 50% of all securities class action settlements in 2020.

Total accounting case settlement dollars rose to $3.5 billion in 2020, more than triple the total of $932 million in 2019. This increase was driven by a small number of mega settlements (those valued at $100 million or higher). The median accounting case settlement value was $10.8 million, comparable to the median settlement value of $10.6 million in 2019.

For defendant companies named in accounting case filings, the Disclosure Dollar Loss Index® (DDL Index®), a measure of market capitalization losses, reached its highest level in the last 10 years. Market capitalization losses for accounting case filings were 77% higher than the 2011–2019 annual average DDL for accounting cases.

Highlights

  • Defendant firm size, filings: At $1.3 billion, the median market capitalization of issuer defendants in 2020 was almost 18% higher than the 2019 median market capitalization of $1.1 billion, and 56% greater than the 2011–2019 average.

  • Defendant firm size, settlements: The median market capitalization of $934.1 million in accounting case settlements was 41% higher than the average annual median for 2011–2019.

  • Dismissals: The first-year dismissal rate of accounting cases filed in 2020 was 3%, the lowest percentage of current-year dismissals over the last 10 years.

  • Restatements: There were 11 accounting case filings involving financial statement restatements in 2020, the lowest level in 10 years. In 2020, the proportion of settled accounting cases involving restatements was also the lowest over the last 10 years.

  • Internal control weaknesses: There were 25 accounting case filings containing an allegation, but no announcement, of internal control weaknesses, the highest level since 2015. Of the 19 settlements in 2020 that involved a company announcement of an internal control weakness, 42% also involved a restatement.

  • Industry: For the third year in a row, there were as many or more accounting case filings and accounting case settlements in the Consumer Non-Cyclical sector (including biotechnology, healthcare, and pharmaceutical companies) than any other industry sector.

About Accounting Cases

Cases are considered “accounting cases” if they 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.

This year’s report focuses on federal securities class action filings containing Rule 10b-5, Section 11, or Section 12(a) claims, previously referred to as “core” filings.

Read the Cornerstone Research report: Accounting Class Action Filings and Settlements—2020 Review and Analysis

Copyright ©2021 Cornerstone ResearchNational Law Review, Volume XI, Number 101
Advertisement
Advertisement
Advertisement
Advertisement
Advertisement
Advertisement

About this Author

Elaine M. Harwood, Vice President, Accounting Practice, Cornerstone Research
Vice President

Elaine Harwood heads the firm’s accounting practice. She consults to clients and works with experts on securities litigation, complex enforcement matters brought by the Securities and Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB), and corporate investigations. She is an expert on financial accounting, financial reporting, and auditing. Dr. Harwood has served for more than fifteen years as a consultant and expert on a wide range of liability and damages issues.

 

Securities litigation...

213-553-2553
Frank T. Mascari, Financial and Accounting Consulting, Cornerstone Research
Principal

Frank Mascari is a principal in the Chicago office of Cornerstone Research. Mr. Mascari has more than twenty years of experience providing financial and accounting consulting services in commercial litigation and fraud investigation matters. He has worked on a variety of issues related to post-acquisition disputes, accounting malpractice, and commercial damages matters.

Accounting and Auditing

  • Assessed damages, liability, and causation claims related to financial reporting fraud and accounting...

312-345-7345
Laura E. Simmons, CPA, Certified Public Accountant, Finance Consulting, Cornerstone Research
Senior Advisor

Laura Simmons is a certified public accountant (CPA) and has more than twenty years of experience in accounting practice and economic and financial consulting. She has focused on damages and liability issues in litigation involving securities and the Employee Retirement Income Security Act, as well as on accounting issues arising in a variety of complex commercial litigation matters. She has served as a testifying expert in cases involving accounting analyses, securities case damages, and research on securities lawsuits.

Dr. Simmons’s research...

202-912-8998
Advertisement
Advertisement
Advertisement