Accounting-Related Cases Make Up 80% of Securities Class Action Settlement Dollars

Accounting-Related Cases Make Up 80% of Securities Class Action Settlement Dollars

2021-04-08 05:00:40
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In a year of a decline in total filing activity for class action claims, the number of class action filings related to accounting allegations has increased for the third consecutive year in 2020.

According to a report by Cornerstone Research, accounting allegations were present in more than 30% of all federal class action filings and accounting cases made up 84% of total settlement dollars in 2020.

The report, Accounting Class Action Filings and Settlements – Review and Analysis for 2020, found that more than a third of accounting cases filed in 2020 included allegations of incorrect revenue recognition, nearly double the number in 2019.

“Accounting issues continue to be at the forefront of the largest securities class action settlements, and recent trends in file filing suggest that this is unlikely to change in the near future,” said Laura E. Simmons, senior advisor and author of the report .

The median settlement value for accounting was $ 10.8 million in 2020, comparable to $ 10.6 million in 2019.

Cases are considered "accounting matters" when they relate to allegations related to violations of generally accepted accounting principles (GAAP), violations of other reporting standards, violations of audits, or weaknesses in internal controls over financial reporting.

Plaintiffs filed 70 class action lawsuits related to accounting allegations in 2020, up from 67 the previous year and the second highest number in the past 10 years. A total of 154 non-accounting classifications of securities were filed in 2020, compared to 177 non-accounting filings in 2019.

There were 38 accounting settlements in 2020, more than 34 settlements in the previous year, but still lower than in the peak years of 2015 to 2017. The number of accounting settlements accounted for nearly 50% of all securities classification settlements in 2020.

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

“The trend of filing accounting against larger companies observed in 2019 continued into 2020. The top 10 issuers defendants accounted for nearly 70% of market capitalization losses for accounting cases in 2020,” said Frank T. Mascari , a client at Cornerstone Research.

Additional report findings:

  • Size of Defendant, Deposits: At $ 1.3 billion, the median market cap of issuer defendants in 2020 was nearly 18% higher than the median market cap of $ 1.1 billion in 2019, and 56% higher than the 2011–2019 average.
  • Size of the company, settlements: The median market cap of $ 934.1 million in accounting settlements was 41% higher than the average annual median for 2011–2019.
  • Laid off: The first year dismissal rate of accounting cases filed in 2020 was 3%, the lowest rate of layoffs in the current year in the past 10 years.
  • Reformulations: There were 11 accounting files related to financial statement restatements in 2020, the lowest level in 10 years. In 2020, the share of accounting cases settled with restatements was also the lowest in the last 10 years.
  • Weaknesses in internal control: There were 25 accounting records with an allegation, but no announcement, of internal control weaknesses, the highest level since 2015. Of the 19 settlements in 2020 that announced an internal control weakness, 42% also concerned an adjustment.
  • Industry: For the third year in a row, there were as many or more accounting records and accounting settlements in the non-cyclical consumer sector (including biotechnology, healthcare and pharmaceutical companies) than in any other industry sector.

Source: Cornerstone Research

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