By Anne Sherry, J.D.
A report from Cornerstone Research finds that the number of securities case settlements involving accounting-related claims declined in 2018, but the total settlement value increased enormously, driven by five “mega settlements” of over $100 million each. Although the number of case filings dropped overall, the number of “core” accounting case filings increased for the first time since 2014. Last year saw a total of 143 new accounting cases, 79 of which were M&A-related and 64 of which were core cases.
Definitions. Cornerstone considers cases to be accounting cases if they allege violations of GAAP or other reporting standards, auditing violations, or weaknesses in internal controls over financial reporting. M&A filings have Section 14 claims but no Rule 10b-5, Section 11, or Section 12(2) claims. “Core” filings exclude M&A filings.
Mega cases. All five 2018 “mega settlements” involved alleged weaknesses in internal controls, four of them involved allegations of GAAP violations, and three involved restatements. Cases involving restatements made up one-fifth of the total number of core filings. Cornerstone calculates a “Disclosure Dollar Loss Index” that measures the DDL (dollar value change in the defendant’s market cap from the start of the class period to the end) over a period of time. There were three accounting cases with a DDL of at least $5 billion in 2018, but Cornerstone observes that the 2018 DDL represents an increase over the average even excluding these “mega DDL cases.”
Frank Mascari, principal at Cornerstone, said that the market capitalization losses correspond with the trend of cases being filed against large issuers. Indeed, the median market capitalization of issuers defending accounting cases filed in 2018 was $1.5 billion, more than double the average from 2009 through 2017 and the second largest in the last 10 years. Larger defendants are generally associated with higher settlements as well, the report notes, but the 2018 numbers buck trends in two respects: the larger issuers did not correlate to institutional lead plaintiffs or longer periods from filing to settlement.
Accounting settlements compared to other cases. Overall, settlements of accounting cases made up 88 percent of the total value of securities settlements—$4.48 billion of $5.1 billion total. Laura Simmons, a senior advisor at Cornerstone, called 2018 a milestone year in that the total value of post-PSLRA settlements exceeded $100 billion. Accounting cases have made up $86 billion of that total. Cornerstone Vice President Elaine Harwood also noted that these trends “indicate that accounting allegations continue to be an important part of both securities class action filings and settlements.”
Industry breakdown. Although the industrial sector saw a large increase in DDL, the number of cases in this sector dropped below its historical average and decreased by 46 percent from 2017. There were more cases in the consumer non-cyclical sector (biotech, healthcare, and pharma) than any other sector, and these cases’ DDL was over 20 percent greater than the sector’s historical average. Accounting cases in the financial sector increased by 83 percent, while cases in the energy sector decreased to their lowest level since 2009.
Energy sector settlements, although representing only 10 percent of the number of accounting settlements, made up nearly 70 percent of the total dollar value for all accounting settlements. Cornerstone notes a sharp contrast with non-accounting cases: there were no non-accounting settlements in the energy sector in 2018.