By John Filar Atwood
In an analysis of 2021 accounting class actions and settlements, Cornerstone Research found that despite a rise in the number of cases related to SPAC accounting, the total number of class actions with accounting allegations fell sharply to 46 last year from 70 in 2020. Accounting case filings made up 24 percent of all federal securities class action filings in 2021, according to the report, down from 31 percent the year before.
Cornerstone defines an accounting case as one that involves allegations related to GAAP violations, violations of other reporting standards, auditing violations, or weaknesses in internal controls over financial reporting. The report focuses on federal securities class action filings containing Rule 10b-5, Section 11, or Section 12(a) claims.
Restatements. The report states that filings referencing financial statement restatements and/or allegations of internal control weaknesses declined to the lowest level in more than 10 years. All of the accounting cases involving restatements in 2021 were filed in the Second or Ninth Circuits, Cornerstone found. Four of every five restatement cases included allegations of internal control weaknesses.
The report indicates that of the 12 accounting cases involving a restatement last year, 11 were associated with Rule 10b-5 issues and one involved Section 11 claims. Cornerstone also determined that compared to other securities class actions, settled cases involving restatements involved longer class periods.
Settlements. Accounting case settlements fell to 38 percent of all securities class actions settled in 2021, compared to 49 percent in 2020, Cornerstone said. The total value of all accounting case settlements also fell to its lowest level in the past decade, which Cornerstone attributed to a drop in both the number and size of settlements.
There were 33 settlements that involved accounting allegations in 2021, down from 38 settlements in the previous year. The total value of those settlements was $755 million compared to $3.7 billion in 2020.
SPAC cases rising. One type of case that did not trend lower last year were those relating to SPAC accounting. Given the historic surge in SPAC registrations in 2020 and 2021, it is not surprising that accounting class actions involving SPACs tripled in 2021 over the prior year’s total.
Cornerstone observed a number of trends in the SPAC class actions, including that from 2019 to 2021 about one in every three SPAC class actions filings involved accounting issues. Short seller reports were often cited in those cases, the report states, and were mentioned much more often in accounting cases than in non-accounting class actions over that period. The most common allegations found in SPAC accounting cases were inappropriate revenue recognition, weaknesses in internal controls, and omitted disclosures of related-party transactions, the report indicates.