Risk & Compliance

Accounting-related Securities Class Actions Climb 47%

Class-action lawsuits involving restatements of financials also reached a seven-year high in 2014, according to Cornerstone Research.
Matthew HellerApril 2, 2015
Accounting-related Securities Class Actions Climb 47%

Filings of securities class actions with accounting-related allegations surged in 2014, apparently reflecting in part the heightened regulatory focus on accounting-related fraud, according to a new report.

After two years of relatively low activity, consulting firm Cornerstone Research reported, 69 new class actions were filed with accounting allegations last year, an increase of 47% on 2013. Overall, the number of securities class-action filings rose only 2% to 170, with cases involving Chinese reverse mergers continuing their sharp decline.

“The surge in accounting-related securities class actions is particularly notable given the lack of change in the overall level of securities class action filings in the past year,” Elaine Harwood, head of Cornerstone’s accounting practice, said in a news release.

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She attributed the increase, at least in part, to the SEC’s emphasis on accounting-related fraud, noting that 18 accounting case filings in 2014 referred to an SEC inquiry or action compared with five in 2013.

Of the 63 securities class actions that were settled in 2014, 70% were accounting-related, the highest proportion since 2010. Only six of those settlements involved Chinese reverse mergers, down from 14 in 2013.

The share of total settlement dollars attributable to accounting cases rose from 25% in 2013 to a more typical level of 85% last year.

The survey results also show that accounting case filings involving restatements of financials reached their highest level in the last seven years — both in terms of the number (29) and as a percentage (42%) of total accounting cases.

“The increase in filings of cases involving [financial] restatements is consistent with our finding of a relative increase in negative stock price movements surrounding restatement announcements in 2014 as compared [with] recent years,” said Laura Simmons, a Cornerstone Research senior adviser. “Overall, the relative increase in stock price drops surrounding restatement announcements may have encouraged plaintiffs to file these cases.”

As far as specific industries, the number of accounting case filings against companies in both the financial and consumer sectors more than doubled in 2014.