Risk Management

Likelihood of Lawsuits Falls

S&spamp;P 500 companies had their “least litigious year” in 2011 for federal securities class-action suits, according to a new study.
Sarah JohnsonJanuary 19, 2012

In 2011, large-company CFOs were less likely to get the bad news that investors were suing their businesses for activities thought to have stemmed from the finance department. A new tally of federal securities class actions shows that only 3.2% of S&P 500 companies were sued last year, resulting in the “least litigious year” for that group.

Indeed, claims of traditional fraud by U.S. entities that sell securities have fallen to levels last seen in the mid-1990s, according to a Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research report published on Thursday. Overall, investors filed 188 such federal actions in 2011, or 3.1% fewer cases than the annual average of 194, and just 12 more than in 2010.

Larger companies have historically been more likely to be named in such class actions. But last year was “an unusually quiet year” for large-cap businesses, according to the report. Also keeping companies’ litigation risk down was a decline in cases related to the financial crisis (only 3 were filed in 2011, compared with 53 in 2009).

What did catch the attention of the plaintiffs’ bar for new filings were concerns over Chinese issuers that listed on U.S. exchanges through reverse mergers (17.6% of the cases); however, those suits are now declining. Also adding to the lawsuit toll were cases against mergers and acquisitions, which made up 22.9% of the filings last year.

The new report also found the following interesting facts:

  • 56% of the filings alleged false forward-looking statements, the highest level in three years.
  • 34% of the filings alleged violations of generally accepted accounting principles, compared with just 26% in 2010 (part of this increase was due to the Chinese reverse-merger cases).
  • About two-thirds of the cases that made GAAP-violation allegations did not reference a company announcement about a restatement or an acknowledgement about unreliable financial statements.