Accounting-Based Class Suits, Settlements Reach New Highs

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By Michael Greene

April 19 — Accounting-related securities class action filings hit a four-year high in 2015, a new Cornerstone Research report found.

According to the April 19 report, 71 securities class actions involving accounting allegations were filed during the year, compared to the 69 cases seen in 2014 and the 10-year average of 67 filings.

The report said the increase represented “a return to the more traditional types of accounting-related filings.”

The report also showed that total settlement dollars from accounting securities class actions spiked to over $2.6 billion in 2015, almost three times higher than the $905.5 million in 2014.

What is interesting is the report's finding that accounting-related securities class suits made up a “disproportionately high” percentage of all settlements and settlement dollars, Kevin LaCroix, an executive vice president at insurance broker RT ProExec and author of the D&O Diary blog, told Bloomberg BNA in an e-mail.

“For me, the value of this report is to show that securities lawsuits with allegations of accounting misconduct or violations are far more serious than securities lawsuits that don't have accounting allegations,” said LaCroix, who tracks securities class actions through his blog.

The report considers a filing to be an accounting case if it raises allegations related to generally accepted accounting principle violations, auditing violations or weaknesses in internal controls over financial reporting.

High Proportion

Last year there were 80 securities class action settlements approved . According to the Cornerstone report, 62 percent of those settlements (50 pacts) involved accounting cases.

The report said accounting cases may make up such a high proportion of securities class action settlements because these lawsuits are less likely to be dismissed, and thus more likely to be settled.

In other findings, accounting-based cases containing allegations of internal control weaknesses continue to steadily increase. The report found that over the last six years, a majority of accounting cases included such allegations.

“Allegations of internal control weaknesses often accompany lawsuits against companies that have been hit with regulatory issues,” LaCroix said. He added that this trend will continue as “increasingly active regulators pursue investigations and enforcement actions.”

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

For More Information

The Cornerstone report is available at http://src.bna.com/eeO.