Accounting Cases – An SEC Priority, But The Cases Being Filed are Class Actions

Accounting and financial fraud cases are an SEC priority. The cases, however, are being brought by the private bar as class actions. The number of accounting class actions filed last year increased by 47% compared to the prior year despite the fact that the number of securities class actions filed was down slightly, according to a new report by Cornerstone Research (here). More than one in four of the cases referred to an SEC inquiry while those tied to a restatement reached their highest level in seven years.

In 2014 there were 69 new accounting class action cases. That compares to 47 in the prior year. Overall there were 101 class actions filed last year compared to 119 in 2013. Viewed as a percentage of all cases filed last year, accounting cases represented 41% of the total actions. Over the last decade the year with the highest percentage of accounting cases was 2006 at 58%.

In contrast 70% of the settled actions last year were accounting cases, the highest since 2010 when it was 72%. In the last ten years 2008 had the highest percentage of accounting cases settlements while 2011 was the lowest at 52%.

Last year 42% of the accounting cases filed were tied to a restatement. That is the highest percentage in the last six years: In 2013 40% of the accounting cases involved a restatement; 38% in 2012; 34% in 2011; 27% in 2010; and 26% in 2009.

The percentage of settlements involving a restatement in 2014 increased to 41% from 32% from the year before. Last year and 2013 had the lowers percentage of accounting cases settlements in the last six years. The highest percentage in that period was 67% in 2010.

In 2014 85% of the dollars paid in settlement were attributed to accounting cases. That compares to 25% in 2013 which appears to be an aberration since in 2012 89% of the settlement dollars were accounting cases, in 2011 74% and in 2010 91%.

The mean stock price drop in 2014 relating to the announcement of a restatement was the most significant in the last decade. It reached over 4%. That compares to the next highest year which was 2009, also over 4% but just slightly less than 2014 while 2010 which had the smallest drop at about 1%.

Finally, for several years the technology sector was responsible for the largest portion of settlement dollars in accounting cases. The financial sector took over that position as the credit crisis unwound. That trend continued until 2014. Last year the energy sector cases were responsible for a significant amount of the settlement dollars although two large actions were largely responsible.