Trends In Accounting Class Action Filings

Last year the number of securities class actions filed with accounting allegations exceeded the average over the last ten years. Likewise, the number of accounting cases filed last year alleging internal control violations was the highest since 2006, according to a report prepared by Cornerstone Research titled Accounting Class Action Filings and Settlements, 2015 Review and Analysis (here).

The 71 accounting cases filed last year is the highest since 2011 when 80 such actions were initiated. At the same time the percentage of securities class actions that contain accounting allegations declined to 38% (71 of 118) compared to 41% (69 of 101) in the prior year. The largest percentage of those accounting cases (38%) were filed in the ninth circuit – the highest number of such cases filed there in ten years. The number of actions involving firms listed on the NASDAQ and the NYSE was about evenly split.

The number of accounting cases filed against firms based outside the U.S. increased to 20 or 28% of the total of these cases. That compares to 14, or 20% of the total, the prior year and 15, or 32% of the total, in 2013. The number of accounting cases filed against firms based outside the U.S. last year is the second highest total over the last decade.

Over half of the accounting cases were brought against firms in the consumer non-cyclical sector were against biotechnology, pharmaceutical and healthcare companies. That is consistent with historical trends. The number of actions filed against industrial sector firms, however, increased to twice its historical average. In contrast, cases against firms in the financial sector declined.

Finally, last year about 30% of the accounting cases involved a restatement. That represents a decline from the 42% in the prior year, 40% in 2013 and 38% in 2012. In contrast, over the past six years most accounting cases contain allegations regarding internal controls. That trend accelerated last year with 52% of the actions containing such a claim. Similarly, the number of accounting case settlements containing such an allegations was the highest in 10 years.