Accounting-related securities class-action lawsuits filings and settlements declined sharply last year, reversing a three-year trend, according to a new report.
The annual report, from Cornerstone Research, found that filings referencing financial restatements and/or allegations of internal control weaknesses fell to the lowest level in 10 years. Meanwhile, the total value of all accounting case settlements dropped to the lowest level over the past decade, reflecting both a decline in the number of settlements plus a decrease in settlement size.
Plaintiffs filed 46 securities class actions with accounting allegations, the second-lowest level in the past decade and down from 70 filings in 2020. Accounting case filings comprised 24% of all federal securities class action filings in 2021, compared to 31% in 2020.
The findings point to a possible slowdown in the litigious environment last year or perhaps better accounting and auditing by firms. However, despite the decrease in the size of settlements last year, the firms involved as issuer defendants were larger in terms of both market capitalization and total assets. There was only one accounting case “mega settlement” of over $100 million. “The decline in accounting case settlement amounts was part of a broader decline for all types of securities class actions settled in 2021,” said Laura E. Simmons, senior advisor at Cornerstone Research, in a statement. “One factor that is typically associated with higher settlement amounts is public pension plan involvement as a lead plaintiff. In 2021, the proportion of accounting case settlements involving a public pension plan lead plaintiff declined to its lowest level in the last 10 years.”
Filings involving special purpose acquisition companies (SPACs) were a particular area of focus that grew. Approximately 20% of accounting case filings in 2021 involved a SPAC, and in the second half of the year, that figure was nearly one in three.
“SPAC filings that include accounting allegations tripled in 2021 as compared to the prior year,” said Elaine Harwood, senior vice president and head of Cornerstone Research’s accounting practice, in a statement. “Allegations of inappropriate revenue recognition and weaknesses in internal control have been the most common accounting issues in these cases, followed by allegedly omitted disclosure of related-party transactions.”
There were 33 settlements that involved accounting allegations in 2021, down from 38 settlements in 2020. The proportion of accounting case settlements declined to 38% of all securities class actions settled in 2021, compared to 49% in 2020.
The total value of securities class action settlements with accounting allegations plunged sharply from $3.7 billion in 2020 to $755 million in 2021. The median settlement value for accounting cases was $7.5 million, down from a median settlement value of $11.3 million in 2020 (adjusted for inflation), despite an increase in the size of issuer firm defendants.
For companies named as defendants in accounting case filings, the Disclosure Dollar Loss Index, a measure of market capitalization losses, plummeted from $70.9 billion to $29.4 billion, the lowest level since 2017.
The decline in class-action filings and settlements could well change next year as the Securities and Exchange Commission gets tougher on companies’ accounting.
“Given the overall decline in financial statement restatements by public issuers in recent years, the decline in accounting-related class actions involving restatements is not surprising,” said Frank Mascari, a principal at Cornerstone Research, in a statement. “However, this trend could reverse, in light of the SEC’s recent focus on registrants’ evaluation of accounting errors and the need for restatements.”