More Class Actions Claim GAAP Violations, Less Paralleled by SEC Case

Last year the number of securities class action cases settled remained largely constant compared to the prior year, according to a report by Cornerstone Research (here). At the same time the number of cases alleging GAAP violations increased, although only a small percentage involved restatements. Curiously, the number of securities class actions paralleled by an SEC enforcement action, which tend to be the larger, more complex cases, declined despite a claimed emphasis on financial fraud actions by the Commission.

In 2014 there were 63 court approved settlements, about the same as the prior year. Yet when compared to the five year period of 2010 through 2014, the number of settled cases declined about 35%.

The settlement amounts declined significantly last year. The value of settlements approved by the courts in 2014 was $1.1 billion compared to an annual average of about $6.6 billion over the prior nine years. The difference in settlement amounts appears to stem at least in part from the fact that in 2014 there was only one mega settlement of over $100 million compared with six mega settlements in 2013. Likewise, 2014 was one of only three years in the last decade where there were no settlements of $500 million or more.

The average settlement of $17 million last year is the lowest in the last decade. The highest was $131.6 million in 2006 followed by $75.8 million in 2007 and $73.5 million in 2013. 11% of the cases last year settled for $2 million or less which is considered nuisance value. That percentage is consistent with prior years.

Most of the settled actions last year had an institutional investor as the lead plaintiff. That is consistent with prior years. The median settlement amount for actions with an institutional investor as plaintiff was $13 million compared to $5 million for other cases, a finding which is also consistent with prior years. The number of settlements involving Section 11 and 12(a)(2) claims without a Rule 10(b)(5) cause of action declined last year to three, compared to seven in the prior year.

In 2014 67% of the settled cases alleged GAAP violations, a significant increase over the 61% average for such claims since the passage of the Reform Act. Interestingly, only 29% of those cases involved a restatement. 21% of the cases which alleged GAAP violations also named the auditor as a defendant.

Finally, only 16% of the settled cases involved a parallel SEC enforcement action. That is significantly less than the 18% in 2013 and 21% in 2012. The median settlement for all post-Reform Act cases with a parallel SEC action of $12.9 million is more than twice that of cases without a corresponding Commission action, reflecting perhaps in part the fact that those actions tend to be more complex. In 2014 the median settlement for cases with a parallel SEC action was $9.4 million compared to $5.5 million for others.

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