- Securities Litigation Study finds accounting related cases are at their lowest level in nearly 20 years
- More eyes on securities law violations: human and electronic
According to the 18th annual Securities Litigation Study released today by PwC US, 2013 was a year in which certain announcements by the SEC and cases pending before the U.S. Supreme Court suggest that 2014 could bring changes on both the litigation and enforcement front. The Study, entitled, Are changes on the horizon?, finds that 160 federal securities litigation class actions were filed in 2013 - an increase of 11 from 2012, but well below the yearly average number of cases filed since the passing of the Private Securities Litigation Reform Act of 1995 (179 cases) or the Sarbanes-Oxley Act of 2002 (175 cases). Additionally, only 46 accounting related cases were filed in 2013, the lowest level in 18 years, marking the first time accounting related cases have fallen below 30 percent of total cases filed.
"It was evident from an early point in the year that 2013 was unlikely to provide many significant trends in the securities litigation landscape," said Neil Keenan, securities litigation principal with PwC. "However, noteworthy events in 2013 have set the stage for potentially sweeping changes in the future. As we consider the impact of such events, it is likely that 2014 could yield substantial changes."
Announcements by the SEC and pending cases before the U.S. Supreme Court could bring substantial changes on both the litigation and enforcement front in 2014. The U.S. Supreme Court is hearing arguments on the "fraud-on-the-market" theory which, if reversed, could cause case filings to decline dramatically. Conversely, PwC predicts that events at the SEC may result in an increase in accounting related cases in the years ahead. The SEC has established a new Financial Reporting and Audit Task Force which, through data analytics and the whistleblower office, will likely open an increased number of accounting related investigations. The SEC's Accounting Quality Model (AQM) provides the SEC with the ability to distinguish irregularities, outliers, and unusual trends among registrants' financial statements within their industry. In addition, the SEC's Office of the Whistleblower continues to generate significant "tips" of potential securities law violations, including alleged accounting related fraud. Approximately, 17% of the 3,238 referrals in 2013 alleged accounting related misconduct. The largest award to date for whistleblower assistance of $14 million was paid in 2013, which the SEC hopes will encourage more whistleblowers to come forward.
With just 69 settlements in 2013 for a second consecutive year, the number of settlements fell well below the five year average of 81. Despite the number of settlements in 2013 remaining consistent with the prior year, the average settlement value of $49.6 million in 2013 is 32 percent greater than 2012, and 21 percent greater than the five year average.
"A potential explanation for the increased average settlement value can be found in the financial crises of the past six years, as the cases that followed the sub-prime mortgage and credit crisis have continued to dominate the settlement landscape," commented Keenan.
Other notable findings in the 2013 Study include:
- Health industry continues to see more securities litigation - Similar to last year, the health industry continued to see more securities litigation than any other industry in 2013. In both years, 23 percent of cases were brought against companies operating in this sector.
- Canadian companies attract greater scrutiny than other foreign issuers - Nine cases were filed in 2013 against Canadian companies, an increase from seven in 2012 and representing 29 percent of all cases filed against foreign issuers in 2013.
- M&A related cases remain a feature of securities litigation - The 15 M&A cases filed in 2013 represented nine percent of total cases filed - a decrease from 16 cases in 2012 and 44 cases in 2011. Nearly all of these M&A cases involved allegations that the proposed purchase price did not appropriately value the company and, as a consequence, shareholders would not be adequately compensated.
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