Securities Class Action Settlements Decline, but Accounting Issues Remain

There was a decrease in the volume and value of securities class action settlements in 2011, but there is reason to expect that this is a temporary dip and that accounting issues will remain important in securities litigation. In 2011, there were 65 securities class action settlements, with a median settlement amount of approximately $6 million, compared with an average of almost 100 settlements, with a median settlement amount of just under $10 million for the prior five years. In addition, the number and percentage of settled cases involving violations of generally accepted accounting principles (GAAP), financial statement restatements, and/or accompanying SEC actions declined to the lowest levels in 10 years. Only one in four cases involved financial restatements.

Each of these factors in 2011 was approximately 30 percent or more below the prior five-year average. While nearly 95 percent of the largest 50 securities class action settlements in history involved accounting cases, the majority of these settlements occurred prior to 2009.

These findings suggest that the risks associated with accounting issues have decreased. However, there are factors that warrant further consideration. This year’s 10-year anniversary of Sarbanes-Oxley is marked by continued regulatory activity, new regulatory developments, an increasing number of allegations related to SOX 404, new incentives created by Dodd-Frank whistleblower provisions and increased collaboration between regulatory agencies. The securities litigation environment remains volatile, and monitoring accounting issues in litigation continues to be important.