Large Corporations Increasingly Targeted
By Eve Tahmincioglu
U.S. courts approved $6 billion of settlements, nearly double the total settlement last year, and the highest since 2010, reports a new analysis.
The increase, according to Cornerstone Research’s annual class action trend report – Securities Class Action Settlements—2016 Review and Analysis – was mainly the result of 10 substantial settlements totaling $100 million or more.
“Larger firms were the target of more settlements in 2016,” says Laura E. Simmons, a Cornerstone Research senior advisor and a coauthor of the report.
And, she points out, a risk factor boards may need to keep an eye on was that financial restatements were often associated with higher settlements.
The report looked at three types of accounting issues among settled cases: (1) alleged GAAP (generally accepted accounting practices) violations, (2) restatements, and (3) reported accounting irregularities.
- Among all post–Reform Act settlements, alleged GAAP violations are included in approximately 60 percent of cases. In 2016, however, the frequency of GAAP violation allegations was 54 percent.
- Restatements were involved in more than 30 percent of cases settled in 2016. These cases were associated with higher settlements as a percentage of “estimated damages” compared to cases without restatements.
- In 2016, no settlements involved reported accounting irregularities, and there was only one such case among 2015 settlements. Historically, approximately 6 percent of cases involve accounting irregularities.
Some other highlights from the report:
- Total settlement dollars approved by U.S. courts in 2016 was nearly double the total in 2015 and the second highest in the past decade.
- The median settlement amount in 2016 was $8.6 million, about 40 percent higher than the 2015 median of $6.1 million.
- In 2016, median settlements as a percentage of “estimated damages” increased 24 percent from the 2011–2015 median and was higher than any annual percentage in the last five years.
- The median Disclosure Dollar Loss (DDL) associated with 2016 settlements was more than 50 percent higher than the previous year.
- Median total assets of issuer defendants increased more than 40 percent over 2015.
- Public pension plan involvement as lead plaintiffs increased for the second straight year.
“While the spike in total settlement value in 2016 was largely driven by growth in very large cases, an increase in the median settlement amount also indicates a shift for more typical securities class actions,” Simmons explains. “Overall, defendant firms in 2016 were substantially larger compared to 2015, and we know from our research that larger firms are generally associated with higher settlement amounts.”