In 2004, the number of private securities class action cases filed in federal court increased to 203 from the 176 filed in 2003, according to a recent study by PricewaterhouseCoopers. Although the number is up slightly, it is down significantly from the peak of 245 cases filed in 1998, the year that the Securities Litigation Uniform Standards Act was passed.
Those figures exclude research analyst and mutual funds cases; suits based on alleged analyst improprieties peaked at 46 in 2002, falling to 19 and 2003 and only one in 2004. Mutual fund cases hit the radar for the first time in 2003, when 16 were filed. That increased to 19 in 2004.
Of the cases filed in 2004, 59 percent involved accounting issues, a decrease from the 66 percent of cases in 2003 and the 74 percent in 2002 that were based on accounting matters. Accounting-based litigation was spurred most by revenue recognition (54 percent), followed by internal controls (41 percent) and estimates (25 percent), with some cases alleging several violations.
Lamont
“The lawsuits against foreign companies were higher than ever," says Grace Lamont, a partner in the PricewaterhouseCoopers securities litigation group and author of the foreign securities portion of the study. "There were 29, a 93 percent increase over 2003.” Of these, 22 involved accounting issues and 21 involved companies based outside of Europe. As the SEC and foreign regulators continue to cooperate, Lamont expects to see foreign issuers sued at the same rate as domestic firms.
The PwC survey showed 104 settled cases in 2004, a slight decrease from the 116 settled in 2003. But the total settlement value increased dramatically, to $5.4 billion from $2.7 billion in 2003. If the Worldcom settlements are removed from the 2004 total, the total still increases to $2.9 billion, for an average settlement value, ex-Worldcom, of $27.6 million. The 78 accounting cases in particular generated large settlements, an average of $33.6 million ex-Worldcom. Settlements were smaller in the 26 non-accounting cases, averaging only $9.6 million.
Greater Attention; Institutional Actions
Bruce Carton, vice president of Securities Class Action Services at Institutional Shareholder Services, says that the trends in the PricewaterhouseCoopers studies match what his firm has seen. He notes another trend: better research and preparation by plaintiffs. “It’s not just a reflex,” he says; plaintiffs aren’t relying on negative press releases but instead preparing stronger complaints. “A little more research and digging going into the complaints is a good thing,” he says.
Plaintiff attorneys may be doing more upfront work because they are increasingly representing institutional investors and pension plans rather than individuals. PricewaterhouseCoopers found that only 42 percent of suits filed in 2004 named individuals as lead filers, down from 55 percent in 2003. Public and union pension funds proved to particularly active, leading 43 percent of the suits, up from 30 percent in 2003. In addition, pension funds were the lead plaintiff in 26 of the cases that settled in 2004, the highest level since PwC began tracking in 1998.
McGuinness
Andrew McGuinness, a lawyer who defends securities class action cases at Dykema Gossett in Ann Arbor, Mich., agrees that more institutions are leading the cases that his firm works on, which may be behind the increased research that goes into the filings. “I’m not prepared to say that the quality of the cases has gone up,” he says. “You’re still seeing the same gaps in logic. Nine times out of 10, you get down to arguing about what’s a strong or weak inference.”
Most of the cases that McGuinness handles are in the Sixth Circuit, which saw a relatively low level of activity in 2004. Only four cases were filed there in 2004, compared to 13. By contrast, the Ninth Circuit, which includes California, had 83 cases filed in 2004, up from 38 in 2003. This was the most active court for securities class action suits both years. McGuinness notes that different courts tend to interpret forward-looking statements differently. “The provision has been given more teeth than it had in the early years following the reform act, at least here,” he says.
So far, reports of material weaknesses under Sarbanes-Oxley's Section 404 have not driven shareholder suits, in part because they have not much affected stock prices. Grace Lamont says that PricewaterhouseCoopers analysts looked at 515 companies that reported a material weakness. Of these, the average price difference between the day before and day after the announcement was an increase of 0.0384 percent. Only three of the companies showed a decline of more than 30 percent, and four companies showed an increase of 30 percent.
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