Companies faced fewer federal securities class action lawsuits in 2012 compared to the same period last year, according to recent analysis by PwC.

Overall, the total number of federal securities class-action filings fell to 137 in the third quarter of 2012, down from the 142 cases filed through Sept. 30, 2011.

In 2012, thus far, foreign companies were named in 27 cases (20 percent), which is a significant decrease when compared to the 46 cases (32 percent) of foreign filings in the first nine months of 2011. According to PwC, the decline in filings against foreign companies appears to be linked to the decline in filings against China-based companies.

The 13 filings against China-based companies in 2012 through the end of the third quarter accounted for 48 percent of foreign filings, as compared to the 30 cases (65 percent) of foreign filings during the comparable period in 2011.  This trend of fewer filings against China-based companies through the third quarter of 2012 continues a trend that began in the third quarter of 2011, when the number of filings declined from 23 cases in the first half of 2011 to 14 cases in the second half of 2011, according to PwC's 2011 Securities Litigation Study. 

The decline in China-related cases consequently led to a decline in accounting-related cases filed against foreign issuers, and the number of filings in the Ninth Circuit. The most active continue to be the Second and Ninth Circuits, with 27 percent and 18 percent of the cases filed thus far in 2012, respectively. 

When compared to cases filed during the comparable period in 2011, these statistics reflect a slight increase from 25 percent of cases filed in the Second Circuit, and a significant decrease from 31 percent of cases filed in the Ninth Circuit. The decline in Ninth Circuit cases may be linked to the decline in the number of cases filed against China-based companies, thus far, in 2012, according the PwC study.

Although case filings against China-based companies similarly declined in the Second Circuit, this is offset by an increase in the number of cases filed against a diverse group of industries, according to PwC's report.

Merger and acquisition activity continues to remain steady, although to a lesser extent than in 2011 and similar to those levels seen in 2010. M&A-related filings represented 20 percent (28 cases) of cases through Sept. 30, 2012, whereas in 2010 and 2011 such M&A-related filings represented 21 percent (27 cases) and 25 percent (36 cases) of total cases for the comparable period, respectively. 

“While it may be premature to draw conclusions from these figures regarding the trend in M&A-related filings, it is worth noting that the overall level of M&A deal activity decreased during the latter half of 2011 and continued into 2012, potentially indicating that there may be a fewer number of ‘targets' for plaintiff attorneys,” according to PwC.

Accounting-related cases during the first three quarters of 2012 represented 31 percent of filings, which is a nine percentage point decrease from the 40 percent of filings during the comparable period in 2011. Through the third quarter of 2012, the most common accounting-related allegations were inadequate internal controls and improper revenue recognition, which were cited in 63 percent and 26 percent of accounting-related cases, respectively. 

Foreign cases represented 33 percent of the accounting-related cases filed in 2012, which is a 24 percentage point decrease from 2011, likely caused by the decrease in cases filed against China-based companies, according to PwC. The most prevalent accounting-related allegations in these foreign cases were internal controls estimates and overstatement of assets.

Industry Trends

An emerging trend thus far in 2012 is the return of pharmaceutical cases, with eight filings through the end of the third quarter during 2012 as compared to just one case in all of 2011. As a result, healthcare led the pack with the largest number of filings, 32 cases in all, representing 23 percent of total filings through the first three quarters of 2012.

“Based on filings in the first nine months of 2012, it seems the decline in health industry cases in 2011 was short lived,” said Patricia Etzold, securities litigation partner with PwC.  “With the increased number of pharmaceutical efficacy cases and accounting cases filed in the health industry thus far in 2012, there is a strong likelihood the health industry will, for the first time since the passage of the PSLRA (Private Securities Litigation Reform Act), have more class action lawsuits than any other industry by year-end.”

In all prior years, the high-tech and financial services industries dominated filings. This year, filings in the high-tech and energy industries were the second largest through the third quarter of 2012, each with 14 percent of filings—a decrease from 26 percent through the third quarter of 2011 for high-tech, and a slight increase from 11 percent for energy.

The financial services industry represented only nine percent of filings through the third quarter of 2012, a decrease of two percentage points over the comparable period in 2011.