PwC’s Latest Securities Litigation Study Confirms Total Settlement Downward Trend

While the first three quarters of 2012 saw an average of 46 cases, securities litigation filings decreased dramatically in the fourth quarter, to 33 cases—the lowest level since the 30 cases filed in the second quarter of 2009, according to the 17th annual Securities Litigation Study released by PwC US. The study entitled, At the crossroads, waiting for a sign, finds that federal securities class action filings in 2012 decreased by about 10 percent from 2011. There were 172 cases in 2012, compared to 191 cases in 2011.

In the U.S., the last quarter was affected by two pivotal events: the impending presidential election and the political uncertainty inherent in the run-up, and a looming “fiscal cliff” of automatic tax hikes and government spending cuts. PwC also noted Superstorm Sandy may have played a role by interrupting transportation, shutting down power, and blocking access to the Internet and phone service in the Northeast, thereby disrupting law firms, courts, and financial markets.

“While 2012 started much the same as 2011, it ended very differently,” said Patricia Etzold, securities litigation partner with PwC. “Despite the uncertain economic and market conditions in the second half of the year, the number of securities litigation filings decreased by 21 percent leaving us to question the direction things will go from here.”

According to PwC, the overall number of settlements and total value of settlements decreased in 2012. After a 26 percent decline in the number of settled federal securities class action cases from 2010 to 2011, cases settled in 2012 decreased by seven percent and the total value of settlements in 2012 represented the lowest amount since 2002.

With the exception of 2011, which saw an increase in total settlement value to $3.4 billion, total annual settlement amounts have been on a downward trend since 2005. The average settlement value (excluding zero-dollar or undisclosed settlements) decreased from $50 million in 2011 to $38 million in 2012.

Filings related to the financial crisis, China-based companies and merger & acquisition (M&A) transactions – although to a lesser extent – saw significant downturns during 2012. Illustrating the drop, only three financial-crisis-related cases were filed after a total of 178 such cases were filed from 2008 to 2011.

However, while only 36 M&A-related cases were filed in 2012 (as compared to 48 in 2011 and 41 in 2010), those 36 cases represented 21 percent of the total cases filed for the year, making 2012 the third year in a row in which M&A-related cases accounted for more than 20 percent of total cases filed.

“The overall level of M&A deal activity continues to remain below the levels seen prior to the financial crisis,” said Neil Keenan, principal with PwC. “Despite the expectation that M&A cases will continue with some level of activity, it will take another market-driven event to truly fill the void left by these waning market events and trends.”

PwC also notes that cases against foreign issuers (FIs) decreased dramatically in 2012 compared to 2011, with only 32 cases filed in 2012 (19 percent of total cases), versus 61 filings (32 percent of total cases) the previous year. Cases against China-based companies decreased 60 percent, from 37 in 2011 to 15 in 2012. Twice as many cases against China-based companies were filed in the first half of the year (10 cases) than in the latter half (five cases).

“With future of litigation trends still murky, companies must cast a wide net for monitoring, assessing, and mitigating risks,” added PwC’s Etzold.

Other notable findings in the 2012 study include:

• Accounting cases diminish, most significantly against foreign issuers – The number of cases that alleged accounting fraud decreased from 74 in 2011 to 51 in 2012, a 31 percent decline. According to PwC, the decline reflects a dwindling number of cases against FIs.

• Health industry sees more cases – The health industry topped the charts as the industry with the highest number of filings for 2012 (38 filings), accounting for approximately 22 percent of total cases filed. The average proportion of filing activity against health industry during the past five years has been approximately 17 percent of total filings.

• Second and Ninth Circuits continue to dominate, but to a lesser extent – The Second and Ninth Circuits saw the most filings among the circuits, with 48 and 32 cases, respectively. However, the 80 combined cases accounted for a relatively low 47 percent of all cases, the first time in the past five years there were more cases filed outside of the Second and Ninth Circuits than within.

“2012 was a year that implied no clear direction as to where regulators or shareholders may focus in the future – at a crossroads, waiting for a sign,” concluded Etzold. “2013 looks to be a year that could go in many different directions. Future securities litigation may not be foretold by the trends reflected in the cases filed, but rather in considering the possible direction of the new regime of regulators, and the future paths companies may take.”

PwC tracks federal cases filed which allege violations of the Securities Act of 1933 and Securities Exchange Act of 1934. The focus of this study is on cases filed after the passage of the Private Securities Litigation Reform Act. The study also analyzes a variety of issues, including whether the case is accounting-related, a breakdown of accounting issues, and settlement data. Sources include case dockets, news articles, press releases, claims administrators, and SEC filings. PwC’s Securities Litigation database contains shareholder class actions filed since 1996.