The number of accounting case settlements in 2013 increased for the second year in a row, but remained low compared with the previous 10 years, according to Cornerstone Research’s latest report, Accounting Class Action Filings and Settlements—2013 Review and Analysis. While the number of securities class action filings that included accounting allegations (47) remained relatively constant in 2013 compared with 2012, the market capitalization losses associated with these filings more than doubled.
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Only 2 percent of lawsuits filed in response to M&A deals that settled in 2013 produced monetary returns for shareholders. These findings are published in Settlements of Shareholder Litigation Involving Mergers and Acquisitions, which follows an earlier report on M&A filings and litigation outcomes issued this year by Cornerstone Research. Legal challenges to M&A deals resulted in only two monetary settlements in 2013, down from four in 2012 and seven in 2011.
The report also finds that plaintiff attorney fees awarded in disclosure-only settlements of M&A cases continued to drop in 2013. In addition, over the last four years, the Delaware Court of Chancery approved 80 percent of the fee amounts requested in such cases, compared with 90 percent in other courts.
Federal Deposit Insurance Corporation (FDIC) litigation activity associated with failed financial institutions increased significantly in 2013, according to Characteristics of FDIC Lawsuits against Directors and Officers of Failed Financial Institutions—February 2014, a new report by Cornerstone Research. The FDIC filed 40 director and officer (D&O) lawsuits in 2013, compared with 26 in 2012, a 54 percent increase.
The surge in FDIC D&O lawsuits stems from the high number of financial institution failures in 2009 and 2010. Of the 140 financial institutions that failed in 2009, the directors and officers of 64 (or 46 percent) either have been the subject of an FDIC lawsuit or settled claims with the FDIC prior to the filing of a lawsuit. Of the 157 institutions that failed in 2010, 53 (or 34 percent) have either been the subject of a lawsuit or have settled with the FDIC.
Plaintiffs filed 166 new federal securities class actions in 2013, a 9 percent increase over 2012, according to Securities Class Action Filings—2013 Year in Review, an annual report prepared by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse. The 2013 filings, although boosted by a second-half surge, are still 13 percent below the historical average from 1997 to 2012.
One possible explanation for filings remaining below the historical average in recent years is the decline in the number of unique companies listed on the NYSE and NASDAQ. A new analysis in the report shows that the number of companies on these exchanges has decreased 46 percent since 1998, providing fewer companies for plaintiffs to target as the subject of federal securities class actions.
The 53 court-approved securities class action settlements reported in 2012 represent a 14-year low, according to Securities Class Action Settlements—2012 Review and Analysis by Cornerstone Research. This represents an 18 percent decrease from the number of approved settlements in 2011, and a decline of more than 45 percent from the 10-year average from 2002 through 2011.
As securities class actions historically take a number of years to settle, the decrease in settlements may be due in part to the relatively low number of securities class actions filed in 2009 and 2010. Despite the decrease in the number of cases settled, total settlement amounts increased by more than 100 percent in 2012 compared with 2011, with the number of mega-settlements (settlements in excess of $100 million) accounting for nearly 75 percent of all 2012 settlement dollars. One-third of the settlements in 2012 were for issuers in the financial services industry, with the technology and pharmaceutical industries being the next most prevalent sectors.
The average reported settlement amount dramatically increased from 2011 levels—in excess of 150 percent (from the inflation-adjusted amount of $21.6 million in 2011 to $54.7 million in 2012). The average settlement amount in 2012, however, is closer to the average for all prior post–Reform Act cases.
This report looks at litigation challenging M&A transactions, filed by shareholders of large U.S. public target companies. These lawsuits usually take the form of class actions. Plaintiff attorneys typically allege that the target’s board of directors violated its fiduciary duties by conducting a flawed sales process that failed to maximize shareholder value. Common allegations include the failure to conduct a sufficiently competitive sale, the existence of restrictive deal protections that discouraged additional bids, and conflicts of interests, such as executive retention or change-of-control payments to executives. Another typical allegation is that the target board failed to disclose enough information about the sale process and the financial advisor’s valuation.
We used Thomson Reuters’ SDC database to obtain a list of all acquisitions of U.S. public targets valued at or over $100 million, announced in each year. We searched the SEC filings of the targets and acquirers for discussion of shareholder litigation. After the deals were closed, we used court dockets to trace litigation outcomes.
Federal securities fraud class action filing activity slowed sharply in 2012. There were 152 filings in 2012 compared with 188 in 2011. The number of federal securities fraud class actions (also referred to in this report as filings, class actions, or cases) filed was 21 percent below the annual average of 193 filings observed between 1997 and 2011 (Figure 1).
The following trends are noteworthy for 2012:
This is the fourth in a series of reports that analyzes the characteristics of professional liability lawsuits filed by the Federal Deposit Insurance Corporation (FDIC) against directors and officers of failed financial institutions. Lawsuits may also be filed by the FDIC against other related parties, such as accounting firms, law firms, appraisal firms, or mortgage brokers, but we generally do not address such lawsuits here.
Overview of Litigation Activity
FDIC litigation against directors and officers (D&O) of failed financial institutions has increased markedly in the fourth quarter of 2012, after a lull during the second and third quarters. In October, November, and through December 7, the FDIC filed nine new lawsuits against directors and officers of failed institutions. If additional lawsuits are filed in the last few weeks of December, the number of filings in the fourth quarter will be higher than in the first quarter, when nine lawsuits were filed. Twenty-three lawsuits have been filed to date in 2012. If the recent pace of new filings persists for the balance of 2012, we expect 26 lawsuits will be filed by the end of the year. This reflects an increased level of filing activity compared with 16 in 2011 and two in 2010. In total, 41 lawsuits have been filed since 2010 against the directors and officers of 40 institutions (two separate lawsuits have been filed against various IndyMac directors and officers).
Federal securities class action filing activity in the first half of 2012 has decreased compared with 2011. There were 88 filings in the first six months of 2012, down 6 percent from both the first half and second half of 2011. If current trends hold, there will be 176 filings in 2012 by year-end, less than the 1997 to 2011 average of 193 but in line with the 2009 to 2011 average of 177.
The slight decrease in total filings was largely due to a substantial decline in Chinese reverse merger (CRM) and merger and acquisition (M&A) filings. There were five CRM-related filings and seven M&A-related filings in the past six months. Compared with the first half of 2011, CRM filings were down 79 percent and M&A filings were down 67 percent. Compared with the second half of 2011, CRM filings were down 44 percent and M&A filings were down 68 percent. Despite the drop in CRM-related filings, filings against foreign issuers as a percentage of all filings were greater than every year except 2011. The decrease in M&A filings easily exceeds the 15 percent decline in the number of M&A deals in the first half of 2012 compared with the first half of 2011.  While the number of nontraditional filings has declined, traditional securities class action filings have increased by 23 percent since the second half of 2011.
As widely reported in the press, seizures of banks and thrifts by regulatory authorities began to subside in 2011. Throughout the year, 92 institutions were seized compared with 157 in 2010 and 140 in 2009. In contrast, Federal Deposit Insurance Corporation professional liability lawsuits targeting failed financial institutions began to increase in 2011. These are lawsuits in which the FDIC, as receiver for failed financial institutions, brings professional liability claims against directors and officers of those institutions and against other related parties, such as accounting firms, law firms, appraisal firms, or mortgage brokers.
From July 2, 2010, through January 27, 2012, the FDIC filed 21 lawsuits related to 20 failed institutions (two of the 21 lawsuits were associated with IndyMac Bank, F.S.B). Of the 21 lawsuits, two were filed in 2010, 16 in 2011, and three in January 2012. Aggregate damages claimed in the complaints totaled $1.98 billion.