Per Cornerstone Research, filings of securities class actions with accounting-related allegations increased 47% in 2014, and accounting case filings involving restatements of financial statements reached their highest level in the last seven years. Most people like numbers and statistics like these to come to conclusions, but sometimes looking at things anecdotally and historically helps fill in some color to the story – potentially giving us a crystal-ball look into the future.
Disclosure-Related Suits Used to be More Common
Let’s start back over a decade ago. With the introduction of Sarbanes-Oxley after the Enron meltdown (the historic poster child of accounting irregularity) and the new required certifications of financial statements by companies’ top executives, it was not surprising that accounting/restatement-related claims would take a backseat to other drivers of securities claims.
For example, the subsequent market meltdown/financial crisis (all in, call it 2007-12 and early talks of a DJIA of 6,000!) made suing public companies—especially financial institutions—like shooting fish in a barrel for the plaintiffs’ bar. These allegations were obviously much less accounting-focused and much more disclosure-related (i.e., your disclosures were false and misleading).
But today, with a historic bull market run continuing (DOW! WOW! 18,000!), it may be hard to claim in some cases that a company’s guidance and/or any false and misleading statements have negatively impacted stock prices—if only because certain stock either just won’t go down or they bounce right back up if they do dip.
Now Accounting-Related Suits are Back
So, we may have come full-cycle in my opinion, meaning back to basics. Absent any big price drops in share prices, the way the plaintiffs’ bar may continue to try and get securities claims to stick is by focusing on the difficult-to-defend situation a company may find themselves in: “We goofed our accounting and our financial statements and therefore we had to correct them – sorry.”
All that being said, a major market correction (no jinx here I hope) and other changes in the markets and regulation certainly could increase disclosure-rooted claims. Or, certain industries may be in harm’s way just because of certain global-economic current events (energy and oil companies as oil prices drop, or any companies materially exposed to the strong dollar).
Regardless, however, history has a tendency to repeat itself.. Let’s see what the next five years brings.