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News and Press Releases |
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HEADLINE:
A New Reality In Securities Litigation
By: Carol A.N. Zacharias
National Underwriter Property & Casualty-Risk & Benefits Management Edition. November 21, 2003
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EXCERPT: In the early years of the new Millennium, bubbles have become trends which have become the new reality in the securities litigation arena. What were previously passed off as one-time events are happening with such frequency and pervasiveness that they have become part of the new liability landscape for directors and officers and their insurers. Reality Number 1: Bubbles Are Now Constant. First it was initial public offering allocation cases, then it was analyst claims, then accounting scandals, and now mutual fund cases. Each new year brings a new scourge to the liability marketplace that can be disclaimed as a bubble. However, these bubbles have become so commonplace that they are part of the new liability landscape in securities litigation. In 2001, a record 312 initial public offering allocation cases were filed, according to Cornerstone Research. Plaintiffs alleged that investment bankers and companies unfairly allocated shares in initial public offerings to selected clients. In addition, numerous analyst cases were filed in which plaintiffs alleged that analysts produced research reports and ratings that lacked objectivity or reasonable factual basis, purportedly to garner business for investment banking divisions of their firms. In 2002, numerous cases were filed involving accounting irregularities at major firms. Targets included Enron, WorldCom, Adelphia, HealthSouth, Xerox, Tyco, ImClone and even accounting firms, such as Anderson. Accounting and restatement cases now comprise a majority of shareholder class action claims, as more fully discussed below in Reality Number 2. In 2003, New York Attorney General Elliot Spitzer commenced a battery of inquiries into mutual fund trading practices, culminating in numerous highly publicized internal or external investigations at firms including Fred Alger Management, Alliance Capital Management Holding LP, Bank of America Corporation, Bank One, Federated Investors Inc., Janus Capital Group Inc., Putnam Investments, Strong Capital Management Inc. and Morgan Stanley. These have prompted some firms to suspend employees following an investigation, while others have offered restitution for any adverse impact on the fund. A central issue in these investigations is late trading, in which an investor purchases shares at a days trading price but after the 4 p.m. close, thereby allowing the trader to profit from information not available to others. Another issue is market timing trading, whereby an investor makes rapid trades in mutual fund shares, which affect the value of the shares of other fund participants. Many funds prohibit or limit market timing trading, and may so state in their prospectus. Thus, while marketing timing trading is not illegal, it may be in violation of these representations. Reality Number 2: Accounting Allegations. In 1996, 47 percent of all private securities class actions contained accounting irregularity allegations, according to PricewaterhouseCoopers. In 1997 through 2002 the percentage jumped to 68 percent, with restatements playing a major role. While there were only 23 cases filed in 1996 in connection with a restatement, there were 69 cases in 2002, a 200 percent increase. Whether this was in response to recently heightened pleading standards or other factors, the reality is that accounting irregularities are a part of todays new securities litigation landscape. Two major categories of accounting issues are raised most often in litigation. Of securities class actions filed in 2002, 82 percent alleged misrepresentations in financial documents and 50 percent alleged a GAAP violation, according to Cornerstone Research. In addition, 50 percent of the GAAP cases alleged improper revenue recognition, while 47 percent of those cases alleged an overstatement of assets, including inventory and accounts receivables, according to Cornerstone. Reality Number 3: Severity of Settlements. Severity has become the watchword for securities class action cases. The average shareholder class action settlement in 2002 was $19.9 million, an increase of 12 percent from 2001 and an increase of 40 percent from the average value from 1996 through 2000, according to a recent PricewaterhouseCoopers study. Cornerstone Research put the 2002 value at $24.3 million, up from $16.6 million in 2001; Tillinghast put the 2002 value at $23 million, 35 percent more than the 2001 settlement value of $17.18 million. Forty individual settlements each exceeded $10 million in 2002, and 106 settlements totaled an aggregate sum over $2.1 billion dollars, according to Cornerstone Research. Hence, severity is a reality in securities class action litigation today.
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