PwC's 2010 Securities Litigation Study Looks Ahead to a New Era of Regulation, Oversight and Whistleblower Justice After a Decade of Fraud, Turmoil and Corruption

Federal class action filing activity increases; total settlement values decrease

As filings against financial firms ebb, other industries feel the heat

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Apr 07, 2011, 12:00 ET

NEW YORK, April 7, 2011 /PRNewswire/ -- Federal class action filing activity rose and the plaintiffs' bar shifted from an overwhelming focus on the financial services industry to a medley of issues across a variety of industries according to the findings of the 15th annual Securities Litigation Study released today by PwC US. The total number of filings for 2010 (174) increased by 12 percent from 2009 (155), despite a continuing decline in the number of financial-crisis-related filings.

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Rivaling the financial industry's top spot, the health industry was the second most commonly sued industry, followed by the technology industry. The utilities industry, specifically oil and gas, experienced the highest percentage increase of filings for any one industry during 2010 due to an increased number of cases related to mergers and acquisitions (M&A) and the Gulf oil spill.

Despite 2010's decline in the number and percentage of financial-crisis-related cases, overall filings reached the second highest level in the last five years. Certain groups of filings with specific common characteristics—such as those filed against educational companies, M&A-related cases filed across all industries, and health industry cases—all impacted this year's filings. Cases filed against foreign private issuers (FIs), in particular Chinese FIs, also contributed to the increase.

According to PwC, total settlement value in 2010 fell to the lowest level since 2003 and the average value of settlements decreased in 2010 compared to 2009 by 11 percent, from $34.0 million to $30.1 million respectively. The average accounting-related settlement value of $45.9 million was 319 percent greater than the average non-accounting-related settlement value; in 2009 the difference between the two kinds of settlements was 170 percent.

"Mega-frauds and corruption, supersized settlements, and sweeping financial reforms are just

some of the memorable news events that emerged from the first decade of the 21st century," said Grace Lamont, partner and U.S. securities litigation and investigations practice leader for PwC. "As much as securities litigation has evolved during that time, the second decade has the potential to yield yet more transformations."

The signing of the Dodd-Frank Act into law on July 21, 2010 – considered to be the most significant piece of financial reform legislation since the 1930s - bestowed new regulatory authority upon the SEC and provided additional enforcement powers such as whistleblower provisions in November 2010.

"The anticipated effects of Dodd-Frank, and particularly the whistleblower program, could lead to a reinvigorated volume of reported securities violations and associated class actions," added Lamont. "Other exogenous factors, such as the possibility of WikiLeaks targeting specific industries and the advances in global communication and networking access, may have far larger implications."

Filings against FIs increased during 2010 by 35 percent. Fifteen of the FI cases filed, or 56 percent, were against Asian companies, which was almost three times the number filed in 2008 or 2009. Between 2006 and 2009 there was an average of seven cases per year brought against Asian companies. According to the report, an unprecedented 12 cases (44 percent) were filed against Chinese companies in 2010. Aside from the cases brought against China-based entities in 2010, cases were brought against companies headquartered in Japan, South Korea, and Singapore.

"In years to come, 2010 may be viewed as a milestone year in securities litigation against FIs," said Neil Keenan, principal in PwC's Forensic Services practice. "The overall impact of the Supreme Court's ruling in the Morrison v. National Australia Bank case is yet to be determined, but early indications favor FI defendants. On a broader level, some have questioned whether this will impact companies' decisions regarding whether or not to list ordinary shares on US exchanges, and many speculate that it could reduce listings of international companies."

Other notable findings in the 2010 study include:

Circuits: A shift in filings from east coast to west coast - The single largest number of filings in 2010 was recorded in the Ninth Circuit, ending the dominance of the east coast, and specifically the Second Circuit, which since 2005 has seen more filings annually than any other. In 2010, 30 percent of filings were in the Ninth Circuit compared to 24 percent in the Second Circuit.
Percentage of accounting-related cases falls further - Accounting-related cases as a percentage of total cases fell from 37 percent in 2009 to 35 percent in 2010, representing the lowest level in 15 years (since the passage of the Private Securities Litigation Reform Act of 1995 (PSLRA)). The percentage of accounting-related cases relative to total filings measured each year has been less than 50 percent for only 4 of the last 15 years analyzed.
No reprieve for directors and officers - The majority of 2010 federal filings continued to name directors and officers. Notably, almost all of the categories of directors and officers named increased from last year.
A decrease in filings against Fortune 500 companies - In 2010, 14 percent of filings were directed at Fortune 500 companies, compared to 20 percent of filings in 2009. The percentage of 2010 filings approximated pre-financial-crisis levels.

"Corruption and bribery will continue to be ongoing priorities for companies around the globe. Last year marked a strong uptick in enforcement activity by US regulators, and this trend will likely not abate on the heels of Dodd-Frank," stated Lamont.

For more information about PwC's Securities Litigation practice and for a full copy of the annual study, please visit http://www.10b5.com.

About PwC's Forensic Services

PwC global Forensic Services team of experienced professionals is dedicated to meeting the challenges caused by fraud allegations, financial crimes and other irregularities. Our portfolio of specialist services includes: Financial Crime Examinations, Forensic Technology Solutions, Regulatory Compliance Reviews, Fraud Risk Management and Fraud Prevention, Dispute Analysis and Litigation Support. The Forensic Services team also manages the PwC Fraud Forum, an exclusive community where members can gain knowledge, participate in events and share important insights on preventing, detecting and investigating fraud, corruption and economic crime. See www.pwc.com/us/forensics and http://usfraudforum.pwc.com for more information.

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SOURCE PwC