Class action settlements involving Petrobras and Wells Fargo & Co. helped investors secure a near-record $4.5 billion for cases related to bad accounting or weak internal controls in 2018.
That payout is the second-highest accounting-related settlement total in the past decade and reflects a trend of investors targeting ever-larger companies, according to a Cornerstone Research Inc. review of accounting-related class action litigation released April 17.
“The increase in the size of those defendant firms is dramatic,” said Laura Simmons, a senior adviser at Cornerstone Research.
“We’re seeing substantially larger defendants both in terms of case filings as well as settlements,” she said.
The median size of a company facing an investor accounting lawsuit last year was $1.5 billion of market capitalization—more than double the average since 2009. Of companies that settled, the median market cap was $957 million, the report said.
A Year of Settlements
Last year, Wilmington Trust Corp, LendingClub Corp., and ComScore Inc. agreed to settlements of more than $100 million, in addition to settlements of $3 billion for Petroleo Brasileiro SA, as Petrobras is formally known, and $480 million for Wells Fargo.
All five cases involved allegations of weak internal controls over financial reporting. Of those, three of the companies had disclosed to investors a weakness in internal controls. Four of the cases involved violations of accounting standards.
Internal control allegations were present in three-quarters of cases settled in 2018—32 of 41 cases. Auditors were named as defendants in just four settled cases.
The number of accounting lawsuits filed dropped slightly to 143 cases in 2018 from 165 cases in 2017. Those numbers exceed the yearly average of 77 cases from 2009 through 2017. The majority of cases involved mergers and acquisitions and reconciliation of alternative performance measures to generally accepted accounting principles.
Accounting remains a central issue in securities class actions, Simmons said, and such cases continue to result in higher settlements.
The report said that 260 class actions filed last year didn’t involve accounting.