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Accounting Class Actions Increase and Settlements are More Expensive

Cornerstone Research has issued its annual report on accounting class action litigation. It makes clear that suing public companies for alleged accounting violations remains a growth industry.


In Accounting Class Action Filings and Settlements—2020 Review and Analysis, Cornerstone found that, in 2020, 70 class actions were filed against public companies alleging accounting violations, a 4 percent increase from the 67 filings in 2019, and the highest number of new accounting cases since 2011. Over 30 percent of 2020 federal securities law class actions included accounting allegations. Settlements in accounting cases represented 84 percent of the total cost of settling securities law class actions. The total value of accounting case settlements in 2020 tripled, from $932 million in 2019 to $3.5 billion in 2020, although the median settlement amount rose only slightly.


Some other indicators of the number, magnitude, and cost of accounting class actions in 2020 include:

  • The total value of accounting class action settlements arose, from $932 million in 2019 to $3.546 billion in 2020. The steep increase in settlement value may not, however, be very meaningful since the median settlement amount increased less than 2 percent. Cornerstone notes that the aggregate settlement figure was due primarily to a small number of very large settlements. In cases where the information on insurance was publicly available, 89 percent of 2020 settlement funds were contributed by D&O insurers.

  • In the 70 accounting cases filed in 2020, average market capitalization losses, as measured by the change in the defendant company’s market capitalization during the class period, was $67.8 billion – up from $54.8 billion in 2019, and 77 percent higher than the 2011-2019 average. In four of the 2020 cases, alleged market capitalization losses were $5 billion or greater.

  • Thirty-eight accounting class actions were settled in 2020, compared to 34 settlements in 2019. Six accounting class action settlements exceeded $100 million, and as noted above, the aggregate value of settlements nearly tripled. In contrast, last year Cornerstone reported that in 2019 the total value of class action settlements against public companies alleging accounting violations declined. See Accounting Class Action Numbers Continue to Grow, April-May 2020 Update.

  • The size of the companies settling accounting class actions is increasing. The median market capitalization of the 2020 settling companies was $934.1 million, almost 50 percent above the $663 million 10-year median.

Restatements and internal control weaknesses continue to be fertile ground for class action litigation, although less so than in 2019. Sixteen percent (11) of the 2020 new accounting cases involved restatements; this was the lowest number of accounting class action filings involving restatements in 10 years. All 2020 restatement cases included an internal control weakness allegation; over the past 10 years, more than 75 percent of restatement cases have included allegations of internal control weaknesses. Forty-one cases were filed alleging internal control violations; in 16 of those, the company had disclosed an ICFR weakness, while in the remaining 25 no such announcement had been made.


As to the industries that attracting accounting class actions:

  • The greatest number of 2020 cases were filed against companies in the Consumer Non-Cyclical sector (which includes biotechnology, healthcare, and pharmaceuticals) and against companies in the Financial sector, with 15 cases filed against companies in each sector. Consumer Non-Cyclical was also the most-sued sector in both 2019 and 2018, and the Financial sector was the second most popular defendant sector in both of those years. Cases against companies in the Technology sector (which was in third place) more than doubled to nine in 2020, up from four in 2019.

  • Companies in the Consumer Non-Cyclical sector also settled the most cases in 2020. By dollar amount, the Financial sector had the highest median settlement amount, $17.6 million.

Readers should note that some of the class action filings numbers in Cornerstone’s 2020 and 2019 reports are not directly comparable. The 2020 report appears to exclude cases challenging mergers and acquisitions on accounting grounds and reports only “core accounting cases” – that is, non-M&A cases alleging violations of generally accepted accounting principles (GAAP) or other reporting standards or weaknesses in internal control over financial reporting (ICFR). M&A accounting class actions typically are filed under the proxy or takeover provisions of the federal securities laws and frequently allege a failure to reconcile a non-GAAP measure to a GAAP measure. Such cases are often brought by attorneys seeking a quick settlement involving a disclosure correction and the payment of attorney’s fees. See Accounting Class Actions Rise, But Settlements Fall, April-May 2018 Update. While such M&A actions were included in the aggregate accounting class action numbers in prior reports, this year Cornerstone relegates then to an appendix.

Comment: Accounting class action litigation against public companies is clearly flourishing. And, as noted in Securities Law Class Actions are Mushrooming, But More Cases are Being Dismissed and the Survivors are Settling for Less, March 2018 Update, the risk that a public company will be named in a securities law class action is increasing, particularly for companies engaged in M&A activity. Accounting issues remain a significant line of attack for the plaintiff’s bar, and restatements and disclosure of internal control weaknesses are likely to attract litigation, if they coincide with a significant drop in stock price. At the same time, the cost of settling accounting cases is on a general upward trend. The best protection against litigation is diligence and care in overseeing the company’s financial reporting.

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