Securities Fraud Suits Declined, Accounting Fraud Charges Up

The study by PricewaterhouseCoopers found that shareholder suits were filed against 201 companies last year, down from 207 in 1999, according to a report in The Wall Street Journal.

The tally, which includes lawsuits filed in federal and state courts, shows that the pace of new shareholder suits has slowed since peaking in 1998.

But since 1995, when Congress passed the Private Securities Litigation Reform Act, the percentage of shareholder lawsuits alleging accounting violations has risen significantly.

Last year, 53% of all newly-filed  shareholder suits contained allegations of accounting fraud, about the same percentage as in 1999, but up from about 40% in 1995. That statistic alone doesn’t necessarily signal that accounting fraud itself has been on the rise.

Accountants Get a Tougher Examination
But in recent years, thanks to a rash of highly publicized accounting scandals, accounting practices get more scrutiny than they used to, from both the investing public and the Securities and Exchange Commission.

Further, to avoid having their cases dismissed during preliminary stages, plaintiffs’ attorneys filing complaints under the 1995 act must plead their fraud allegations with far greater specificity than previously required.

“In the plaintiffs’ attorneys’ minds, it makes it a stronger case if they can allege that management cooked the books,” said Kerry Francis, a Pricewaterhouse partner who specializes in corporate investigations.

Based on a review of all such suits since 1998, the study found that 35% of all of shareholder complaints alleging accounting violations are filed after a company announces a restatement of its financial statements.

Nearly half of all companies sued for accounting violations eventually restate their earnings, the study found.

‘Channel Stuffing’ Charge Common

About two-thirds of all the accounting-fraud cases filed last year alleged some sort of revenue-recognition violation, such as “channel stuffing,” under which sales are recognized on products sold into the distribution channel, even though no end user has agreed to buy the products and the distributor still has the right the return the
merchandise.

The most popular targets of shareholder lawsuits continued to be companies in the software, computer-services and telecommunications industries.

Settlement amounts also have been on the rise. Since the 1995 passage of the reform act, about 25% of all shareholder suits have been settled out of court.

Excluding the $3.3 billion paid to settle accounting-fraud lawsuits against Cendant
Corp. in 1999, the average settlement since the act’s passage in 1995 through the end of last year was $13.8 million.

For 2000, the average settlement was $15.4 million, up from $14.3 million in 1999, excluding the Cendant settlement. Accounting-fraud settlements also were far more costly than ordinary securities-fraud lawsuits on average.

Since the reform act’s passage, the average accounting-fraud settlement was nearly $18 million, excluding the Cendant case. For last year, that figure climbed to $20.7 million from $17.5 million in 1999.