Stability in Accounting-Related Securities Class Actions Amid Declining Settlement Sizes in 2024

In the complex landscape of securities litigation, the year 2024 showcased notable trends within accounting-related class actions. According to a comprehensive report from Cornerstone Research, the number of such filings and settlements held steady, albeit with a significant reduction in the total value of settlements.

Continued Filings and Settlements

The data indicates that the number of accounting-related securities class action filings experienced a slight uptick, totaling 57 filings in 2024, up from 56 in 2023. However, this number still falls below the historical average of 61 filings between 2015 and 2023. Accounting cases accounted for 26% of all securities class action filings, marking their second-lowest level in a decade.

A key observation from the report is the shift in the demographic of defendants. The median pre-disclosure market capitalization for these issuers dropped to a decade low of $445.6 million, suggesting that smaller companies are increasingly at the center of these legal challenges. Notably, the firm's DDL Index, which tracks dollar-value changes in defendant firms’ market capitalizations, fell by 42% to $45.6 billion in 2024, below the historical average.

Emerging Trends in Allegations

One of the most striking shifts in the report is the change in the nature of allegations. Traditionally dominated by revenue recognition issues, 2024 marks a pivotal moment where allegations related to asset valuations and impairments became the most frequently cited violations. This trend highlights a potential evolution in how accounting standards are being interpreted and litigated.

Additionally, the report notes that filings involving restatements have plunged over 30% from the previous year, returning to historical levels. There have also been at least two separate complaints that included accounting allegations against 32 issuers since 2015, indicating a pattern of persistent scrutiny in specific sectors.

Declining Settlement Values

Though the number of settlements remained unchanged at 35, the total monetary value of these settlements dropped significantly from $1.6 billion in 2023 to just $1.1 billion in 2024. This downturn represents the second-lowest level in the past decade, primarily driven by a sole mega settlement exceeding $100 million—far below the historical average of four such settlements annually.

Smaller issuer defendants continued to dominate settlements, with the median pre-disclosure market capitalization of defendants decreasing by 39% to $745.5 million. This trend correlates directly with the decline in settlement amounts, which fell from an average of $47 million to $30.1 million, and the median settlement amount dropped from $15.4 million to $12 million.

Time to Settlement

Interestingly, the average time taken to reach a settlement in accounting-related cases decreased by over seven months, reverting to levels consistent with the prior nine years after a spike in 2023. The report highlights that 'plaintiff-style damages'—a metric assessing potential investor losses—plays a critical role in individual settlement outcomes. A nearly 50% reduction in median plaintiff-style damages compared to 2023 accounts heavily for the reduced size of settlements observed in 2024.

Insights on Settlement Trends

The report further reveals that the settlements that included accusations of both GAAP violations and internal control weaknesses dropped to their lowest levels in a decade. Settlement values linked to claims of internal control weakness constituted just 27% of the total value of all accounting case settlements.
Conversely, while the number of settlements involving restatements increased, the median settlement amount was substantially lower—down 85% when compared to cases that did not involve restatements.

Conclusion

As the landscape of accounting-related securities class actions evolves, the 2024 findings highlight a crucial inflection point in terms of settlement sizes, allegation patterns, and responsible issuer demographics. This underscores the increasing complexity of navigating securities law in an environment where plaintiffs may need to adapt their strategies and expectations accordingly. The innovations in analytical methods introduced by Cornerstone, particularly in evaluating damage metrics, will likely influence how these cases are approached in future litigation.

Through diligent scrutiny of financial practices and trends, stakeholders can better anticipate and adapt to the emerging challenges presented by ongoing developments in this legal arena. Understanding the implications of these statistics is essential for investors and legal professionals alike, as they navigate the future of accounting standards and related litigations.