Securities
Jun. 1, 2001
Securities-Fraud Suits Multiply, Study Shows
LOS ANGELES - Over the past several years, an increasing number of disgruntled shareholders have accused companies of financial fraud, according to a new study.
Heightened scrutiny by the Securities and Exchange Commission and a large number of earnings restatements in recent years have contributed to the increase in the number of shareholder lawsuits alleging financial fraud, according to the study released earlier this week by PricewaterhouseCoopers, one of the country's largest accounting firms.
Although any publicly traded company can be the subject of a class action, the report found that high-tech firms are plaintiffs' lawyers' favorite targets.
Of all shareholder cases filed last year, 53 percent contained allegations of financial fraud, up from 45 percent in 1996, according to the PricewaterhouseCoopers study.
Latham & Watkins partner Steve Wilson, who defends companies, officers and directors in securities class actions, said that the SEC has been keeping a close eye on accounting practices.
"The SEC declared 1999 the year of the accountant, and they went out of their way to focus enforcement activity on what they regarded as accounting abuses," Wilson, a partner with offices at Latham's headquarters in Los Angeles and in San Diego, said.
"Any time that you get a higher degree of SEC enforcement, you tend to get a higher level of plaintiffs' actions as well."
In addition to the SEC's microscope, investors themselves are becoming increasingly sophisticated, according to Ilan Kranz, a senior associate at PricewaterhouseCoopers who helped prepare the report.
"People have a lot more information these days, and they also expect a lot from their investments," he said.
One popular target is the software industry, with lawyers filing lawsuits against 26 software companies last year alone, the report notes.
Although the percentage of all filed cases containing allegations of financial fraud increased from 1996 to 2000, the percentage then decreased slightly, from 54 percent in 1999 to 53 percent in 2000.
Another factor driving the longer-term increase is a large number of high-profile companies announcing a restatement of earnings, with "intriguing admissions of 'accounting irregularities,'" the report states, although it doesn't provide an exact number.
PricewaterhouseCoopers found that the number of cases accusing corporate defendants of accounting improprieties has jumped since the enactment of the Private Securities Litigation Reform Act of 1995, intended to eliminate frivolous securities lawsuits.
The reform act requires plaintiffs' lawyers to include details in their initial complaints and halts discovery until a court has reviewed a motion to dismiss. A 9th Circuit Court of Appeals ruling in 1999 clarified and strengthened the pleading standards.
In 1998, Congress passed the Securities Litigation Uniform Standards Act to prevent plaintiffs' attorneys from trying to circumvent the 1995 law by shifting the filing of new cases from federal to state court.
"That's why over the last two years the typical shareholder action is really not filed in state court anymore," PricewaterhouseCoopers' Kranz added.
A review of the accounting cases filed and settled since the passage of the 1995 reform act shows that the average case has settled for nearly $18 million dollars, according to the study.
Noted plaintiffs' attorney William Lerach, name partner in the San Diego office of Milberg Weiss Bershad Hynes & Lerach, said that the number of suits alleging financial fraud is increasing because the amount of financial fraud has been "skyrocketing."
"The Private Securities Litigation Reform Act of 1995 emboldened corporate executives to push the envelope and behave much more aggressively because they know how much more difficult that law made it for shareholders to sue them for fraud," Lerach said.
The widespread availability of stock options and the opportunity for executives to pocket huge amounts of money from them also have tempted executives to falsify their numbers, he added.
"And there's no question that for the past nine months now at least the economy has been weakening, and this puts great pressure on companies to make their numbers. And when they can't make their numbers, they often resort to accounting chicanery to create the results they want to report," he said.
However, Wilson insists that the picture is not quite this simple.
"There are certainly situations where accounting abuses occur, but there are also a lot of situations where people make accounting judgments that may appear to be wrong with the benefit of hindsight, but that were made in good faith at the time," he said.
Toni Vranjes
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