PwC's Securities Litigation Update Reveals Slight Slowdown in Federal Securities Class Action Filings

Number of securities litigation class action filings through Q3 2012 has been slightly out-paced compared to the same time period in 2011; filings in health industry may be showing an upward trend

Oct 15, 2012, 11:47 ET from PwC US

NEW YORK, Oct. 15, 2012 /PRNewswire/ -- According to PwC's Securities Litigation Update, released today, the activity of federal securities class action filings through September 30, 2012 has been slower when compared to the same time period in 2011.  Specifically, the number of cases filed through the third quarter of 2012 totaled 137 cases, compared to 142 cases filed through September 30, 2011.  If filings continue at a similar rate, 183 federal securities class actions are expected to be filed by year end compared to a total of 191 filings made in 2011 – a decrease of approximately 4.2 percent – just above the annual average (180) of cases filed since the enactment of the Private Securities Litigation Reform Act of 1995.

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Foreign companies were named in 27 cases (20 percent) filed thus far in 2012.  This is a significant decrease when compared to the percentage of foreign filings in 2011, which represented 32 percent (or 46 cases) of total filings for the first nine months of 2011.  The decline in filings against China-based companies[1] appears to be the leading cause for this downward shift.  The number of filings against China-based companies (13) in 2012 through the end of the third quarter accounted for 48 percent of foreign filings, as compared to 65 percent (or 30 cases) of foreign filings during the comparable period in 2011.  This declining trend of filings against China-based companies through the third quarter of 2012 is a continuation of the declining trend that began in the third quarter of 2011, when the number of filings declined from 23 cases in the first half of 2011 to 14 cases in the second half of 2011, as noted in PwC's 2011 Securities Litigation Study.  As described further below, the decline in China-related cases has also led to a decline in accounting-related cases filed against foreign issuers and the number of filings in the Ninth Circuit.

Plaintiff attorneys continue to focus their attention on merger and acquisition ("M&A") related litigation, but to a lesser extent than in 2011 and similar to those levels seen in 2010.  M&A-related filings represented 20 percent of cases through September 30, 2012 (28 cases), whereas in 2010 and 2011 such M&A-related filings represented 21 percent (27 cases) and 25 percent (36 cases) of total cases for the comparable period, respectively.  While it may be premature to draw conclusions from these figures regarding the trend in M&A-related filings, it is worth noting that the overall level of M&A deal activity decreased during the latter half of 2011 and continued into 2012, potentially indicating that there may be a fewer number of "targets" for plaintiff attorneys.

Accounting-related cases during the first three quarters of 2012 represented 31 percent of filings, which is a nine percentage point decrease from the percentage of filings during the comparable period in 2011 (40 percent). Through the third quarter of 2012, the most common accounting-related allegations were inadequate internal controls and improper revenue recognition, which were cited in 63 percent and 26 percent of accounting-related cases, respectively.  Foreign cases represented 33 percent of the accounting-related cases filed in 2012, which is a 24 percentage point decrease from 2011 – likely caused by the decrease in cases filed against China-based companies.  The most prevalent accounting-related allegations in these foreign cases were internal controls estimates and overstatement of assets.

An emerging trend thus far in 2012 is the return of pharmaceutical efficacy cases, with eight filings through the end of the third quarter during 2012 as compared to just one case in all of 2011.  These pharmaceutical efficacy cases helped contribute to the health[2] industry having the largest number of filings (32) of any industry, which represents 23 percent of total filings through the first three quarters of 2012, boosting the health industry by 11 percentage points over 2011 filings during the comparable period.

Filings in the high-technology[3] and energy[4] industries were the second largest through Q3 of 2012, each with 14 percent of filings, a decrease from 26 percent through Q3 of 2011 for high-technology, and a slight increase from 11 percent for energy. The financial services industry represented only nine percent of filings through the third quarter of 2012, a decrease of two percentage points over the comparable period in 2011.

"Based on filings in the first nine months of 2012, it seems the decline in health industry cases in 2011 was short lived," said Patricia A. Etzold, securities litigation partner with PwC.  "With the increased number of pharmaceutical efficacy cases and accounting cases filed in the health industry thus far in 2012, there is a strong likelihood the health industry will, for the first time since the passage of the PSLRA, have more class action lawsuits than any other industry by year-end. The high-technology or financial services industries dominated filings in all prior years."

The most active circuits continue to be the Second and Ninth, with 27 percent and 18 percent of the cases filed thus far in 2012, respectively.  When compared to cases filed during the comparable period in 2011, these statistics reflect a slight increase from 25 percent of cases filed in the Second Circuit, and a significant decrease from 31 percent of cases filed in the Ninth Circuit.  This decrease in the Ninth Circuit is most likely attributable to the decline in the number of cases filed against China-based companies thus far in 2012.  Although there is a similar decrease in cases against China-based companies filed in the Second Circuit, this is offset by an increase in the number of cases filed against a diverse group of industries.

For more information about PwC's Securities Litigation update, visit:

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[1]   The term "China-based companies" includes entities headquartered in the People's Republic of China and Hong Kong.

[2]   "Health" includes pharmaceuticals, medical devices and health services.

[3]   "High-Technology" includes computer services, electronics and telecommunications.

[4]   "Energy" includes energy, utilities, oil and gas.