PricewaterhouseCoopers released the results of its 2001 securities litigation study on June 10, 2002. The results show a marked increase in the number of IPO (initial public offering) lawsuits, along with record-breaking percentages and settlements for suits involving allegations of improper accounting.
Altogether, PwC identified 483 cases of securities litigation filed in 2001, of which 308 involved IPO allocations. These so-called "laddering" cases were filed against underwriters and the companies they took public in the late 1990s and in early 2000. A typical laddering case alleges that the investment banks agreed to give favored treatment to select investors, letting them buy shares of a new company at the initial price if they agreed to purchase more stock when prices rise. Almost all the laddering cases were filed against hi-tech companies in the computer services, telecommunications or biotech sectors.
Setting aside the new breed of IPO cases, the percentage of the remaining cases that include accounting allegations has been rising steadily in recent years, reaching a record-breaking 57% in 2001. The report's author, PricewaterhouseCoopers partner Charles W. Laurence, told Bloomberg that approximately the same percentage of the cases filed so far in 2002 involve charges of accounting fraud.
PwC's breakdown of the cases involving accounting fraud in 2001 shows that revenue recognition continues to be the most commonly alleged accounting abuse. Fully 69% of the accounting cases filed in 2001 involved allegations related to revenue recognition, while 28% involved overstatement of assets, 26% involved use of estimates, 9% involved understatement of liabilities, and 6% involved purchase accounting.
PwC also found that the average accounting case tended to settle for far greater amounts than non-accounting cases. In fact, 18 of the top 20 settlements were accounting cases. After removing the "extreme cases," PwC says, the average accounting settlement in 2001 was $13 million, compared with the $10.2 million average for years 1996 through 2000.
Download the full report.