April 5, 2010

Private Securities Litigation Continues to Fall

The latest report from Cornerstone Research shows a sharp drop-off in federal securities fraud class action filing activity in 2009. Continuing a trend that we have seen over the past few years, the 169 federal securities fraud class action filings in 2009 were off 24% from 2008, and were well below the historical average over the past ten years. Included in this big decline was a sharp retreat in credit-crisis filings, down nearly 47% from 2008 levels.

By contrast, the average value for settlements in 2009 increased to $37 million compared with $28 million in 2008, according to another study published by Cornerstone Research. Securities class action settlements totaled $3.8 billion in 2009, an increase of more than 35 percent over 2008. The Cornerstone study also reports 103 settlements approved in 2009, up from 97 reported in 2008. Professor Joseph Grundfest, Director of the Stanford Law School Securities Class Action Clearinghouse (which works in cooperation with Cornerstone Research), observed that, “Because securities fraud litigation typically settles three to five years after the first complaint is filed, this year’s settlement activity reflects lawsuits brought roughly between 2004 and 2006. Given litigation trends over those years, the 2009 settlement data are within the zone of expected settlements, and aren’t much of a surprise.”

Pressure on Audit Fees Intensifies

Apparently it is not just the lawyers facing pressure on their fees these days. As this recent story notes, the tide has turned on audit fees, with companies ramping up the pressure on audit firms to reduce fees and provide more services. Following years of ever-increasing audit fees in the wake of the Sarbanes-Oxley Act, along with auditors “firing” their riskier clients in large numbers, the recent trend (at least since 2007) has been a decline in audit fees, coupled with increasing incidences of companies being the ones dumping their auditors, presumably in favor of cheaper alternatives.

According to data analyzed by CFO, companies with revenues in the $250 million to $500 million range saw a drop of 5% in their fees from 2007-2008, while smaller companies in the $100 million to $250 million range saw an 8% drop on average. The growing practice at public companies is for chief financial officers to benchmark what the company is paying its auditors against the company’s peers, utilizing the readily available audit fee disclosure.

One concern noted with the pressure on fees – low-balling the auditor on fees risks pressuring auditors to underaudit, with abnormally low fees serving as a negative sign for shareholders and the market on the theory that “you get what you pay for.” The article cites examples – like the $186,000 per year audit fees paid Madoff’s multi-billion dollar fund – where the fees just don’t add up to the relative size or complexity of the audit.

This fee pressure is no doubt a trend that is here to stay – even the concerns arising from the financial crisis seem to be outweighed by the pressure on bottom lines to cut professional fees wherever possible and to put everything out for re-bid.

More on our “Proxy Season Blog”

With the proxy season in full gear, we are posting new items regularly on our “Proxy Season Blog” for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– Shareholder Meetings: Eni’s Rules of Order
– Surfing Champion Surfaces in a Proxy Filing…
– Court: Non-Shareholder has Standing to Challenge Director Election
– The Board Diversity Disclosures: What They Look Like So Far
– Proxy Disclosures: Another SEC Enforcement Action

– Dave Lynn