A report on securities class actions

The W$J discusses a PWC report released today on private securities class actions in 2004 (I haven’t been able to find the report on-line). According to the article:

--these suits were up 16% from 2003.

--settlements (omitting the WorldCom outlier) were up 3%, with 22 over $20 million.

--suits against foreign firms (29) represented 14% of the total

Most disturbingly, the article points out that “technology companies almost by definition are more susceptible to lawsuits challenging their books.” That’s because many suits are based on accounting problems, specifically including revenue recognition issues, to which tech companies are most prone.

The fact that a particular industry is especially subject to lawsuits by its very nature would seem to be a problem, unless there’s something inherently wrong with the industry. Why should we want to subject tech companies to a litigation tax?

The data on foreign firms is obviously of interest to the market for cross-listings. (I will be posting a more recent paper on this issue shortly).

Finally, the article notes that securities litigation can be expected to rise because of Sarbox.  I noted here the potential effect of Section 404, and specifically that

every business that fails because of inherent business risks will become potential litigation bait because of a hindsight claim linking the failure with incomplete disclosure of internal control gaps.

This could exacerbate the litigation tax on tech firms, which may have the hardest time anticipating the risks they should have disclosed in their internal controls reports.