GLOBAL - PricewaterhouseCoopers is predicting there could be a higher number of shareholder litigation filed against companies over the coming year as officials suggest tough financial conditions could lead to "bad behaviour".
Details of the 2007 securities litigation study produced by the consulting firm notes while 169 securities class actions were filed in 2007 - higher than the 109 filed in 2006 - there could yet many more to come this year, as companies are under more pressure to deliver good results.
Grace Lamont, partner and leader of the securities litigation practice, suggests, along with co-author Patricia Etzold, the state of the economy can play a key role in the governance of listed companies.
"During hard times, the increased pressure to produce good financial results is more likely to lead to bad behaviour, which in turn is likely to result in higher levels of shareholder litigation. If current speculation on the downward direction of the economy is to be believed, then private securities class actions will most likely trend upward over the next few years, above the recent average number of filings since Sarbanes-Oxley," the report's authors suggests.
At the same time, PwC is predicting hedge funds could face increased shareholder claims on the back of the sub-prime crisis, in part because many more pension funds are now investing in these investments, and pension funds are the lead plaintiffs in approximately 40% of cases.
"As the subprime fallout continues into 2008, this will be one area to watch. Not only could litigation against hedge funds by investors increase, but large institutional investors such as pension funds - which have added hedge funds totheir portfolios over recent years and which are increasingly active in shareholder lawsuits - may also begin to focus with similar activism on hedge funds in order to recover losses associated with the subprime crisis," continues the report.
Closer analysis of the reasons for filing cases shows internal controls were the issue cited in 49% of cases - although there can be more than one reason cited - along with 47% for incorrect estimates on financial announcements, understatement of liabilities and expenses was less of an issue in 2007, accounting for 23%, while overstatement of assets was cited in 32% of accounting cases as the reason for filing a lawsuit.
Interestingly, restatements was a "hot topic" in 2007, according to PwC, and is expected to be so again in 2008, however, it is less likely a case will be filed on every restatement as data suggests of the estimated 1300 restatements reported, just 39 led to class action suits.
"The fate of 2008 will depend largely on how a number of trends and issues that emerged in 2007 evolve," the PwC report continued.
"At the forefront of these, of course, is the subprime fiasco, which we expect will have ramifications well into 2008. The unknowns that we expect to reveal themselves in 2008 include:
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