New York – August 17, 2012 – GMI Ratings, the leading provider of research on environmental, social, governance and accounting‐related risks affecting the performance of public companies, released today the results of its Litigation Risk Model study for the first half of 2012. For this period, the study found that a majority of companies facing Federal class action lawsuits were ranked in the lowest 20% of the risk ratings distribution a year before the lawsuit was filed. These results confirm that the Litigation Risk Model is a valuable tool for investors and insurers hoping to predict class actions, which frequently lead to reputational damage, stock price declines and settlement costs.
Fifty‐seven percent of the companies that had federal class action suits filed against them in the United States in the six months ended June 30, 2012 were correctly classified in the lowest‐rated quintile 12 months before the lawsuit was filed. Only 2% of the companies were ranked in the highest quintile a year before the litigation. Eighty percent of all companies facing class actions were ranked in GMI Ratings’ two worst quintiles. (These calculations exclude four companies that GMI did not rate 12 months before the suits.)
Closer to the lawsuit filing date, the accuracy of the model improves so that, at the time of the filing, 66% of the companies named in lawsuits were ranked in the lowest quintile; 84% were ranked in the lowest two quintiles, and none in the highest quintile.
Litigation Against Companies with Best and Worst Risk Ratings
| % At Filing | % 1 Year Before Filing | |
| 1 (highest risk) | 66% |
57% |
|
2 |
18% |
23% |
|
3 |
8% |
11% |
|
4 |
8% |
7% |
| 5 (lowest risk) |
0% |
2% |
Key Trends
- Only four suits were brought against Chinese companies in our universe for the first half of 2012, down markedly from 2011 when they represented 18% of our total for the year.
- In the first six months of 2012, the percentage of filings in the Industrials, Technology, and Telecommunications sectors declined from 2011, while the proportion of suits in Healthcare increased substantially.
- The number of filings in the Financial sector (7) remained relatively low, only a little above half their weight in our universe of companies.
- The largest portion of class action lawsuits (28%) was filed against Healthcare companies.
- After Healthcare, the Non‐Cyclical Consumer Goods and Services industry makes the worst showing when adjusted for each sector’s relative size in the broad universe.
Federal Securities Class Action Suits by Sector, First Half 2012
| % of Suits | % of Population | Suits as % of Population | |
| Basic Materials | 4.6% |
10.0% |
0.46 |
| Cyclical Consumer Goods / Services | 15.4% |
12.4% |
1.24 |
| Energy | 9.2% |
10.4% |
0.89 |
| Financials | 10.8% |
19.4% |
0.56 |
| Healthcare | 27.7% |
11.6% |
2.39 |
| Industrials | 9.2% |
14.2% |
0.65 |
| Non‐Cyclical Consumer Goods / Services | 7.7% |
4.7% |
1.64 |
| Technology | 13.8% |
12.0% |
1.15 |
| Telecommunications Services | 0.0% |
1.9% |
0.00 |
| Utilities | 1.5% |
3.3% |
0.47 |
About the GMI Ratings Litigation Risk Model
Developed in 2005, the GMI Ratings Litigation Risk Model identifies companies most likely to face a securities class action suit. The model combines the Accounting and Governance Risk (AGR®) Score with commonly recognized litigation risk factors such as company size, industry classification, and recent stock market performance. The following are consistently validated key findings of the GMI Rating Litigation Risk Model:
- Companies with low AGR Scores have increased litigation risk.
- Recent high‐risk events increase litigation risk. Examples of such events include accounting‐related events, mergers and acquisitions, executive officer changes, insider trading, negative earnings surprises.
- Incidence of litigation is higher among larger companies.
- The risk of litigation varies significantly by sector.
- Severe equity losses increase litigation probability. The model captures the severity of loss both on an absolute basis and relative to the market over a 12‐month look‐back period. The model also calibrates the general level of lawsuits to the performance of the S&P 500 over the past year.
- The model includes a financial distress indicator, as bankruptcy has been found to occur more than twice as frequently among fraudulent companies than among other companies.
Statistical Reliability and Validation of the Model
Version 3.0 of the Litigation Risk Model was constructed using a large data set of more than 600,000 monthly observations. In order to avoid data dependency and over‐fitting, the model was trained on all Federal Class Action Litigations filed between 2000 and 2006, excluding IPO Laddering cases. It was then validated on Federal Class Actions filed between 2007 and April 2010 (the out‐of‐sample period.)
The model has an out‐of‐sample Accuracy Ratio of .70. The Accuracy Ratio is a key summary measure of model effectiveness, defined as the ratio of (i) the predictive power of a given model above and beyond the random model divided by (ii) the predictive power of an ideal model above and beyond the random model.
About GMI Ratings
GMI Ratings is an independent provider of research and ratings on environmental, social, governance and accounting‐related risks affecting the performance of public companies. The firm’s ESG ratings for nearly 5,500 companies worldwide incorporate 120 ESG KeyMetrics™ to help investors assess the sustainable investment value of corporations. The firm also provides Accounting and Governance Risk (AGR®) ratings and corresponding litigation probabilities for approximately 18,000 public companies worldwide. AGR metrics reflect the accuracy and reliability of a company’s financial reporting. Clients of GMI Ratings include leading investment managers, asset owners, insurers, auditors, regulators and corporations seeking to incorporate accounting and ESG factors into risk assessment and decision‐making. A signatory to the Principles for Responsible Investment (PRI), GMI Ratings was formed in 2010 through the merger of GovernanceMetrics International, The Corporate Library and Audit Integrity. In the 2012 Independent Research in Responsible Investment (IRRI) Survey conducted by Thomson Reuters Extel and SRI‐CONNECT.com, GMI Ratings was named “The Best Independent Corporate GovernanceResearch Provider”. For more information please visit www.gmiratings.com.
GMI Ratings Media Contacts
Paul Hodgson (phodgson@gmiratings.com; 207/553‐5683)
Joyce Brown (jbrown@gmiratings.com; 207/ 874‐6921)
Joshua Kendall (jkendall@gmiratings.com; +44 (0)207 160 9861) Lev Janashvili (ljanashvili@gmiratings.com; 212/949‐1313 x339)
|
1 |
A123 Systems, Inc. | Industrials | 4/2/2012 | 3.8% |
1.8% |
2 |
3 |
|
2 |
Accretive Health, Inc. | Healthcare | 4/26/2012 | 5.5% |
2.2% |
1 |
3 |
|
3 |
AOL, Inc. | Technology | 5/3/2012 | 5.4% |
4.6% |
1 |
1 |
|
4 |
ATS Corp | Technology | 3/6/2012 | 2.1% |
2.4% |
3 |
2 |
|
5 |
Biosante Pharmaceuticals Inc | Healthcare | 2/3/2012 | 4.8% |
0.9% |
1 |
5 |
|
6 |
Cablevision Systems Corporation | Cyclical Consumer Goods / Services | 1/26/2012 | 4.5% |
1.7% |
2 |
3 |
|
7 |
CARBO Ceramics Inc. | Energy | 2/9/2012 | 1.1% |
0.6% |
5 |
7 |
|
8 |
Centene Corp | Healthcare | 6/29/2012 | 4.4% |
2.7% |
1 |
2 |
|
9 |
Central European Distribution Corp | Non‐Cyclical Consumer Goods / Services | 6/8/2012 | 9.0% |
9.4% |
1 |
1 |
| 10 | Chelsea Therapeutics International Ltd. | Healthcare | 4/4/2012 | 3.8% |
2.5% |
2 |
2 |
| 11 | Chemed Corporation | Healthcare | 1/12/2012 | 2.7% |
2.2% |
3 |
3 |
| 12 | Chesapeake Energy Corporation | Energy | 4/26/2012 | 4.0% |
2.1% |
2 |
3 |
| 13 | China Sky One Medical, Inc. | Healthcare | 2/24/2012 | 3.6% |
15.1% |
2 |
1 |
| 14 | Chinacast Education Corporation | Non‐Cyclical Consumer Goods / Services | 5/25/2012 | 4.6% |
4.0% |
1 |
1 |
| 15 | Collective Brands Inc. | Cyclical Consumer Goods / Services | 1/25/2012 | 4.9% |
2.1% |
1 |
3 |
| 16 | Columbia Laboratories Inc. | Healthcare | 2/1/2012 | 1.5% |
0.6% |
4 |
7 |
| 17 | Cost Plus, Inc. | Cyclical Consumer Goods / Services | 5/25/2012 | 0.7% |
0.8% |
7 |
6 |
| 18 | CPI Corp. | Non‐Cyclical Consumer Goods / Services | 1/13/2012 | 2.5% |
1.2% |
3 |
4 |
| 19 | Credit Suisse Group AG (ADR) | Financials | 5/25/2012 | 8.6% |
6.8% |
1 |
1 |
| 20 | Deckers Outdoor Corp | Cyclical Consumer Goods / Services | 5/31/2012 | 12.7% |
1.6% |
1 |
3 |
| 21 | Delta Petroleum Corp. | Energy | 4/18/2012 | 2.5% |
1.2% |
3 |
4 |
| 22 | Direct Markets Holdings Corp | Financials | 6/11/2012 | 0.6% |
0.5% |
7 |
8 |
| 23 | Dynegy Inc. | Utilities | 3/28/2012 | 13.8% |
5.7% |
1 |
1 |
| 24 | Eastman Kodak Company | Cyclical Consumer Goods / Services | 2/10/2012 | 17.6% |
18.1% |
1 |
1 |
| 25 | EasyLink Services International Corp. | Technology | 6/8/2012 | 1.4% |
2.4% |
4 |
2 |
| 26 | Enterprise Financial Services Corp. | Financials | 4/10/2012 | 1.8% |
2.0% |
3 |
3 |
| 27 | First Solar, Inc. | Technology | 3/15/2012 | 37.0% |
18.0% |
1 |
1 |
| 28 | General Maritime Corp | Energy | 6/12/2012 | 4.0% |
3.0% |
2 |
2 |
| 29 | General Motors Company | Cyclical Consumer Goods / Services | 6/29/2012 | 6.4% |
8.5% |
1 |
1 |
| 30 | GenVec, Inc. | Healthcare | 2/3/2012 | 0.5% |
NULL |
8 |
NULL |
| 31 | Green Mountain Coffee Roasters Inc. | Non‐Cyclical Consumer Goods / Services | 5/7/2012 | 17.7% |
5.0% |
1 |
1 |
| 32 | Health Management Associates, Inc. | Healthcare | 1/26/2012 | 13.3% |
6.4% |
1 |
1 |
| 33 | Hecla Mining Company | Basic Materials | 2/1/2012 | 2.4% |
1.1% |
3 |
5 |
| 34 | JPMorgan Chase & Co. | Financials | 5/14/2012 | 5.8% |
5.5% |
1 |
1 |
| 35 | K12 Inc. | Industrials | 1/30/2012 | 4.2% |
1.9% |
2 |
3 |
| 36 | KIT digital, Inc. | Technology | 5/25/2012 | 10.1% |
2.4% |
1 |
2 |
| 37 | K‐Sea Transportation Partners L.P. | Industrials | 1/26/2012 | 0.7% |
0.9% |
7 |
5 |
| 38 | LHC Group, Inc. | Healthcare | 6/13/2012 | 7.2% |
3.5% |
1 |
2 |
| 39 | Magna International Inc. (USA) | Cyclical Consumer Goods / Services | 5/4/2012 | 4.4% |
4.1% |
1 |
1 |
| 40 | MAKO Surgical Corp. | Healthcare | 5/10/2012 | 2.1% |
2.1% |
3 |
3 |
| 41 | Medtronic, Inc. | Healthcare | 3/12/2012 | 4.9% |
18.5% |
1 |
1 |
| 42 | Metabolix, Inc. | Basic Materials | 2/17/2012 | 0.7% |
0.4% |
6 |
9 |
| 43 | Metlife Inc | Financials | 1/12/2012 | 18.1% |
7.3% |
1 |
1 |
| 44 | Micromet Inc. | Healthcare | 2/8/2012 | 2.9% |
3.7% |
2 |
1 |
| 45 | ModusLink Global Solutions, Inc. | Technology | 6/12/2012 | 0.7% |
1.1% |
7 |
5 |
| 46 | Molycorp, Inc. | Basic Materials | 2/3/2012 | 3.9% |
NULL |
2 |
NULL |
| 47 | Netflix, Inc. | Non‐Cyclical Consumer Goods / Services | 1/13/2012 | 23.1% |
4.5% |
1 |
1 |
| 48 | NeurogesX, Inc | Healthcare | 4/23/2012 | 0.9% |
2.4% |
6 |
2 |
| 49 | New Energy Systems Group. | Industrials | 2/10/2012 | 0.7% |
0.9% |
6 |
5 |
| 50 | Oppenheimer Holdings Inc. (USA) | Financials | 3/26/2012 | 4.0% |
1.4% |
2 |
4 |
| 51 | OPTi Inc. | Industrials | 2/9/2012 | 0.8% |
NULL |
6 |
NULL |
| 52 | Orrstown Financial Services | Financials | 5/25/2012 | 2.5% |
0.6% |
3 |
7 |
| 53 | Powerwave Technologies, Inc. | Technology | 2/9/2012 | 6.7% |
1.0% |
1 |
5 |
| 54 | SAIC, Inc. | Technology | 2/24/2012 | 8.7% |
5.2% |
1 |
1 |
| 55 | Siemens AG | Industrials | 1/18/2012 | 2.2% |
4.5% |
2 |
1 |
| 56 | St. Jude Medical, Inc. | Healthcare | 6/14/2012 | 6.2% |
6.7% |
1 |
1 |
| 57 | SuccessFactors, Inc. | Technology | 1/5/2012 | 5.8% |
3.9% |
1 |
1 |
| 58 | Tempur‐Pedic International Inc. | Cyclical Consumer Goods / Services | 6/20/2012 | 3.6% |
2.8% |
2 |
2 |
| 59 | THQ Inc. | Cyclical Consumer Goods / Services | 6/15/2012 | 3.6% |
2.1% |
2 |
3 |
| 60 | Tibet Pharmaceuticals Inc | Healthcare | 5/25/2012 | 3.7% |
NULL |
2 |
NULL |
| 61 | TranS1 Inc. | Healthcare | 1/24/2012 | 2.0% |
4.7% |
3 |
1 |
| 62 | Viropharma Inc | Healthcare | 5/17/2012 | 16.2% |
4.2% |
1 |
1 |
| 63 | Wal‐Mart Stores, Inc. | Cyclical Consumer Goods / Services | 5/7/2012 | 3.3% |
4.6% |
2 |
1 |
| 64 | Walter Energy, Inc. | Energy | 1/27/2012 | 6.4% |
2.6% |
1 |
2 |
| 65 | Weatherford International Ltd | Energy | 3/22/2012 | 2.5% |
2.9% |
3 |
2 |
GMI Ratings is not directly or indirectly compensated for the specific views, opinions or recommendations expressed in its research reports. This document is for information purposes only and is not to be considered a solicitation to buy or sell any security. Neither GMI Ratings nor any other party guarantees its accuracy nor makes any warranties regarding its usage. Modification or reproduction of this report is forbidden without explicit permission. Copyright © 2012 GMI Ratings. All rights reserved.
The post GMI Ratings’ Litigation Risk Model Accurately Identifies Public Companies at Risk of Class Action Lawsuits appeared first on GMI Ratings.
