BulletProofBlog the blog on crisis communications

Each Monday, Bulletproof Blog now features exclusive interviews with thought leaders on issues of critical importance to companies and countries. This week, with the recent release of Pricewaterhouse Coopers' 2008 Securities Litigation Study, we interview Al Vondra, who is a Partner in PwC' s Forensic Services practice.

In 30 years with PwC, Mr. Vondra has directed numerous audit engagements, forensic and fraud investigations, merger and acquisition audits, due diligence reviews, internal control reviews, and dispute analysis projects. A nationally-recognized specialist in securities litigation, its causes, and its affects on business, he shared his insights with Bulletproof:

What were among the most surprising findings of PwC' s 2008 Securities Litigation Study?

Al Vondra: Given the sweeping effects of the current financial crisis - from the collapse of major financial institutions to massive government bailouts - I can' t say that 2008 provided many surprises at all, but there was some revealing data in the survey. For the first time since the passage of the Private Securities Litigation Reform Act in 1995, financial services was the most frequently sued industry group. Pension funds and other large institutional shareholders were among the most active plaintiffs. And the SEC secured some of the biggest settlements ever from firms that provided investors with misleading information.

The number of federal securities class action suits was up 29 percent from 2007 as well. The value of settlements in federal securities class actions fell by 45 percent - but that is explained by the massive $3.2 billion settlement reached by a large multinational corporation in 2007. If we remove this outlier, settlement values actually increased by 9 percent.

So, if I had to identify what was most surprising about 2008, I would point to the decline in accounting-related cases as a percentage of the total filings - which fell from 52 percent in 2007 to 40 percent in 2008. Given the new rules put in place by Sarbanes-Oxley, and the market turmoil we' ve seen, we largely got the type of results we were expecting.

In such a perilous securities litigation landscape, what can financial services providers do to limit their reputational liabilities?

Al Vondra: First, they have to ensure that they' ve got effective risk management measures in place and that those measures are communicated to key stakeholders. Of all of the accounting-related filings in 2008, inadequate internal controls were cited by plaintiffs 43 percent of the time.

Second, they have to be prepared to infuse even more transparency into their communications, especially considering the fact that mark-to-market estimates and overstatement of assets were alleged 52 and 38 percent of the time, respectively, in 2008' s accounting-related securities filings.

There' s little doubt in my mind that effective risk management and a commitment to transparent communications can significantly limit a company' s liability.

What' s next with regard to federal securities class action litigation? Are there issues emerging on the horizon that companies need to be aware of?

Al Vondra: I think we' re going to see more of the same in 2009. At the end of 2008, the SEC had 50 open investigations related to the financial crisis. While SEC investigations are not necessarily a driver of plaintiff-driven federal securities litigation, the two do normally walk hand-in-hand.

I think that we are also going to see the Foreign Corrupt Practices Act continue to play a major role. Both the SEC and DOJ secured record FCPA settlements in 2008 - and both agencies have pledged to remain vigilant on the FCPA front moving forward.

When the dot-com bubble burst, high-tech federal securities class actions dominated the landscape. With the bursting of the housing bubble and all of the lost wealth that came with it, there' s a new 800 lb. gorilla in the room - and it isn' t going away any time soon.