August 24, 2017

A class securities fraud suit is more likely to make it past the pleading stage when the targeted company restated its financials.

Judges between 2007 and 2016 dismissed roughly 28 percent of traditional class securities cases involving restatements compared to almost 40 percent of those not involving a restatement, Cornerstone Research senior adviser Laura Simmons told Bloomberg BNA. Traditional securities cases are those alleging violations of 1934 Securities Exchange Rule 10b-5 and/or 1933 Securities Act Section 11or Section 12(a)(2).

Courts take a dim view of corporations that enhance their balance sheets at investors’ expense, securities lawyers said. In addition, the fact of a restatement makes it hard to deny that the misstated numbers weren’t material—or that they weren’t misstated in the first place.

An issuer that restates its financials is admitting two important elements of a securities fraud claim: materiality and falsity, Washington securities lawyer Daniel Sommers, Cohen Milstein Sellers & Toll PLLC, said. For investors alleging securities law violations that don’t require fraudulent intent, “a restatement is an even more powerful ally,” Sommers said. In those cases, a restatement may provide all the facts needed to state a claim, he said.

This article originally appeared in Bloomberg BNA.