GMI Ratings’ Litigation Risk Model Accurately Identifies Public Companies at Risk of Class Action Lawsuits

New York – February 6, 2013 – GMI Ratings, the leading provider of research on environmental, social, governance and accounting-related risks affecting the performance of public companies, today released full-year 2012 results for its Litigation Risk Model. 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.

Key Findings

  • 53% of the companies that had federal securities class actions filed against them in the United States in 2012 were classified in the lowest ratings quintile a year before the lawsuit was filed. Only 4% were ranked in the highest quintile.
  • As of the quarter closest to the filing, 63% of all companies facing class actions were ranked in GMI Ratings’ worst quintile. Fewer than 1% were in the best quintile.

James A. Kaplan, Chief Executive of GMI Ratings, said: “In 2012, our Litigation Risk Model continued its steady performance, correctly differentiating between publicly traded companies at high risk of federal securities class actions and those at very low risk of such lawsuits. 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.” 

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.

Download Report

The full report is available for download on the GMI Ratings website. The report includes data on the incidence of lawsuits in particular sectors and risk quintiles.  It also includes the list of 117 companies rated by GMI that faced federal securities class actions in 2012.

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 Governance Research Provider”. For more information please visit www.gmiratings.com.

GMI Ratings Media Contacts

Joyce Brown (jbrown@gmiratings.com; +1 207/553-5679)