NEW YORK CITY BARNEW YORK CITY BARSecurities Litigation: Securities Litigation:

Current Developments & StrategiesCurrent Developments & Strategies

DAMAGES AND LOSS CAUSATIONDAMAGES AND LOSS CAUSATION

By Alex SussmanBy Alex Sussman

December 6, 2007 December 6, 2007

1

IntroductionIntroduction

Focus on the typical Rule 10bFocus on the typical Rule 10b--5 securities fraud class 5 securities fraud class action, governed by the Private Securities Litigation action, governed by the Private Securities Litigation Reform Act of 1995 (“PSLRA”)Reform Act of 1995 (“PSLRA”)

Requirements and methods of establishing:Requirements and methods of establishing:

Loss causationLoss causation

DamagesDamages

2

Loss Causation Loss Causation ––PSLRA and PSLRA and Dura PharmaceuticalsDura Pharmaceuticals

Economic loss and loss causation are required elements of Economic loss and loss causation are required elements of an SEC Rule 10ban SEC Rule 10b--5 claim. 5 claim. Dura Dura PharmsPharms., Inc. v.., Inc. v. BroudoBroudo, , 544 U.S. 336 (2005).544 U.S. 336 (2005).

“[T]he plaintiff shall have the burden of proving that the “[T]he plaintiff shall have the burden of proving that the [alleged 10b[alleged 10b--5 violation] caused the5 violation] caused theloss . . . .” 15 U.S.C. § 78uloss . . . .” 15 U.S.C. § 78u--4(b)(4). 4(b)(4).

Dura Dura held that the allegation that stock was purchased at held that the allegation that stock was purchased at an allegedly inflated price due to a fraudulent an allegedly inflated price due to a fraudulent misrepresentation does not, in itself, adequately plead loss misrepresentation does not, in itself, adequately plead loss causation. causation.

3

Connecting Fraud to the LossConnecting Fraud to the Loss

“Loss causation is the causal link between the alleged “Loss causation is the causal link between the alleged misconduct and the economic harm ultimately misconduct and the economic harm ultimately suffered by the plaintiff.”suffered by the plaintiff.” LattanzioLattanzio v. Deloitte &v. Deloitte &ToucheTouche LLPLLP, 476 F.3d 147, 157 (2d Cir. 2007)., 476 F.3d 147, 157 (2d Cir. 2007).

Plaintiff must show that (1) “the market reacted Plaintiff must show that (1) “the market reacted negatively to a corrective disclosure” or (2) negatively to a corrective disclosure” or (2) defendants “misstated or omitted risks that did lead to defendants “misstated or omitted risks that did lead to the loss,” the loss,” i.e. i.e. materialization of a concealed risk. materialization of a concealed risk. LentellLentell v. Merrill Lynch & Co., Inc.v. Merrill Lynch & Co., Inc., 396 F.3d 161, , 396 F.3d 161, 173 (2d Cir. 2005).173 (2d Cir. 2005).

4

Loss Causation Complaint Allegations Loss Causation Complaint Allegations ––Does Rule 9(b) Apply?Does Rule 9(b) Apply?

Dura Dura assumed the Rule 8 notice pleading standard applies assumed the Rule 8 notice pleading standard applies to allegations of loss causation and most courts have to allegations of loss causation and most courts have applied that standard. applied that standard. In re Tower Automotive Sec. In re Tower Automotive Sec. LitigLitig.., , 483 F. Supp. 2d 327, 348 (S. D.N.Y. 2007).483 F. Supp. 2d 327, 348 (S. D.N.Y. 2007).

Some courts have applied Rule 9(b)’s heightened Some courts have applied Rule 9(b)’s heightened “particularity” pleading requirement for alleging “the “particularity” pleading requirement for alleging “the circumstances constituting fraud.” circumstances constituting fraud.” In re First Union Sec. In re First Union Sec. LitigLitig.., 2006 U.S. Dist. LEXIS 5083, *17, 2006 U.S. Dist. LEXIS 5083, *17--*18 (W.D.N.C. *18 (W.D.N.C. Jan. 20, 2006).Jan. 20, 2006).

5

Loss Causation Complaint Allegations Loss Causation Complaint Allegations ––Does Rule 9(b) Apply?Does Rule 9(b) Apply?

In In Teachers’ Ret. Sys. v. HunterTeachers’ Ret. Sys. v. Hunter, 477 F.3d 162, 186 (4th , 477 F.3d 162, 186 (4th Cir. 2007), the court observed that there is a “strong case” Cir. 2007), the court observed that there is a “strong case” for applying Rule 9(b) to loss causation allegations, but for applying Rule 9(b) to loss causation allegations, but instead required “sufficient specificity to enable the court instead required “sufficient specificity to enable the court to evaluate whether the necessary causal link exists.”to evaluate whether the necessary causal link exists.”

6

Loss Causation Loss Causation ––A Necessary Element for Class Certification?A Necessary Element for Class Certification?

In In Oscar Private Equity Investments v. Allegiance Oscar Private Equity Investments v. Allegiance Telecom, Inc.Telecom, Inc., 487 F.3d 261 (5, 487 F.3d 261 (5thth Cir. 2007), the court Cir. 2007), the court ruled that plaintiffs must establish loss causation in order ruled that plaintiffs must establish loss causation in order to obtain class certification, because the fraudto obtain class certification, because the fraud--onon--thethe--market presumption of reliance is rebutted if there is no market presumption of reliance is rebutted if there is no loss causation.loss causation.The The Oscar Oscar court vacated the district court’s class court vacated the district court’s class certification order, citing certification order, citing Miles v. Merrill LynchMiles v. Merrill Lynch, 471 F.3d , 471 F.3d 24, 27 (2d Cir. 2006) (requiring court determination of 24, 27 (2d Cir. 2006) (requiring court determination of each element of a Rule 23 class certification motion).each element of a Rule 23 class certification motion).

7

No Loss Causation No Loss Causation ––No Connection Between Fraud and LossNo Connection Between Fraud and Loss

In In LattanzioLattanzio, Second Circuit held there was no loss , Second Circuit held there was no loss causation because plaintiffs did not “allege that causation because plaintiffs did not “allege that Deloitte’s misstatements concealed the risk of Deloitte’s misstatements concealed the risk of Warnaco’s bankruptcy.” 476 F.3d at 157.Warnaco’s bankruptcy.” 476 F.3d at 157.

Rule 10bRule 10b--5 claim failed because fraudulent 5 claim failed because fraudulent representation that an investor was accredited did not representation that an investor was accredited did not cause any loss. cause any loss. ATSI ATSI Communc’nsCommunc’ns, Inc. v. The, Inc. v. The ShaarShaarFund, Ltd.Fund, Ltd., 493 F.3d 87 2d (2d Cir. 2007)., 493 F.3d 87 2d (2d Cir. 2007).

8

No Loss Causation No Loss Causation ––Losses Occur Prior to Corrective DisclosureLosses Occur Prior to Corrective Disclosure

Courts find no loss causation where the disclosure of Courts find no loss causation where the disclosure of fraud occurred after the stock price dropped for fraud occurred after the stock price dropped for reasons unrelated to the fraud. reasons unrelated to the fraud. McGowan Lowe & McGowan Lowe & Co.Co. v. v. Jamine Jamine Ltd.Ltd., 231 Fed. , 231 Fed. AppxAppx. 216 (3d Cir. . 216 (3d Cir. 2007).2007).

Plaintiff sold shares before the corrective disclosure Plaintiff sold shares before the corrective disclosure and, therefore, suffered no loss and had no claim. and, therefore, suffered no loss and had no claim. Glazer v. Glazer v. Enzo BiochemEnzo Biochem, Inc., Inc., 474 F.3d 474 4, 474 F.3d 474 4thth Cir. Cir. 2006), 2006), cert. deniedcert. denied, 127 Sup. Ct. 1876 (2007)., 127 Sup. Ct. 1876 (2007).

9

No Loss Causation No Loss Causation ––Fraud Revealed After Unrelated Price DeclineFraud Revealed After Unrelated Price Decline

No loss causation where price dropped after bankruptcy No loss causation where price dropped after bankruptcy announcement and plaintiff never alleged that “market’s announcement and plaintiff never alleged that “market’s acknowledgement of prior misrepresentations caused that acknowledgement of prior misrepresentations caused that drop.” drop.” D.E. & J. Ltd.D.E. & J. Ltd. P’shipP’ship v. Conawayv. Conaway, 133 F., 133 F. App’xApp’x994, 1000 (6994, 1000 (6thth Cir. 2005).Cir. 2005).

Robbins v. Robbins v. KogerKoger PropertiesProperties, 116 F.3d 1441 (11th Cir. , 116 F.3d 1441 (11th Cir. 1997): $80 million jury verdict reversed1997): $80 million jury verdict reversed

10

No Loss CausationNo Loss CausationPrice Drops on Unrelated Bad NewsPrice Drops on Unrelated Bad News

In re Gilead Sciences Sec. In re Gilead Sciences Sec. LitigLitig.., 2005 WL 2649200, at , 2005 WL 2649200, at *7*7--8 (N.D. Cal. Oct. 11, 2005): Where disclosures were 8 (N.D. Cal. Oct. 11, 2005): Where disclosures were unrelated to alleged fraud, the court ruled loss causation unrelated to alleged fraud, the court ruled loss causation allegations were “too attenuated to withstand scrutiny allegations were “too attenuated to withstand scrutiny under under Dura.”Dura.”

In re In re TelliumTellium, Inc. Sec. , Inc. Sec. LitigLitig.., 2005 WL 2090254, at *3, 2005 WL 2090254, at *3--4 4 (D.N.J. Aug. 26, 2005): Announcement that revenues (D.N.J. Aug. 26, 2005): Announcement that revenues were lower than expected was held not to be a corrective were lower than expected was held not to be a corrective disclosure, because the bad news did not disclose the disclosure, because the bad news did not disclose the fraud.fraud.

11

Loss Causation Loss Causation ----Materialization of the Concealed RiskMaterialization of the Concealed Risk

Generally, if there is no corrective disclosure, the Generally, if there is no corrective disclosure, the necessary materialization of risk is “sudden and caused necessary materialization of risk is “sudden and caused the stock value to plummet.” the stock value to plummet.” In reIn re RhodiaRhodia S.A. Sec.S.A. Sec.LitigLitig.., 2007 U.S. Dist. LEXIS 72758 (S.D.N.Y. Sept. , 2007 U.S. Dist. LEXIS 72758 (S.D.N.Y. Sept. 26, 2007) (certain claims dismissed).26, 2007) (certain claims dismissed).

For example, in For example, in In re In re Parmalat Parmalat Securities Litigation,Securities Litigation,disclosure of a bond default was held to be the disclosure of a bond default was held to be the materialization of the alleged fraudulent scheme. 375 materialization of the alleged fraudulent scheme. 375 F. Supp. 2d 278, 284 (S.D.N.Y. 2005).F. Supp. 2d 278, 284 (S.D.N.Y. 2005).

12

Loss Causation Loss Causation ----Materialization of the Concealed Risk (cont’d)Materialization of the Concealed Risk (cont’d)

Stock price decline following disclosure of accounting Stock price decline following disclosure of accounting problems was held to be the materialization of risk from problems was held to be the materialization of risk from concealed internal control deficiencies. concealed internal control deficiencies. In re Scottish Re In re Scottish Re Group Sec. Group Sec. LitigLitig.., 2007 U.S. Dist. LEXIS 81565, *59, 2007 U.S. Dist. LEXIS 81565, *59--*62 *62 (S.D.N.Y. Nov. 2, 2007).(S.D.N.Y. Nov. 2, 2007).

Plaintiffs adequately alleged that stock price decline Plaintiffs adequately alleged that stock price decline resulted from concealed risks of various liabilities which resulted from concealed risks of various liabilities which became public, including in an analyst report. became public, including in an analyst report. Schleicher Schleicher v. Wendtv. Wendt, 2007 U.S. Dist. LEXIS 67924, *55, 2007 U.S. Dist. LEXIS 67924, *55--*57 (S.D. *57 (S.D. Ind. Sept. 12, 2007).Ind. Sept. 12, 2007).

13

Loss Causation Loss Causation ----Materialization of the Concealed Risk (cont’d)Materialization of the Concealed Risk (cont’d)

Claims against accounting firm for allegedly false Claims against accounting firm for allegedly false audit opinions concerning AOL were dismissed to the audit opinions concerning AOL were dismissed to the extent they neither concealed any undisclosed risk nor extent they neither concealed any undisclosed risk nor were ever corrected. were ever corrected. In re AOL Time Warner, Inc. In re AOL Time Warner, Inc. Sec.Sec. LitigLitig..,, 503 F. Supp. 2d 666, 677503 F. Supp. 2d 666, 677--80 (S.D.N.Y. 80 (S.D.N.Y. 2007).2007).

14

Selected Cases Selected Cases ––Loss Causation Allegations SufficientLoss Causation Allegations Sufficient

In re Bradley In re Bradley PharmsPharms., Inc. Sec. ., Inc. Sec. LitigLitig., ., 2006 WL 740793 2006 WL 740793 (D.N.J. Mar. 23, 2006): Court held that announcement of (D.N.J. Mar. 23, 2006): Court held that announcement of SEC investigation, resulting in stock drop, could be a SEC investigation, resulting in stock drop, could be a partial corrective disclosure.partial corrective disclosure.

Asher v. Baxter Int’l, Inc.Asher v. Baxter Int’l, Inc., 2006 WL 299068 (N.D.Ill. , 2006 WL 299068 (N.D.Ill. Feb. 7, 2006): Although a “close question,” court held Feb. 7, 2006): Although a “close question,” court held disclosure of disappointing quarterly results could be a disclosure of disappointing quarterly results could be a corrective disclosure of company’s prior allegedly corrective disclosure of company’s prior allegedly fraudulent projections, in apparent tension withfraudulent projections, in apparent tension with TelliumTelliumruling, ruling, supra. supra.

15

Event Studies and Loss CausationEvent Studies and Loss Causation

Event studies may be used to prove or disprove loss Event studies may be used to prove or disprove loss causation by providing a methodology for analyzing causation by providing a methodology for analyzing companycompany--specific stock price movementsspecific stock price movements

Plaintiffs won summary judgment using an event study Plaintiffs won summary judgment using an event study showing loss causation in showing loss causation in Gaming Lottery Sec.Gaming Lottery Sec. LitigLitig.., , 2001 U.S. Dist. LEXIS 2034 (S.D.N.Y. Mar.2001 U.S. Dist. LEXIS 2034 (S.D.N.Y. Mar. 1, 2001)1, 2001)

IkonIkon Office Solutions Sec.Office Solutions Sec. LitigLitig.., 2001 U.S. Dist. LEXIS , 2001 U.S. Dist. LEXIS 1172 (E.D. Pa. Feb.1172 (E.D. Pa. Feb. 6, 2001): Plaintiff expert’s event 6, 2001): Plaintiff expert’s event study did not show price movements were due to alleged study did not show price movements were due to alleged fraudfraud

16

Event Studies Event Studies –– Methodology and UseMethodology and Use

Components and methodology of event studies:Components and methodology of event studies:

Regression analysis of stock price changesRegression analysis of stock price changes

Adjust for Adjust for marketwidemarketwide and and industrywideindustrywide stock price stock price changes, unrelated to fraud changes, unrelated to fraud

Identify companyIdentify company--specific price movementsspecific price movements

In re Imperial Credit Indus. Sec.In re Imperial Credit Indus. Sec. LitigLitig.., 252 F. Supp. 2d , 252 F. Supp. 2d 1005, 1014 (C.D. Cal. 2003): An event study “is an 1005, 1014 (C.D. Cal. 2003): An event study “is an accepted method for the evaluation of materiality [and] accepted method for the evaluation of materiality [and] damages to a class of stockholders”damages to a class of stockholders”

17

Integrated ChronologyIntegrated Chronology

18

19

Expert Opinions on Loss CausationExpert Opinions on Loss Causation

Court denied defendants’ summary judgment motion Court denied defendants’ summary judgment motion based on plaintiff expert’s opinion, but allowed possible based on plaintiff expert’s opinion, but allowed possible laterlater DaubertDaubert challenge in challenge in In re BristolIn re Bristol--Myers Squibb Myers Squibb Sec.Sec. LitigLitig.., 2005 U.S. Dist. LEXIS 18448, at *62, 2005 U.S. Dist. LEXIS 18448, at *62--63 63 (D.N.J. Aug. 17, 2005)(D.N.J. Aug. 17, 2005)

Plaintiffs’ expert showed loss causation that raised an Plaintiffs’ expert showed loss causation that raised an issue for trial in issue for trial in In reIn re PharmaprintPharmaprint, Inc. Sec., Inc. Sec. LitigLitig.., 2002 , 2002 U.S. Dist. LEXIS 19845, at *26 (D. N.J. Apr.17, 2002)U.S. Dist. LEXIS 19845, at *26 (D. N.J. Apr.17, 2002)

20

Failure of Expert to Show Loss CausationFailure of Expert to Show Loss Causation

Plaintiffs offered no expert testimony or other evidence to Plaintiffs offered no expert testimony or other evidence to show loss causation, where the stock price had collapsed show loss causation, where the stock price had collapsed before alleged fraud was revealed. before alleged fraud was revealed. Ray v. Citigroup Ray v. Citigroup Global Markets, Inc., Global Markets, Inc., 2005 U.S. Dist. LEXIS 24419, at 2005 U.S. Dist. LEXIS 24419, at *11 (N.D. Ill. Oct. 18, 2005), *11 (N.D. Ill. Oct. 18, 2005), aff’daff’d, 482 F.3d 991 (7, 482 F.3d 991 (7thth Cir. Cir. 2007).2007).

Expert testimony was inadmissible for failure of expert to Expert testimony was inadmissible for failure of expert to address obvious alternative explanations for alleged address obvious alternative explanations for alleged losseslosses. . In re Williams Sec.In re Williams Sec. LitigLitig.., 496 F. Supp. 2d 1195 , 496 F. Supp. 2d 1195 (N.D. Okla. 2007).(N.D. Okla. 2007).

21

Defense Expert May Disprove Loss CausationDefense Expert May Disprove Loss Causation

“Defendants’ expert’s event study proved that none of the “Defendants’ expert’s event study proved that none of the alleged misstatements . . . had an effect on the stock alleged misstatements . . . had an effect on the stock price.”price.” NathensonNathenson v.v. ZonagenZonagen, Inc., Inc., 322 F. Supp. 2d 764, , 322 F. Supp. 2d 764, 780 (S.D. Tex.),780 (S.D. Tex.), aff'daff'd in pertinent partin pertinent part, 267 F.3d 400 (5th , 267 F.3d 400 (5th Cir. 2001).Cir. 2001).

22

DamagesDamages

No express measure of damages under Section 10(b)No express measure of damages under Section 10(b)

Section 28(a) provides that recovery shall not exceed a Section 28(a) provides that recovery shall not exceed a plaintiff’s “actual damages”plaintiff’s “actual damages”

23

Damages Measure in Section 10(b) Damages Measure in Section 10(b) “Fraud on the Market” Cases“Fraud on the Market” Cases

“Out“Out--ofof--pocket” measure of damages. pocket” measure of damages. Affiliated UteAffiliated Ute, 406 , 406 U.S. U.S. 128, 128, 155 (1972); 155 (1972); GuraryGurary v. v. WinehouseWinehouse, 235 F.3d , 235 F.3d 792 (2nd Cir. 2000)792 (2nd Cir. 2000)

Amount overpaid by stock Amount overpaid by stock purchaserspurchasers because stock because stock price was artificially inflated by alleged price was artificially inflated by alleged misrepresentation or omission; ormisrepresentation or omission; or

Amount lost by stock Amount lost by stock sellerssellers because stock price was because stock price was artificially deflated by alleged misrepresentation or artificially deflated by alleged misrepresentation or omissionomission

24

Aggregate Damages in Class ActionAggregate Damages in Class Action

Multiply: Per share damages (generally determined by Multiply: Per share damages (generally determined by event studies)event studies)

Times: Number of shares damaged (plaintiffs offer stock Times: Number of shares damaged (plaintiffs offer stock trading models/defendants may object)trading models/defendants may object)

PSLRA provides “bouncePSLRA provides “bounce--back” rule which reduces per back” rule which reduces per share damages, if stock price rebounds during 90 days share damages, if stock price rebounds during 90 days following corrective disclosure, following corrective disclosure, see see 15 U.S.C. 15 U.S.C. §§78u78u--4(e)4(e)

25

Determining PerDetermining Per--ShareShareDamages During Class PeriodDamages During Class Period

PerPer--share damages: The difference between “true value” share damages: The difference between “true value” of stock and actual price paid by buyer of stock and actual price paid by buyer

Generally, plaintiffs argue that stock price decline after Generally, plaintiffs argue that stock price decline after corrective disclosure reflects amount price was inflatedcorrective disclosure reflects amount price was inflated

Proving damages can be a “daunting task”Proving damages can be a “daunting task”---- usually a usually a “battle of experts,” “battle of experts,” In re In re MicrostrategyMicrostrategy Sec. Sec. LitigLitig.., 150 , 150 F.Supp. 2d 896 (E.D. Va. 2001)F.Supp. 2d 896 (E.D. Va. 2001)

26

Event Studies Necessary to Event Studies Necessary to Calculate Per Share DamagesCalculate Per Share Damages

Need to factor out extraneous factors and isolate effect of Need to factor out extraneous factors and isolate effect of fraud on stock pricefraud on stock price

Damage calculations have been rejected for failure to Damage calculations have been rejected for failure to conduct an event study, conduct an event study, e.g., In re Imperial Credit Indus.; e.g., In re Imperial Credit Indus.; Executive Executive TelecardTelecard Sec. Sec. LitigLitig., 979 F. Supp. 1021 ., 979 F. Supp. 1021 (S.D.N.Y. 1997);(S.D.N.Y. 1997); Oracle SecOracle Sec. . LitigLitig., ., 829 F. Supp. 1176 829 F. Supp. 1176 (N.D. Cal. 1993)(N.D. Cal. 1993)

Where regression analysis was not feasible, event study Where regression analysis was not feasible, event study was not required in was not required in RMED Int’l v. Sloan’sRMED Int’l v. Sloan’s, 2000 U.S. , 2000 U.S. Dist. LEXIS 3742 (S.D.N.Y. Mar. 24, 2000)Dist. LEXIS 3742 (S.D.N.Y. Mar. 24, 2000)

27

Calculating Number of Damaged SharesCalculating Number of Damaged Shares

How many shares were purchased during class period and How many shares were purchased during class period and still held at end of class period?still held at end of class period?

Plaintiffs’ experts use stock trading models based upon Plaintiffs’ experts use stock trading models based upon key assumptionskey assumptions

28

Daily Closing Price, Alleged True Value and Inflation

Example of a constant dollar inflation ribbon

29

Stock Trading ModelStock Trading Model

Estimate float available for trading by class members by Estimate float available for trading by class members by making adjustments to total outstanding sharesmaking adjustments to total outstanding shares

Estimate total shares traded by class members by making Estimate total shares traded by class members by making adjustments to reported trading volumeadjustments to reported trading volume

Assume trading pattern: Determine number of retained Assume trading pattern: Determine number of retained shares that are damagedshares that are damaged

30

Stock Trading Models Stock Trading Models ----Typical Adjustments to Float Typical Adjustments to Float and Trading Volume Inputsand Trading Volume Inputs

Float adjustmentsFloat adjustmentsInstitutional investors that do not trade during the damage periInstitutional investors that do not trade during the damage period (od (--))Insider holdings (Insider holdings (--))Company stock in 401(k) plan (Company stock in 401(k) plan (--))Short interest (+)Short interest (+)

Trading volume adjustments Trading volume adjustments Double counting in the reported volume due to market maker activDouble counting in the reported volume due to market maker activity (ity (--))Short sellers covering positions (Short sellers covering positions (--))Changes in insiders holdings (Changes in insiders holdings (--))Stock buybacks (Stock buybacks (--))

Lower float or trading volume results in fewer retained Lower float or trading volume results in fewer retained shares and lower damagesshares and lower damages

31

Types of Stock Trading Models Types of Stock Trading Models Proportional Trading Model (PTM)Proportional Trading Model (PTM)

Typical original plaintiffTypical original plaintiff--style modelstyle modelAssumes every share is equally likely to tradeAssumes every share is equally likely to trade

Accelerated Trading Model (ATM)Accelerated Trading Model (ATM)Generally lower damages than PTMGenerally lower damages than PTMAssumes shares traded since beginning of class period are more lAssumes shares traded since beginning of class period are more likely to ikely to trade than shares that have not traded during class periodtrade than shares that have not traded during class period

Two Trader Model (TTM)Two Trader Model (TTM)Modified plaintiffModified plaintiff--style modelstyle modelGenerally lower damages than PTMGenerally lower damages than PTMAssumes one class of shares (“Traders”) has a much higher likeliAssumes one class of shares (“Traders”) has a much higher likelihood of hood of trading than other class of shares (“Investors”)trading than other class of shares (“Investors”)

32

Example of PTM Trading Damages Analysis

33

Stock Trading Models GenerateStock Trading Models GenerateSubstantial Differences in Estimated DamagesSubstantial Differences in Estimated Damages

$1.8 million$1.9 million

$3.0 million

Proportional Accelerated Two-Trader

Source: B. Stangle and G. Jetley, Analysis Group, Inc.Notes: Accelerated Trading Model assumes previously traded shares are 5 times more likely to trade than untraded shares.Two-Trader Model assumes high-intensity "traders" hold 20% of the float and account for 80% of daily volume, and low-intensity “investors” hold 80% of the float and account for 20% of daily volume.

Example: Total Float Available for Trading: 1,000,000 sharesDaily Trading Volume: 10,000 shares / dayInflation Per Share: $5/share (constant dollar inflation)Class Period Length: 90 days

34

Example of PTM Trading Damages Analysis (cont’d)

Total///////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////

35

Some Court Opinions HaveSome Court Opinions HaveRejected Trading ModelsRejected Trading Models

One court has ruled that the PTM was inadmissible under One court has ruled that the PTM was inadmissible under DaubertDaubert, see, see Kaufman v. MotorolaKaufman v. Motorola, 2000 U.S. Dist. , 2000 U.S. Dist. LEXIS 14627 (N.D. Ill. Sept.LEXIS 14627 (N.D. Ill. Sept. 21, 2000)21, 2000)

Plaintiffs’ expert testified as to proportional trading:Plaintiffs’ expert testified as to proportional trading:“Had never been tested against reality”“Had never been tested against reality”“Never accepted by professional economists”“Never accepted by professional economists”

Effect: Jury would determine perEffect: Jury would determine per--share damages, share damages, rather than aggregate damagesrather than aggregate damages

36

Some Court Opinions HaveSome Court Opinions HaveRejected Trading Models (cont’d)Rejected Trading Models (cont’d)

One court has ruled that the Two Trader Model is of One court has ruled that the Two Trader Model is of “significantly questionable reliability” and “probably does not “significantly questionable reliability” and “probably does not satisfy the satisfy the DaubertDaubert test.”test.” In re Broadcom Corp. Sec. In re Broadcom Corp. Sec. LitigLitig.., , 2005 U.S. Dist. LEXIS 12118, at *82005 U.S. Dist. LEXIS 12118, at *8--9 (C.D. Cal. June 3, 9 (C.D. Cal. June 3, 2005).2005).

The court ruled that a jury determination of the per share The court ruled that a jury determination of the per share damage per day combined with use of the claims damage per day combined with use of the claims administration process was more accurate and reliable.administration process was more accurate and reliable.

Broadcom Broadcom cites other courts that rejected trading models, cites other courts that rejected trading models, 2005 U.S. Dist. LEXIS 12118, at *42005 U.S. Dist. LEXIS 12118, at *4--*7*7

37

Other Courts Have Accepted Trading Other Courts Have Accepted Trading Models or Other Proof of Aggregate DamagesModels or Other Proof of Aggregate Damages

In In In re In re WorldcomWorldcom, Inc. Sec. , Inc. Sec. LitigLitig., ., 2005 U.S. Dist. LEXIS 2005 U.S. Dist. LEXIS 3143 (S.D.N.Y. Mar. 3, 2005), evidence of aggregate damages 3143 (S.D.N.Y. Mar. 3, 2005), evidence of aggregate damages was allowed, but no stock trading model was at issuewas allowed, but no stock trading model was at issue

Plaintiffs’ expert’s calculation of aggregate shares held Plaintiffs’ expert’s calculation of aggregate shares held admissible, without considering admissible, without considering Motorola Motorola criticisms, in criticisms, in BlechBlechSec. Sec. LitigLitig., ., 2003 U.S. Dist. LEXIS 4650 (S.D.N.Y. Mar. 26, 2003 U.S. Dist. LEXIS 4650 (S.D.N.Y. Mar. 26, 2003)2003)

Some courts view criticisms of PTM as going to weight and Some courts view criticisms of PTM as going to weight and credibility, rather than admissibility, credibility, rather than admissibility, e.g., In re Cendant Corp. e.g., In re Cendant Corp. Sec.Sec. LitigLitig.., 109 F. Supp. 2d 235 (D.N.J. 2000), 109 F. Supp. 2d 235 (D.N.J. 2000)

38

ConclusionConclusion

Securities fraud cases present loss causation and damage Securities fraud cases present loss causation and damage issues that invite creative legal and economic analysis. issues that invite creative legal and economic analysis.

Expert witnesses and studies play an important role in Expert witnesses and studies play an important role in analyzing and presenting arguments on those issues. analyzing and presenting arguments on those issues.