An Economist’s View of Market Evidence in Valuation and Bankruptcy Litigation

The following post comes to us from Faten Sabry, Senior Vice President at NERA Economic Consulting, and is based on a NERA publication by Ms. Sabry and William P. Hrycay.

Courts often face many challenges when assessing the solvency of a company whether public or privately held. Examples of difficult valuation questions include: would a company with a market capitalization of several hundred million dollars possibly be insolvent? Or, would publicly-traded debt at or near par be conclusive evidence that the issuer is solvent at the time? Or, would a company’s inability to raise funds or maintain its investment grade rating at a given time be sufficient to rule on solvency?

It is common in valuation and solvency disputes to have qualified experts with very different opinions on the fair market value of a company, often using the same standard approaches of discounted cash flows and comparables. How would the courts or the arbitrators decide and what is the role of contemporaneous market evidence in such disputes? In this article, we discuss the role of market evidence and possible misinterpretations of such evidence and highlight recent court decisions in the United States.


Automated Detection in SEC Enforcement

The following post comes to us from Jerry Arnold, Affiliated Academic at NERA Economic Consulting, and is based on a NERA publication by Dr. Arnold and Raymund Wong.

Although US Securities and Exchange Commission (SEC) enforcement actions related to financial fraud and issuer disclosures have been on a decline since 2007, recent statements and actions suggest that the SEC is likely to re-focus its efforts on detecting, pursuing, and preventing accounting fraud. [1] Since her confirmation as Chair of the SEC, Mary Jo White has made it clear that her administration will focus on identifying and investigating accounting abuses at publicly-traded companies. [2] Among the recent initiatives announced by the SEC are the increased focus on the whistle blower program and the establishment of the Financial Reporting and Audit Task Force, the Microcap Fraud Task Force, and the Center for Risk and Quantitative Analytics. [3]


Recent Trends in Securities Class Action Litigation: 2013 Review

The following post comes to us from Dr. Renzo Comolli and Svetlana Starykh, Senior Consultants at NERA Economic Consulting, and is based on portions of a NERA publication. The complete publication, including analysis of motions, trends in resolutions and settlements, and footnotes, is available here.

Legal developments have dominated the news about federal securities class actions in 2013. Last February, the Supreme Court decision in Amgen resolved certain questions about materiality but focused the debate on Basic and the presumption of reliance, which are now back to the Supreme Court after certiorari was granted for the second time in Halliburton.

Against this legal backdrop, 2013 saw a small increase in the number of complaints filed for securities class actions in general and for class actions alleging violation of Rule 10b-5 in particular. Filings in the 5th Circuit doubled, while filings in the 9th Circuit bounced back after having dipped in 2012.


Credit Crisis Litigation Update: It is Settlement Time

The following post comes to us from Faten Sabry, Senior Vice President at NERA Economic Consulting, and is based on a NERA publication by Ms. Sabry, Eric Wang, and Joseph Mani; the full document, including footnotes, is available here.

It has been more than six years since the onset of the credit crisis and we have documented for the first time in the past few months a significant increase in the number and size of settlements. Meanwhile, the pace of new filings has slowed as housing markets continue to improve and delinquencies and defaults decline. However, litigation arising from the credit crisis is far from over.

In this post, we discuss the recent trends of settlement activity and review some of the major settlements in credit crisis litigation. We also discuss mortgage settlements that are related to repurchase demands mainly between mortgage sellers and Fannie Mae and Freddie Mac. We then examine the current trends in filings, including the types of claims made, the nature of defendants and plaintiffs in the litigation, and the financial products involved.

Our main findings, which are discussed in greater detail below, include the following:


FSA Calendar Year-End Update 2012

The following post comes to us from Paul Hinton, Vice President at NERA Economic Consulting, and is based on a NERA publication by Mr. Hinton, Robert Patton, and Zachary Slabotsky; the full document, including footnotes, is available here.

Fines imposed by the Financial Services Authority (FSA) since 1 January 2012 (through 20 December) have totalled £310 million, more than four times the total for 2011 (see Figure 1 below). This increase is due to a handful of very large fines, including the £160 million fine against UBS for LIBOR manipulation announced 19 December, which is the largest-ever FSA fine by a substantial margin.

The number of fines assessed against firms, 25, was in line with last year. In contrast, the number of fines against individuals fell to its lowest level since 2009, and the aggregate fine amount imposed on individuals fell slightly compared to 2011.

The dramatic increase in aggregate fines is the result of a few headline-grabbing penalties against banks, notably those against UBS and Barclays for manipulation of LIBOR and EURIBOR, and against UBS for failing to prevent unauthorised trading by a rogue trader, Kweku Adoboli. Those three fines alone totalled nearly £250 million. The size of fines against banks, of which there were nine in 2012 as compared to seven in 2011, largely explains the £244 million jump in the annual totals.


2012 Trends in Securities Class Actions

The following post comes to us from Dr. Ron Miller, Vice President at NERA Economic Consulting, and is based on a NERA publication by Dr. Miller, Dr. Renzo Comolli, Svetlana Starykh, and Sukaina Klein; the full document, including complete footnotes, is available here.

Update: The full-year review, which includes December 2012 statistics, is available here.

The Steady Stream of Filings Has Continued Throughout 2012

The steady stream of federal securities class actions has continued unabated throughout 2012. [1] Through the end of November, 195 securities class actions were filed in federal courts—a pace that, if continued through December, would lead to a total of 213 cases for the full year. (See Figure 1.) This would put 2012 filings just slightly below their average rate over the previous five years.

Click image to enlarge

It is noteworthy that this level of filings has been maintained even though cases related to the credit crisis, which had been prominent in recent years, have all but ended. [2] For example, of the 208 filings in 2009, 59 were related to the credit crisis; by contrast, only four cases of the 195 filed through November of this year involved such allegations. While the decline in credit crisis cases itself is not surprising, it is notable that this decline has not translated into an overall decline in federal filings. The average number of federal filings in 2005-2006, just before the crisis hit, was only 160. One might have expected the rate of filings to return to this lower level after the wave of credit crisis cases subsided, but that has not happened: the plaintiffs’ bar has found new causes of action, with merger objection cases picking up much of the slack.


Recent Trends in US Securities Class Actions against Non-US Companies

Editor’s Note: Elaine Buckberg is Senior Vice President at NERA Economic Consulting. This post is based on a NERA publication by Robert Patton; the full publication, including footnotes, is available here.

The volume of US securities class action litigation targeting companies outside the US has recently reached record levels, despite a 2010 decision by the US Supreme Court, in Morrison v. National Australia Bank, which substantially restricted the extraterritorial reach of many such cases. This increase is attributable in large part to a wave of suits filed against Chinese companies listed on US stock markets. Even excluding Chinesecompany litigation, however, the pace of US securities class actions against non-US companies has not fallen below the levels observed prior to the Morrison decision.

On the other hand, Morrison may have had some effect on settlement sizes. In the past several years, there have been few very large settlements in US securities class actions against non-US companies, a development that, as discussed below, may be attributable in part to the decision. This article surveys recent trends in filings of US securities class actions against non-US company defendants, drawing upon data up to mid-2012. It also discusses trends in settlements, and concludes by reviewing the outlook for such litigation going forward.


Do Courts Count Cammer Factors?

Elaine Buckberg is Senior Vice President at NERA Economic Consulting. This post is based on a NERA publication by Dr. David Tabak, available here.

One of the key stages in many securities class actions is class certification. The most common path for plaintiffs to obtain certification includes showing that the market in which the securities at issue traded was efficient, leading to what, in 1988, the Supreme Court in Basic v. Levinson termed a “rebuttable presumption” of reliance common to all class members.

The following year, the court in Cammer v. Bloom listed five factors that would help establish that a security traded in an efficient market. Since then, dozens of courts have relied on these “Cammer factors” in evaluating market efficiency. The rulings do not state, however, how the court reached an overall opinion on market efficiency when different factors point in different directions. To help shed light on this issue, we have examined identifiable cases from 2002 through 2011 in which a court ruled on market efficiency after reviewing some or all of the Cammer factors.

Our review of the data yields a perhaps remarkable conclusion: in over 98 percent of the cases, the ultimate ruling on efficiency can be predicted by the number of factors that the court found favored efficiency less the number of factors that the court said argued against efficiency. When this figure was positive, the court found the security at issue to have traded in an efficient market in all but one instance, while when the figure was zero, the court always found the security to have traded in an inefficient market. Moreover, just limiting the analysis to a review of three Cammer factors (turnover, analysts, and market makers) yields similar results.


SEC Settlement Trends

Elaine Buckberg is Senior Vice President at NERA Economic Consulting. This post is based on a NERA publication by Ms. Buckberg and James A. Overdahl; the full publication (including charts and footnotes) is available here.

Trends in the Number of Settlements

The SEC’s promise to hold more individuals accountable was realized in 1H12 in a 20% jump in the number of SEC settlements with individuals. The SEC settled 286 cases with individuals in the first half of this year, putting it on pace for 572 settlements in FY12, which would be the most since 2005. This marks a shift from the end of fiscal 2011, when we reported that the SEC’s promise to hold more individuals accountable was borne out in the value, but not in the number, of settlements with individuals.

Total SEC settlements are also up, but the increase is entirely explained by the rise in settlements with individuals. The SEC settled with 379 defendants in 1H12, putting it on pace for 758 settlements in FY12. This would constitute a 13% increase from the SEC’s 670 settlements in 2011 and would constitute the most annual settlements since 2005. The pace of settlements with companies is down slightly, with 93 settlements, consistent with an annual pace of 186, as compared with 196 in FY11.

The increase in individual settlements is driven primarily by allegations relating to insider trading. The increase from 63 insider trading settlements in FY11 to an annualized number of 120 projected for FY12 accounts for over half of the observed increase in settlements in 2012. The SEC also increased its settlement activity with individuals in matters relating to Ponzi schemes. Settlements with individuals relating to public company misstatements rose to an annualized pace of 78 settlements, up from a low of 60 in 2011, but still well below the 91 settlements in 2010.


Cross Border Shareholder Class Actions Before and After Morrison

Elaine Buckberg is Senior Vice President at NERA Economic Consulting. This post is based on a NERA publication by Ms. Buckberg and Max Gulker; the full publication is available here.

In our paper, Cross Border Shareholder Class Actions Before and After Morrison, we conduct an empirical inquiry into the effect of the Supreme Court’s 2010 decision in Morrison v. National Australia Bank on the competitiveness of US markets as a venue for listings by foreign issuers and trading in cross-listed stocks. Passed in the wake of Morrison, the Dodd-Frank Act requires that the SEC inform Congress about the merits of creating a new extraterritorial private right of action. We provide input into the debate by using data on 329 shareholder class actions filed against foreign companies and discussing the effects of such a right on the competitiveness of U.S. capital markets.

We conclude that foreign companies’ expected litigation costs should fall after Morrison, because investors who purchased their shares on overseas exchanges will be excluded from classes. By reducing expected litigation costs, Morrison eases a deterrent to US listing by foreign issuers and thereby makes the US a more competitive venue for cross-listings, as well as for the volume in the cross-listed stocks. We submitted our paper to the SEC as part of its public comment process, and have posted it on SSRN.


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