Just how important are statistical models? Just take a look at some recent cases where effective statistical analysis, including market event studies, became the “make or break” evidence, especially in cases concerning securities litigation and lost profit/economic damages:
- Expert’s market event study helps support loss causation claims and class action certification in large securities litigation; In re Flag Telecom Holdings, Ltd. Securities Litigation, (U.S. District Court, S.D.N.Y., 2007)
- Sophisticated event study shows efficient market and convinces court to certify class of litigants in a “fraud on the market” theory; In re Xcelera.com Securities Litigation (1st Cir., 2005)
- Delaware Chancery Court rejects lost profits computation based on an event study analysis that failed to consider all possible events that may have contributed to the loss; In Penn Mart Supermarkets, Inc. v. New Castle Shopping, LLC, (2005)
- Delaware Chancery Court favors “shared synergies” and actuarial analysis in the fair value appraisal of an insurance conglomerate’s merger; Highfields Capital, Ltd. v. AXA Financial, Inc. (2007)
- Federal court defines market efficiency, the five factors that prove it—and the statistical financial analysis that does (and does not) meet the burden of proof; In re Polymedica Corporation Securities Litigation (U.S. District Court, Mass., 2006)
- In context of shareholder seeking access to company books, Delaware Chancery Court approves unique statistical methodology for testing whether stock option backdating has occurred; Louisiana Municipal Police Employees’ Retirement System v. Countrywide Financial Corp. (2007)
- Court reverses $1.45 billion jury verdict based on lack of “fraud-free” valuation of securities; Morgan Stanley & Co. Inc. v. Coleman Holdings Inc.(Fla. App., 2007)
The last case was—until its reversal for lack of reliable statistical evidence, the largest jury award for economic damages ever. All of these case—especially in light of the securities and loss litigation that is certain to come out of the current economic spiral—demonstrate just how important it is for valuation analysts to present compelling and understandable statistical models to a judge or jury (and assist their attorneys in preparing the evidence for deposition and trial). Reminder: Copies of all cases are available at BVLaw™, and the case abstracts are available by subscription at BVLibrary™.)
LEARN MORE. To refresh and refine your use of statistical models, regression analysis, and market event studies, be sure to tune into BVR’s next teleconference, “Compelling Statistical Evidence: Mining, Modeling, and Presenting Quantitative Financial Evidence to Juries,” featuring William Kennedy, Ph.D, CPA/ABV of St. Louis’ Anders Minkler & Diehl, LLP, and Jeffrey Dorman, Esq. with the Chicago office of law firm Freeborn & Peters, LLP. The teleconference takes place Wednesday October 22, 2008; to register, click here.
Compiled and written by the fine staff at Business Valuation Resources in the latest issue of their free eZine, the BV Wire.