Compass Lexecon LLC

06/30/2017 | Press release | Distributed by Public on 07/17/2017 07:39

Compass Lexecon Client JP Morgan Disqualifies Opposing Expert Under Daubert

Court Relies on Analysis of Compass Lexecon Affiliate Professor Allen Ferrell

In two important decisions analyzing relevant precedents and admissible expert testimony in securities fraud litigation, Judge Robert W. Sweet of the Southern District of New York excluded a Plaintiff's expert under Daubert. (Sherman v. Bear Stearns, July 2016 & June 2017)

Plaintiff in the case purchased Bear Stearns' common equity before Bear Stearns' stock price fell during the financial crisis and alleged that Bear Stearns misrepresented its financial condition and that these misrepresentations caused him to suffer massive losses. Plaintiff's expert initially purported to model how 'leakage' of an alleged fraud (i.e. the dissemination of information over time not limited to corrective disclosures) drove Bear Stearns' stock price down after Plaintiff's purchase. Plaintiff's expert also used his model to measure damages to the Plaintiff caused by the leakage of information about the alleged fraud.

Defendant JP Morgan retained Compass Lexecon and its affiliate Professor Allen Ferrell to analyze and critique Plaintiff's expert's leakage model. Professor Ferrell explained that the expert's model did not exclude the effects of non-fraud related information and showed that it mechanically attributed almost the entire decline in Bears Stearns' stock price to the alleged fraud and ignored the effects of the financial crisis and company specific non-fraud related news. Judge Sweet agreed, and cited and quoted Professor Ferrell's analysis and critique of the leakage model extensively in his opinion excluding Plaintiff's expert under Daubert.

Plaintiff's expert then submitted a revised report in which he attempted to remedy the flaws identified by Professor Ferrell relating to his leakage model. In his revised report, Plaintiff's expert purported to establish damages using an event study of two alleged corrective disclosures. Plaintiffs' expert assumed that the inflation in Bear Stearns' stock price, over the eight months prior to the alleged corrective disclosures, was a constant dollar amount equal to the stock price declines he claimed were caused by the corrective disclosures.

Professor Ferrell explained that the opposing expert's analysis incorrectly assumed that the disclosure of the alleged fraud, at any time before the corrective disclosures, would have had the same effect on Bear Stearns' stock price as the purported corrective disclosures did. Judge Sweet agreed, and cited Professor Ferrell's analysis in his opinion, and once again excluded the Plaintiff's expert under Daubert.

Bear Stearns' successor, JP Morgan is represented by Brad S. Karp, Jack Baughman, Jessica S. Carey, Jonathan Hurwitz, Geoffrey R. Chepiga and Rachale C. Miller of Paul, Weiss, Rifkind, Wharton & Garrison LLP. Professor Ferrell was supported by a team at Compass Lexecon led by Jerry Lumer that included Michael Keable, Laura Yergesheva, Eugenia Vinogradsky and Donald Hong.