Court Relies on Analysis of Compass Lexecon Affiliate Professor Allen Ferrell
In an important decision analyzing relevant precedents and admissible expert testimony based on a leakage model in securities fraud litigation, Judge Robert W. Sweet of the Southern District of New York recently issued a lengthy opinion excluding a Plaintiff’s expert under Daubert. (Sherman v. Bear Stearns, July 2016)
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 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. Professor Ferrell explained that the model was also fundamentally flawed because it failed to show that any decline in Bear Stearns’ stock price was statistically significant, during almost all of the period over which it measured damages. 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.
Bear Stearns’ successor, JP Morgan, was successfully 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.