Credit Suisse and other Compass Lexecon Clients Prevail in Historic New Zealand Securities Fraud Trial

In a total victory for defendants in the first shareholder class action brought in New Zealand, the High Court ruled in this case that the IPO prospectus for Feltex Carpets Limited did not contain any material misstatements or omissions. The representative plaintiff had accused the defendants of making numerous material misstatements and omissions in Feltex’s prospectus, which allegedly resulted in its IPO taking place in early June 2004 at a significantly inflated price and caused substantial shareholder losses. Compass Lexecon Senior Consultant Professor Bradford Cornell was retained by the defendants (Feltex’s selling shareholder and IPO promoter, Credit Suisse; joint lead managers First NZ Capital and Forsyth Barr; and Feltex’s management team) to analyze loss causation and damages. In his trial testimony, Professor Cornell explained that shareholder losses caused by misstatements and omissions in a prospectus can be measured by examining the difference between the offering price of the stock in question and the price at which the stock would have traded if those misstatements and omissions were fully disclosed. Professor Cornell concluded that there was no significant share price reaction when certain alleged misrepresentations were disclosed, demonstrating that there was no sound economic basis to conclude that these alleged misrepresentations had a material effect on Feltex’s IPO price. In arriving at findings that may have widespread implications for future securities class actions brought in New Zealand, the High Court agreed with Professor Cornell, stating: “As Professor Cornell emphasized, the lack of reaction in terms of the share price at that time tends to confirm that the difference was not material.” The High Court also favorably cited Professor Cornell’s testimony on measuring loss, noted that the plaintiff did not provide any rebuttal testimony, and rejected the plaintiff’s alternative theory of full recovery of the price paid for Feltex shares in the IPO. Professor Cornell was supported by John Haut, Peter Clayburgh, Eric Madsen, Shawn Chen, and others from Compass Lexecon’s Pasadena office. We worked with Adrian Olney and Chris Curran of Russell McVeagh and David Cooper of Bell Gully.