Role of a Financial Economist in Global Enforcement Actions and Regulatory Investigations

The Globalization of Enforcement Actions and Internal InvestigationsABA Criminal Justice Section’s Second International White Collar Crime ConferenceLondon, England

7 October 2013

Vinita M. Juneja, Ph.D.Senior Vice President andCo-Chair of NERA's White Collar Criminal Litigation, Investigations, and Compliance Practice

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Wide Variety of Financial Issues and Alleged WrongdoingSome Illustrative Examples Are:

LIBOR (Price Fixing)

Market Timing

Options Backdating

Mispricing of Securities

Material Misstatement Re: Capital Reserves

Insider Dealing

Bribery

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BigEuroBank Allegedly Misstated Value of its CDO’s

1 May 2007 to 1 November 2008

BigEuroBank

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19

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25

27

29

Sto

ck P

rice

1 June 2007 15 October 2008

Date of Alleged Misstatement

Date ofDisclosure

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Example 1: Typical Analysis in a Security Mispricing Case

Did BigEuroBank earlier misstate a security’s value?

What is the misstatement?

Was the alleged misstatement material?– Examine impact of alleged misstatement on stock price

– Perform an event study

– Control for other influences on stock price at the same time (e.g., macroeconomic news);

– Is the remaining stock price impact statistically significant?

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Example 1: Typical Analysis in a Security Mispricing Case

Pinpoint timing of eventual disclosure– Perform an event study

– Control for other influences on stock price at the same time

– Is the remaining stock price impact statistically significant?

– Review qualitative discussion in analyst reports to assess the disclosure’s importance in the context of the larger announcement

Continued…

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1 June 2007 15 October 2008

European Banks Moved in Tandem on Date of the Alleged Correction

BigEuroBank European Banks Index

Date of Alleged Misstatement

Date ofDisclosure

Sto

ck P

rice

15 October 2008:Negative European Economic Reports

Released.

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1 May 2007 to 1 November 2008

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First Issue: Pinpoint Timing of Disclosure– Different time zones for different markets

– Different disclosure practices/requirements in different countries

Example 1 Globalized: What Additional Considerations Arise?

Question: When the corrective news hit the market, did the stock price of BigEuroBank decline?

BigEuroBank trades on multiple exchanges in different countries and continents

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Example 1 Globalized:What Additional Considerations Arise?

Second Issue: Event Study Implementation

Asynchronous market openings and closings create problems:– What is the price of the “last trade”? (timing and exchange

rate issues)

Continued…

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Example 1 Globalized:What Additional Considerations Arise?

Should the stock return be measured from previous close of Country A to close of Country A or to close of Country B (if B closes earlier)?

Stock Return

or

Stock Return

NYSEClose

14 October 2008

DisclosureAfter Close14 October

2008

Deutsche Bourse Open15 October

2008

Deutsche Bourse Close

15 October2008

NYSEClose

15 October 2008

Continued…

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Example 1 Globalized:What Kinds of Additional Considerations Arise?

How to control for market if BigEuroBank also trades on the NYSE?

What if the more active market is closed for a holiday while the news is announced?

Appropriate use of complex statistical tools to perform an event study with asynchronous trading

Continued…

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Where do company’s shareholders reside?

Where are the majority of the company’s shareholders located?

How much of the potential exposure is accounted for by holders in a specific jurisdiction?

Example 2: Shareholder Profile Analysis in a Cross-Border Securities Litigation

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Example 2: Shareholder Profile Analysis in a Cross-Border Securities Litigation

What can we say about the proportion of investors from a certain jurisdiction that purchased on a given exchange?– Based on shareholder data

– Based on academic literature

– Based on country studies of household stock ownership

Continued…

Question: On which exchanges and in which countries did most of the trading occur?

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Examples of Available Information About a Company’s Shareholders

Canada—NOBO lists, fund holdings data

Switzerland—shareholder register with very detailed information on holdings and transactions by individual shareholders

Germany—large beneficial owner notifications and mutual fund holdings data

USA—DTCC, transfer agent, brokerage house transactions, and public filings by mutual funds, investment advisors and institutional holders

Thank YouVinita M. Juneja, Ph.D.

Senior Vice President andCo-Chair of NERA's White Collar Criminal Litigation, Investigations, and Compliance Practice NERA—London020 7659 8618vinita.juneja@nera.com

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