Below we briefly describe some of our securities cases.

Rule 10b-5 and Section 11

Alex Tse, et al. v. Ventana Medical Systems, Inc., et al.
Counsel for the defense retained Cornerstone Research, Wharton School professor Michael R. Gibbons and Harvard Business School professor (and former investment banker) Ronald W. Moore. The plaintiffs had invested in BioTek Solutions ("BioTek"), which agreed to merge with Ventana Medical Systems ("Ventana"). Plaintiffs alleged that Ventana had committed securities fraud by, among other things, failing to disclose information about a compensation package for two Ventana directors that included stock options in the soon-to-be-merged company, and misrepresenting that the conversion price offered to the BioTek investors on convertible notes was fair market value of the soon-to-be-merged company's common stock. Plaintiffs claimed that this fraud caused them to agree to merger terms that were less than favorable, and brought the case in federal district court in Delaware.

Professor Moore opined on the pre-merger value of BioTek and concluded that the transaction was fair to BioTek investors from a financial point of view. Professor Gibbons opined on both damages and the value of the securities that the BioTek investors received in the merger. The defendants won the case, with their motion for summary judgment being granted in full. The court found plaintiffs' damage claim speculative and found no evidence that Ventana had misrepresented the conversion price to BioTek investors.

David Danis v. USN Communications, Inc., et al.
In a class action suit against USN Communications ("USN"), plaintiffs alleged that the company's misstatements and omissions had misled the investing public regarding, among other things, USN's billing capabilities. Plaintiffs claimed that the alleged fraud created a market for USN's initial public offering and subsequently inflated the company's stock price. Defense counsel for USN's auditors retained Cornerstone Research. We supported Professor Michael R. Gibbons of the Wharton School, who analyzed the importance of audited financial statements to the market's valuation of USN shares. We worked with Professor Gibbons to conduct an event study, research developments in the Competitive Local Exchange Carrier industry, and produce a Rule 26 report. We also assessed the damages analyses of the plaintiffs' experts. The court granted summary judgment in favor of our client.

Allen T. Gilliland Trust, et al. v. H&F MobileMedia Partners, LLC, et al.
In a case involving the wireless telecommunications industry, counsel for MobileMedia's auditors engaged finance expert Dr. Allan Kleidon of Cornerstone Research to analyze plaintiffs' decision to affirm a prior transaction. The analysis examined whether alleged misstatements and omissions were material to that decision or caused damage to plaintiffs. In addition, Cornerstone Research evaluated analyses produced by plaintiffs' experts. The court ruled that the plaintiffs' damage analyses were based on a flawed theory, and on the eve of trial, plaintiffs dropped all claims against our client.

David Goldkrantz v. Merv Griffin, et al.
Counsel for the defense retained Cornerstone Research and New York University professor William L. Silber after shareholders sued Griffin Gaming & Entertainment ("GGE") over its merger with Sun International Hotel Limited ("Sun"). Plaintiffs claimed that a license agreement between Sun and Merv Griffin, the largest shareholder and chairman of the board of GGE, had fraudulently inflated Sun's stock price. Our analysis demonstrated that Sun's subsequent writeoff of the agreement with Griffin had not prompted a decline in Sun's stock price. That meant Sun's stock price had not been inflated by the original agreement. The judge in the case relied heavily on Professor Silber's report and granted summary judgment for the defendants.

American Pacific Securities Litigation
Counsel for American Pacific retained Cornerstone Research to assess liability and calculate potential damages in this class action securities litigation. Plaintiffs alleged that the defendants had made misleading statements about the prospects for two of American Pacific’s products. Stanford law professor and former SEC commissioner Joseph Grundfest prepared a declaration that contributed to a successful summary judgment motion on one of the products. On the remaining allegations, we worked with finance professor Mark Grinblatt of UCLA to analyze the behavior of the stock price and developed trial exhibits that critiqued the methodology used by the plaintiffs’ expert to estimate damages. After a three week trial the jury found no liability.

Seagate Technology II Securities Litigation
Shareholders sued Seagate Technology in this 10b-5 case, arguing that they had been misled by announcements from company officials. In support of defendants’ motion for summary judgment, Dr. Allan Kleidon of Cornerstone Research and the Stanford Law School provided an event study which examined the effect of the announcements on Seagate’s stock price. In February 1994, U.S. District Judge Vaughn R. Walker ruled for the defendants on all alleged affirmative misstatements. In February 1995, he ruled for the defendants on the remaining alleged omissions, stating, “Plaintiffs have repeatedly argued that defendants’ conduct, as a whole, defrauded investors by not revealing material information known to defendants about changes in the disk drive marketplace. Notwithstanding the volume of paper submitted in support of their claims, plaintiffs have failed to provide sufficient evidence to demonstrate the existence of triable issues of fact. The 20-20 lens of hindsight shows defendants misjudged their market, causing Seagate’s profitability to plummet in the end of its 1988 fiscal year. The securities laws... can only deter fraud. And of fraud there is simply no proof.”

AST Research Securities Litigation
In this 10b-5 securities suit brought against AST Research, a leading PC manufacturer, the plaintiffs alleged that AST’s management had manipulated various aspects of the accounting treatment of its acquisition of Tandy Corporation (inventory valuations, treatment of goodwill and creation and use of reserves) to inflate the stock price. Defense counsel retained Cornerstone Research to assist Purdue University professor John McConnell in evaluating the plaintiffs’ expert’s damage calculation and in preparing an alternative damage assessment. We uncovered a number of errors and unreasonable assumptions in the plaintiffs’ analysis that counsel used as the basis for cross examination of the plaintiffs’ expert. The case settled during this cross examination.

Equitec Rollup Litigation
This case centered on a late-1989 rollup transaction in which several real estate limited partnerships created by Equitec in the early- to mid-1980s were combined into one publicly traded master limited partnership. Our clients, counsel for the master limited partnership offering’s sponsor, disputed the plaintiffs’ contention that their security interests had lost value in the transaction. We supported an industry expert, a finance expert and a real estate expert who testified during trial that the decline in the value of the securities was the result of national real estate market trends and unexpected events such as the economic recession of the early 1990s. Further, based on sales and dispositions of comparable properties, the likely returns from selling the subject properties and liquidating the partnerships were no greater (and most likely less) than creating the rollup. Additionally, the increase in value associated with the greater liquidity of a publicly traded master limited partnership security offset the rollup fees paid by the plaintiffs and therefore did not reduce the value of their holdings. After several months of trial the case settled.

Worlds of Wonder Securities Litigation
After a highly successful Christmas season with their top-selling product (Teddy Ruxpin) Worlds of Wonder, a high-tech toy manufacturer, went public. However, when sales declined the following year, the company declared bankruptcy. Shortly thereafter, a class action suit was filed alleging Section 11 and Rule 10b-5 violations. Working with finance professor Randolph Westerfield of the University of Southern California, Cornerstone Research analyzed changes in the value of the company’s stock price to determine whether the market had anticipated the downturn in the company’s fortunes even before the bankruptcy announcement. We found evidence that investors were aware of the risky nature of the business, given the toy industry’s fierce competitiveness and short product life cycles. We also found that investors’ expectations for the firm diminished following the October 1987 stock market crash which heightened consumer uncertainty and pushed the entire toy industry into a severe downturn. Based on this analysis, Professor Westerfield submitted a declaration supporting the defendant’s motion for summary judgment, which was granted by the court.

Tri-Star Pictures Securities Litigation
Following Tri-Star Pictures’ 1987 purchase of Coca-Cola’s Entertainment Business Sector, minority shareholders of Tri-Star alleged that Coca-Cola had used its large position in Tri-Star to engineer the transaction at an inflated price. Working with New York University finance professor William Silber, we analyzed the reactions of Tri-Star’s and Coca-Cola’s stock prices to the purchase announcements and reviewed comments by industry analysts at the time. Our analysis refuted plaintiffs’ contention that Tri-Star paid an inflated price for the Entertainment Business Sector. Following expert depositions, the case settled favorably.

Tambrands Securites Litigation
In this 10b-5 securities case involving Tambrands, Inc., the plaintiffs alleged that Tambrands’ management failed to make a timely disclosure of changes in the company’s expectations for long-term growth. Retained by counsel for the defendant, we identified numerous deficiencies in the plaintiffs’ damage model which, when corrected, significantly reduced the plaintiffs’ damage estimate. We developed an alternative model of potential damages that allowed us to estimate the effect on share price of long-term growth expectations, distinct from the effect of short-term expectations. The case settled favorably following depositions.

Derivatives

West Virginia v. Morgan Stanley
Dr. Allan Kleidon testified on behalf of the defense regarding the use, valuation and trading of derivatives in State of West Virginia v. Morgan Stanley. The plaintiff claimed that certain derivatives transactions were ultra vires and sought compensatory and punitive damages. Testifying on behalf of Morgan Stanley, Dr. Kleidon showed that the sale of put options by West Virginia was not incompatible with the objective of hedging West Virginia’s portfolio. After a lengthy trial in which the judge ruled against Morgan Stanley on liability, the jury awarded minimal damages. On appeal, the West Virginia Supreme Court reversed the lower court ruling against Morgan Stanley. The case has settled.

In dispute between a bank and a former corporate client, counsel for the bank retained Cornerstone Research in a matter involving over-the-counter derivatives transactions. In preparation for trial we worked with three financial economics experts: Professors William Sharpe of Stanford University; Mark Rubinstein of the University of California, Berkeley; and René Stulz of Ohio State University. With William Sharpe we developed an overview of derivatives and how corporations use them in managing risk; with Mark Rubinstein we developed models to determine the prices of certain derivatives; and with René Stulz we examined risk management activities undertaken by the plaintiff and assessed various pricing models for the derivatives in question. In a series of pre-trial rulings, the court dismissed most of the plaintiff’s claims against our client. The case settled shortly thereafter.

Counsel retained Cornerstone Research in a dispute over the advice provided by an investment bank relating to an “assisted” interest rate swap between the FDIC and a thrift. We worked with Professor John McConnell to analyze the terms of the swap and its effects on the thrift’s cash flows, and to develop a pricing model of the value of the FDIC-assisted swap under various assumptions about liability. These analyses provided counsel with a range of damage estimates and settlement scenarios. The case settled prior to trial.

Denial of Class Certification

Larry R. Cooper, et al. v. E*Trade Group, Inc., et al.
Putative plaintiffs in a class action suit complained of access and execution delays to E*Trade's on-line brokerage system. Plaintiffs claimed that their experts could determine on a class-wide basis what damages these alleged delays caused to individual class members. Dr. Allan Kleidon of Cornerstone Research analyzed the claim, and concluded that it would be impossible to (a) determine on a class-wide basis whether plaintiffs had suffered damages, or (b) determine damages without having information on each individual's trading intentions at the time of delay. The court found that individual issues predominated and denied certification of the proposed class.

Schedule 13D Filing

Seagoing Uniform v. Texaco
Attorneys representing Bass Brothers Enterprises, which was charged with making false and misleading statements in a Texaco Schedule 13D filing, retained Cornerstone Research to evaluate damages. Working with Stanford University professor William Beaver, we analyzed how Texaco’s stock price responded to public announcements by controlling for market and industry influences. Dr. Beaver’s deposition served as the basis for an early settlement of the case. The court stated that his “qualifications were undeniably impressive” and that “the foregoing analysis of the damages issue... in support of the proposed settlement is, the court finds and concludes, the most persuasive argument offered with respect to the reasonableness, adequacy, and fairness of the proposed settlement amount...”

Antitrust

Nasdaq Antitrust Litigation
Counsel for the codefendant market makers retained Professor Robert D. Willig of Princeton University and Dr. Allan Kleidon to research the allegations of “tacit collusion” among Nasdaq dealers that have spawned dozens of antitrust lawsuits and a U.S. Department of Justice investigation. Their research concluded that collusion among Nasdaq dealers is “extraordinarily unlikely” given the market’s structure, and “there is no responsible scientific basis for drawing a conclusion of collusion” from the original data. This research is ongoing.

Valuation

Zuri Invest v. Benarroch
Cornerstone Research was retained by counsel representing the plaintiffs, Zuri Invest A.G. (a Swiss corporation) and two individuals. The complaint alleged securities fraud, intentional misrepresentation, conversion and breach of contract. The damages were based on the valuation of thinly traded restricted shares and employee stock options in Brush Creek Mining and Development Company, a gold mining corporation. The jury awarded full damages to the plaintiffs based on the testimony of our expert.

Auditor Liability

ACC/Lincoln Savings Securities Litigation
In a suit brought by security holders against the officers and professional advisors of ACC/Lincoln Savings, a bankrupt Arizona thrift holding company, defense counsel retained Cornerstone Research to address plaintiffs’ liability and damage claims. We worked with Stanford University professor Mark Wolfson and with University of Chicago professor Roman Weil to evaluate damages and to rebut the plaintiffs’ damage calculations. In addition, we worked with real estate expert Elliott Pollack to assess Lincoln Savings’ real estate portfolio, and with Dr. Dan Brumbaugh to evaluate the savings and loan industry and regulatory conditions. The case settled during trial.

Repurchase

Kahn v. Tremont Corporation
In this case involving a related-party transaction, the plaintiff alleged that a stock repurchase plan inflated the price Tremont paid for stock in NL Industries. The plaintiff further alleged that the Tremont Board of Directors Special Committee set up to review the transaction should not have approved it. Cornerstone Research supported Professor William Beaver and Harvard University professor Jay Lorsch, who testified on behalf of the defense. Professor Beaver’s testimony focused on the stock market reaction to the transaction announcement and the stock repurchase program’s effect on the price of the repurchased stock. Professor Lorsch testified about the role and performance of the Board of Directors Special Committee. The court found that “the evidence establishes the entire fairness of the transaction to the Tremont shareholders,” and denied “plaintiff’s request for equitable rescission of the stock purchase transaction and rescissory damages.”

Insider Trading

Cornerstone Research has experience responding to the complex and often sensitive allegations typical of insider trading litigation. In one such case, Cornerstone Research worked with several faculty members of the Stanford Graduate School of Business to analyze the pricing behavior of more than fifty securities suspected to have been influenced by insider trading. We developed databases of hundreds of trading positions held by arbitrageurs and examined short, long, and option positions on a trade-by-trade basis. Presentation of this analysis helped our client counter testimony by government witnesses.

In another engagement regarding an admitted instance of insider trading, Cornerstone Research analyzed the impact of improper trading on the intra-day stock price of a publicly held company. Cornerstone Research’s analysis assisted the parties in understanding the magnitude of damages, and contributed to the settlement of the case.

 

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