Standard Out-Of-Pocket Damages Methodology Employed by Economics Expert Witness Deemed Reliable
Posted on November 15, 2024 by Expert Witness Profiler
In 2007, SCANA received legislative approval to construct two nuclear reactors at the V.C. Summer Nuclear Generating Station in Fairfield County, South Carolina” (the “Nuclear Project”). Deloitte served as SCANA’s external auditor for over 70 years. International Brotherhood of Electrical Workers Local 98 Pension Fund alleges that, “[t]hroughout the Class Period, Deloitte repeatedly violated its professional responsibilities, failed in its role of gatekeeper and deceived investors about SCANA’s accounting for, and expected completion of” the Nuclear Project.
Deloitte allegedly “gave unqualified, ‘clean’ audit reports on SCANA’s financial statements and internal control over financial reporting, misleading investors into believing that SCANA would complete the Nuclear Project in time to obtain $1.4 billion in nuclear tax credits[,] despite voluminous evidence that SCANA could not possibly achieve this goal.”
The Consolidated Complaint alleged that SCANA, its investors, government regulators, and Deloitte understood that the success of the Nuclear Project depended on SCANA obtaining $1.4 billion in federal production tax credits and being able to raise energy rates on consumers to cover construction costs.
Plaintiff International Brotherhood of Electrical Workers Local 98 Pension Fund filed a motion for class certification, appointment of class representative, and appointment of class counsel (the “Class Certification Motion”) while Deloitte filed a motion to exclude the damages-related opinion offered in Dr. Matthew D. Cain’s expert report.
Economics Expert Witness
Matthew D. Cain is a Ph.D in Finance, a Senior Fellow at the Berkeley Center for Law and Business, and a Senior Visiting Scholar at Berkeley Law School, University of California. He teaches courses, delivers guest lectures, participates in academic seminars, and conducts research in various topic areas related to finance, economics, accounting, law, and business.
His research is focused on topics including empirical corporate finance, corporate governance, board independence, mergers and acquisitions, hostile takeovers, shareholder lawsuits, negotiations, financial contracting, disclosures of financial information, and shareholder activism. Cain worked at the SEC between 2014 and 2018 as a Financial Economist. Before working at the SEC, he was an Assistant Professor of Finance at the University of Notre Dame. Cain has also published research in leading peer-reviewed finance, accounting, law, and economics journals.
Discussion by the Court
Deloitte did not challenge Cain’s qualifications, and the Court concluded that Cain is qualified to opine on the matters discussed in his reports.
Based on his analysis, Cain “formed the opinions that the market for shares of SCANA’s Common Stock was efficient during the Class Period” and that “damages in this matter can be calculated on a class-wide basis subject to a common methodology.” Deloitte challenged only Cain’s opinion regarding damages and, thus, the Court limited its discussion to Cain’s damages-related opinion.
Cain’s first report, dated April 30, 2021 (the “First Report”), explained that “[t]he ‘out-of-pocket’ method of calculating damages represents a standard and well-accepted methodology under Section 10(b) of the Exchange Act” and that the “approach calculates damages formulaically as the artificial inflation in the share price at the time of purchase minus the artificial inflation in the share price at the time of sale.”
Deloitte challenged Cain’s damages-related opinion on two bases. First, Deloitte argued that IBEW asserted two damages theories––a materialization of risk theory and a corrective disclosure theory––but that Cain’s report ignored the materialization of risk theory.
Deloitte’s Challenge Regarding the Materialization of Risk Theory
Deloitte contended that Cain’s report appears to be referencing corrective disclosures rather than risk.
However, as the Fourth Circuit has explained, “the ultimate loss causation inquiry under either the corrective disclosure theory or the materialization of a concealed risk theory is the same: whether a misstatement or omission concealed something from the market that, when disclosed, negatively affected the value of the security.”
The First Report stated that Cain will use the out-of-pocket method for
calculating damages on a class-wide basis. The out-of-pocket method calculates the difference between the price at which the stock sold and the price at which the stock would have sold absent any artificial inflation cause by a Defendant’s alleged misrepresentations or omissions.
Accordingly, the Court concluded that Cain has offered a reliable damages model consistent with IBEW’s liability case and has demonstrated that IBEW’s damages are attributable to that theory of liability.
Deloitte’s Challenge Regarding Damages Attributable Only to Deloitte
Deloitte next argued that Cain failed to identify or offer a “methodology by which damages attributable to SCANA, its officers, or others could be separated from damages attributable to Deloitte.” However, at the class certification stage in a securities fraud class action, a methodology is not required “to make an allowance for any damages caused by things other than the Defendants’ alleged fraud.”
Moreover, Cain has explained that “event studies are widely-employed to calculate artificial inflation [and] measure stock price reactions to corrective disclosures which reveal the relevant truth that was concealed by alleged material omissions and/or misrepresentations.”
Additionally, Cain opined, “to the extent that reliable evidence is introduced to show that a material portion of the difference in the artificial inflation between the purchase and sale of the securities may be attributed to non-fraud related factors, the impact of such ‘confounding information’ on the price of SCANA securities can be determined on a common, classwide basis using various accepted methodologies.” Accordingly, the Court concluded that Cain’s damages-related opinion should not be excluded.
Held
- The Court denied Deloitte’s motion to exclude damages-related expert opinion of Dr. Matthew D. Cain.
- The Court granted IBEW’s motion for class certification, appointment of class representative, and appointment of class counsel.
Key Takeaways:
Cain’s damages-related opinion were admissible because Cain has offered a reliable damages model consistent with IBEW’s liability case and has demonstrated that IBEW’s damages are attributable to that theory of liability.
Moreover, at the class certification stage in a securities fraud class action, a methodology is not required “to make an allowance for any damages caused by things other than the Defendants’ alleged fraud.”
Case Details:
| Case Caption: | International Brotherhood Of Electrical Workers Local 98 Pension Fund V. Deloitte & Touche Llp Et Al |
| Docket Number: | 3:19cv3304 |
| Court: | United States District Court, South Carolina |
| Order Date: | November 12, 2024 |
