Fourteen-Year Lawsuit Hinged on Financial Expert

Daniel Fischel

On August 19, 2002, Avril Lavine’s “Complicated” was the number-one song in the U.S., the public accounting firm Arthur Andersen LLP was about to surrender its CPA licenses, and the plaintiffs in Lawrence E. Jaffe Pension Plan v. Household International, Inc., et al filed their first complaint in U.S. District Court in Chicago.

Jaffe was one of dozens of securities fraud suits that named Andersen as a defendant after the firm was implicated in the Enron scandal, triggering investigations into its other audits. The case was both timely and ahead of its time since it concerned alleged accounting fraud by a subprime mortgage lender, foreshadowing the global financial crisis of 2007–2008.

Today, Arthur Andersen is a distant memory, Avril Lavigne is on her second husband, and former Enron CFO Andrew Fastow is out of prison and on the speaking circuit. And what of Jaffe?

The case settled just last week for $1.58 billion.

A Tale of Two Trials

The epic 14-year story of this class action is one in which the gears of justice didn’t just grind slowly–they slipped into reverse. A six-week jury trial in 2009 ended with a verdict in favor of the plaintiffs. Judge Ronald Guzman entered a judgment of $2.46 billion, which set a record for a securities fraud case that had gone to verdict. After the defendants appealed to the Seventh Circuit, a three-judge panel in 2015 upheld most of the verdict but sent the case back to the lower court for a second trial on loss causation and another unrelated issue.

Questions about loss causation arose from the circumstances of the case. From November 2001 through October 2002, Household International’s stock price fell 54% as bad news about the company emerged. In August 2002, Household said it would restate three and a half years of financial statements and record a $600 million pre-tax charge. Two months later, the company revealed it would settle predatory lending charges with 46 state attorneys general for $484 million.

By late 2002, the entire stock market was struggling due to widespread accounting scandals and economic recession. The S&P 500 index lost 22% of its value during the year, contributing to the defense’s theory that Household’s stock suffered more from market forces than from self-inflicted wounds.

To address causation, the plaintiffs retained expert witness Daniel Fischel, president of economics consultancy Compass Lexecon. Fischel’s CV includes such titles as former dean of The University of Chicago Law School and published treatises that have been cited by the U.S. Supreme Court. His hourly rate for Jaffe ranged from $1,000 to $1,250, which is about three times the 2015 industry average. (Forward Forensics readers may remember Fischel from In re Pfizer.)

Cause and Effect

Fischel prepared an event study, which is commonly used to prove causation in securities fraud cases. The study examined the extent to which Household’s stock price had been inflated by false and misleading statements made by the defendants. Through regression analysis, Fischel controlled for market factors and economic trends. The upshot of his approach was to isolate changes in stock price that were attributable only to Household’s fraud-related disclosures.

The defense argued, however, that Fischel’s model failed to account for firm-specific, non-fraud factors that may have contributed to the drop in price. Such factors would be disclosures that were specifically about Household and, although negative, did not concern fraud. This was one of the only arguments in which the appeals court found merit, citing the U.S. Supreme Court opinion in Dura Pharm., Inc. v. Broudo as authority. Therefore, the court ordered a second trial focused narrowly on causation.

After the case was remanded, Fischel dutifully prepared a supplement to his report in which he examined firm-specific, non-fraud factors. He came to the same conclusions as he had before. A testament to his gravitas is the ferocity with which the defense attacked his work product before and after the appeal. Household unleashed no fewer than four experts to rip apart Fischel’s report and put forth alternatives. The defense filed separate Daubert motions before and after the appeal to exclude Fischel’s testimony and followed up each with multiple supporting memos. The court denied both motions entirely.

Not in My Household

After the second denial in February 2016, the writing was on the wall: Fischel’s report would again be presented to a jury, which would likely lead to a similar outcome as in the first trial. Instead of betting against another $2.46 billion judgment, the defense settled for $1.58 billion just hours before the second trial was to begin on June 6.

In a press release, lead plaintiffs’ counsel Robbins Geller Rudman & Dowd LLP said the settlement is the largest ever following a securities fraud class action trial, the largest securities fraud settlement in the Seventh Circuit, and the seventh largest settlement ever in a securities fraud case since the enactment of the Private Securities Litigation Reform Act of 1995.

Though still subject to approval by the court, the proposed amount is larger than the $970 million that AIG agreed to pay shareholders to resolve claims related to its subprime mortgage exposure. It’s also more than the $500 million to which J.P. Morgan conceded to end a class action over mortgage-backed securities it sold to Bear Stearns. It’s not, however, $2.46 billion. That’s a minor consolation for HSBC Holdings plc (NYSE:HSBC), which acquired Household for $14 billion in November 2002 and subsequently re-branded it HSBC Finance Corp.

As for Arthur Andersen, the firm reached a settlement agreement with the plaintiffs in 2005, which calls for the total amount of its payment to be determined by the settlement reached with the other defendants. Andersen still operates with a small staff in Illinois that is dedicated entirely to winding down the firm.

Originally published at on June 23, 2016.