Williams Communications Group, Inc. (WCG), a telecommunications firm whose objective was to own or lease, operate, and extend a nationwide fiber-optic network and to provide services exclusively to communications service providers, was sued on behalf of investors in a shareholder and noteholder class action. The principal allegation was that WCG’s stock and note prices were inflated due to allegedly undisclosed financial difficulties at WCG and the glut of dark fiber in the market.

NERA Senior Vice President Dr. David Tabak and plaintiffs’ expert submitted simultaneous opening reports in this matter. Plaintiffs’ expert submitted a report calculating damages for the stock based on three inflation methodologies—an “index method,” a “constant percentage method,” and a “constant dollar method”—while his analysis of the notes used the index and constant dollar methods. In his rebuttal report, Dr. Tabak argued that plaintiff’s index and constant percentage methods failed to properly account for differences between fraud-related and other influences on the prices of WCG’s securities and thereby provided a form of market insurance to investors. He also noted that plaintiffs’ expert’s analysis of the WCG notes was inadequate because it failed to use an event study to account for noncompany-specific influences on the prices of the notes.

The court granted NERA’s client’s motion for summary judgment, dismissing plaintiffs’ claims due to the court’s exclusion of plaintiffs’ expert opinion on damages and loss causation, which was stuck following a Daubert challenge, as well as on other grounds.

In his decision, United States District Court Judge Stephen P. Friot found that in order to justify the index method, plaintiffs’ expert was forced to “broaden[ ] the concept of corrective disclosure to encompass essentially anything negative about the prospects of the company” and consequently excluded this methodology because it did not adequately tie the damages calculation to disclosures of the alleged fraud, finding that as a result it “collides directly with loss causation doctrine and is accordingly rejected.”

With regard to the constant percentage method, the court noted that plaintiff’s expert “acknowledged that he could give no ‘economic or logical reason’ why a shareholder who sold on January 29 [the date of the first alleged corrective disclosure] would have a claim and a shareholder who sold on January 28 would not have a claim,” an adjustment that plaintiffs’ expert made to account for the Supreme Court’s Dura ruling that if a “purchaser sells the shares quickly before the relevant truth begins to leak out, the misrepresentation will not have led to any loss.” The court further noted that the constant percentage method provides a “partial downside insurance policy” to investors, which would also be contrary to Dura. While the court did allow that it could conceive of a case in which the constant percentage method would pass Daubert, it did not explain how such the method could get around the admitted lack of economic or logical reasons for its application or the fact that it provides for partial insurance, and found no reason to ignore those deficiencies in the report of plaintiffs' expert in the WCG securities litigation. The court therefore excluded the constant percentage inflation methodology.

Plaintiffs’ expert’s constant dollar methodology was excluded due to its failure to identify days with statistically significant price movements that were also disclosures of the alleged fraud.

Finally, the court excluded plaintiffs’ expert’s analysis of the WCG notes because it found that he had not performed an event study, even though an affidavit from Dr. Tabak provided “a very cogent showing that an event study could have been performed as to the notes.”

Read the Court’s decision.

On 18 February 2009, the United States Court of Appeals for the Tenth Circuit affirmed the district court’s exclusion of plaintiffs’ damages expert’s testimony and the resulting grant of summary judgment for defendants. Plaintiffs chose not to appeal the exclusion of their expert’s use of the “constant percentage method.” Consistent with the economic reasoning presented by NERA’s expert, with regard to the use of the “index method,” the court found that a “plaintiff cannot simply state that the market had learned the truth by a certain date and, because the learning was a gradual process, attribute all prior losses to the revelation of the fraud. The inability to point to a single corrective disclosure does not relieve the plaintiff of showing how the truth was revealed; he cannot say, ‘Well, the market must have known.’” The court then found that plaintiffs’ expert had not properly identified any corrective disclosures related to the alleged fraud, and consequently affirmed the exclusion of the “index method” and “constant dollar method,” leading to its affirmation of the grant of summary judgment for defendants.

Read the appellate decision.