An interview with Megan Kraai by Teresa Zink

Megan Kraai is a partner in the Litigation and Regulatory practice group at DLA Piper, LLP (US). She practices in the areas of commercial litigation, regulatory and compliance matters and government controversies. Ms. Kraai was formerly Head of Compliance for Fannie Mae in Washington, D.C. and before that was Senior Vice President for Global Anti-Money Laundering Operations and Compliance at Bank of America. She will speak further on this topic at Mealey’s Litigation Conferences program “The FDIC & The Banking Crisis: Litigation Challenges Past, Present & Future” being held Jan. 15 and 16 at the Westin Grand in Washington, D.C.

Wachovia, IndyMac, Washington Mutual…these and other bank failures have rocked the financial world and should be a wakeup call for corporate counsel and others who represent banks or companies that do business with banks. So far in 2008, there have been 24 bank failures, with ten of those in the last quarter alone, notes DLA Piper partner Megan Kraai. Compare that to three bank failures in 2007 and none in 2005 or 2006 and it is easy to understand why the number and speed of recent bank failures have caught many by surprise.

“I would encourage lawyers to talk with their clients and make sure their clients understand the nature of their relationship with the bank, even when the bank is healthy,” Kraai advises. “2008 has shown us is that these bank failures can happen quickly.” It is important to understand what your position is in the event of a bank failure, and it is equally important to understand the role the Federal Deposit Insurance Corporation (FDIC) plays in addressing the problems of failed banks.

Because there were few bank failures in recent years, there are not as many practitioners as there were in the 1980s who understand what the FDIC does when a bank becomes troubled. But they should. “When the FDIC takes over a bank, it has what are sometimes called superpowers in the event of a receivership,” Kraai warns, and the situation is not all that similar to a business bankruptcy. Lessons learned from the recent wave of consolidations in the banking industry won’t help much either, she says. “A bank acquisition is much different than a receivership by the FDIC.”

Acknowledging that “we are all reluctant to admit what we don’t know,” Kraai offers a primer on the FDIC for 2009.

The FDIC is Busy, And Getting Busier
As a response to the sheer numbers of bank failures, Kraai notes, the FDIC has taken steps to bolster its ability to respond. For example, she says, in an effort to find people with relevant experience, the FDIC in August began hiring back some of its retirees who had experience in the savings and loan crisis of the 1980s. In October, the FDIC increased the amount of the deposit insurance on accounts to $250,000, in part to preempt runs on banks and in part reacting to the reactions of WaMu depositors as the bank was failing, according to Kraai.

The FDIC maintains what is called a Troubled Bank List and while the names of the banks are confidential in order to prevent runs on the banks, the size of the list is important, Kraai says. “Currently there are 171 troubled banks on the list, which is up 46 percent since just the second quarter and it is the highest number since 1995,” according to Kraai. Historically approximately 13 percent of the banks on the list have failed.

However, Kraai warns, “although it is an important list, no list is perfect.” For example, she points out, “IndyMac, which was an historic failure, was not on the troubled bank list six months before it failed. WaMu never went on it. So, I think it is interesting to note that the list is large and growing larger, but I think it also indicates that the speed of some of these recent failures has taken many by surprise.”

New Territory For Many
Kraai thinks that, “because it has been a fairly long time, thankfully, since we have seen bank failures on this scale,” it is worth thinking about what happened and how to advise clients who “haven’t experienced this type of economic environment or bank failure environment.” Whether the clients are banks, companies that have service contracts with the banks or large depositors, it is worth taking the time to understand what their rights and responsibilities are if a bank should fail.

“I think an important thing to recognize is, to the extent that you look at a traditional business bankruptcy as an analogy, it is not all that useful.” Kraai warns. “In a regular business bankruptcy, the goal is to keep the business operating as a going concern and try to find a private sector resolution.” However when a bank fails and the FDIC comes in, it has “significant powers and wide latitude in what it can do and the goal is to resolve the failed bank’s problems and its commitments at the least cost possible to the FDIC and therefore the consumer.” That is a very different goal.

The other often surprising thing is how quickly the banks operations can be wound up. “The FDIC is efficient, which might surprise some people in a government agency,” says Kraai. She notes that companies can operate in Chapter 11 for years, but a bank failure is generally resolved within 90 to 100 days, and sometimes more quickly than that. So even if a bank your client does business with is on sound financial footing, it is still a good idea to take the time to understand what their rights and responsibilities are should something happen to the bank.

What Happens When A Bank Fails?
When a bank fails, the FDIC is appointed either receiver or conservator in order to wind up the bank’s business in the way that will minimize the cost to the FDIC deposit insurance fund or to operate the bank as a going concern. Generally, that means drawing up a menu of the assets and the liabilities of the troubled bank and offering it for sale to other financial institutions, according to Kraai.

According to Kraai, “There are different ways that the FDIC can dispose of the assets and liabilities of a failed bank when the FDIC is acting as a receiver, but the most commonly used approach is a purchase and assumption (P&A) transaction.” In a P&A transaction, the FDIC acts as broker and finds a healthy bank to take over part or all of the failed bank.

“There are certain things that you should know if you are advising someone who has a relationship to a failed bank, if you are advising the bank that is having problems or if you are advising a bank that is thinking of acquiring a failed bank,” Kraai says. For example, there are types of claims that never go to the acquiring bank, but stay with the FDIC. These include: claims or lawsuits against the directors and officers of the failed bank, any claims under directors and officers insurance policies and employee benefit plans. Real estate and subsidiaries of the failed bank usually don’t go to the acquiring bank, according to Kraai, however in the case of WaMu, JPMorgan Chase acquired WaMu’s real estate.

Most of the time when a bank fails, the FDIC is appointed as receiver. However, occasionally, the FDIC operates the bank in a conservatorship proceeding. IndyMac, is one conservatorship in the news right now, according to Kraai. When that bank failed it had assets of $32 billion and deposits of $19 billion. According to Kraai, “a conservatorship is more akin to a regular bankruptcy because the FDIC is trying to conserve the resources of the bank and operate the bank, whereas the goal of receivership is to liquidate the bank, wind it up, sell its assets and move on.”

“Though each bank failure is different, there are broad parameters: if a bank fails, the FDIC will either act as conservator or receiver, almost always a receiver. If it is a receivership, most of the time the FDIC disposes of the failed bank’s assets and liabilities through the mechanism of a purchase and assumption agreement. If it is a purchase and assumption agreement, most of the time these claims don’t pass, they stay with the FDIC.” However, she warns “other than those broad parameters, every single failure is different.”

In addition, Kraai emphasizes that, “When assessing the bids for the bank’s assets the FDIC is required to accept the bid that will be least costly to the FDIC deposit insurance fund,” known as the “least cost rule.” If the FDIC believes that a particular failure poses systemic risk, it can waive the least cost rule, but doing so is rare.

Kraai points to the Wachovia transaction as a special situation. At the end of September the FDIC seized Wachovia and brokered a transaction with Citigroup for Citigroup to buy Wachovia on an “open bank basis,” which means that the FDIC was going to advance funds to help make the purchase. Then on October 5, Wells Fargo, “which had been at the table with Citigroup and had walked away from the transaction,” according to Kraai, came back in and bought Wachovia in a private transaction. “It seems as though the FDIC was willing to entertain that because it fit with the least cost resolution since federal government did not have to put forth any funds to make that transaction happen,” Kraai speculates.

FDIC ‘Superpowers’
The FDIC has extensive powers as the receiver of a failed bank which are designed to help the agency achieve its mission very quickly. These powers include the authority to: merge the bank with another bank, transfer any asset of the failed bank, issue subpoenas,
hire private sector services (like law firms) if it is cost effective, repudiate leases or contracts, and sue directors and officers personally for gross negligence. Further, when the FDIC acquires bank assets in the receivership it can defeat claims against those assets, according to Kraai.

Something that surprises many companies that do business with a bank that goes into receivership is that during first 90 days of the receivership, you cannot terminate a contract with the failed bank, says Kraai. “No matter what the contract says, you cannot exercise your right to terminate the contract or declare a default or accelerate any of the remedies. You have to keep performing under the contract.”

In addition, the FDIC has the power to repudiate any contract with the failed bank that it finds “burdensome” and, unlike in other areas of the law where there are certain standards for termination of a contract “the FDIC has sole discretion for determining what it finds burdensome,” Kraai says. “The FDIC does not need to explain, or write down, why it found the contract to be burdensome.” In addition, the FDIC has the power to assign any contract with a failed bank, even if the terms of the contract specifically prohibit assignment.

However, Kraai says, “although the FDIC can chose what contracts to accept or repudiate, it can’t cherry pick within those contracts. So if you have a contract with a failed bank, the FDIC either has to accept that contract in whole or repudiate it in whole.”

Something else to keep in mind, says Kraai, is that if your client is a depositor with money in a foreign branch of a bank that fails, that deposit is not insured, even if it is a domestic bank.

Where are the Failing Banks?
Briefly examining the demographics of recent bank failures, Kraai notes that this year they have been spread around the country, including California, Georgia, Texas, Michigan, Minnesota, Illinois, North Carolina, West Virginia, Ohio, Nevada, and it is fairly obvious that the failures can be tied to banks that were heavily involved in mortgages.

In addition to making sure clients understand the nature of their relationships with banks, it is also important to for people to understand that “if you have a relationship with a bank that has gone into receivership there are priorities of how people are going to get paid out, just like in a business bankruptcy.” Administrative expenses of the receivership are paid first (which can sometimes work to the advantage of entities that have a contract with a failed bank), then the deposits, other senior liabilities, subordinated debt and finally shareholders.

Talk To The FDIC
Also, she says, don’t be shy about going to the FDIC and asking questions. “I think it can be a natural tendency to not want to go in and ask ‘What’s my status, where am I?’” Kraai notes. Although anyone with an agreement with a failed bank is required to keep performing under any contracts for the first 90 days, “there may be things you can do and it is wise to talk with the FDIC.” She notes that the FDIC maintains a website with information on all of the failed banks and telephone numbers to call “and they are very responsive, even with the volume of work they are doing.” Because every P&A agreement is different, “it can be confusing for someone who has an agreement with the bank to know where it is residing and what is going to happen to it,” according to Kraai.

“So I think that it makes sense to spend some time talking with your clients and understanding ‘this is what my agreement means and this is what happens if the bank goes under or is taken over.’ Then if the bank fails, avail yourself and your client of the resources the FDIC provides.”

Teresa Zink is a freelance writer living in the suburbs of Philadelphia. She is former legal news editor at Mealey Publications . She is a frequent contributor to HB Litigation Conferences, formerly Mealey’s Litigation Conferences. You can email Teresa at tkz@verizon.net.

Contacts:
Nicole Quigley
Crowell & Moring LLP
202.624.2849
nquigley@crowell.com

Tom Hagy
Mealey’s Litigation Conferences
484.324.2755 x207
tom.hagy@bvresources.com

New York, N.Y. – December 8, 2008 – The volatile credit default swaps (CDS) market is expected to prompt significant litigation as investors seek to recoup their losses, as well as attention from regulators who are likely to seek control over the market.

That is the forecast of attorneys at Crowell & Moring LLP which is hosting a free continuing legal education program on the CDS market on December 11, 2008, from 1:30-5:00 pm EST. The seminar, “Credit Default Swaps: Exploring the Controversy – Market Forces, Litigation, Regulation, Accounting & Tax,” will take place at the Grand Hyatt Hotel, New York. A cocktail reception will follow.

Panelists will explain credit derivatives, discuss how the controversy arose over them, and where they are headed in the future. Members of the press and public are invited.

One partner at Crowell & Moring said that while the CDS market has been blamed for much of the current financial crisis, it may have been more of a scapegoat. “We need to look more closely at the product,” said attorney William J. McSherry, Jr., part of the firm’s white collar and securities litigation group. “CDS is a derivative product that to date has had no regulation or transparency. As we attempt to steer our way through the panic of the financial crisis, we must be careful that the regulations we put into place are the right ones, not merely placeholders. They have to buttress the strength of the industry, not regulation for its own sake.”

Crowell & Moring partner Viva Hammer, a former associate tax legislative counsel at the U.S. Department of Treasury, said, “Everyone is wondering if there is a next Lehman Brothers that hasn’t been identified yet. This is an opaque market. No one even knows who their counterparty’s counterparties are.”

“There are untested and novel tax issues running around the CDS market,” Hammer added, “and there will be a variety of controversies unfolding after the planned clearinghouse is operational. On the regulation side, there will most certainly be legislation. Companies are concerned about disclosure obligation, requirements over registration, and transparency. They’re also concerned about mechanisms for enforcement, such as mandatory arbitration and access to a forum different than a court.”

Crowell & Moring is currently advising a number of global investment banks who are dealers in the CDS markets on the proposed formation of a CDS clearinghouse, which is to be created together with the IntercontinentalExchange, Inc.
Speakers and topics at this fully accredited event include:

2:05 – 3:00 pm: How Did We Get Here?
Panelists will discuss topics including the development of the market and the current environment; fair valuation issues in the current market environment; value hierarchy under FAS 157; and counterparty risk considerations for derivatives.

• (Keynote address) Robert Pickel, Executive Director and Chief Executive Officer of International Swaps and Derivatives Association (ISDA)

• Anthony Saunders, Ph.D., John M. Schiff Professor of Finance and Chairman, Department of Finance, Stern School of Business, New York University

• Justin Burchett, Ph.D., Economic Advisory Services, Grant Thornton LLP and former managing director at Structured Credit Holdings, responsible for asset origination of credit derivatives and structured finance securities

3:00 – 3:45 pm: Where Are We Now?
Panelists will discuss topics including the limited scope of the current accounting and reporting rules; real examples of how CDS and TRS are used to create synthetic assets, liability and equity, as well as conversion of liability into equity; financial innovation; and the new Chapter 11.

• Douglas G. Baird, Harry A. Bigelow Distinguished Service Professor of Law; former Dean of Law School, University of Chicago

• Bala Dharan, Ph.D., CPA, Visiting Professor of Accounting, Harvard Law School and Vice President in the financial accounting and valuation practice, CRA International, Inc

• The Honorable Robert E. Grossman, Bankruptcy Judge, U.S. Bankruptcy Court for the Eastern District of New York;

• Stephan Kuppenheimer, Founder and Chief Executive Officer, FSI Capital

• John Ray, Managing Director, Avidity Partners, LLC, and Chairman, Enron Creditors Recovery Corporation

4:00 – 5:00 pm: Where Are We Going?
Panelists will address topics including the benefits of CDS; the costs and benefits of CDS policy proposals; CDS systematic risk characteristics; the use of accounting for derivatives; and what to anticipate in terms of financial statement and litigation issues in the future.

• Steven Halterman, National Office Director, PricewaterhouseCoopers and former Director of Derivatives and Financial Instruments, Metropolitan Life Insurance Company

• Chester S. Spatt, Ph.D., Kenneth B. and Pamela R. Dunn Professor of Finance and Director, Center for Financial Markets, Tepper School of Business, Carnegie Mellon University and former Chief Economist and Director, Office of Economic Analysis, U.S. Securities and Exchange Commission

• René M. Stulz, Ph.D., Everett D. Reese Chair of Banking and Monetary Economics, Ohio State University, former president of the American Finance Association, and author of “Risk Management and Derivatives”

In addition to McSherry and Hammer, Crowell & Moring panelists include: Clifton S. Elgarten, litigation partner; Thomas A. Hanusik, white collar and securities litigation partner; William M. O’Connor, financial services partner; William C. O’Neill, insurance/reinsurance partner; Nilam R. Sharma, insurance/reinsurance partner.

Conference services for this event are being provided by Mealey’s Litigation Conferences, a unit of BVR Legal. To register and view a full agenda, please visit www.BVRLegal.com and click on “Live Events,” or contact Lynnsey Perrin-Hee at lynnsey.perrinhee@bvresources.com or  610-312-3527 .

Mealey’s Litigation Conferences is a legal education and information company that has been promoting legal discourse since 1992.

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Philadelphia – December 3, 2008 – Let’s face it.  For those of us fortunate enough to have jobs right now, we’re working harder than ever.  Lawyers are no different.  According to a recent survey performed by Robert Half Legal, a third of those polled want to work fewer hours.  Only two percent said they want to make more money.

Mealey’s Litigation Conferences is offering a teleconference to help lawyers find more time in their day.  “Effective Time Management for Lawyers” will take place at 1 p.m. ET on Friday, December 5, 2008.  This 100-minute program is accredited for approximately 1.5 CLE credits.

Featured speakers will be Margaret Spencer Dixon Esq. of Spencer Consulting and Catherine Goldhaber Esq. of Segal McCambridge Singer & Mahoney.  

After participating in one event with Spencer, an attorney from a large firm had this to say:   “You’d think after years in law school and practicing law in a challenging environment, you would know all you need to know about ‘time management,’ but Meg gave us practical ideas for taking our use of time to the next level, freeing us up to do more of what we choose to do.” 

In addition to being a skilled time manager, co-presenter Goldhaber is in the thick of it.  She is an experienced litigator, author and speaker on asbestos, toxic torts, products liability and environmental litigation.

On the agenda:  identifying, learning and changing your work patterns; organizing information, planning and prioritizing; dealing with multiple matters and deadlines; effective use of technology; managing interruptions, keeping accurate time records and learning when to say “no”; maintaining momentum; effective and responsible delegation; improving meeting outcomes; and project management.

To register click here.  Or, contact Customer Service at 888-287-8258 (located in Portland, Ore.) or CustomerService@bvresources.com.  You also may contact the content leads directly:  Sharon Boothe at 484-324-2755 x208 or sharon.boothe@bvresources.com and Tom Hagy at 484-324-2755 x207 or tom.hagy@bvresources.com.  

Mealey’s Litigation Conferences:  Promoting Legal Discourse Since 1992.   

In what may be the first reported case to emerge from the ongoing financial crisis, the North Carolina Superior Court considered a shareholder’s challenge to the proposed merger between Wachovia and Wells Fargo banks. In Ehrenhaus v. Baker (Nov. 3, 2008), a Wachovia shareholder claims that the merger price and other particulars of the deal are unfair, constituting a breach of the directors’ fiduciary duties. In particular, the merger permits:

• A stock-for-stock exchange, 0.1991 shares of Wells Fargo common stock for each share of Wachovia common stock, valued at $7.00 per share;
• A share exchange agreement, whereby Wells Fargo gains nearly 40% aggregate voting rights;
• A “fiduciary out” provision, which prohibits the Wachovia board from walking away from the Wells Fargo deal should a better offer come along; and,
• Three Wachovia board members to join the Wells Fargo board.

In considering the plaintiff’s motion to enjoin the merger and expedite discovery, the court began with a dire assessment of the current U.S. economy:

For several months, this nation has been engulfed by a financial storm the likes of which have not been seen since the Great Depression. Venerable financial institutions thought to be permanent pillars of both Wall Street and Main Street have been sold at the equivalent of a federal fire sale, nationalized, or put into bankruptcy or receivership.

Although the court denied the plaintiff’s request for speedy discovery, under the circumstances it did agree to expedite the injunction proceedings, asking the parties to file briefs in time for a November 24, 2008 hearing. Look for a complete abstract of the court’s decision in the January 2009 Business Valuation Update™, and additional reports of case proceedings in the BVWire™.

Contact:

Tom Hagy

Mealey’s Litigation Conferences

484-324-2755 x207

tom.hagy@bvresources.com

Sharon Boothe

Mealey’s Litigation Conferences

484-324-2755 x208

sharon.boothe@bvresources.com

Philadelphia – December 2, 2008 – Legal and business matters dealing with the global, multi-billion reinsurance market will once again be the subject of high-level programs produced by Mealey’s Litigation Conferences, which also is launching a new report based on the many top-level presenters it delivers throughout the year. 

Coming up on its sixteenth year, the “Insurance Insolvency & Reinsurance Roundtable” is scheduled for April 22-25, 2009 at The Fairmont Scottsdale Princess in Scottsdale, Arizona.  This is the preeminent event for attorneys and executives who represent or work in the reinsurance industry.  Chairing the program will be Neal Moglin, Esq., partner with Lovells LLP; Debra Hall, executive director, Global Risk Coalition; and Peter Thomas, executive vice president and managing director, Willis Re.

“We continue to make adjustments to the program to reflect the constantly changing developments in global financial markets,” said Sharon Boothe, director at Mealey’s Conferences.  “We also have greater country representation on our faculty than ever before, with speakers from Belgium, Brazil, Germany, Switzerland, the United Arab Emirates and the United Kingdom – and  we’re not done yet.”  Boothe has been the conference director at Mealey’s Conferences since she ran the company’s first event in 1992. 

For attorneys and executives with a specific interest in arbitration, Mealey’s Litigation Conferences is producing “The Reinsurance & Arbitration Conference” on March 2-3, 2009 at the Westin Grand in Washington, DC.   Chairing this program will be Ann Field, vice president reinsurance claims and legal, Zurich North America; Joy Langford, Esq., Chadbourne & Parke LLP; and Elaine Lehnert, managing director, Veris Consulting, LLC.

With the faculty of these and its other reinsurance programs, Mealey’s Litigation Conferences is launching a monthly report named for its flagship event:  “The Reinsurance Roundtable Continuum.”  Starting in January 2009, Reinsurance Continuum will provide interviews, insights and presentations not only from recent conferences and teleconferences, but also from programs that are still in development.

“We believe that we have a new way of connecting and educating our attendees throughout the year,” said Tom Hagy, publisher at Mealey’s Litigation Conferences.  “By delivering content from recent programs as well as upcoming conferences, the Continuum format will help keep the conversation going from one program to the next, while giving our speakers a new outlet for sharing their insights with a broader audience.”

For more information, please visit www.BVRLegal.com, contact Customer Service at 888-287-8258 (located in Portland, Ore.) or CustomerService@bvresources.com, or contact the content leads directly:  Sharon Boothe at 484-324-2755 x208 or sharon.boothe@bvresources.com and Tom Hagy at 484-324-2755 x207 or tom.hagy@bvresources.com.  Mealey’s Litigation Conferences:  Promoting Legal Discourse Since 1992. 

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Philadelphia – November 25, 2008 – Representatives of leading insurance services companies and regulators will be among the panelists at the conference “The Insurance Industry’s Top 10 Risks & Opportunities” – taking place December 8-9 in Philadelphia.

On the faculty will be:

• Cindy Koehler, VP and Assistant GC for the Complex & Emerging Risks Department at Liberty Mutual Insurance Company;

• Susan Grondine, GC for Cavell USA;

• Katherine Barker,  President, PRO IS Inc.;

• Suresh Krishnan, GC of ACE USA;

• Domenick DiCicco, Head VP of Litigation Management & Complex Claims, Zurich General Insurance;

• Mark Peters, Special Deputy Superintendent in Charge, New York Liquidation Bureau;

• Stephen Zielezienski, Senior VP & GC at the American Insurance Institute; and

• Tracey Laws, Senior VP & GC at the Reinsurance Association of America.

The program is being chaired by Jennifer Devery, partner-elect with Crowell Moring LLP of Washington, DC, and Lloyd Gura, a partner with Mound Cotton in New York.

For more information, please visit www.BVRLegal.com and click on “Live Conferences.”  Contact Customer Service at 888-287-8258 (located in Portland, Ore.) or CustomerService@bvresources.com.    Please direct other inquiries to Tom Hagy at 484-324-2755 x207 or tom.hagy@bvresources.com,  or Sharon Boothe at 484-324-2755 x208 or sharon.boothe@bvresources.com. Discounts are available for multiple attendees, corporations, and government agencies.  Press passes are available.

This event is being produced by Mealey’s Litigation Conferences, a unit of Business Valuation Resources LLC.  Mealey’s Litigation Conferences is an education and information company serving attorneys and business experts in complex legal disputes. 

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There are endless uses for statistical evidence.  It is great for estimating damages, providing quantitative proof of the extent to which conduct had an impact, or rebutting or cross examining an expert.  But, attorney Jeffrey Dorman says, “Just as important to knowing how to use statistical evidence is knowing when not to use it.”

Speaking on a live recording for Mealey’s Litigation Conferences and Business Valuation Resources LLC, Dorman said statistical evidence is not a magic bullet that should be used in every case.  “Sometimes it’s inappropriate, irrelevant or even inadmissible.” 

And if anyone should know it would be Dorman.  In addition to being a 30-year litigator and a partner with Freeborn & Peters LLP, he has extensive training and experience in statistical estimation, mathematical modeling, parametric estimating, system dynamics programming, and financial analysis. 

As a general rule it is only necessary to use damages experts when it is necessary to estimate damages, Dorman said.  In many cases there is no need to estimate, such as in cases of liquidation.  When a contract is broken, the damages generally comprise the cost of covering the contract.  In the case of theft, generally speaking it is the cost of the item stolen, unless it is something rare or unique.  In both cases, damages can usually be computed directly, without the need for estimation, and can be presented through a fact witness, as opposed to an expert witness.

In contrast, where damages depend upon future economic variables like profits, sales, demand and cost, or future commissions, competitive harm, or patent infringement, there is no way to avoid the use of a damages expert, he said.

In between these categories you have the cusp, Dorman said, like a class action where back pay is involved and data are available to directly calculate the lost back pay of each class member.  When in this situation, he said, if feasible, you should perform the direct calculation of damages; this will be better than a class-wide estimate based on regression sample because even a good approximation will miss the true value in virtually every instance.  A properly chosen random sample, while methodologically acceptable, will have sampling errors. 

Dorman warned:  If you chose to base your damages calculation on a sample and the opposing party correctly performs a direct calculation, there will be credibility problems because “an estimate is just that – an estimate.”  However, if the class members are in the tens of thousands so that it is impractical to perform a direct calculation, the use of a sample might be the only practical way to assess damages. 

It is a judgment call as to whether to perform a direct calculation or estimation, he went on.  You have to look at what data are needed, whether the data are available, and whether there is someone who can perform the direct calculation.  You also need to examine the cost and the likelihood that the opposing party will perform a direct calculation. 

Besides expenses there are other tactical reasons to consider when employing a financial expert.  You need to weigh the necessity against the impact on discovery  – the subject of another post.   

Dorman spoke for Mealey’s Litigation Conferences and BVR along with Dr. G. William Kennedy PhD, CPA/ABV with Anders Minkler & Diehl, LLP.   This is an excerpt from the session.  To receive more information about how to receive a copy of the recording, the materials and transcript of the presentation, contact Customer Service at (888) BUS-VALU, (503) 291-7963 or write to me directly at tom.hagy@bvresources.com.  I also own a phone and know how to use it:  610-312-4754.

Experienced statistical modeling expert Dr. G. William Kennedy says the analytical tools he uses can be “extremely powerful” in establishing or disproving liability or determining damages if applied by a properly trained expert.   However, he says, in the hands of a novice they can be dangerous. 

Dr. Kennedy, Ph.D. and CPA/ABV with Anders Minkler & Diehl, LLP in St. Louis spoke on a live recording for Mealey’s Litigation Conferences and Business Valuation Resources LLC entitled “Compelling Statistical Evidence: Mining, Modeling, and Presenting Quantitative Financial Evidence to Juries.” 

If paired with a well-trained professional, Kennedy is extremely confident in the accuracy of the tools he discussed on the recording.  “Most of the methods I am relying on are in the textbooks and offer a great deal of certainty,” Kennedy said.  “The benefit of these statistical tools, the benefit to the bar, is that they all meet the criteria established under Daubert.”   He said he has told juries he is 99.999% confident in his estimations.

Once you have gathered the data Kennedy recommends that you draw a simple plot, which, he says, “helps avoid traps of using data that may have errors or need serious diagnostic work, or that the conclusions you are drawing are really not valid.” 

Then begin performing analysis.  “This process is iterative,” he says.  “There is not a eureka moment.”  The answers should be very clear at this point and you should only modify the analysis if necessary.  “I don’t mean to get to the answer counsel wants.  I mean if there are errors in the modeling, in the data, etcetera.  Anything that would make us go back and make corrections to make sure the results are credible.”  It is a quality control process, he said, that once complete offers data that are ready for forecasting.

These kinds of tools and techniques might be used in a productive way in litigation settings, both for damages and liability estimations. 

There are several statistical tools one can use in establishing liability or in damages quantification:  statistical sampling, correlation analysis, analysis of variance, time-series analysis, regression analysis, event studies and Monte Carlo simulation.  

Statistical sampling.  Take a sample but make sure it is representative of the population.  You can use it where the total population isn’t available or if it is impractical to obtain.  In a recent case where insurance allocation was based on addresses, he said he had to use sampling because it was impossible to get information on all of the locations.

Correlation analysis.  This looks at the relationship of two variables, for example height and weight, analysis of which would show that the taller a person is the more he will weigh.   This analysis will show the strength and direction of that correlation.  Correlation analysis is an effective tool to use in lost profits cases, he said, because it can test whether a factor is significant to a company’s sales and profitability.

Analysis of variance.  This not a method Kennedy uses a lot because it is imbedded in other tools like regression analysis.  He used it in a damages-for-lost-profits case where the question was whether national publicity about a product was the cause of the damages.  “We tested whether after the event the sales month to month changed and if there was an adverse reaction by consumers to the product problem.   If so there would be an increased volatility.  We tested this in various ways.  We compared that to the immediate period after the event and news publicity and came to an objective and quantifiable conclusion as to whether sales volatility increased.  In this case we actually were working on a liability determination.”  

Time series analysis.  This is a method that includes a regression-based calculation displaying a single series of dates.  A popular example is in graphical updates on the stock market.  What this analysis shows is whether the variable movements have a pattern.  This is one tool that can help forecast future sales, observe seasonality, or allow adjustments for seasonal or cyclical trends.   

Regression analysis.  This is broader than time series analysis, although it can be based on time.  Regression analysis permits two or more variables.  You can have variables X or Y or a number of variables.  In statistical analysis X tends to be time, but in regression X can be anything, like height or weight.  A business model might be that company’s sales move in sync with overall retail sales or with macroeconomic or internal factors.  Regression analysis can be used with cross sections of data.  It is important when diagnosing errors in data to know whether something is cross sectional or time sensitive.  Examples are lost profit calculations, which are influenced by a multitude of internal and external factors, “a situation well suited for regression analysis,” Kennedy explained. 

Event studies.  Event studies have been used in securities fraud cases, subprime lending cases, and in accounting liability action.  Conducting event studies is similar to constructing market models where you regress a company’s returns against market indices and come up with relationship about how stock prices might be performing across time against particular indices.  An event is something defined by the pleadings in the case, a particular adverse behavior by a board of directors or management, or an external event on a particular date.   In a classic event study you go back to pre-event time windows, look at daily returns against market indices or, in a more refined model, at daily stock returns or industry indices.  Then you test around the event window:  was there a change in the relationship between your company’s stock price and the overall market?  If so, how much?  You then need to quantify the change around the event date.  You can use this model to answer questions like:  what would the stock price have been had the event not occurred? 

Monte Carlo simulation.  How do you get around issues of quantifying uncertainty of an unestablished business where there is no commercialization yet?  The Monte Carlo simulation is a good tool for this, he said.  It is good for construing something as simple as “price x quantity” in software commercially available.  You can specify a range of prices and ranges of quantities and specify how you think the prices will likely stack – at higher or lower ranges.  Allowing you to show the variables will behave the Monte Carlo simulation will let you run and re-run the model, change the numbers and track the answer.  It allows you to do this thousands of times, he said, taking forecasting uncertainty out of the analysis.  “I use it almost every time I conduct an IP valuation.”

When presenting analysis based on Monte Carlo, Kennedy quotes authorities that have commented on the simulation.  The Litigation Services Handbook has many flattering things to say about Monte Carlo tool, calling it “The most flexible method of calculating an expectation when there are multiple potential outcomes or when the outcomes depend to varying degrees on the different inputs.”  The ABA treatise Fundamentals of Intellectual Property Valuation, a primer for identifying and determining value, also has good things to say about Monte Carlo simulations, he said.

Kennedy summarized by saying that statistical models are a very powerful way to present damages or proof or lack of liability; that because of the complex nature of the tools the expert should be thoroughly trained and knowledgeable of the tools; that attorneys should know the limitations of the tools; and, even though the tools are complex, experts and attorneys must present them to the trier of fact in a way that is easy to understand. 

Dr. Kennedy presented along with Jeffrey Dorman, Esq. with Freeborn & Peters, LLP of Chicago.  To receive more information about how to receive a copy of the recording, the materials and transcript of the presentation, contact Customer Service at (888) BUS-VALU, (503) 291-7963 or write to me directly at tom.hagy@bvresources.com.  I also own a phone and know how to use it:  610-312-4754.

From Tom Hagy

To the Customers of Mealey’s Litigation Conferences

Megan Kraai, DLA Piper

We at Mealey’s Litigation Conferences are pleased to announce that former Fannie Mae compliance lead Megan Kraai has agreed to join the faculty of The FDIC & the Banking Crisis: Litigation Challenges Past, Present & Future.  

This fully accredited program is being held at the Westin Grand in Washington, DC, Jan. 15-16, 2009.

Kraai is now partner with DLA Piper in that global law firm’s litigation and regulatory practice group.  While with Fannie Mae, Kraai created, implemented and led a risk-based compliance program; developed company-wide policies; developed the company’s corporate privacy program; started the company’s first OFAC program for compliance with US trade sanctions regulations; and developed and delivered the company’s first online courses for privacy, code of conduct and insider trading.

Kraai will join nearly two dozen other speakers at the FDIC & the Banking Crisis program, chaired by attorneys at another leading law firm, Hughes Hubbard & Reed LLP.  Scott H. Christensen and Dennis S. Klein, both Hughes Hubbard partners, are putting together a unique program on this urgent issue. 

We are thrilled to be working with such top legal industry talent, something we strive for with all of our events.  

For more information, click here or contact me at tom.hagy@bvresources.com or 484-324-2755 x207, or Sharon Boothe, vice president, at sharon.boothe@bvresources.com or 484-324-2755 x208.

Tom Hagy

November 22, 2008

Written by Teresa Zink

 Keeping track of the changing regulatory requirements of the various jurisdictions in which an insurance or reinsurance company does business can certainly cause insurance company lawyers to lose some sleep. 

In recent years, the trend in both the U.S. and overseas has been toward less regulation and more consistency in the regulations that are in place, according to former Farmers’ Group General Counsel Jason Katz.  However, he cautions, “Looking at what has happened in the banking sector I would have to say that the move toward less and less regulation may not be the wisest thing right now.”  Nor may it be realistic.

At a time when the regulatory landscape in the U.S. and abroad is changing, General Counsels of insurance and reinsurance companies need to take an active role in the process and be certain they are part of the discussion, according to Katz.

The European Union is ahead of the U.S. in developing a regulatory framework that allows E.U. companies to be regulated by one member country while providing reinsurance in the other countries without being subject to the vagaries of each local regulatory regime, according to Katz. 

Recent moves in the U.S., including the NAIC’s Reinsurance Regulatory Modernization Framework, reflect efforts to establish similar uniformity in this country.  “I think where people may be getting a little off track or a little ambitious is when they propose to drop requirements for collateralization,” Katz says. 

Jason Katz recently retired as Executive Vice President and General Counsel at Farmers Group, Inc. in Los Angeles.  He participated in a General Counsels’ Roundtable Discussion titled “What Keeps Us Awake at Night?” at Mealey’s Litigation Conference’s Global Reinsurance Forum held Oct. 6 and 7 in Boston.  Mr. Katz spoke to Ms. Zink for an article in the upcoming first issue of The Reinsurance Roundtable Continuum, a monthly report based on the outstanding speakers at the various reinsurance programs run by Mealey’s Litigation Conferences.  This is an excerpt from that article.