Role of a Financial Economist in Global Enforcement Actions and Regulatory Investigations The Globalization of Enforcement Actions and Internal Investigations ABA Criminal Justice Section’s Second International White Collar Crime Conference London, England 7 October 2013 Vinita M. Juneja, Ph.D. Senior Vice President and Co-Chair of NERA's White Collar Criminal Litigation, Investigations, and Compliance Practice

1 Wide Variety of Financial Issues and Alleged Wrongdoing Some Illustrative Examples Are: LIBOR (Price Fixing) Market Timing Options Backdating Mispricing of Securities Material Misstatement Re: Capital Reserves Insider Dealing Bribery

2 BigEuroBank Allegedly Misstated Value of its CDO’s 1 May 2007 to 1 November 2008 BigEuroBank Stock Price 1 June October 2008 Date of Alleged Misstatement Date of Disclosure

3 Example 1: Typical Analysis in a Security Mispricing Case  Did BigEuroBank earlier misstate a security’s value?  What is the misstatement?  Was the alleged misstatement material? –Examine impact of alleged misstatement on stock price –Perform an event study –Control for other influences on stock price at the same time (e.g., macroeconomic news); –Is the remaining stock price impact statistically significant?

4 Example 1: Typical Analysis in a Security Mispricing Case  Pinpoint timing of eventual disclosure –Perform an event study –Control for other influences on stock price at the same time –Is the remaining stock price impact statistically significant? –Review qualitative discussion in analyst reports to assess the disclosure’s importance in the context of the larger announcement Continued…

5 1 June October 2008 European Banks Moved in Tandem on Date of the Alleged Correction BigEuroBankEuropean Banks Index Date of Alleged Misstatement Date of Disclosure Stock Price 15 October 2008: Negative European Economic Reports Released May 2007 to 1 November 2008

6  First Issue: Pinpoint Timing of Disclosure –Different time zones for different markets –Different disclosure practices/requirements in different countries Example 1 Globalized: What Additional Considerations Arise? Question: When the corrective news hit the market, did the stock price of BigEuroBank decline?  BigEuroBank trades on multiple exchanges in different countries and continents

7 Example 1 Globalized: What Additional Considerations Arise?  Second Issue: Event Study Implementation  Asynchronous market openings and closings create problems: –What is the price of the “last trade”? (timing and exchange rate issues) Continued…

8 Example 1 Globalized: What Additional Considerations Arise?  Should the stock return be measured from previous close of Country A to close of Country A or to close of Country B (if B closes earlier)? Stock Return or Stock Return NYSE Close 14 October 2008 Disclosure After Close 14 October 2008 Deutsche Bourse Open 15 October 2008 Deutsche Bourse Close 15 October 2008 NYSE Close 15 October 2008 Continued…

9 Example 1 Globalized: What Kinds of Additional Considerations Arise?  How to control for market if BigEuroBank also trades on the NYSE?  What if the more active market is closed for a holiday while the news is announced?  Appropriate use of complex statistical tools to perform an event study with asynchronous trading Continued…

10  Where do company’s shareholders reside?  Where are the majority of the company’s shareholders located?  How much of the potential exposure is accounted for by holders in a specific jurisdiction? Example 2: Shareholder Profile Analysis in a Cross-Border Securities Litigation

11 Example 2: Shareholder Profile Analysis in a Cross-Border Securities Litigation  What can we say about the proportion of investors from a certain jurisdiction that purchased on a given exchange? –Based on shareholder data –Based on academic literature –Based on country studies of household stock ownership Continued… Question: On which exchanges and in which countries did most of the trading occur?

12 Examples of Available Information About a Company’s Shareholders Canada—NOBO lists, fund holdings data Switzerland—shareholder register with very detailed information on holdings and transactions by individual shareholders Germany—large beneficial owner notifications and mutual fund holdings data USA—DTCC, transfer agent, brokerage house transactions, and public filings by mutual funds, investment advisors and institutional holders

Thank You Vinita M. Juneja, Ph.D. Senior Vice President and Co-Chair of NERA's White Collar Criminal Litigation, Investigations, and Compliance Practice NERA—London © Copyright 2013 NERA UK Limited All rights reserved.