1 Nicole Lavallee (SBN 165755) Email: [email protected] 2 Lesley Ann Hale (SBN 237726) 3 Email:[email protected] BERMAN DeVALERIO 4 425 California Street Suite 2100 5 San Francisco, CA 94104 Telephone: (415) 433-3200 6 Facsimile: (415) 433-6382
7 Christopher J. Keller Alan I. Ellman 8 Stefanie J. Sundel LABATON SUCHAROW LLP 9 140 Broadway New York, New York 10005 10 Telephone: (212) 907-0700 Facsimile: (212) 818-0477 11 Email: [email protected]
12 Attorneys for Mineworkers’ Pension Scheme and Proposed Lead Counsel for the Class 13 UNITED STATES DISTRICT COURT 14 NORTHERN DISTRICT OF CALIFORNIA SAN JOSE DIVISION 15
16 SAJI VETTIYIL, Individually and on Behalf ) 17 of All Others Similarly Situated, ) )Civil Action No.: C-09-00117 RS 18 Plaintiff, ) )Mag. Judge Richard Seeborg 19 vs. ) ) 20 SATYAM COMPUTER SERVICES, LTD., )Hearing B. RAMALINGA RAJU, B. RAMA RAJU, ) Date: April 22, 2009 21 SRINIVAS VADLAMANI, PRICE ) WATERHOUSE, ) Time: 9:30 A.M. 22 PRICEWATERHOUSECOOPERS ) Courtroom:4 INTERNATIONAL, LTD., ) 23 Defendants. ) 24 )
25 NOTICE OF FILING MINEWORKERS’ PENSION SCHEME’ MEMORANDUM 26 OF LAW IN FURTHER SUPPORT OF ITS MOTION FOR CONSOLIDATION APPOINTMENT AS LEAD PLAINTIFF, AND APPROVAL OF SELECTION OF 27 LEAD COUNSEL, AND IN OPPOSITION TO THE COMPETING MOTIONS 28
[C-09-00117 RS] NOTICE OF FILING MINEWORKERS’ PENSION SCHEME’ MEMORANDUM OF LAW IN FURTHER SUPPORT OF ITS MOTION FOR CONSOLIDATION APPOINTMENT AS LEAD PLAINTIFF, AND APPROVAL OF SELECTION OF LEAD COUNSEL, AND IN OPPOSITION TO THE COMPETING MOTIONS 1 Mineworkers’ Pension Scheme (“Mineworkers’ Pension”) hereby informs the Court, all 2 parties, and their counsel of record that Mineworkers’ Pension filed on March 26, 2009 in the 3 action entitled Patel v. Satyam Computer Services, Ltd., 09-cv-93-BSJ (S.D.N.Y.), their: (1) 4 Memorandum of Law in Further Support of the Motion of Mineworkers’ Pension Scheme for
5 Consolidation, Appointment as Lead Plaintiff, and Approval of Selection of Lead Counsel, and 6 in Opposition to the Competing Motions; (2) Declaration of Christopher J. Keller in Further 7 Support of the Motion of Mineworkers’ Pension Scheme for Consolidation, Appointment as
8 Lead Plaintiff, and Approval of Selection of Lead Counsel, and in Opposition to the Competing 9 Motions; and (3) Declaration of Kenneth D. Kotz, attached hereto as Exhibits A-C, respectively. 10 Plaintiff Saji Vettiyil (“Vettiyil”) filed his action before this Court on January 9, 2009. 11 The first related action against Satyam, however, was filed in the Southern District of New York 12 (“S.D.N.Y.”) on January 7, 2009, and nine more related actions were filed in S.D.N.Y.
13 afterwards. On January 26, 2009, Vettiyil filed a motion with the Judicial Panel on Multidistrict 14 Litigation seeking to consolidate all Satyam class actions in the Northern District of California 15 (“N.D.C.A.”). On March 20, 2009, Vettiyil withdrew his motion to consolidate and consented to 16 the transfer of his action to S.D.N.Y. See Not. of Withdrawal of Mot. for Transfer of Actions to 17 N.D.C.A. & Consent to Transfer to the S.D.N.Y. (Dkt. No. 54). As such, Mineworkers’ Pension
18 believes the case will continue in S.D.N.Y. but is notifying this Court of its filings out of an 19 abundance of caution.
20 Dated: April 1, 2009 Respectfully submitted, 21 By: /s/ Nicole Lavallee Nicole Lavallee (SBN 165755) 22 Email: [email protected] Lesley Ann Hale (SBN 237726) 23 Email: [email protected] 24 BERMAN DeVALERIO 425 California Street 25 Suite 2100 San Francisco, CA 94104 26 Telephone: (415) 433-3200 Facsimile: (415) 433-6382 27 Proposed Liaison Counsel for the Class 28
[C-09-00117 RS] NOTICE OF FILING MINEWORKERS’ PENSION SCHEME’ MEMORANDUM OF LAW IN FURTHER SUPPORT OF ITS MOTION FOR CONSOLIDATION APPOINTMENT AS LEAD PLAINTIFF, AND APPROVAL OF SELECTION OF LEAD COUNSEL, AND IN OPPOSITION TO THE COMPETING MOTIONS 1 Christopher J. Keller Alan I. Ellman 2 Stefanie J. Sundel LABATON SUCHAROW LLP 3 140 Broadway New York, New York 10005 4 Telephone: (212) 907-0700 Facsimile: (212) 818-0477 5 Attorneys for Mineworkers’ Pension Scheme 6 and Proposed Lead Counsel for the Class
7 8 9 10 11 12
13 14
15 16 17 18 19
20 21 22
23 24
25 26 27 28 [C-09-00117 RS] NOTICE OF FILING MINEWORKERS’ PENSION SCHEME’ MEMORANDUM OF LAW IN FURTHER SUPPORT OF ITS MOTION FOR CONSOLIDATION APPOINTMENT AS LEAD PLAINTIFF, AND 2 APPROVAL OF SELECTION OF LEAD COUNSEL, AND IN OPPOSITION TO THE COMPETING MOTIONS Exhibit A Christopher J. Keller (CK-2347) Eric J. Belfi (EB-8895) Alan I. Ellman (AE-7347) Stefanie J. Sundel (SS-8168) LABATON SUCHAROW LLP 140 Broadway New York, New York 10005 Telephone: (212) 907-0700 Facsimile: (212) 818-0477
Attorneys for Mineworkers’ Pension Scheme and Proposed Lead Counsel for the Class
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
AEKTA BEN PATEL, On Behalf of Herself Electronically Filed And All Others Similarly Situated, Plaintiff, Civil Action No. 1:09-cv-00093-BSJ-DFE vs. Hon. Barbara S. Jones SATYAM COMPUTER SERVICES LTD., Mag. Judge Douglas F. Eaton B. RAMALINGA RAJU, and B. RAMA RAJU, (ECF Case) Defendants.
(Additional Captions on the Following Pages)
MEMORANDUM OF LAW IN FURTHER SUPPORT OF THE MOTION OF MINEWORKERS’ PENSION SCHEME FOR CONSOLIDATION, APPOINTMENT AS LEAD PLAINTIFF, AND APPROVAL OF SELECTION OF LEAD COUNSEL, AND IN OPPOSITION TO THE COMPETING MOTIONS HOSSEIN MOMENZADEH, On Behalf Of Himself Electronically Filed And All Others Similarly Situated, Plaintiff, Civil Action No. 1:09-cv-00161-CM vs. Hon. Colleen McMahon SATYAM COMPUTER SERVICES LTD., B. RAMALINGA RAJU, and B. RAMA RAJU, (ECF Case) Defendants.
CYNTHIA FREEMAN, Electronically Filed Plaintiff, Civil Action No. 1:09-cv-00330-BSJ vs. SATYAM COMPUTER SERVICES LTD., Hon. Barbara S. Jones B. RAMALINGA RAJU, B. RAMA RAJU, SRINIVAS VADLAMANI, and JOHN DOES 1-5, (ECF Case) Defendants.
NAVEEN CHANDER JEPU, On Behalf Of Himself Electronically Filed And All Others Similarly Situated, Plaintiff, Civil Action No. 1:09-cv-00337-BSJ vs. Hon. Barbara S. Jones SATYAM COMPUTER SERVICES LTD., B. RAMALINGA RAJU, B. RAMA RAJU, and (ECF Case) SRINIVAS VADLAMANI, Defendants.
BERT H. STURGIS, II, On Behalf Of Himself And Electronically Filed All Others Similarly Situated, Plaintiff, Civil Action No. 1:09-cv-0361-BSJ vs. Hon. Barbara S. Jones SATYAM COMPUTER SERVICES LTD., B. RAMALINGA RAJU, and B. RAMA RAJU, (ECF Case) Defendants. LARRY R. PENNINGTON, Individually and On Behalf of All Others Similarly Situated, Electronically Filed Plaintiff, Civil Action No. 1:09-cv-0386-BSJ vs. Hon. Barbara S. Jones SATYAM COMPUTER SERVICES LTD., B. RAMALINGA RAJU, B. RAMA RAJU, and (ECF Case) VADLAMANI SRINIVAS, Defendants. JAMES HAMBLIN, On Behalf Of Himself And All Others Similarly Situated, Electronically Filed Plaintiff, Civil Action No. 1:09-cv-0489-VM vs. Hon. Victor Marrero SATYAM COMPUTER SERVICES LTD., B. RAMALINGA RAJU, B. RAMA RAJU, (ECF Case) SRINIVAS VADLAMANI, PRICEWATERHOUSE COOPERS INTERNATIONAL LIMITED, PRICEWATERHOUSE COOPERS PVT LTD., and PRICE WATERHOUSE, Defendants. HILLEL RAYMON, Individually and On Behalf of All Others Similarly Situated, Electronically Filed Plaintiff, Civil Action No. 1:09-cv-00512-BSJ vs. Hon. Barbara S. Jones SATYAM COMPUTER SERVICES LTD., B. RAMALINGA RAJU, and B. RAMA RAJU JR., (ECF Case) and VADLAMANI SRINIVAS, Defendants. BRIAN FABER, Individually and On Behalf of All Others Similarly Situated, Electronically Filed Plaintiff, Civil Action No. 1:09-cv-00569-BSJ vs. Hon. Barbara S. Jones SATYAM COMPUTER SERVICES LTD., B. RAMALINGA RAJU, B. RAMA RAJU, and (ECF Case) SRINIVAS VADLAMANI, Defendants. WILLIAM M. HEBERT, JANET K. HEBERT and THE WILLIAM M. HEBERT IRA, On Behalf of Electronically Filed Themselves and All Others Similarly Situated, Civil Action No. 1:09-cv-01124-BSJ Plaintiff, vs. Hon. Barbara S. Jones
SATYAM COMPUTER SERVICES LTD., (ECF Case) B. RAMALINGA RAJU, B. RAMA RAJU, PRICEWATERHOUSE COOPERS INTERNATIONAL LIMITED, PRICEWATERHOUSE COOPERS PVT LTD., and PRICE WATERHOUSE, Defendants.
ASHIT M. MEHTA, On Behalf of Himself And All Others Similarly Situated, Electronically Filed Plaintiff, Civil Action No. 1:09-cv-01789-BSJ vs. Hon. Barbara S. Jones SATYAM COMPUTER SERVICES LTD., B. RAMALINGA RAJU, and B. RAMA RAJU, (ECF Case) Defendants. TABLE OF CONTENTS
I. INTRODUCTION 1
II. ARGUMENT 5
A. In-and-Out Purchasers Have Long-Been Rejected As Subject to Unique Defenses 5
B. The Supreme Court’s Decision in Dura and Its Impact on Calculation of Largest Financial Interest Pursuant to the PSLRA 6
1. The Earliest Disclosure Alleged in Any of the Complaints Occurred on December 15, 2008 8
2. The Alleged “Partial Disclosures” of the Truth Argued by Sampension and Skagen Should Not Be Credited for Purposes of the Lead Plaintiff Determination 10
C. Sampension and Skagen Suffer From a Conflict of Interest with Defendant PwC That Renders Them Inadequate to Serve as Lead Plaintiff 12
D. Purchasers of Satyam Common Stock on the Indian Stock Exchanges are Not Part of the Class Definition as Alleged 14
E. Mississippi PERS’ Purchases of Satyam Common Stock on the Indian Stock Exchanges Subject It to a Unique Defense of Lack of Reliance 14
1. The Class Will Need to Rely on the Fraud-On-The-Market Theory of Reliance to Satisfy the Commonality and Predominance Requirements of Rule 23 14
2. The Fraud-On-The-Market Theory is Premised on an Efficient Market for the Securities At Issue 15
3. A Semi-Strong Efficient Market is Required Before the Fraud-On-The-Market Theory is Applied 15
4. Defendants Will Likely Argue That the Indian Stock Exchanges are Neither Semi-Strong Efficient Nor Weak Form Efficient Markets 17 5. Mississippi PERS May Be Subject to the Unique Defense That It Cannot Invoke the Fraud-On-the-Market Presumption of Reliance, and Would Therefore Be Inadequate and Atypical 19
6. The Court Could Appoint Separate Representation for ADR and Common Stock Purchasers 20
III. CONCLUSION 22
- ii - TABLE OF AUTHORITIES
FEDERAL CASES
ASARCO LLC v. Americas Mining Corp., 396 B.R. 278 (S.D. Tex. 2008) 16
In re Bally Total Fitness Sec. Litig., No. 04-cv-3530, 2005 WL 627960 (N.D. Ill. Mar. 15, 2005) 5, 20
Basic, Inc. v. Levinson, 485 U.S. 224 (1988) 4, 15, 17
Borochoff v. Glaxosmithkline PLC, 246 F.R.D. 201 (S.D.N.Y. 2007) 13
Bowman v. Legato Sys., 195 F.R.D. 655 (N.D. Cal. 2000) 5
In re Cable & Wireless, PLC Sec. Litig., 217 F.R.D. 372 (E.D. Va. 2003) 5, 22
Cammer v. Bloom, 711 F. Supp. 1264 (D.N.J. 1989) 16
In re Centerline Holding Co. Sec. Litig., No. 08-cv-505, 2008 WL 1959799 (S.D.N.Y. May 5, 2008) 11
In re Comverse Technology Inc. Sec. Litig., No. 06-CV-1825 (NGG), 2007 WL 680779 (E.D.N.Y. Mar. 2, 2007) 6, 7
Constance Sczesny Trust v. KPMG LLP, 223 F.R.D. 319 (S.D.N.Y. 2004) 20
Cromer Fin. Ltd. v. Berger, 205 F.R.D. 113 (S.D.N.Y. 2001) 19
Dura Pharms. v. Broudo, 544 U.S. 336 (2005) passim
Freudenberg v. E* Trade Financial Corp., No. 07-cv-8538, 2008 WL 2876373 (S.D.N.Y. July 16, 2008) 21
Kops v. NVE Corp., No. 06-cv-574 (MJD/JJG), 2006 WL 2035508 (D. Minn. July 19, 2006) 7
- iii - Landry v. Price Waterhouse Chartered Accountants, 123 F.R.D. 474 (S.D.N.Y. 1989) 13, 20 In re McKesson HBOC, Inc. Sec. Litig., 97 F. Supp. 2d 993 (N.D. Cal. 1999) 6
In re Microstrategy Inc. Sec. Litig., 110 F. Supp. 2d 427 (E.D. Va. 2000) 5
Newman v. Eagle Bldg. Techs., 209 F.R.D. 499 (S.D. Fla. 2002) 20
Pirelli Armstrong Tire Corp. Retiree Med. Benefits Trust v. LaBranche & Co., 229 F.R.D. 395 (S.D.N.Y. 2004) 12
Police and Fire Ret. Sys. of the City of Detroit v. Safenet, Inc., No. 06-cv-5797 (PAC), 2007 U.S. Dist. LEXIS 97959 (S.D.N.Y. Feb. 21, 2007) 8
In re PolyMedica Corp. Sec. Litig., 432 F.3d 1 (1st Cir. 2005) 15, 16
In re Res. Am. Sec. Litig., 202 F.R.D. 177 (E.D. Pa. 2001) 15
In re Royal Ahold N.V. Sec. & ERISA Litig., 219 F.R.D. 343 (D. Md. 2003) 13
Ruland v. InfoSonics Corp., No. 06- cv-1231, 2006 WL 3746716 (S.D. Cal. Nov. 7, 2006) 8
In re Safeguard Scientifics, 216 F.R.D. 577 (E.D. Pa. 2003) 20
In re Star Gas Sec. Litig., 04-cv-1766, 2005 WL 818617, at *5 (D. Conn. Apr. 8, 2005) 22
In re Surebeam Corp. Sec. Litig., No. 03-CV-1721, 2004 WL 5159061 (S.D. Cal. Jan. 5, 2004) 20
Teamsters Local 445 Freight Division Pension Fund v. Bombardier, Inc., No. 05-cv-1898, 2006 WL 2161887 (S.D.N.Y. Aug. 1, 2006) 16
In re Veeco Instruments Inc. Sec. Litig., 233 F.R.D. 330 (S.D.N.Y. 2005) 7
-iv -
In re Vivendi Universal, S.A. Sec. Litig., 242 F.R.D. 76 (S.D.N.Y. 2007) 13
In re Waste Mgmt., Inc. Sec. Litig., 128 F. Supp. 2d 401 (S.D. Tex. 2000) 5
W.R. Huff Asset Mgmt. Co. v. Deloitte & Touche LLP, 549 F.3d 100 (2d Cir. 2008) 13
DOCKETED CASES
Brooks v. Interlink Elecs., Inc., No. 05-cv-8133 PA (SHx), slip op. (C.D. Cal. July 14, 2006) 8
Cole v. Health Mgmt Assocs., Inc., No. 07-cv-484-FtM-34SPC (M.D. Fla. May 14, 2008) 8
Genovese v. Ashley, No. 08-cv-7831 (GEL) (S.D.N.Y. Feb. 13, 2009) 21
In re HealthSouth Corp. Sec. Litig., No. 03-cv-1500 (N.D. Ala. Nov. 5, 2004) 13
Saltzman v. Citigroup, Inc., 07-9901 (S.D.N.Y. Jan. 28, 2008) 13
Zirkin v. Quanta Capital Holdings, Ltd., No. 07-cv-851 (RPP) (S.D.N.Y. May 7, 2007) 21
STATUTES
15 U.S.C. § 78-4(b)(4) passim
Fed. R. Civ. P. 23 passim
MISCELLANEOUS
Anand Pandey, Efficiency of Indian Stock Mkt., Oct. 2003 18
Alok K. Mishra & M. Thomas Paul, Integration & Efficiency of Stock & Foreign Exch. Mkts. in India 18
Debasmita Ghosh, Satyam to axe 4,500 employees, Times of India, Sept. 15, 2008 11
- v - Jackie Range, Pricewaterhouse Partners Arrested in Satyam Probe, Wall St. J., Jan. 25, 2009 12
Jonathan R. Macey & Geoffrey P. Miller, Good Finance, Bad Economics: An Analysis of the Fraud-on-the-Market Theory, 42 Stan. L. Rev. 1059, 1077-78 (1990) 16
R. Vaidyanathan & Kanti Kumargali, Efficiency of the Indian Capital Mkt., 5.2 Indian J. of Fin. & Research 27 (July 1994) 18
Rajesh Chakrabarti, An Empirical Study of Exchange-Traded ADRs from India 18
Rakesh Gupta & Parikshit K. Basu, Weak Form Efficiency In Indian Stock Mkts., 6.3 Int’l Bus. & Econ. Res. J. 57 (Mar. 2007) 17
Sunil Poshakwale, Evidence of Weak Form Efficiency & Day of the Week Effect in the Indian Stock Mkt., 10.3 Finance India 605, 615 (Sept. 1996) 18
Andrew C. Worthington & Helen Higgs, Fin. Dev. in Emerging Capital Mkts. With Efficiency Benchmarks 18
-vi - Mineworkers’ Pension Scheme (“Mineworkers’ Pension”), respectfully submits this
memorandum of law in further support of its motion for an order: (i) consolidating the above-
captioned, related actions against Satyam Computer Services Ltd. (“Satyam”); (ii) appointing
Mineworkers’ Pension as lead plaintiff for a class of all purchasers of American Depository
Receipts (“ADRs”); (iii) approving its selection of Labaton Sucharow LLP (“Labaton Sucharow”)
as lead counsel for the class of ADR purchasers; and (iv) granting such other and further relief as
the Court may deem just and proper, and in opposition to the competing motions.
I. INTRODUCTION
Presently pending before this Court are four competing motions for consolidation,
appointment of lead plaintiff and approval of selection of lead counsel. 1 Pursuant to the PSLRA,
this Court shall appoint the “most adequate plaintiff” to serve as lead plaintiff. 15 U. S.C. § 78u-
4(a)(3)(B)(i). Toward this end, the Court is required to determine which movant has the “largest
financial interest” in the relief sought by the Class and “otherwise satisfies the requirements of
Rule 23 of the Federal Rules of Civil Procedure” (“Rule 23”). 15 U.S.C. § 78u-
4(a)(3)(B)(iii)(I)(cc). While determination of which movant has the largest financial interest –
the “presumptive lead plaintiff” – is the starting point of the lead plaintiff selection process, the presumptive lead plaintiff must also demonstrate that it will “fairly and adequately protect the
interests of the class” and not be “subject to unique defenses.” 15 U.S.C. § 78u-
4(a)(3)(B)(iii)(II). With no infirmities under Rule 23 and losses of approximately $8.3 million
1 In addition to Mineworkers’ Pension, the current movants are: (1) Mississippi Public Employees’ Retirement System (“Mississippi PERS”), Sampension KP Livsforsikring A/S (“Sampension”), and SKAGEN A/S (“Skagen”) (collectively, the “Global Institutional Investors” or “GII Group”); (2) Nasser Saddique, Varughese and Mariana Thomas, Roshan L. Sharma, Aurangzeb Alamgir, and William M. and Janet K. Hebert; and (3) Brian F. Adams (on behalf of an Option Class only). The following parties also filed a motion for consolidation, appointment of lead plaintiff, and approval of selection of lead counsel, but have since filed notices of withdrawal or non-opposition, effectively terminating their motions: (1) Société Générale Securities Services Kapitalanlagegesellschaft mbH and Universal-Investment-Gesellschaft mbH; (2) Integre Advisors; (3) Wayne Lau; (4) Labourers’ Pension Fund of Central and Eastern Canada; (5) India Performance Fund, LP, India Performance Master Fund, Ltd., and Parag G. Patel; and (6) Priyanka Arora. under the last-in-first-out (“LIFO”) and first-in-first-out (“FIFO”) loss methodologies,
Mineworkers’ Pension, part of the third largest public pension fund system in the United
Kingdom, has the largest financial interest in the relief sought by the Class, and is the “most
adequate plaintiff.”
While one other lead plaintiff movant, the GII Group, claims to have a larger financial
interest, as shown below, it does not. In fact, the GII Group’s total financial interest in the
outcome of this litigation, on behalf of the ADR class, is likely zero. See accompanying
Declaration of Kenneth Kotz of Forensic Economics (“Kotz Decl.”) at ¶¶ 24 & Ex. 5.
Accordingly, Mineworkers’ Pension, a sole lead plaintiff, represented by one proposed lead
counsel law firm, has the largest financial interest in this action and is the presumptive lead plaintiff.
First, the claimed financial interest of the GII Group is illusory. Sampension and Skagen
(who claim aggregate losses of $20 million) are in-and-out traders. For purposes of appointing
lead plaintiffs, courts have long-held that in-and-out traders, who sell all of their stock while the
relevant security is still artificially inflated, have no financial interest in the litigation. Here, both
of these funds sold all of their Satyam ADRs before the end of the class period and before the
truth regarding the Satyam fraud was disclosed. Accordingly, based upon the allegations of all
twelve pending complaints, Sampension and Skagen have no provable loss in this case and thus
no financial interest in its outcome. If appointed, these funds would face a withering attack from
defendants on a motion to dismiss, class certification, summary judgment and ultimately trial, that
they suffered no compensable losses. This exposes them to unique defenses, and should
disqualify them from lead plaintiff contention.
Sampension and Skagen’s “discovery” of two “new” partial disclosures (on September 15
and October 2, 2008), raised for the first time in its brief in support of its lead plaintiff motion,
2 appears to have been made for the principal purpose of generating a financial interest in the
litigation and being appointed lead plaintiff. The Court should not countenance this apparent
effort. Putting aside the obvious inference to be drawn from the fact that all twelve complaints,
filed by competent, experienced class-action counsel, did not allege either of these two purported
disclosures, the Court as a matter of prudence should only credit clear partial disclosures already
alleged in filed complaints in calculating the largest financial interest. Emphatically,
Mineworkers’ Pension is not arguing that the Court should rule that the September 15 and
October 2 disclosures are not partial disclosures, but rather that the Court should adopt the prudent approach of only crediting clearly alleged partial disclosures for purposes of calculating
which lead plaintiff movant has the largest financial interest. A contrary result would
unnecessarily expose the class to a heightened risk that the lead plaintiff may ultimately be unable
to prove any losses whatsoever, and seriously prejudice the extraordinarily strong claims possessed by class members, such as Mineworkers’ Pension, who held virtually all of its class period purchases through the end of the class period and suffered unassailable losses in the
amount of $8.3 million.
Second, Mississippi PERS, which purchased 100% of its shares of Satyam common stock
on the Indian National Stock Exchange (“NSE”) and/or Bombay Stock Exchange (“BSE”)
(collectively, the NSE and BSE are referred to as the “Indian Stock Exchanges”), is not a member
of the proposed class of ADR purchasers and, as such, its interest cannot be considered for purposes of determining the most adequate lead plaintiff for the class of ADR purchasers. To the
extent the Court wishes to recognize a class of common stock purchasers, we believe Mississippi
PERS may indeed be the right lead plaintiff for such a class.
Third, even if the court considers Mississippi PERS’ losses as part of the current lead plaintiff motion, Mississippi PERS’ would not be the correct choice for lead plaintiff on behalf of
ADR purchasers given the high likelihood that it would have to overcome the likely defense that
3 the Indian Stock Exchanges are not semi-strong efficient securities markets, and thus purchasers
of common stock on those markets may not be afforded the presumption of reliance under the
Supreme Court’s ruling in Basic v. Levinson, 485 U.S. 224 (1988). Mineworkers’ Pension provides the Court with evidence that indicates that such a defense is highly likely. If successful
at class certification, this unique defense would most probably preclude common stock purchasers
from invoking the fraud-on-the-market presumption of reliance and defeat Rule 23’s requirement
that common questions predominate over individual questions as to such purchasers. See Fed. R.
Civ. P. 23(a)(2) & 23(b)(3). Such an event could set the class back years and reargue the lead plaintiff process to be repeated. Again, as with the lack of provable loss causation by
Sampension and Skagen, Mineworkers’ Pension does not advocate for finding that the Indian
Stock Exchanges lack semi-strong efficiency, but that ADR purchasers should not be represented by a lead plaintiff that may be burdened with having to overcome this defense. Along with the
majority of other lead plaintiff movants, Mineworkers’ Pension purchased only Satyam ADRs on
the New York Stock Exchange (“NYSE”) and sought only to move on behalf of an ADR purchaser class. 2 Instead of subjecting the Class to the risks that flow from appointing as lead plaintiff a purchaser on (what defendants will argue is) an inefficient market, Mineworkers’
Pension should be appointed as lead plaintiff. 3
In sum, there is a high likelihood that Sampension, Skagen and Mississippi PERS, three
separate investors, represented by three proposed co-lead counsel, have no financial interest in the
outcome of this litigation on behalf of the ADR class. In contrast, Mineworkers’ Pension has a
clean, unassailable $8.3 million financial interest in this litigation, having purchased and held
2 American Depositary Shares (“ADSs”) are issued by depository banks in the U.S. under agreement with the issuing foreign company and are U.S. dollar-denominated equity shares of a foreign-based company available for purchase on an American stock exchange. The entire issuance is called an American Depositary Receipt or ADR, and the individual shares are referred to as ADSs. 3 Should the Court choose, at this time, to recognize the existence of a common stock class and consider a lead plaintiff motion on behalf of such a class, Mineworkers’ Pension would support the application of Mississippi PERS’ appointment as co-lead plaintiff.
4 virtually all of its ADRs on the NYSE through the end of the class period, is represented by one proposed lead counsel, and will fairly and adequately represent all ADR purchasers. 4
The remaining lead plaintiff applications fail because each of those movants has
significantly smaller losses than Mineworkers’ Pension and cannot show that Mineworkers’
Pension would not otherwise be qualified under Rule 23. Thus, Mineworkers’ Pension is the
“most adequate plaintiff” and respectfully requests that this Court appoint it as lead plaintiff and
approve its selection of Labaton Sucharow as lead counsel.
II. ARGUMENT
A. In-and-Out Purchasers Have Long-Been Rejected As Subject to Unique Defenses
Plaintiffs pursuing private securities fraud claims under the PSLRA must prove that the
defendant’s fraudulent statements or omissions were the cause of their loss, the element known as
loss causation. See 15 U.S.C. § 78-4(b)(4). “In-and-out” traders – investors who purchased and
then sold all of their stock during the class period, before the alleged fraud was disclosed – are
routinely rejected as lead plaintiffs because they are subject to the unique defense that they
cannot, or will face difficulties in trying to, show that the fraud, as opposed to other market
forces, caused their loss. See In re Bally Total Fitness Sec. Litig., No. 04-cv-3530, 2005 WL
627960, at *6 (N.D. Ill. Mar. 15, 2005) (“[I]t does appear that [movant] would have to use
considerable resources to establish that even though it was an in-and-out trader, its losses
nevertheless were caused by the alleged fraudulent statements.”); In re Cable & Wireless, PLC
Sec. Litig., 217 F.R.D. 372, 379 (E.D. Va. 2003) (denying motion for appointment as lead plaintiff in part because movant sold all of its shares before the alleged fraud was revealed to the public); In re Microstrategy Inc. Sec. Litig., 110 F. Supp. 2d 427, 437 n.23 (E.D. Va. 2000)
4 Mineworkers’ Pension’s motion is the “model” envisioned by the PSLRA: one “strong lead plaintiff” with one counsel which will “actively manage the litigation on behalf of the class.” Bowman v. Legato Sys. ,195 F.R.D. 655, 658 (N.D. Cal. 2000); see also In re Waste Mgmt., Inc. Sec. Litig., 128 F. Supp. 2d 401 (S.D. Tex. 2000) (Connecticut State Retirement Plans and Trust Funds, serving as the sole lead plaintiff with a single lead counsel, Labaton Sucharow, recovered $457 million on behalf of aggrieved investors).
5 (disqualifying movant whose transactions “suggested that most of its losses occurred before
defendants issued the first correction” because movant “may be subject to unique defenses ....”);
In re McKesson HBOC, Inc. Sec. Litig., 97 F. Supp. 2d 993, 998 (N.D. Cal. 1999) (“The court
therefore holds that it is inappropriate to count losses (or profits) by ‘in-and-out’ traders in this
case when determining the plaintiff with the greatest financial interest in the litigation.”).
Sampension and Skagen are in-and-out traders because they sold out of Satyam ADRs before the
first alleged partial disclosure on December 15, 2008, see Schedule A to Certifications, and are
therefore subject to the unique defense of inability to prove loss causation. Consequently, their
motion should be denied.
B. The Supreme Court’s Decision in Dura and Its Impact on Calculation of Largest Financial Interest Pursuant to the PSLRA
The Supreme Court’s decision in Dura Pharmaceuticals v. Broudo, 544 U.S. 336 (2005),
confirmed the correctness of the rule against “in and out” traders as lead plaintiffs. The Supreme
Court explained in Dura, “if, say, the purchaser sells the shares quickly before the relevant truth begins to leak out, the misrepresentation will not have led to any loss.” Id. at 342. Pursuant to
Dura, where the theory of loss causation pled is based on a corrective disclosure and/or partial
disclosure, losses on shares sold before any disclosure of the truth are not recoverable as a matter
of law. As Judge Garaufis’s decision in In re Comverse Technology Inc. Securities Litigation,
No. 06-CV-1825 (NGG)(RER), 2007 WL 680779 (E.D.N.Y. Mar. 2, 2007) (Garaufis, J.),
explains, Dura had a material impact on the lead plaintiff selection process, such that pre-
disclosure losses that are not caused by the defendants’ fraud should not figure into the lead plaintiff financial interest analysis.
In Comverse, the district court reversed a magistrate judge’s appointment of a movant
who claimed a $2.9 million loss and appointed instead a competing movant who had $343,202.50
in losses. The court held Dura requires exclusion of losses that, based on the complaints filed,
resulted from sales prior to a corrective disclosure: “The exclusion of in-and-out shares [from the
6 financial interest analysis] follows directly from the underlying holding in Dura ....” Id. at *6.
Accordingly, the district judge excluded all pre-disclosure losses from the financial interest
analysis and considered only losses incurred on shares retained through the disclosure alleged in
the complaint. See id. at *7.
Notably, the district court expressly rejected the arguments that: (1) because pleading
standards are liberal, a plaintiff should not be penalized at the lead plaintiff stage for not having
alleged every partial disclosure of the truth in its original complaint; and (2) loss causation is a
factual issue that cannot be determined at the lead plaintiff stage. See id. at *6. The Comverse
court, whose reasoning is particularly apt here, reasoned that to allow a plaintiff to claim pre-
disclosure losses at the lead plaintiff stage without record support for the theory that a claimed
loss was incurred due to a drop in the stock’s price following the revelation of the truth, in whole
or in part, would encourage lead plaintiff movants to “overstate their losses at the outset of a
lawsuit, in hope of a court’s declining to look beyond those conclusory allegations until after
discovery, when it might be too late to appoint a more deserving lead plaintiff.” Id.
Likewise, Judge McMahon in In re Veeco Instruments Inc. Securities Litigation, 233
F.R.D. 330, 333 (S.D.N.Y. 2005), questioned whether, under the reasoning of Dura, a lead plaintiff movant who sells all of its stock prior to the issuance of a curative disclosure “can prove
loss causation – or, for that matter, loss.” Judge McMahon determined that such a movant “is, at
the very least, subject to a unique defense” to which other movants were not subject. The court in
Kops v. NVE Corp., No. 06-cv-574 (MJD/JJG), 2006 WL 2035508 (D. Minn. July 19, 2006),
similarly held that losses incurred prior to the first disclosure alleged in the action must, pursuant
to Dura, be excluded from the PSLRA financial interest analysis:
In Dura ..., the Supreme Court held that in order to state a claim for securities fraud, a plaintiff cannot simply allege that the price of the stock was inflated by a misrepresentation at the time that he purchased it. Instead, the plaintiff must claim that the share prices fell after the truth became known, causing a loss to the plaintiff. Id. at 347. “[A] person who ‘misrepresents the financial condition of a corporation in order to sell its stock’ becomes liable to a relying purchaser ‘for the loss’ the purchaser sustains ‘when the facts ... become generally known’ and ‘as a
7 result’ share value ‘depreciate[s].’” Id. at 344 (quoting Restatement of Torts § 548A, cmt. b.). Under Dura, the Court only calculates losses incurred from sales occurring after disclosure, that is, losses proximately caused by the alleged fraud.
Id. at *5 (emphasis added).
Echoing this holding, in Police and Fire Retirement System of the City of Detroit v.
Safenet, Inc., No. 06-cv-5797 (PAC), 2007 U.S. Dist. LEXIS 97959, at *6-7 (S.D.N.Y. Feb. 21,
2007), Judge Crotty rejected a lead plaintiff applicant where the lion’s share of its stock was sold prior to any partial disclosure: “[T]he lion’s share of the [movant group’s] claimed losses may be
uncollectible or at least subject to unique defenses in that [one group member] may have sold
most of its shares before [the defendant] announced corrective measures.”
In addition to the above-cited authority, numerous other courts, in this District and across
the country, have agreed that in-and-out losses suffered by lead plaintiff movants should not be
included in the calculation of the “largest financial interest” under the PSLRA. See, e.g., Cole v.
Health Mgmt Assocs., Inc., No. 07-cv-484-FtM-34SPC, slip op. at 11-13 (M.D. Fla. May 14,
2008) (“[F]or the purpose of resolving the instant Motions, under Dura, [the Court] should not
consider the losses suffered by [movant] prior to [defendant’s] issuance of the July 31, 2007
corrective disclosure.”) (attached to the Declaration of Christopher J. Keller (the “Keller Decl.”)
as Ex. 1); Ruland v. InfoSonics Corp., No. 06-cv-1231 BTM-WMC, 2006 WL 3746716, at *5
(S.D. Cal. Nov. 7, 2006) (same); Brooks v. Interlink Elecs., Inc., No. 05-cv-8133 PA (SHx), slip
op. at 1-2 (C.D. Cal. July 14, 2006) (“Because [movant] was not a shareholder at the time of
either the March 9, 2005 or the November 2, 2005 disclosures, it does not, in the Court’s view,
have the largest financial interest in the relief sought by the class.”) (Keller Decl., Ex. 2).
1. The Earliest Disclosure Alleged in Any of the Complaints Occurred on December 15, 2008
December 15, 2008 marks the earliest allegation of the emergence of the truth about
Satyam’s financial condition in any of the twelve pending complaints. The Vettiyil v. Satyam
8 Computer Services, Ltd. complaint5 alleges that “[p]roblems began on December 15, 2008 when
Satyam announced it was seeking to acquire Maytas Infrastructure and Maytas Properties. Shares
of Satyam’s ADRs ended at $12.55 per share” on that date. Yettiyil at ¶ 48 (N.D. Cal. filed Jan.
16, 2009) (Keller Decl., Ex. 3). As alleged in the complaints filed in the Action, only after
December 15, 2008 did additional partial corrective disclosures begin leaking out to the market.
On December 16, 2008, Satyam issued a press release announcing that its Board of Directors
approved proposals to acquire a 100% stake in Maytas Properties and a 51 % stake in Maytas
Infra, two companies partly owned by Defendant B. Raju, the Company’s co-founder and
Chairman. Raymon v. Satyam Computer Servs. Ltd., No. 09-cv-512, at ¶ 43 (S.D.N.Y. filed Jan.
20, 2009). On this news, shares of Satyam’s ADRs fell from $12.55 per ADR to $5.70 per ADR.
Id. at ¶ 44. On December 23, 2008, the World Bank confirmed that it had declared Satyam
ineligible to receive direct contracts under its corporate procurement program “for providing
improper benefits to Bank staff and for failing to maintain documentation to support fees charged
for its subcontractors.” Hamblin v. Satyam Computer Servs. Ltd., No. 09-cv-489, at ¶ 67
(S.D.N.Y. filed Jan. 16, 2009). The price of Satyam’s ADRs fell on this news. Id.
The final corrective disclosure occurred on January 7, 2009, when Satyam announced the
resignation of Defendant B. Raju from its Board of Directors. Defendant B. Raju sent a
resignation letter to the Satyam Board of Directors and the Securities & Exchange Board of India
admitting a multiyear fraud in which Satyam’s financial accounts and disclosures were
systematically falsified—for several years profits were overstated, liabilities were understated,
and debt owed to the Company was overstated. Id. at ¶ 43. Upon this revelation, trading in
Satyam ADRs was halted. When trading resumed on January 12, 2009, the price of Satyam
5 The Yettiyil action was filed in the Northern District of California; the plaintiff has filed a motion to transfer the case to the Southern District of New York. See Notice of Withdrawal of Mot. for Transfer of Actions to the N. Dist. of Cal. & Consent to Transfer to the S. Dist. of N.Y., Yettiyil, 5:09-cv-00117-RS (N.D. Cal. Mar. 20, 2009) [Dkt. # 54].
9 ADRs plummeted more than 84%, from a January 6, 2009 closing price of $9.35 per ADR to close at $1.46 per ADR on January 12, 2009. Id. at ¶ 50.
2. The Alleged “Partial Disclosures” of the Truth Argued by Sampension and Skagen Should Not Be Credited for Purposes of the Lead Plaintiff Determination
Not a single complaint among the twelve complaints on file alleges a corrective disclosure dated earlier than December 15, 2008. 6 Sampension and Skagen, however, sold all of their
Satyam ADRs before the December 15, 2008 disclosure. See Sampension and Skagen
Certifications. Sampension sold out of Satyam ADRs before the first pled disclosure and, as of today, has zero losses. See Kotz Decl. at ¶ 24 & Ex. 5. Skagen sold all of its ADRs on October
13, 2008 (making it in-and-out before the first pled disclosure), and then purchased 403,000 shares on December 16, 2008 and realized a gain of $1,115,392 on those purchases. Id.
Sampension and Skagen attempt to allege new corrective disclosures for the first time in their memorandum of law in support of their lead plaintiff motion. See GII Group Br. at 4-5.
Specifically, they state that:
On September 15, 2008, it was reported that Satyam would lay off 4,000 employees and assign others to “dummy projects” before deciding whether to terminate their employment. As investors later learned, Satyam may have fabricated the existence of up to 13,000 employees as a mechanism for the Defendants to siphon cash out of the Company. Thus, it appears this disclosure partially corrected false and misleading statements that had masked Defendants’ efforts to manipulate the number of workers employed by Satyam and the cost of Satyam’s employee salaries – a significant portion of which served as compensation for the Defendants. The September 15 announcement caused a downward correction in the price of Satyam securities, with Satyam common stock falling from $8.94 (on September 12) to close at $8.02 on September 15, 2008, a decline of 10% and Satyam ADSs falling from a closing price of $21.08 (on September 12) to close at $18.05 on September 15, 2008, a decline of 14%.
GII Group Opening Br. at 4 (footnote omitted).
6 Patel at ¶¶ 22-30; Momenzadeh at ¶¶ 21-3 1; Freeman at ¶¶ 25-33; Jepu at ¶¶ 61-75; Sturgis at ¶¶ 34-42; Pennington at ¶¶ 23-33; Hamblin at ¶¶ 67-81; Raymon at ¶¶ 43-50; Faber at ¶¶ 25-32; Hebert at ¶¶ 24-39; Mehta at ¶¶ 41-50.
10 Sampension and Skagen also add in their lead plaintiff memorandum of law a second new
alleged corrective disclosure which was not pled in any of the twelve complaints on file:
On October 2, 2008, it was reported that “Satyam Computer ha[d] accelerated the hunt for prospective companies that it could acquire....” Following this news, the Company’s common stock declined sharply, falling from a closing price of $6.69 (October 3, 2008) to $5.17 (October 10, 2008), or 23%, on the BSE, and Satyam ADSs fell from $15.60 (on October 2, 2008) to close at $12.32 (on October 9, 2008), or 21%, on the NYSE.
Id. at 5.
No plaintiff who filed a complaint alleged either of these disclosures as “partial
disclosures” of the truth. Further, no other lead plaintiff movant raises these arguments. As a
result, it is reasonable to presume that these claimed partial disclosures may have been raised at
this time for the purpose of reverse-engineering a financial interest in the outcome of this
litigation.7 The Court should not consider them in evaluating which movant has the largest
financial interest. See In re Centerline Holding Co. Sec. Litig., No. 08-cv-505, 2008 WL
1959799, at *3 n.27 (S.D.N.Y. May 5, 2008) (Scheindlin, J.) (“The Burns Group argues that even
if they have failed to allege that the December 5, 2006 statements were misleading when made,
they might still be able to demonstrate that Centerline was under a duty to update those
statements prior to March 12, 2007. This is certainly a possibility. But it is a possibility wholly
unsupported by any facts alleged in the complaints.”) (emphasis added). The most prudent
standard, one that creates a level playing field for all lead plaintiff applicants, would be to only
recognize clear partial disclosures pled in the twelve pending complaints in determining which
movant has the largest financial interest. An added benefit would be to put an end to
7 To wit, Satyam’s shares fell only 1.3% as a result of the purported October 2, 2008 disclosure, and the September 15 news concerned the firing of employees for performance-related reasons. According to news reports, 1,500 of the fired Satyam employees were previously put under the Company’s “performance improvement plan,” a “euphemism for employees put on watch list and asked to shape up or ship out ....” See Debasmita Ghosh, Satyam to axe 4,500 employees, Times of India, Sept. 15, 2008 (attached as Ex. 4 to Keller Decl.). With respect to this purported corrective disclosure, a Satyam spokesperson said: “The bottom 5% of those who have got a bad appraisal are put under PIP and given dummy projects to prove themselves. If they fail they will be shown the door.” See Id. The competing inference is that this merely disclosed news of Satyam’s operations.
11 gamesmanship at the lead plaintiff stage, and discourage tenuous or barely plausible claims of partial disclosures.
According to the expert analysis of Kenneth Kotz, after excluding in-and-out sales before
December 15, 2008, Sampension did not suffer any losses and Skagen experienced a gain of
$1,115,392. See Kotz Decl. at ¶ 24 & Ex. 5. As such, they have no financial interest in the
outcome of the Action, let alone the largest.
C. Sampension and Skagen Suffer From a Conflict of Interest with Defendant PwC That Renders Them Inadequate to Serve as Lead Plaintiff
In order to meet the adequacy requirement under Rule 23, “there should be no conflict between the interests of the class and the named plaintiff nor should there be collusion among the
litigants.” Pirelli Armstrong Tire Corp. Retiree Med. Benefits Trust v. LaBranche & Co., 229
F.R.D. 395, 413 (S.D.N.Y. 2004) (Sweet, J.) (citation omitted). Sampension and Skagen both use
Defendant PricewaterhouseCoopers (“PwC”) as their public auditor. See Keller Decl., Exs. 5-6.
PwC has been Sampension’s auditor for at least four years, and Skagen’s auditor for at least five
years. Id. In this Action, there are allegations that PwC either knew of Satyam’s management’s
fraudulent accounting and permitted it or was grossly reckless in failing to detect it. See Hamblin
at ¶ 108. According to the allegations, “the fraud was of such a magnitude that basic testing procedures required by applicable auditing standards would have uncovered the accounting
manipulations.” Id. On January 25, 2009, Indian police arrested two partners of an Indian arm of
PwC on charges of criminal conspiracy and cheating in connection with the fraud investigation of
Satyam. See Jackie Range, Pricewaterhouse Partners Arrested in Satyam Probe, Wall St. J., Jan.
25, 2009 (Keller Decl. Ex. 7).
PwC itself therefore faces the distinct possibility of criminal liability for the fraud at
Satyam. Due to the long-standing relationship of Sampension and Skagen with PwC, the Class
faces the risk that Sampension and Skagen may not name PwC as a defendant in the consolidated
complaint if they are appointed lead plaintiff, or that even if they do name PwC as a defendant,
12 claims against PwC may not be pursued with the vigor of a lead plaintiff who does not employ
PwC, or even worse at some point Sampension or Skagen could withdraw. This conflict of
interest is best illustrated in In re HealthSouth Corp. Securities Litigation, No. 03-cv-1500 (N.D.
Ala. Nov. 5, 2004), where the lead plaintiff, Oracle, withdrew from the action because it retained
Ernst & Young as its auditor. See Mot. for Withdrawal of Oracle Partners, L.P. as Lead Pl., at 1
[Dkt. # 280] (Keller Decl. Ex. 8). According to Oracle, Ernst & Young “believes that there is an
independence issue and will not undertake to serve as Oracle’s auditor unless Oracle withdraws.”
Id. It would hardly be surprising if PwC also took a similar position with Sampension and
Skagen and made them choose between their long-time auditor and naming PwC as a defendant
in the consolidated complaint. The Court should therefore spare the Class from this inevitable
conflict of interest and reject Sampension and Skagen as inadequate, particularly where
Mineworkers’ Pension has clean losses and no conflicts of interest. 8
8 Sampension, based in Denmark, and Skagen, based in Norway, face another unique defense because they will likely be challenged by defendants on the grounds that courts in their home countries will not give res judicata effect to a judgment of this Court. Judge Stanton in Borochoff v. Glaxosmithkline PLC, 246 F.R.D. 201, 204-05 (S.D.N.Y. 2007), rejected a group of foreign investors as lead plaintiff because of the possibility that the investors’ home jurisdiction would not give res judicata effect to a U.S. judgment; see also In re Vivendi Universal, S.A. Sec. Litig., 242 F.R.D. 76, 105 (S.D.N.Y. 2007) (Holwell, J.) (excluding foreign shareholders from foreign countries because courts in those countries “w[ould] not give res judicata effect to judgments or settlements in a U.S. opt-out class action.”); In re Royal Ahold N.V. Sec. & ERISA Litig., 219 F.R.D. 343, 352 (D. Md. 2003). While the likelihood of success of defendants’ argument is not certain, at the lead plaintiff appointment stage “whether these defenses will be successful is of no matter. The fact that plaintiffs will be subject to such defenses renders their claims atypical of other class members.” Landry v. Price Waterhouse Chartered Accountants, 123 F.R.D. 474, 476 (S.D.N.Y. 1989) (Edelstein, J.). Counsel for Sampension and Skagen, however, should be well-aware of the concerns raised by the res judicata problems in Denmark, as such counsel made the same argument against a Danish lead plaintiff movant in the Saltzman v. Citigroup, Inc., 07-9901 (S.D.N.Y. Jan. 28, 2008). See The U.S. Public Fund Group’s Memo. of Law in Further Supp. of Its Motion for App’t as Lead Plaintiff and in Opp’n to All Competing Movants, at 14-15 [Dkt. # 34] (Keller Decl. Ex. 9). Furthermore, Skagen states in its certification that it has received an assignment of claims in order to satisfy the constitutional standing requirements recently articulated by the Second Circuit in W.R. Huff Asset Management Co. v. Deloitte & Touche LLP, 549 F.3d 100 (2d Cir. 2008). The alleged assignment, however, is not attached to the certification, nor does the certification state that the assignment confers to Skagen legal title to the claims in this Action. This is yet another infirmity that may render Skagen an inadequate class representative.
13 D. Purchasers of Satyam Common Stock on the Indian Stock Exchanges are Not Part of the Class Definition as Alleged
Although Satyam common shareholders such as Mississippi PERS may have valuable
claims against the Company, purchasers of Satyam common stock on the Indian Stock Exchanges
are not properly alleged to be part of this Action. All of the pending complaints assert claims on behalf of a class consisting of ADR purchasers. Accordingly, purchasers of common stock fall
outside of this class definition. It is black letter law that a lead plaintiff movant must be a
member of the class it seeks to represent. Mississippi PERS is not. This is not to say that
Mississippi PERS cannot seek to be appointed as a lead plaintiff of a separate class of common
stock holders. 9
E. Mississippi PERS’ Purchases of Satyam Common Stock on the Indian Stock Exchanges Subject It to a Unique Defense of Lack of Reliance
1. The Class Will Need to Rely on the Fraud-On-The-Market Theory of Reliance to Satisfy the Commonality and Predominance Requirements of Rule 23
If the Court is inclined to consider the application of Mississippi to serve as a lead plaintiff for both common stockholders and ADR purchasers, defendants would argue that
Mississippi PERS would be subject to a unique defense that trading on the Indian Stock
Exchanges is not efficient, and thus may be unable to rely upon the fraud on the market doctrine.
One of the “basic elements” of a securities fraud action under § 10(b) of the Exchange Act and
Rule 10b-5 promulgated thereunder is “reliance.” Dura, 544 U.S. 336. Although reliance is
typically demonstrated on an individual basis, the Supreme Court has noted that such a
requirement would effectively foreclose securities fraud class actions because individual
9 While GII Group will likely argue that the Faber and Sturgis complaints contain reference to purchasers of Satyam common stock, it is clear from the “Nature of the Action” sections in both of these complaints that they are brought on behalf of ADR purchasers. See Faber ¶ 1, Sturgis ¶ 1. Moreover, it appears that any reference to common stock in those complaints is likely accidental in light of the fact that the Faber Complaint alleges in ¶ 34: “Throughout the Class Period, Satyam Computer Services Ltd. common stock was actively traded on the NYSE (an open and efficient market) under the symbol ‘SAY.’” (emphasis added). To the contrary, Satyam’s common stock is traded on the Indian Stock Exchanges under the symbols “SCS IN” and “SCS IB” ; and it is only Satyam’s ADRs that are traded on the NYSE under the symbol “SAY.”
14 questions of reliance would inevitably overwhelm the common ones under Rule 23(b)(3). Basic,
485 U.S. at 242. To avoid this result, the Supreme Court in Basic recognized the fraud-on-the-
market theory, which obviates the plaintiff’s need to prove individualized reliance on a
defendant’s misstatement by permitting a rebuttable presumption that the plaintiff relied on the
“integrity of the market price,” which reflected that misstatement.
2. The Fraud-On-The-Market Theory is Premised on an Efficient Market for the Securities At Issue
Before an investor can be presumed to have relied upon the integrity of the market price,
however, the market must be “efficient.” See id. at 248 n.27. “Efficiency refers to the flow of
information in the relevant market and the effect of that information on the price of the stock.” In
re PolyMedica Corp. Sec. Litig., 432 F.3d 1, 7-8 (1st Cir. 2005). The First Circuit in PolyMedica
explained:
In an efficient market, the defendant’s misrepresentations are said to have been absorbed into, and are therefore reflected in, the stock price. Conversely, when a market lacks efficiency, there is no assurance that the market price was affected by the defendant’s alleged misstatement at all. Instead, the price may reflect information wholly unrelated to the misstatement.
Id. at 8.
3. A Semi-Strong Efficient Market is Required Before the Fraud-On-The-Market Theory is Applied
“According to the prevailing definition of market efficiency, an efficient market is one in
which market price fully reflects all publicly available information.” Id. at 10 (citing Eugene F.
Fama, Efficient Capital Mkts: A Review of Theory & Empirical Work, 25 J. Fin. 383 (1970)).
Numerous courts and commentators have noted that this prevailing definition of market
efficiency is consistent with the “semi-strong” form of the efficient market hypotheses, and that
the Supreme Court’s Basic decision implicitly adopted the semi-strong form of market efficiency.
See id. at 10 n.16; In re Res. Am. Sec. Litig. 202 F.R.D. 177, 189 (E.D. Pa. 2001) (stating that
15 “[t]he Basic court adopted the semi-strong form of market efficiency as a prerequisite for a fraud
on the market presumption”); Jonathan R. Macey & Geoffrey P. Miller, Good Finance, Bad
Economics: An Analysis of the Fraud-on-the-Market Theory, 42 Stan. L. Rev. 1059, 1077-78
(1990) (“It is clear that the Supreme Court implicitly applied the semi-strong form of the
[Efficient Capital Markets Hypothesis] in Basic.”).
Market efficiency is generally classified into three forms: weak, semi-strong and strong,
each of which makes a progressively stronger claim about the kind of information that is reflected
in stock price. See PolyMedica, 432 F.3d at 10 n.16. Under the weak form, “an efficient market
is one in which historical price data is reflected in the current price of the stock, such that an
ordinary investor cannot profit by trading stock based on the historical movements in stock price.” Id. (citing Macey & Miller, supra, at 1077-78). Under the semi-strong form, “an efficient
market is one in which all publicly available information is reflected in the market price of the
stock, such that an investor’s efforts to acquire and analyze public information (about the
company, the industry, or the economy, for instance) will not produce superior investment
results.” Id. Under the strong form, “an efficient market is one in which stock price reflects not just historical price data or all publicly available information, but all possible information-both public and private. Based on this form of an efficient market, not even an inside trader can
outperform other investors because all such information is reflected in market price.” Id.; see
also Teamsters Local 445 Freight Division Pension Fund v. Bombardier, Inc., No. 05-cv-1898,
2006 WL 2161887, at *6 (S.D.N.Y. Aug. 1, 2006) (Scheindlin, J.). Commentators have noted
that both weak-form and strong-form market efficiency are incompatible with the fraud-on-the-
market theory. PolyMedica, 432 F.3d at 10 n.16 (citing Macey & Miller, supra, at 1078-79). 10
10 Counsel for the GII Group may argue that the BSE is an efficient market based on the five widely-accepted market efficiency factors articulated in Cammer v. Bloom, 711 F. Supp. 1264 (D.N.J. 1989). Use of the Cammer factors, however, presupposes a semi-strong efficient market. See Teamsters Local 445, 2006 WL 2161887, at *6 (discussing efficient market hypothesis independently of Cammer factors); see also ASARCO LLC v. Americas Mining Corp., 396 B.R. 278, 343 (S.D. Tex. 2008) (citing cases applying Cammer factors where stock was traded on the semi- strong NYSE or Nasdaq).
16 4. Defendants Will Likely Argue That the Indian Stock Exchanges are Neither Semi-Strong Efficient Nor Weak Form Efficient Markets
Unfortunately, a significant body of scholarly literature posits that the Indian Stock
Exchanges do not meet the requirements for a semi-strong efficient market. Accordingly, defendants will inevitably argue that common stockholders purchasing on the Indian Stock
Exchanges will be unable invoke the fraud-on-the-market presumption, thereby failing to meet the commonality and predominance requirements of Rule 23. See, e.g., Basic, 485 U.S. at 242
(“Requiring proof of individualized reliance from each member of the proposed plaintiff class effectively would have prevented respondents from proceeding with a class action, since individual issues then would have overwhelmed the common ones.”).
Professors Rakesh Gupta of Central Queensland University (Australia) and Parikshit K.
Basu of Charles Sturt University (Australia) have researched the efficiency of the Indian Stock
Exchanges. See Rakesh Gupta & Parikshit K. Basu, Weak Form Efficiency In Indian Stock Mkts.,
6.3 Int’l Bus. & Econ. Res. J. 57 (Mar. 2007) (Keller Decl., Ex. 10). According to Professors
Gupta and Basu, the Indian Stock Exchanges do not meet even the weak form efficient market
1 industry-accepted threshold based on the random walk hypothesis. 1 See id. at 57, 61.
Professors Gupta and Basu also analyzed the stock exchanges in India for weak form efficiency using three different models that are widely accepted in literature for determining market efficiency: the Augmented Dickey-Fuller test (the “ADF Test”), the Phillip-Perron test
(the “PP Test”) and the Kwiatkowski, Phillips, Schmidt and Shinn test (the “KPSS Test”). See id. at 62. Under these three widely-accepted models, Professors Basu and Gupta opine: “We employ three different tests ADF, PP and the KPSS tests [sic] and find similar results. The results of these tests find that these markets are not weak form efficient.” Id.
11 If a securities market does not meet the criteria for a weak form efficient market, a fortiori it cannot meet the criteria for a semi-strong efficient market.
17 The conclusion of Professors Gupta and Basu that the Indian Stock Exchanges do not
even qualify as weak form efficient markets is supported by other academic literature. See
Anand Pandey, Efficiency of Indian Stock Mkt., Oct. 2003, at 2 (“The study carried out in this paper has presented the evidence of the inefficient form of the Indian Stock Market.”) (Keller
Decl., Ex. 11); Andrew C. Worthington & Helen Higgs, Evaluating Fin. Dev. in Emerging
Capital Mkts. With Efficiency Benchmarks, at 12 (“We may conclude that the Indian equity
market is not weak form efficient.”) (Keller Decl., Ex. 12); Sunil Poshakwale, Evidence of Weak
Form Efficiency & Day of the Week Effect in the Indian Stock Mkt., 10.3 Finance India 605, 615
(Sept. 1996) (“The results of runs test and serial correlation coefficients tests indicate non-random
nature of the series and, therefore, violation of weak form efficiency in the BSE.... The
implication of rejection of weak form efficiency for investors is that they cannot adopt a ‘fair
return for risk’ strategy, by holding a well diversified portfolio while investing in the Indian stock
market.”) (Keller Decl., Ex. 13).
Although Satyam’s ADRs are financial derivatives that derive indirect value from the
underlying asset – here, Satyam common shares listed in India – the price of these ADRs is also
influenced by other factors such as returns in the market where the ADR trades, i.e., the U.S.
market. See Rajesh Chakrabarti, An Empirical Study of Exchange-Traded ADRs from India, at 4
(Keller Decl., Ex. 14). “ADR returns appear to have unanticipated movers .... The ADRs enjoy
considerable premium over their underlying stocks, indicating effective market segmentation between the US and Indian markets.” Id. at 11. As a result of market segmentation, Satyam’s
ADRs can be viewed as trading in an efficient market – the NYSE – despite that the security from
which they derive is traded in an arguably inefficient market. 12
12 Other academic literature has opined that the Indian Stock Exchanges are weak form efficient, but that standard falls short of the semi-strong efficient requirement of Basic and its progeny. Cf. R. Vaidyanathan & Kanti Kumargali, Efficiency of the Indian Capital Mkt., 5.2 Indian J. of Fin. & Research 27, 39 (July 1994) (“We have tested the weak form of efficiency using three tests .... For all these periods, the runs test provides supportive evidence for the weak form of the efficient market hypothesis ....”) (Keller Decl., Ex. 15); Alok K. Mishra & M. Thomas Paul, Integration & Efficiency of Stock & Foreign Exch. Mkts. in India, at 27 (“Therefore, the impulse
18 5. Mississippi PERS May Be Subject to the Unique Defense That It Cannot Invoke the Fraud-On-the-Market Presumption of Reliance, and Would Therefore Be Inadequate and Atypical
The scholarly research referenced above finds that the Indian Stock Exchanges are neither
semi-strong efficient nor even weak form efficient. Thus, defendants will inevitably make a
strenuous challenge on class certification that common shareholders will not enjoy the benefit of
the fraud-on-the-market presumption. Without belaboring the point, Mineworkers’ Pension is
not advocating the position that the Indian Stock Exchanges are inefficient, but rather that
defendants will vigorously raise such a defense. The PSLRA expressly recognizes that where
such “unique defenses” exist, a lead plaintiff unburdened by such unique defenses should be
appointed. 15 U.S.C. § 78u-4(a)(3)(B)(iii)(II)(bb) (lead plaintiff presumption rebutted “unique
defenses that render such plaintiff incapable of adequately representing the class.”); see Cromer
Fin. Ltd. v. Berger, 205 F.R.D. 113, 123 (S.D.N.Y. 2001) (Cote, J.) (“When a defense that is
unique to a class representative threatens to dominate or even interfere with that plaintiff’s ability
to press the claims common to the class, then that threat must be analyzed with care.”). Should
Mississippi PERS be appointed Lead Plaintiff over a global class of purchasers of Satyam
securities on both the Indian Stock Exchanges and the NYSE, Mississippi PERS may have to
devote substantial resources to rebutting this unique defense, whereas Mineworkers’ Pension and
all other purchasers of Satyam ADRs on the NYSE would otherwise have no trouble invoking the
fraud-on-the-market presumption of reliance.
Moreover, even where the issue of a unique defense is a close call, the legitimate risk that
it’s appointment “might imperil certification of a class in this case” is enough to deny
Mississippi PERS’s motion for lead plaintiff, insofar as it seeks to represent the claims of ADR
response function also corroborates our conclusion that both the markets are efficient from the stand point [ sic] of the weak form of market efficiency.”) (Keller Decl., Ex. 16).
19 purchasers. 13 Newman v. Eagle Bldg. Techs., 209 F.R.D. 499, 504 (S.D. Fla. 2002) (emphasis
added). Judge Edelstein in Landry, 123 F.R.D. at 476, agreed that the likelihood of success of a
named plaintiff’s unique defense is an irrelevant consideration:
[WJhether these defenses will be successful is of no matter. The fact that plaintiffs will be subject to such defenses renders their claims atypical of other class members.... Each of these plaintiffs would be required to devote considerable time to rebut the claim that their purchases were based not on the integrity of the market, but on non-public information .... Clearly, this situation would prejudice absent class members.
Id. (emphasis added, footnote omitted); see also Bally Total Fitness, 2005 WL 627960, at *6
(“The PSLRA ... provides that we ask simply whether [a proposed lead plaintiff] is likely to be
‘subject to’ the unique defense ...; we do not have to determine that the defense is likely to
succeed.”); In re Surebeam Corp. Sec. Litig., No. 03-CV-1721, 2004 WL 5159061, at *7 (S.D.
Cal. Jan. 5, 2004) (“Without comment or consideration of [the defendant]’s guilt or innocence as
to the underlying charges, this court finds that there is at least a potential that [movant] Jamerica
will be subject to unique defenses and will not fairly and adequately protect the interests of the
class. Therefore, the court finds that Jamerica is incapable of serving as lead plaintiff.”) (emphasis
added); In re Safeguard Scientifics, 216 F.R.D. 577, 582 n.4 (E.D. Pa. 2003) (“Although we do
not resolve the issue of credibility at this stage of litigation, we do note its existence and its potential and likely adverse effect on the putative class’ interests.”) (emphasis added).
6. The Court Could Appoint Separate Representation for ADR and Common Stock Purchasers
Mississippi PERS is a well-respected institutional investor and has successfully
discharged its fiduciary duties as lead plaintiff in a number of high-profile securities class actions.
13 The detailed evidence of the lack of semi-strong and even weak form efficiency of the BSE and NSE certainly falls within the definition of the “proof” of unique defenses required by the PSLRA to rebut any presumption that Mississippi PERS is the “most adequate plaintiff” to represent Satyam ADR purchasers. 15 U.S.C. § 78u- 4(a)(3)(B)(iii)(II); Cf. Constance Sczesny Trust v. KPMG LLP, 223 F.R.D. 319, 324-25 (S.D.N.Y. 2004) (Stein, J.) (“[C]onclusory assertions of inadequacy are, however, insufficient to rebut the statutory presumption under the PSLRA without specific support in evidence of the existence of an actual or potential conflict of interest or a defense to which [the potential lead plaintiff] would be uniquely subject.”) (emphasis added).
20 And while Mineworkers’ Pension does not advocate defendants’ anticipated position on the issue
of the efficiency of the Indian Stock Exchanges, neither can it ignore it. The unique defense to
which Mississippi PERS is subject here – and to which all Satyam ADR purchasers are free of –
requires that a separate lead plaintiff be appointed to represent ADR purchasers. 14
Numerous courts in this District have appointed co-lead plaintiffs to represent divergent
interests when the circumstances so require. In Genovese v. Ashley, No. 08-cv-7831 (GEL)
(S.D.N.Y.), the recent securities action against Fannie Mae, Judge Lynch appointed co-lead plaintiffs and co-lead counsel to separately represent classes of common and preferred
shareholders because he found a potential conflict of interest existed between the two classes:
I am persuaded that in this case it may not be desirable to have a single lead plaintiff because there may be substantive conflicts of interest among those comprising the largest hypothetical class. The biggest source of conflict seems to me to be between the holders of common and preferred shares. I do not think it’s possible for a lead plaintiff that has primarily suffered losses on preferred stock to fairly represent the interest of common shareholders ....
Id., Hrg. Tr. 7:25-8:7, Feb. 13, 2009 (Keller Decl., Ex. 17). Under similar circumstances, Judge
Patterson in Zirkin v. Quanta Capital Holdings, Ltd., No. 07-cv-851 (RPP) (S.D.N.Y.), appointed
separate lead plaintiffs and lead counsel to represent common and preferred shareholders. Id.,
Hrg. Tr. 30:4-10; 31:1-15, May 7, 2007 (Keller Decl., Ex. 18). In Freudenberg v. E*Trade
Financial Corp., No. 07-cv-8538, 2008 WL 2876373, at *7 (S.D.N.Y. July 16, 2008), Judge
Sweet rejected the argument that a lead plaintiff movant was subject to a unique defense because
it purchased an allegedly atypical security, but nevertheless appointed a co-lead plaintiff who purchased common stock “on the possibility that conflicts do ultimately arise.” See also In re
Star Gas Sec. Litig., 04-cv-1766, 2005 WL 818617, at *5 (D. Conn. Apr. 8, 2005) (appointing
14 Mineworkers’ Pension advocated this position in its opening motion papers. See Mineworkers’ Pension Opening Br. at 1 n.2 [Dkt. #24] (“Mineworkers’ Pension is of the view that a class consisting of U.S. purchasers of Satyam securities on the BSE be represented separately due to serious legal hurdles not otherwise faced by ADR purchasers.”).
21 three previously-competing movants as lead plaintiff because court wanted an institutional investor and a purchaser in the early part of the class period as lead plaintiff); Cable & Wireless,
217 F.R.D. at 377-78 (appointing previously-competing foreign institutional investor and U.S. individual investor as co-lead plaintiffs due to concerns over subject matter jurisdiction).
Mineworkers’ Pension submits that the Court, should it choose to currently recognize a class of common stock purchasers, should appoint separate lead plaintiffs for purchasers of common stock on the Indian Stock Exchanges and Satyam ADR purchasers.
III. CONCLUSION
For the foregoing reasons and the reasons set forth in its opening memorandum,
Mineworkers’ Pension respectfully requests that its Motion for Consolidation, Appointment as
Lead Plaintiff, and Approval of Selection of Counsel be granted. In the alternative, should the
Court appoint Mississippi PERS as lead plaintiff and its counsel as lead counsel, Mineworkers’
Pension respectfully requests that the Court appoint it as co-lead plaintiff and its counsel as co- lead counsel to adequately protect the interests of Satyam’s ADR purchasers.
Dated: March 26, 2009 Respectfully submitted,
LABATON SUCHAROW LLP
By: /s/ Christopher J. Keller
Christopher J. Keller (CK-2347) Eric J. Belfi (EB-8895) Alan I. Ellman (AE-7347) Stefanie J. Sundel (SS-8168) 140 Broadway New York, New York 10005 Telephone: (212) 907-0700 Facsimile: (212) 818-0477
Attorneys for Mineworkers’ Pension Scheme and Proposed Lead Counsel for the Class
22 Exhibit B Part 1 Christopher J. Keller (CK-2347) Eric J. Belfi (EB-8895) Alan I. Ellman (AE-7347) Stefanie J Sundel (55-8168) LABATON SUCHAROW LLP 140 Broadway New York, New York 10005 Telephone: (212) 907-0700 , Facsimile: (212) 818-0477
Attorneys for Mineworkers' Pension Scheme and Proposed Lead Counsel for the Class
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
AEKTA BEN PATEL, On Behalf of Herself And Electronically Filed All Others Similarly Situated, Plaintiff, Civil Action No. 1:09-cv-00093-BSJ-DFE vs. Hon. Barbara S. Jones SATYAM COMPUTER SERVICES LTD., Mag. Judge Douglas F. Eaton B. RAMALINGA RAJU, and B. RAMA RAJU, I (ECF Case) Defendants.
(Additional Captions on the Following Pages)
DECLARATION OF CHRISTOPHER J. ICELLER IN FURTHER SUPPORT OF THE MOTION OF MINEWORKERS' PENSION SCHEME FOR CONSOLIDATION, APPOINTMENT AS LEAD PLAINTIFF, AND APPROVAL OF SELECTION OF LEAD COUNSEL, AND IN OPPOSITION TO THE COMPETING MOTIONS 1 HOSSEIN MOMENZADEH, On Behalf Of Himself I . . 1 Electronically Filed And All Others Similarly Situated, Plaintiff, 1 Civil Action No. 1:09-cv-00161-CM vs. 1 Hon. Colleen McMahon SATYAM COMPUTER SERVICES LTD., B. RAMALINGA RAJU, and B. RAMA RAJU, (ECF Case) Defendants.
CYNTHIA FREEMAN, Electronically Filed Plaintiff, Civil Action No. 1:09-cv-00330-BSJ vs. 1 SATYAM COMPUTER SERVICES LTD., 1 Hon. Barbara S. Jones B. RAMALINGA RAJU, B. RAMA RAJU, SRINIVAS VADLAMANI, and JOHN DOES 1-5, (ECF Case) Defendants.
NAVEEN CHANDER JEPU, On Behalf Of Himself Electronically Filed And All Others Similarly Situated, Plaintiff, I Civil Action No. 1:09-cv-00337-BSJ vs. Hon. Barbara S. Jones SATYAM COMPUTER SERVICES LTD., B. RAMALINGA RAJU, B. RAMA RAJU, and (ECF Case) SRINIVAS VADLAMANI, 1 Defendants.
BERT H. STURGIS, II, On Behalf Of Himself And Electronically Filed All Others Similarly Situated, 1 Plaintiff, 1 Civil Action No. 1:09-cv-00361-BSJ vs. 1 I Hon. Barbara S. Jones SATYAM COMPUTER SERVICES LTD., 1 B. RAMALINGA RAJU, and B. RAMA RAJU, (ECF Case) Defendants. 1 LARRY R. PENNINGTON, Individually and On I Behalf of All Others Similarly Situated, I Electronically Filed Plaintiff, Civil Action No. 1:09-cv-00386-BSJ vs. I Hon. Barbara S. Jones SATYAM COMPUTER SERVICES LTD., B. RAMALINGA RAJU, B. RAMA RAJU, and I (ECF Case) VADLAMANI SRINIVAS, Defendants. JAMES HAMBLIN, On Behalf Of Himself And All I Others Similarly Situated, ! Electronically Filed Plaintiff, I Civil Action No. 1:09-cv-00489-VM vs. I Hon. Victor Marrero SATYAM COMPUTER SERVICES LTD., B. RAMALINGA RAJU, B. RAMA RAJU, ' (ECF Case) SRINIVAS VADLAMANI, PRICEWATERHOUSE COOPERS INTERNATIONAL LIMITED, PRICEWATERHOUSE COOPERS PVT LTD , and • PRICE WATERHOUSE, Defendants. • HILLEL RAYMON, Individually and On Behalf of 1 All Others Similarly Situated, i Electronically Filed Plaintiff, I Civil Action No. 1:09-cv-00512-BSJ vs. I Hon. Barbara S. Jones SATYAM COMPUTER SERVICES LTD., B. RAMALINGA RAJU, and B. RAMA RAJU JR., I (ECF Case) and VADLAMANI SRINIVAS, Defendants. BRIAN FABER, Individually and On Behalf of All Others Similarly Situated, Electronically Filed Plaintiff, Civil Action No. 1:09-cv-00569-BSJ vs. • I Hon. Barbara S. Jones SATYAM COMPUTER SERVICES LTD.,
• B. RAMALINGA RAJU, B. RAMA RAJU, andI (ECF Case) • SRINIVAS VADLAMANI, Defendants. WILLIAM M. HEBERT, JANET K. HEBERT and 1 THE WILLIAM M. HEBERT IRA, On Behalf of Electronically Filed Themselves and All Others Similarly Situated, Civil Action No. 1:09-cv-01124-BSJ Plaintiff, vs. Hon. Barbara S. Jones
SATYAM COMPUTER SERVICES LTD., I (ECF Case) B. FtAMALINGA RAJU, B. RAMA RAJU, PRICEWATERHOUSE COOPERS INTERNATIONAL LIMITED, PRICEWATERHOUSE COOPERS PVT LTD., and PRICE WATERHOUSE, Defendants.
ASHIT M. MEHTA, On Behalf of Himself And All 1 Others Similarly Situated, Electronically Filed Plaintiff, 1 Civil Action No. 1:09-cv-01789-BSJ vs. Hon. Barbara S. Jones SATYAM COMPUTER SERVICES LTD., B. RAMALINGA RAJU, and B. RAMA FtAJU, (ECF Case) Defendants. Pursuant to 28 U.S.C. § 1746, I, Christopher J. Keller , declare under penalty of perjury that the following is true and correct:
1. I am a partner of the law firm of Labaton Sucharow LLP ("Labaton Sucharow").
Labaton Sucharow is counsel for the Mineworkers' Pension Scheme ("Mineworkers' Pension") and proposed lead counsel for the Class. I am a member in good standing of the Bar of the State of New York.
2. I submit this declaration in further support of the motion of Mineworkers' Pension for consolidation, appointment as lead plaintiff and for approval of its selection of lead counsel.
3. Attached as exhibits hereto, are true and accurate copies of the following documents:
Exhibit 1: Cole v. Health Mgmt Assocs., Inc., No. 07-cv-484-FtM-34SPC, slip op. (M.D. Fla. May 14, 2008)
Exhibit 2: Brooks v. Interlink Elecs., Inc., No. 05cv-8133 PA (SHx), slip op. (C.D. Cal. July 14, 2006)
Exhibit 3: Complaint, Vettiyil v. Satyam Computer Servs, Ltd., 5:09-cv-00117-RS (N.D. Cal. filed Jan. 16, 2009)
Exhibit 4: Debasmita Ghosh, Satyam to axe 4,500 employees, Times of India, Sept. 15, 2008
Exhibit 5: Excerpts from Sampension KP Livsforsilcring A/S Annual Reports for years 2007 and 2005
Exhibit 6: Excerpts from SKAGEN A/S Annual Reports for years 2008 and 2004
Exhibit 7: Jackie Range, Pricewaterhouse Partners Arrested in Satyam Probe, Wall St. J., Jan. 25, 2009
Exhibit 8: Mot. for Withdrawal of Oracle Partners, L.P. as Lead Pl., In re HealthSouth Corp. Sec. Ling., No. 03-cv-1500 (N.D. Ala. Nov. 5, 2004)
Exhibit 9: The U.S. Public Fund Group's Memo. of Law in Further Supp. of Its Motion for App't as Lead Plaintiff and in Opp'n to All Competing Movants, Saltzman v. Citigroup, Inc., 07-9901 (S.D.N.Y. filed Jan. 28, 2008) Exhibit 10: Rakesh Gupta 8c Parikshit K. Basu, Weak Form Efficiency In Indian Stock Mkts., 6.3 Int'l Bus. & Econ. Res. J. 57 (Mar. 2007)
Exhibit 11: Anand Pandey, Efficiency of Indian Stock Mkt., Oct. 2003
Exhibit 12: Andrew C. Worthington & Helen Higgs, Evaluating Fin. Dev. in Emerging Capital Mkts. With Efficiency Benchmarks
Exhibit 13: Sunil Poshakwale, Evidence of Weak Form Efficiency & Day of the Week Effect in the Indian Stock Mkt., 10.3 Finance India 605 (Sept. 1996)
Exhibit 14: Rajesh Chakrabarti, An Empirical Study of Exch.-Traded ADRs from India
Exhibit 15: R. Vaidyanathan 8c Kanti Kumargali, Efficiency of the Indian Capital Mkt., 5.2 Indian J of Fin. & Research 35 (July 1994)
Exhibit 16: Alok K. Mishra & M. Thomas Paul, Integration & Efficiency of Stock & Foreign Exch. Mkts. in India
Exhibit 17: Transcript of Hearing, Genovese v. Ashley, No. 08-cv-7831 (GEL) (S.D.N.Y. Feb. 13, 2009)
Exhibit 18: Transcript of Hearing, Zirkin v. Quanta Capital Holdings, Ltd., No. 07-CIV- 851 (S.D.N.Y. May 7, 2007)
I declare under penalty of perjury that the foregoing is true and corre t.
Executed on March 26, 2009. .varrer J. Keller
•
-2- Exhibit 1 UNITED STATES DISTRICT COURT MIDDLE DISTRICT OF FLORIDA FORT MYERS DIVISION
FLORENCE COLE, on behalf of herself and all others similarly situated, Plaintiff, vs. Case No. 2:07-cv-484-FtM-34SPC Consolidated Cases HEALTH MANAGEMENT ASSOCIATES, INC., WILLIAM J. SCHOEN, JOSEPH V. VUMBACCO and ROBERT E. FARNHAM, Defendants.
ORDER
THIS CAUSE is before the Court on (1) the City of Ann Arbor Employees' Retirement
System's ("Ann Arbor") Motion for Consolidation, Appointment as Lead Plaintiff and for Approval of Selection of Lead Counsel (Dkt. No. 10; Motion 1) and (2) Motion of Gerardo Obando ("Obando") for Consolidation, Appointment as Lead Plaintiff Pursuant to § 21D(a)(3)(B) of the Securities Exchange Act of 1934 and Approval of Selection of Lead and Liaison Counsel and Incorporated Memorandum of Law (Dkt. No. 15; Motion 2) (collectively "Motions"), both of which were filed on October 1, 2007. 1 Ann Arbor and
Gopal G. Gosh and Florence Cole, Keith Rehder, Charlet Burcin, Gerald Gammell and Joseph Lorio also filed motions seeking appointment as lead plaintiff(s). See Motion of Florence Cole, Keith Rehder, Charlet Burcin, Gerald Gammell and Joseph Lorio to Consolidate All Related Cases, to be Appointed Lead Plaintiffs, for Approval of their Selection of Lead Counsel, and Incorporated Memorandum of Law (Dkt. No. 13), filed October 1, 2007, and Gopal G. Ghosh's Motion for Consolidation, for Appointment as Lead Plaintiff and Approval of Selection of Lead Counsel and Liaison Counsel and Memorandum of Law in Support Thereof (Dkt. No. 14), filed October 1, 2007. However, these movants later withdrew their motions. See Notice of Withdrawal of Gopal G. Gosh's Motion for Consolidation, for Appointment as Lead Plaintiff and Approval of Selection of Lead Counsel and Liaison Counsel and Memorandum of Law in Support Thereof (Dkt. No. 30), filed on November 8, 2007; Response to Order to Show Cause and Notice of Withdrawal of Florence Cole, Keith Rehder, Charlet Obando (collectively "Movants") each filed a memorandum in opposition to the other's
Motion. See Memorandum of Law in Further Support of City of Ann Arbor Employees'
Retirement System's Motion for Consolidation, Appointment as Lead Plaintiff and for
Approval of Selection of Lead Counsel and in Opposition to the Competing Motions (Dkt. No.
21; Response 1), filed on October 19, 2007; Memorandum of Law in Further Support of the
Motion of Gerardo Obando and in Opposition to All Other Motions for Consolidation,
Appointment as Lead Plaintiff and Approval of Selection of Lead Counsel (Dkt. No. 22;
Response 2) (collectively "Responses),filed on October 19, 2007. On October 24, 2007, the
Court entered an Order (Dkt. No. 23) granting the Motions to the extent that the Movants sought the consolidation of Case Nos. 2:07-cv-484-34SPC, 2:07-cv-509-34DNF, and 2:07- cv-629-34SPC and taking the Motions under advisement to the extent that they sought the appointment of a lead plaintiff and the approval of counsel. On November 13, 2007, the
Court entered an Order (Dkt. No. 31) permitting Movants to file a limited reply. The Movants filed replies to the Responses on November 20, 2007. See Reply Memorandum in Further
Support of the Motion of Gerardo Obando for Appointment as Lead Plaintiff and Approval of Selection of Lead Counsel (Dkt. No. 32; Reply 1); Reply Memorandum of Law in Further
Support of the Motion of City of Ann Arbor Employees' Retirement System for Appointment as Lead Plaintiff and for Approval of Selection of Lead Counsel and in Response to the
Opposition of the Competing Movant (Dkt. No. 33; Reply 2). Accordingly, the Motions are ripe for review.
Burcin, Gerald Gammell and Joseph Lorio's Motion for Consolidation, for Appointment as Lead Plaintiff and Selection of Lead Counsel and Liaison Counsel and Memorandum of Law in Support Thereof (Dkt. No. 43), filed January 10, 2008.
2 1. Background
The consolidated actions seek class wide relief on behalf of those individuals and entities who purchased the common stock of Defendant Health Management Associates,
Inc. ("HMA") between January 17, 2007 and July 30, 2007. See generally Case No. 2:07-cv-
484-34SPC, Complaint (Dkt. No. 1; Complaint 1), filed on August 2, 2007; Case No. 2:07-cv-
509-34DNF, Class Action Complaint (Dkt. No. 1; Complaint 2), filed on August 10, 2007; and
Case No. 2:07-cv-629-34SPC, Class Action Complaint (Dkt. No. 1; Complaint 3), filed on
September 27, 2007. Defendant HMA "owns and operates general acute care hospitals in non-urban communities located throughout the United States." See Complaint 1 at 15.
Plaintiffs allege that Defendant HMA and certain of its officers and directors violated Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Securities and Exchange
Commission Rule 10b-5 by disseminating false and misleading information to the investing public. See Complaint 1 at 23-24; Complaint 2 at 23-28; Complaint 3 at 26-28. Specifically,
Plaintiffs assert that Defendants failed to disclose the following: "(1) that the Company was experiencing a deterioration in the collectibility of its accounts receivable from uninsured patients; (2) that the Company was significantly under-reserving for bad debt expense; (3) as such, the Company would be forced to dramatically increase its provision for bad debt expense going forward, which would severely impact the Company's net earnings in subsequent quarters; (4) that as a result of the above, the Company's financial statements were materially misleading; (5) that the Company's materially misleading financial statements enabled the Company to effectuate a major recapitalization which was otherwise unattainable; (6) that the Company lacked adequate internal and financial controls; and (7)
3 that the Company's statements about its financial well-being, earnings, and guidance were lacking in a reasonable basis when made." Complaint 2 at 5. Plaintiffs further state that, on July 31, 2007, HMA issued a press statement revealing that it had experienced a deterioration in the collectibility of its accounts receivable from uninsured patients throughout the Class Period and announcing that it had taken a $39.0 million charge to reflect the recent decline in the collectibility of its accounts receivable from uninsured patients. See Complaint
1 at 7; Complaint 2 at 3; Complaint 3 at 33. Upon the release of this news, the price of HMA's stock declined approximately 25 percent. See Complaint 1 at 8; Complaint 2 at
4; Complaint 3 at 34.
Discussion
A. Appointment as Lead Plaintiff
In the Motions, Ann Arbor and Gerardo Obando each seek appointment as lead plaintiff in this action pursuant to Section 21 D(a)(3)(B) of the Securities Exchange Act of
1934. See Motion 1 at 3; Motion 2 at 3. Both Movants claim that they have the largest financial interest in the consolidated actions. See Memorandum in Support of the Motion of
City of Ann Arbor Employees' Retirement System for Consolidation, Appointment as Lead
Plaintiff and for Approval of Selection of Lead Counsel (Dkt. No. 11; Memorandum) at 8-9;
Motion 2 at 9. In addition, both Movants maintain that their claims are typical of those of other class members and that each will adequately represent the class. See Memorandum at 9-11; Motion 2 at 10-12.
A motion for appointment of a lead plaintiff in a class action suit based on securities fraud is governed by the Securities Exchange Act of 1934, § 21 D(a), as amended by the
4 Private Securities Litigation Reform Act of 1995 (PSLRA), 15 U.S.C. § 78u-4a, and Rule 23 of the Federal Rules of Civil Procedure. See Piven v. Sykes Enterprises Inc., 137
F.Supp.2d 1295, 1301 (M.D. Fla. 2000); Edward J. Goodman Life Income Trust v. Jabil
Circuit, Inc., No. 8:06-CV-1716-T-23EAJ, 2007 WL 170556, at *2 (M. D. Fla. Jan. 18, 2007).
Under the PSLRA, the plaintiff or plaintiffs must, within 20 days after the filing of a class action complaint, publish a notice advising members of the class of their right to file a motion to be appointed as lead plaintiff in the action no later than 60 days after the date on which the notice is published. See 15 U.S.C. § 78u-4(a)(3)(A)(i). Within 90 days after the publication of the notice, the district court "shall consider any motion made by a purported class member in response to the notice . . . and shall appoint as lead plaintiff the member or members of the purported plaintiff class that the court determines to be most capable of adequately representing the interests of class members (hereafter . . . referred to as the
'most adequate plaintiff') ...1515 U.S.C. § 78-u4(a)(3)(B)(i).
Under the PSLRA, the district court is required to adopt a rebuttable presumption that the "most adequate plaintiff' is the person or group of persons that "(aa) has either filed the complaint or made a motion in response to a notice . . .; (bb) in the determination of the court, has the largest financial interest in the relief sought by the class; and (cc) otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure." 15 U.S.C. §
78u-4(a)(3)(B)(iii)(I); see also Edward J. Goodman Life Income Trust, 2007 WL 170556, at
*2; In re Catalina Marketing Corp. Sec. Litig., 225 F.R.D. 684, 686 (M.D. Fla. 2003); Newman v. Eagle Bldg. Tech., 209 F.R.D. 499, 502 (S.D. Fla. 2002). In order to satisfy the requirements of Rule 23 of the Federal Rules of Civil Procedure, the proposed lead plaintiff
5 must establish that: (1) his or her claims and defenses are typical of the claims of the class; and (2) he or she will fairly and adequately protect the interests of the class. See Fischler v. AmSouth Bancorporation, No. 96-1567-Civ-T-17A, 1997 WL 118429, at *2 (M.D. Fla. Feb.
6, 1997) (noting that Rule 23 analysis in regards to lead plaintiff determination focuses on typicality and adequacy); see also Fed.R.Civ.P. 23(a); Piven, 137 F.Supp.2d at 1306. Once it has been determined that a proposed lead plaintiff meets the criteria resulting in a presumption of adequacy under the PSLRA, a member of the purported plaintiff class may rebut the presumption by establishing that the presumptive lead plaintiff "will not fairly and adequately protect the interests of the class" or "is subject to unique defenses that render such plaintiff incapable of adequately representing the class." 15 U.S.C. § 78u-
4(a)(3)(B)(iii)(I I); see also Piven, 137 F.Supp.2d at 1301; Edward J. Goodman Life Income
Trust, 2007 WL 170556, at *2; In re Catalina Mktg. Corp. Sec. Litig., 225 F.R.D. at 686;
Newman, 209 F.R.D. at 502.
(1) Notice and Filing Requirements Under the PSLRA
In the instant case, Plaintiff Cole in Case Number 2:07-cv-484-FtM-34SPC filed the initial class action complaint against Defendants on August 2, 2007. See generally
Complaint 1. Plaintiffs counsel published a notice in PR Newswire on that same date. See
Declaration ofJulie Prag Vianale in Support of Motion of Gerardo Obando for Consolidation,
Appointment as Lead Plaintiff Pursuant to § 21 D(a)(3)(B) of the Securities Exchange Act of
1934 and Approval of Selection of Lead Counsel (Dkt. No. 16; Obando Declaration) at Exh.
A. In the notice, Plaintiff's counsel advised members of the purported class of the instant action and of their ability to file a motion with this Court seeking appointment as lead plaintiff
6 no later than sixty days from the date of the notice. See Declaration, Exh. A; see also 15
U.S.C. § 78u-4(a)(3)(A)(i). As noted above, Movants filed the instant Motions on October
1, 2007 in response to the notice. Thus, the Motions are timely. See 15 U.S.C. § 78u-
4(a)(3)(A)(i).
(2) Largest Financial Interest
The Court is presented with two competing Motions seeking appointment as lead plaintiff. Ann Arbor contends that, with sustained losses of $36,250.11, it has the largest known financial interest in the relief being sought. See Memorandum at 8-9. However,
Obando asserts that he has suffered estimated losses of $26,640.00 and "has not received notice of any other applicant or applicant group that has sustained greater financial losses in connection with the purchase and/or sale of [HMA's] publicly traded securities. See
Motion 2 at 9.
In the Responses, each Movant disputes the other's claim regarding who has the largest financial interest in the relief being sought by the class. See generally Responses.
Ann Arbor notes that its financial interest of $36,250 is greater than the amount claimed by
Obando. See Response 1 at 4, 6-8. In addition, Ann Arbor asserts that Obando overstated his financial interest in this action by failing to exclude a $10 per share special dividend that he received on March 2, 2007, which ultimately increased the amount of money he obtained for his shares of HMA stock. See id. at 4, 7. Obando maintains that Ann Arbor overstated its loss by $10,506 by including in-and-out transactions or transactions that took place during the class period but before Defendants' misconduct was disclosed to the public. See
7 Response 2 at 4, 6-9. Thus, Obando asserts that Ann Arbor actually sustained a loss of
$25,744 which is $896 less than the $26,640 loss he incurred. See id. at 4•2
In its reply, Ann Arbor argues that the Court should not reduce its financial interest by excluding transactions that occurred during the class period because, at this time, it is premature to determine which declines in HMA's stock are attributable to Defendants' fraud.
See Reply 2 at 3. Moreover, Ann Arbor contends that, even if the Court were to find that it only sustained losses in the amount of $25,744, its financial interest in this action would still exceed Obando's actual financial interest of $6,638.60. See Reply 2 at 2. In his reply,
Obando notes that the Ann Arbor failed to provide any legal authority in support of its argument that his estimated loss figure should be reduced to offset the dividend payments he received. See Reply 1 at 6-7.
Notably, the PS LRA does not provide a procedure for determining which plaintiff has the largest financial interest in the litigation. See Koos v. NVE Corp., No. Civ. 06-
574(MJ D/JJG), Civ. 06-982 (MJD/JJG), Civ. 06-997 (MJD/JJG), 2006 WL 2035508, at *3 (D.
Minn. July 19, 2006); Ruland v. InfoSonics Corp., No. 06CV1231 BTMVVMC, 06CV1233
2 Obando also maintains that the PSLRA certification provided by Ann Arbor is defective because it fails to identify a third action, namely City of Ann Arbor Employees' Retirement System v. Cross Country Healthcare, Inc. Case No. 04-cv-80728 (S.D. Fla.), in which Ann Arbor moved to be appointed as lead plaintiff within the preceding three-year period. See Response 2 at 5. The PSLRA provides that a lead plaintiff movant must file a certification identifying any other action "filed during the 3-year period preceding the date on which the certification is signed" in which the lead plaintiff movant sought to serve as a representative party on behalf of a class. 15 U.S.C.§78u-4(a)(2)(A)(v). Ann Arbor's certification was signed on September 27, 2007. See Declaration of David J. George in Support of the Motion of City of Ann Arbor Employees' Retirement System for Consolidation, Appointment as Lead Plaintiff and for Approval of Selection of Lead Counsel (Dkt. No. 12; Ann Arbor Declaration) at Exh. C. A review of the docket from City of Ann Arbor Employees' Retirement System v. Cross Country Healthcare, Inc. Case No. 04-cv-80728, reveals that this action was filed on August 5, 2004. See Reply 2 at Exh. B. Accordingly, Ann Arbor was not required under the PSLRA to identify this action in its certification because it was filed more than three years before the date on which Ann Arbor's certification was signed.
8 BTMWMC, 06CV1309 BTMVVMC, 06CV1331 BTMWMC, 06CV1378 BTMVVMC, 06CV1435
BTMWMC, at *4 (S.D. Cal. Nov. 7, 2006). However, many courts consider the following factors in reaching this determination: "(1) the number of shares purchased during the class period; (2) the net number of shares purchased during the class period (i.e., shares purchased during and retained at the end of the class period); (3) the total net funds expended during the class period; and (4) the approximate loss suffered during the class period." In re Comverse Tech., Inc. Sec. Litig., No. 06-CV-1825 (NGG) (RER), 2007 WL
680779, at *3 (E.D. N.Y. Mar. 2, 2007). The Court will discuss each of these factors in turn.
During the Class Period, Ann Arbor purchased 36,120 shares of HMA stock, in comparison with Obando's purchase of 2,000 shares. See Ann Arbor Declaration at Exh.
B; Obando Declaration at Exh. B. Ann Arbor also retained a greater number of net shares of HMA stock during the Class Period, specifically,12,443 shares versus Obando's 2,000 shares. See Ann Arbor Declaration at Exh. B, Exh. C; Obando Declaration at Exh. B.
Moreover, Ann Arbor expended more net funds than Obando. Indeed, Ann Arbor expended
$147,940.103 in total net funds during the Class Period, while Obando expended $40,800.00 in total net funds. See Ann Arbor Declaration at Exh. B, C; Obando Declaration at Exh. B.
Thus, the first three factors weigh in favor of Ann Arbor being appointed as lead plaintiff in this action.
With respect to the fourth factor or the approximate loss suffered by Movants during the Class Period, Ann Arbor claims a total loss of $36,250, and Obando claims a total loss
3 The Court calculated a different figure than that determined by Ann Arbor. See Response 1 at 8. However, this difference was mostly caused by a difference in rounding.
9 of $26,640. See Memorandum at 4; Motion 2 at 9. However, each Movant asserts that the other has overstated his or its loss. While Ann Arbor maintains that Obando's claimed loss should be reduced to reflect his receipt of the $10 per share dividend, see Response
1 at 4, 7, Obando contends that Ann Arbor's in-and-out transactions should not be taken into consideration in determining its loss, see Response 2 at 4,6-9. Thus, the Court must determine whether to include the losses Ann Arbor realized on shares that it sold during the
Class Period but before the July 31, 2007 press statement, as well as whether to reduce
Obando's claimed loss to reflect his receipt of the $10 per share special dividend.
As a preliminary matter, the Court finds that Obando's claimed loss should not be reduced on account of his receipt of a $10 per share dividend on March 2, 2007. As noted by Obando, see Reply 1 at 6-7, Ann Arbor has not provided any legal support for its argument that Obando's estimated loss figure should be reduced to offset the dividend payments he received, see generally Response 1 at 7, Reply 2 at 2-3. Moreover, the Court has not found any case law addressing this issue. In light of the foregoing, the Court finds that Obando suffered an estimated loss of $26,640. See Obando Declaration at Exh. C.
The Court next addresses Obando's argument that, in determining the loss suffered by Ann Arbor, the Court should not include transactions that took place during the class period but before Defendants' alleged misconduct was disclosed to the public. Obando relies on the United States Supreme Court's decision in Dura Pharmaceuticals Inc. v.
Broudo, 544 U.S. 336 (2005), in arguing that Ann Arbor did not suffer any loss as a result of Defendants' fraud by selling these shares before HMA's issuance of the July 31, 2007 press statement. See Response 2 at 7-9.
10 In Dura, the Supreme Court held that a plaintiff in a securities fraud action cannot establish loss causation by merely alleging that, on the date he or she purchased shares of a company's stock, the price of the stock was artificially inflated because of a defendant's misrepresentation. See Dura, 544 U.S. at 342-343. Instead, the plaintiff must assert that the price of the company's stock declined after the defendant's misconduct was disclosed to the public. See id. at 344-45.
In determining which potential lead plaintiff suffered the greatest loss on account of a defendant's misrepresentation, several courts have declined to include any losses that were incurred by the movants before the defendant's misconduct was disclosed to the public.
See Kops, 2006 WL 2035508, at *5; In re Comverse Tech. Inc. Sec. Litig., 2007 WL
680779, at *4; Ruland, 2006 WL 3746716, at *5. In so ruling, these courts concluded that, under Dura, these losses could not have been proximately caused by the misconduct at issue because they occurred prior to the truth being revealed which decreased the price of the stock. See Kops, 2006 WL 2035508, at *5; In re Comverse Tech., Inc. Sec. Litig., 2007
WL 680779, at *4; Ruland, 2006 WL 3746716, at *5. The Court agrees that, for the purpose of resolving the instant Motions, under Dura, it should not consider the losses suffered by
Ann Arbor prior to HMA's issuance of the July 31, 2007 press statement which revealed that it had experienced a deterioration in the collectibility of its accounts receivable from uninsured patients throughout the Class Period.4
4 As noted above, Ann Arbor argues that it is premature for the Court to determine at this stage of the litigation which declines in Health Management's stock are attributable to fraud. See Reply 2 at 3. However, as recognized by the United States District Court for the Eastern District of New York in hi re Comverse Technology, Inc. Securities Litigation many courts have either dismissed cases or decided motions at the pleading stage on loss causation grounds. See d at *5 (collecting cases).
11 Upon review of the documentation submitted by Ann Arbor in support of its motion, the Court notes that Ann Arbor sold 23,500 shares on May 24, 2007, and 177 shares on
June 22,2007, for a total of 23,677 shares of HMA stock during the Class Period. See Ann
Arbor Declaration at Exh. B. Ann Arbor indicates that it received $245,810.00 from its sale of the 23,500 shares and $2,000.45 from its sale of the 177 shares, for a total sales proceeds of $247,810.45. See id. at Exh. B. In determining Ann Arbor's cost basis in these shares, Obando matched the 23,677 shares with 23,677 of the 25,800 shares that Ann Arbor purchased on May 18, 2007 at a price of $10.91 per share, and Ann Arbor has not challenged this calculation. See Response 2 at 6; see generally Reply 2. Thus, the Court will multiply the 23,677 shares by the price per share of $10.91 to obtain Ann Arbor's aggregate cost of $258,316.07 in these shares. By subtracting this amount from the
$247,810.45 in sales proceeds, the Court determines that Ann Arbor suffered a loss of
$10,505.62 in its sale of the 23,677 shares of HMA stock. Ann Arbor's claimed total loss of
$36,250.11 is then reduced by this amount to obtain a new loss amount of $25,744.49.
Based on the foregoing, the Court finds that, with a total loss of $26,640, Obando suffered the greatest approximate loss during the Class Period. Thus, the fourth factor weighs in favor of Obando being appointed as lead plaintiff in this action.
The Court recognizes that some courts have found that the amount of financial loss is the most important of the above factors in determining which lead plaintiff movant has the greatest financial interest in an action. See Weiss v. Friedman, No. 05-CV-04617(RJH), 05-
CV-04706(RJH), 05-CV-04771 (RJH), 05-CV-04795(RJH), 05-CV-04818 (RJH), 05-CV-
04824(RJH), 05-CV-04851(RJH), 05-CV-04877(RJH), 2006 WL 197036,at *3 (S.D. N.Y. Jan.
12 25, 2006) (collecting cases). However, another court has concluded that, when in-and-out transactions are ignored, the number of net shares purchased is the most significant factor.
See Ruland, 2006 WL 3746716, at *6. As noted above, Ann Arbor purchased 12,443 net shares of HMA stock during the Class Period, while Obando only purchased 2,000 net shares. Indeed, Ann Arbor purchased the greatest number of shares, as well as net shares, during the class period and expended the most total net funds during the Class Period.
Although Obando suffered the greatest approximate loss following the public disclosure of the misconduct at issue, the difference in the amount of loss suffered by Obando and that suffered by Ann Arbor is merely $895.51. The differences between Ann Arbor and Obando in the number of shares purchased during the Class Period, the net number of shares obtained during the Class Period, and the total net funds expended during the Class Period are much greater. Upon consideration of all of the relevant factors, the Court determines that Ann Arbor has the largest financial interest in the instant litigation and is therefore presumptively the most adequate plaintiff in the instant action. See 15 U.S.C. § 78u-
4(a)(3)(B)(iii)(I).
(3) Rule 23 Requirements
Relying on In re Bally Total Fitness Securities Litigation, Nos. 04C3530, 04C3634,
04C3713, 04C3783, 04C3844, 04C3864, 04C3936, 04C4642, 04C4697, 2005 WL 627960, at *5-6 (N.D. III. Mar. 15, 2005), Obando argues that the Ann Arbor is unable to satisfy the requirements of Rule 23 because it is subject to a unique defense as a result of the in-and- out transactions. See Response 2 at 9-11. Specifically, Obando contends that Ann Arbor is unable to serve as an adequate representative of the class because it will be unable to
13 prove that some of its losses were attributable to the alleged fraud. See id. at 9-11. Ann
Arbor replies that these transactions do not subject it to a unique defense because other investors who sold shares during the class period at a loss are also members of the class and it only sold a portion of its shares prior to the end of the class period. See Reply 2 at 4.
As noted above, the Rule 23 analysis focuses on whether the presumptive lead plaintiffs claims and defenses are typical of the claims of the class and whether the presumptive lead plaintiff will fairly and adequately protect the interests of the class. See
Fischler, 1997 WL 118429, at *2. Rule 23's typicality requirement "is satisfied where the named plaintiffs' claims 'arise from the same event or pattern or practice and are based on the same legal theory as the claims of the class." In re Miva Inc. Sec. Litig., No. 2:05-cv-
201-FtM-29DNF, 2008 WL 681755, at *3 (M.D. Fla. Mar. 12, 2008) (quoting Kornberg v.
Carnival Cruise Lines, Inc., 741 F.2d 1332, 1337 (11th Cir. 1984)). In addition, in determining whether a presumptive lead plaintiff meets Rule 23's adequacy requirement, the
Court must consider "(1) whether any substantial conflicts of interest exist between the
[presumptive lead plaintiff] and the class; and (2) whether the [presumptive lead plaintiff] will adequately prosecute the action." Valley Drug Co. v. Geneva Pharm. Inc., 350 F.3d 1181,
1189 (11th Cir. 2003).
As an initial matter, the Court finds Obando's reliance on In re Bally Total Fitness
Securities Litigation to be misplaced. In that case, the United States District Court for the
Northern District of Illinois found that members of the purported plaintiff class had rebutted the presumption that an in-and-out trader was the presumptive lead plaintiff. See In re Bally
Total Fitness Sec. Litig., 2005 WL 627960, at *5-6. The Court noted that, because the
14 presumptive lead plaintiff had sold all of its stock during the class period and before the alleged fraud had been revealed to the public, it would have to spend a considerable amount of time establishing that its losses were caused by the fraudulent statements at issue which would distract it from the claims of the rest of the class. See id. at *6. In the instant case,
Ann Arbor did not sell all of its shares during the class period. Indeed, Ann Arbor held 12,443 shares of HMA stock at the time of the July 31, 2007 press statement.
Moreover, the Court concludes that Ann Arbor meets the typicality and adequacy requirements of Rule 23. VVith respect to the typicality requirement, Ann Arbor has demonstrated that, like other class members, it (1) purchased HMA shares during the Class
Period at a prices that were artificially inflated as a result of Defendant's allegedly false and misleading statements, (2) was adversely affected by Defendants' misrepresentations, and
(3) suffered damages as a result of Defendants' conduct. See Memorandum at 10; see also
Edward J. Goodman Life Income Trust, 2007 WL 170556, at *3 (finding that a lead plaintiff movant met the typicality requirement by demonstrating that, like other class members, they purchased "shares during the class period in reliance on allegedly false and misleading statements issued by Defendants and suffered financial losses allegedly due to Defendants' conduct."). In regard to the adequacy requirement, no evidence has been presented indicating that a conflict exists between the interests of Ann Arbor and those of class members or that Ann Arbor is unable to vigorously prosecute the instant action. See Valley
Drug Co., 350 F.3d at 1189. In light of the foregoing, the Court appoints Ann Arbor as the lead plaintiff in the instant action.
B. Appointment of Lead Counsel
15 Ann Arbor also seeks the Court's approval of its choice of counsel. See Motion at 2.
Ann Arbor states that its lead counsel, Coughlin Stoia Geller Rudman & Robbins LLP, has substantial experience prosecuting shareholder and securities class actions. See
Memorandum at 11.
Subject to the Court's approval, the most adequate plaintiff is required to select and retain counsel to represent the class. See 15 U.S.C. § 78u-4(a)(3)(B)(v). "The decision to approve counsel selected by the Lead Plaintiff is a matter within the Court's discretion and is by no means automatic." See Molema v. Bio-One Corp., No. 6:05-cv-1859-0r1-22DAB,
2006 WL 1733859, at *2 (M.D. Fla. 2006).
Upon review of the resume of the proposed lead counsel, the Court concludes that
Coughlin Stoia Geller Rudman & Robbins LLP possesses the requisite experience in the area of securities class actions to represent the interests of the class members. See Ann
Arbor Declaration at Exh. D. In addition, the Court notes that no party to the instant action has raised any objection to Ann Arbor's selection of counsel. Accordingly, the Court appoints Coughlin Stoia Geller Rudman & Robbins LLP as lead counsel.
III. Conclusion
In light of the foregoing, it is hereby ORDERED:
1. The Motion for Consolidation, Appointment as Lead Plaintiff and for Approval of Selection of Lead Counsel (Dkt. No. 10) filed by the City of Ann Arbor Employees'
Retirement System's is GRANTED to the extent that the motion seeks the appointment of
Ann Arbor as lead plaintiff and the approval of Ann Arbor's selection of counsel.
16 2. Motion of Gerardo Obando for Consolidation, Appointment as Lead Plaintiff Pursuant to § 21 D(a)(3)(B) of the Securities Exchange Act of 1934 and Approval of Selection of Lead and Liaison Counsel and Incorporated Memorandum of Law (Dkt. No. 15) is DENIED to the extent that the motion seeks the appointment of Gerardo Obando as lead plaintiff and the approval of Gerardo Obando's selection of counsel. DONE AND ORDERED at Fort Myers, Florida, this 14th day of May, 2008.
(111C01-111014601 M CIA MORALES HIP fARD United States District Judge
Ic3
Copies to:
Counsel of Record
17 Exhibit 2 P SEND UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA
LI) CIVIL MINUTES - GENERAL its Case No: CV 05-8133 PA (SHx) -Date July 14, 2006
Title, ' Roger Brooks, et al. v. Interlink Electronics, Inc., et al.
Present: The Honorable 2, PERCY ANDERSON, UNITED STATES DISTRICT JUDGE C. Kevin Reddick Not Reported N/A Deputy Clerk Court Reporter Tape No. Attorneys Present for Plaintiffs: Attorneys Present for De admits uuLKETED ON CM None None JUL 1 7 2006 Proceedings: IN CHAMBERS - COURT ORDER
Before the Court is the Motion to Vacate, or in the Alternative, to Reconsider th ar Naer 003 Appointing Westpark Capital as Lead Plaintiff filed by Bill Green and Brij Bhargava (Docket No. 48). Pursuant to Rule 78 of the Federal Rules of Civil Procedure and Local Rule 7-15, the Court finds that this matter is appropriate for decision without oral argument. The hearing calendared for July 10, 2006 is vacated, and the matter taken off calendar.
The PSLRA directs the court to "appoint as lead plaintiff the member or members of the purported class that the court determines to be the most capable of adequately representing the interest of the class members... ." 15 U.S.C. § 78u-4(a)(3)(B)(i). Specifically, the PSLRA presumes that the "most adequate plaintiff' is the personor group of persons that "in the determination of the court, has the largest financial interest in the relief sought by the class." 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I)(bb). Accordingly, the PSLRA provides a rebuttable presumption that the person or group of persons with the largest financial interest in the relief sought by the class is the plaintiff "most adequately" situated to represent the class as lead plaintiff, provided this person or group of persons otherwise satisfies the requirements of Rule 23 of the Federal Rules of Civil Procedure. 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I)(bb)- (cc). This presumption may be rebutted by evidence that the plaintiff would not fairly and adequately represent the interest of the class or is subject to unique defenses that render such plaintiff incapable of adequately representing the class. 15 U.S.C. § 78u-4(3)(B)(Iii)(II)(aa)-(bb).
Here, Westpark was an "in-and-out" seller which sold all of its shares before Interlink made - either of its corrective disclosures. As the Complaint alleges, the price of Interlink's stock dropped approximately forty percent on the day Interlink announced its second restatement of its financial results. - The Court therefore determines that much of the relief sought by the class relates to the harm associated with the November 2, 2005 disclosure. Because Westpark was not a shareholder at the time of either the . March 9, 2005 or the November 2, 2005 disclosures, it does not, in the Court's view, have the largest financial interest in the relief sought by the class. Cf. In re Cornerstone Propane Partners, L.P. Securities Litig., No. C 03-2522 MHP, 2006 WL 1180267, at *8 (N.D. Cal. May 3, 2006) ("Here, since corrective 56/ disclosure is alleged to have oacurred only from July 2001 onwards, under Dura there can be no loss C . / causation for plaintiffs who purchased and sold stock at the inflated share price prior to that disclosure — CV-90 (06/04) • CIVIL MINUTES - GENERAL Pa: 1 10 - P SEND' UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA (2, CIVIL MINUTES - GENERAL , Case No CV 05-8133 PA (SHx) Date < July 14, 2006
Title , Roger Brooks, et al. v. Interlink Electronics, Inc., et al.
and thus these plaintiffs may not recover at all.") (citing Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 125 S. Ct. 1627, 161 L. Ed. 2d 577 (2005)).Y
The Court further finds that although Westpark may have been the presumptive lead plaintiff, as an in-and-out seller which sold its shares prior to the corrective disclosures, Westpark does not satisfy the adequacy and typicality requirements of Federal Rule of Civil Procedure 23 and is subject to unique defenses that render it incapable of adequately representing the class. Id.; see also 15 U.S.C. § 78u- 4(3)(B)(E)(aa)-(bb). The Court therefore will not name Westpark as lead plaintiff Instead, the Court declares Bill Green and Brij Bhargava as the presumptive lead plaintiffs. See In re Cavanaugh, 306 F.3d 726, 731 (9th Cir, 2002). Any plaintiff who wishes to attempt to rebut the new presumptive lead plaintiffs showing that they satisfy Rule 23's typicality and adequacy requirements may do so by filing an opposition to the appointment of Bill Green and Brij Bhargava as lead plaintiffs no later than July 31, 2006. If an opposition is filed, Bill Green and Brij Bhargava may file a reply in support of their appointment as lead plaintiffs by August 7, 2006.
IT IS SO ORDERED.
•
•
• Initials of Preparer
cc:
I • The Court is not finding, at this point, that no in-and-out seller can establish loss Causation. Instead, the Court has merely determined that as an in-and-out seller which sold all of its shares before the corrective disclosures, Westpark does not have largest financial interest in the relief sought by the class.
CV-90 (06/04) CIVIL MINUTES - GENERAL Page 2 of 2 Exhibit 3
Case 5:09-cv-00117-RS Document 4 Filed 01/16/2009 Page 1 of 45
1 Joseph W. Cotchett (#36324) jeotchett*mmlegal.com 2 Mark C. Molumphy (#168009) mmolumphvAcpmlegal.com 3 Philip L. Gregory (#95217) pgregormitomlegal.com 4 Michelle T. Duval (#239497) [email protected] 5 COTCHETT, PITRE & McCARTHY San Francisco Airport Office Center 6 840 Malcolm Road, Suite 200 Burlingame, CA 94010 7 Telephone: (650) 697-6000 Facsimile: (650) 697-0577 8 Attorneys for Plaintiff and the Proposed Class 9
10
11 UNITED STATES DISTRICT COURT
12 NORTHERN DISTRICT OF CALIFORNIA
13 SAN JOSE DIVISION
14 SAJI VETTIYIL, individually and on behalf ) Case No. C-09-00117 RS of all others similarly situated, ) 15 ) CLASS ACTION Plaintiffs, ) 16 ) FIRST AMENDED COMPLAINT FOR v. ) VIOLATION OF FEDERAL 17 ) SECURITIES LAWS SATYAM COMPUTER SERVICES, LTD.,) 18 ) DEMAND FOR JURY TRIAL B. RAMALINGA RAJU, )
19 ) B. RAMA RAJU, ) 20 ) SRINIVAS VADLAMANI, ) 21 ) PRICE WATERHOUSE, ) 22 ) PRICEWATERHOUSECOOPERS ) 23 INTERNATIONAL, LTD., ) ) 24 Defendants. ) ) 25 )
26
27
E: 28 EEsEEEEKEs COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS
Case 5:09-cv-00117-RS Document 4 Filed 01/16/2009 Page 2 of 45
1 TABLE OF CONTENTS
2 Page(s)
3 I. INTRODUCTION 1
4 II. JURISDICTION AND VENUE 4
5 III. THE PARTIES 5
6 A. Plaintiffs 5
7 B. Defendants 5
8 1. Corporate Defendants. 5
9 2. Individual Defendants. 7
10 3. Aiding and Abetting/Conspiracy 9
11 4. Unnamed Participants. 9
12 IV. CLASS ALLEGATIONS. 9
13 V. FACTUAL ALLEGATIONS 10
14 A. Birth of Satyam and the Growth of the Computer Outsourcing Industry 10
15 B. Satyam Begins Filing Form 20-F's with the SEC, Audited by PwC. 11 16 C. Satyam Sells ADRs on the NYSE 12
17 D. In Late 2008, Warning Signs Emerge of Problems at Satyam 13
18 E. The Accounting Fraud Is Finally Revealed To The Market. 15
19 F. Market Responds to Fraud Announcement 17
20 G. PwC and the Pervasive Accounting Improprieties. 19
21 H. Defendants Concealed Accounting Improprieties And Misstated Satyam's Financial Condition In Public Reports, Filings And Statements. 22 22 1. 2005 25 23 2. 2006 26 24 3. 2007 26 25 4. 2008 27 26 I. The Securities and Exchange Board of India Investigates Fraud. 28 27 J. Violations of Accounting Rules. 29 E: 28 EEETEEEKEs COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS i Case 5:09-cv-00117-RS Document 4 Filed 01/16/2009 Page 3 of 45
1 K. Insider Trading 32 2 VI. SCIENTER ALLEGATIONS 32 3 VII. FRAUD-ON-THE MARKET DOCTRINE 32 4 VIII. CAUSES OF ACTION. 33 5 FIRST CAUSE OF ACTION VIOLATION OF SECTION 10(b) OF THE EXCHANGE ACT 6 AND RULE 10b-5 PROMULGATED THEREUNDER. 33 7 SECOND CAUSE OF ACTION VIOLATION OF SECTION 20(a) OF THE EXCHANGE ACT 35 8 THIRD CAUSE OF ACTION 9 VIOLATION OF SECTION 11 OF THE SECURITIES ACT 37 10 FOURTH CAUSE OF ACTION VIOLATION OF SECTION 15 OF THE SECURITIES ACT 38 11 PRAYER FOR RELIEF 40 12 JURY TRIAL DEMAND. 41 13 14
15 16 17 18 19
20 21 22
23 24 25 26 27 .1 28 LAW 0 FFIC ES COTCHETT, PITRE,SRVION & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS ii Case 5:09-cv-00117-RS Document 4 Filed 01/16/2009 Page 4 of 45
1 Plaintiff Saji Vettiyil ("Plaintiff'), individually and on behalf of all those similarly 2 situated, alleges the following based upon the investigation of plaintiff and his counsel, including 3 a review of regulatory investigations, regulatory filings, reports, press releases and media reports. 4 I. INTRODUCTION
5 1. On January 7, 2009, the Chairman of Satyam Computer Services Ltd. ("Satyam" 6 or "Company"), Ramilinga Raju, announced the largest corporate fraud in Indian history, 7 admitting that he and Satyam had intentionally committed accounting fraud over the last few 8 years and that over 90% of Satyam's earnings and assets were fictitious. In a letter written to 9 the Board of Directors of Satyam, Chairman Raju announced that Satyam's balance sheet was 10 inflated by at least INR71 billion (Indian rupees), equal to approximately $1.4 billion USD. In 11 that same letter, he claimed that the fraud was orchestrated by himself and his younger brother, 12 Rama Raju, the Managing Director and Chief Executive Officer of Satyam. Satyam, ironically 13 means "truth" in Sanskrit. The day prior to its collapse, Satyam was listed as having a market 14 capitalization of $3.15 billion USD. That value evaporated overnight as a result of the fraud.
15 2. This is a class action on behalf of persons who purchased American Depository 16 Receipts ("ADR") of Satyam between January 1, 2004 and January 6, 2009 (the "Class Period") 17 arising out of Defendants' dissemination of false and misleading statements concerning the 18 Company's financial condition and accounting practices relating to, among other items, over $70 19 billion rupees (equal to $1.4 billion) in fictitious and inflated revenue and assets and the real 20 increased costs needed to justify those fictitious and inflated revenues. 21 3. Satyam was one of the largest Indian consulting, information technology and 22 computer outsourcing companies in the world, supposedly worth over $3 billion USD. The 23 genesis of the computer outsourcing industry began in Silicon Valley in the 1980's. With the 24 growth of Silicon Valley and the many high technology companies that contributed to Silicon 25 Valley's transformation into the largest computer technology center of the world throughout the 26 late 1980's and the 1990's, the demand for a skilled and tech savvy workforce at a reasonable cost 27 in order to provide back office support grew, especially at many of the largest corporations in the 28 LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 1
Case 5:09-cv-00117-RS Document 4 Filed 01/16/2009 Page 5 of 45
1 United States India, with a large concentration of highly skilled workers and a struggling 2 economy, was in an excellent position to fill Silicon Valley's demand Satyam, founded in 1987 3 in Hyderabad, Andhra Pradesh, India, was one of the first Indian companies to fulfill the demand. 4 Satyam's primary office in the United States is located in Santa Clara, California. A significant 5 portion of Satyam's business is with major technology companies, most of them based in the 6 United States As such, California is at the heart of Satyam's business in the United States. 7 4. The day after the announcement of the fraud, the trading of shares of Satyam on 8 the Bombay Stock Exchange plummeted to near zero. In New York City, the announcement 9 occurred prior to the opening of trading on the New York Stock Exchange ("NYSE") on the 10 morning of January 7, 2009. Shares of Satyam American Depository Receipts ("ADR") lost over 11 90% of their value in trading prior to the opening of the NYSE. Trading in Satyam ADRs did 12 not open on the NYSE on the morning of January 7, 2009 as the NYSE announced that it was 13 suspending trading in that security until further notice. 14 5. The Securities and Exchange Board of India has announced it has launched an 15 investigation into Satyam's finances and the activities of its senior officers and directors, 16 including Chairman Raju and his younger brother, who was the Managing Director and Chief 17 Executive Officer of Satyam. SEBI regulators termed the financial wrong-doing at Satyam as 18 being of "horrifying magnitude." 19 6. The scope of the fraud is unheralded and has been described in the media as the 20 largest financial scandal in Indian history, sufficient to cripple confidence in not only the Indian 21 information technology outsourcing industry but the entire Indian market. In his letter to the 22 Satyam Board of Directors, Chairman Raju announced that Satyam's reported financial 23 statements as of September 30, 2008 were false in the following ways: 24 • Inflated (non-existent) cash and bank balances of INR50.4 billion 25 (compared to INR53.61 billion reflected in Satyam's books). In other 26 words, instead of INR53.61 in assets, Satyam actually had only INR3.21 27 28 LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 2
Case 5:09-cv-00117-RS Document 4 Filed 01/16/2009 Page 6 of 45
1 billion in assets. Approximately 94% of Satyam's cash assets were thus 2 non-existent. 3 • Non-existent accrued interest of INR3.76 billion. 4 • Understated liability of INR12.3 billion on funds arranged for himself.
5 • Overstated debtor's position of INR4.90 billion (compared to 26.5 billion 6 reflected in Satyam's books). 7 Over the last few years, Satyam has inflated its earnings and assets by over INR70 billion, 8 which equates to approximately $1.4 billion USD. 9 7. For the fiscal quarter ending September 30, 2008, Satyam reported revenues of 10 INR 27 billion and operating margins of INR6.49 billion (24 percent of revenue). However, the 11 true operating margins for Satyam were a fraction of that. In his letter, Chairman Raju admitted 12 that actual revenues were INR21 billion and actual operating margins were INR6.1 billion (3 13 percent of revenues). In order to conceal this inflated operating margin, Satyam inflated its cash 14 and balances by INR588 million.
15 8. In response to this news, Satyam's stock in India lost near 77% in value, 16 plummeting to near zero. According to its Annual Report on Form 20-F filed with the Securities 17 and Exchange Commission ("SEC"), as of March 31, 2008, Satyam had 670,479,293 shares of 18 outstanding equity securities. In the United States, shares of Satyam ADRs fell approximately 19 $8.42 per share to 93 cents, about 90% of their value, in market action prior to the opening of 20 trading on the NYSE. Trading in Satyam ADRs is currently suspended. Each share of Satyam 21 ADRs is currently worthless. In its latest Form 20-F with the SEC, Satyam stated that, as of 22 March 31, 2008, it had 130,505,900 underlying equity shares supporting 65,252,950 ADRs. 23 Each ADR represents 2 shares of Satyam equity stock. 24 9. On February 25, 2005, Satyam filed a Form F-3 with the SEC in order to list its 25 ADRs on the NYSE. Form F-3 is an SEC registration statement for foreign corporations seeking 26 to issue securities in the United States, if they meet certain requirements. Satyam's Form F-3 27 filing was last amended on May 9, 2005. The underwriters of Satyam's ADRs were Merrill 28 LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 3
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1 Lynch International, J.P. Morgan Securities, Inc., Citigoup Global Markets, Ltd., Bear, Stearns 2 & Co. Inc., Lehman Brothers, Inc., Gilford Securities, Inc. and Janney Montgomery Scott LLC. 3 PricewaterhouseCoopers ("PwC"), serving as Satyam's auditor, reviewed and audited the 4 financial statements included with the filed Form F-3. PwC consented to serve as an expert on 5 Satyam's accounting for the filing of the Form F-3.
6 10. Since 2001, Satyam has filed annual reports with the SEC on Form 20-F. These 7 Annual Reports contain financial statements for Satyam that were approved by Srinivas 8 Vadlamani, Satyam's Chief Financial Officer and by PwC. Due to the massive scope of this 9 fraud, it is impossible that Satyam's CFO and outside auditor could have failed to detect the 10 fraud without either being complicit in the fraud or recklessly failing to perform their 11 responsiblities in an acceptable manner. 12 11. By this action, plaintiff seeks to recover lost funds for the victims of these 13 improper accounting schemes.
14 II. JURISDICTION AND VENUE
15 12. Plaintiff asserts claims under § 11, § 15, and § 20 of the Securities Act, 15 U.S.C. 16 §77k, under §10(b) of the Securities Exchange Act, 15 U.S.C.§10(b) and Rule 10b-5, 17 C.F.R. § 17 240.10b-5, promulgated thereunder, and under the common law. Federal subject matter 18 jurisdiction exists pursuant to § 22(a) of the Securities Act, 15 U.S.C. § 77v(a), § 27 of the 19 Securities Exchange Act, 15 U.S.C. §78aa, and 28 U.S.C. § 1331 (federal question). Venue of 20 this action in this Court is proper pursuant to Section 27 of the 1934 Act. Many of the collateral 21 acts and transactions occurred in this district. Satyam's primary operations in the United States 22 took place in the Silicon Valley in California, as it had an office at 3945 Freedom Circle, Suite 23 720, Santa Clara, CA. 24 13. Defendants, directly and/or indirectly, used the means and instrumentalities of 25 interstate commerce, the United States mails, and the facilities or the national securities markets 26 in connection with the acts, conduct, and other wrongs complained of herein.
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1 III. THE PARTIES
2 A. Plaintiffs
3 14. Plaintiff Saji Vettiyil is a resident of Santa Cruz County, Arizona. As set forth in
4 the certificate attached hereto as Exhibit A, Plaintiff purchased Satyam ADRs and has been
5 damaged as a result.
6 15. Plaintiff and other Class members purchased Satyam ADR shares in the open
7 market, unaware that Defendants' statements and omissions regarding the stock and financial
8 results were false and/or misleading and were causing Satyam's stock price to be artificially
9 inflated. Plaintiff and the Class relied upon Defendants' statements and omissions in Satyam's
10 public reports, press releases, and SEC filings when they purchased shares of Satyam ADRs and 11 were thus injured by the Defendants' actions. Plaintiff and the Class further relied on the
12 integrity of the market for Satyam securities and the fact that Satyam securites were fairly priced.
13 Believing the Defendants' statements to be true has resulted in injury to the Plaintiff and each
14 Class member.
15 B. Defendants
16 1. Corporate Defendants
17 16. Defendant Satyam Computer Services Ltd. ("Satyam" or "Company") is a
18 consulting, information technology and computer outsourcing corporation based in Hyderabad,
19 India. Satyam operates in the United States, primarily in Silicon Valley. During the Class
20 Period, Satyam had approximately 670 million shares outstanding, including 130 million shares
21 that were being used to support 65 million Satyam ADRs which were listed in the United States
22 on the NYSE. Shares of Satyam and Satyam ADRs traded in an efficient market.
23 17. Defendant Price Waterhouse is an Indian accounting firm with its office located
24 at # 8-2-293/82/A/1131A, Road No. 36, Jubilee Hills, Hyderabad 500 082, India. Price
25 Waterhouse is a member-firm of the global PricewaterhouseCoopers International Ltd. network.
26 Price Waterhouse conducted the audits of Satyam Computer Services since at least 2001 when it
27 audited and certified the financial results for Satyam when it first filed its financial statements
28 with the SEC on Form 20-F on August 13, 2001. The last financial statements filed by Satyam LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 5 Case 5:09-cv-00117-RS Document 4 Filed 01/16/2009 Page 9 of 45
1 prior to the January 7, 2009 admission of fraud were approved and signed off by Srinivas Talluri,
2 an audit partner for Price Waterhouse. Price Waterhouse provided both auditing and consulting
3 services to Satyam, and issued unqualified audit opinions on Satyam's financial statements. Price
4 Waterhouse also audited the reported financial statements filed with the SEC in connection with
5 Satyam's filing on Form F-3 in order to issue securities on the NYSE to American investors. As
6 part of its audit procedures, Price Waterhouse audited the financial results of Satyam for over
7 seven years where it apparently missed the fact that over 90% of Satyam's reported assets did not
8 exist. Satyam issued materially false and misleading statements when it certified Satyam's
9 financial results as accurate and presented in accordance with GAAP. 10 18. Defendant PricewaterhouseCoopers International Ltd. is a multinational 11 auditing, accounting, and consulting firm. PricewaterhouseCoopers International Ltd. is a U.K.
12 company. PricewaterhouseCoopers is structured as a network of member firms, connected
13 through membership in PricewaterhouseCoopers International Limited. In most parts of the
14 world, the right to practice accountancy is granted only to national firms in which locally
15 qualified professionals have majority or full ownership. Consequently, PwC member firms are
16 locally owned and managed. PricewaterhouseCoopers' member firms, including Defendant Price
17 Waterhouse operate locally in countries around the world. This structure provides PwC firms
18 with the flexibility to operate simultaneously as the most local and the most global of businesses.
19 Defendant Price Waterhouse is a member-firm of PricewaterhouseCoopers International Ltd. As
20 the parent firm of Price Waterhouse, PricewaterCoopers International Ltd. is liable for the acts
21 and omissions of Price Waterhouse. There is a unity of interest and ownership between
22 PricewaterhouseCoopers International Ltd. and Price Waterhouse such that the acts of the one are
23 for the benefit of the other and can be imputed as the acts of the other.
24 19. PricewaterhouseCoopers International Ltd. and Price Waterhouse are hereinafter
25 referred to jointly as
26
27
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1 2. Individual Defendants 2 20. Defendant B. Ramalinga Raju is the former Chairman of the Board of Satyam. 3 Defendant Ramalinga Raju resigned from his position as Satyam's Chairman on January 7, 2009 4 when he disclosed to the market that he personally participated in inflating Satyam's earnings 5 and assets by over INR70 billion (equal to $1.4 billion USD). Ramalinga Raju signed the Form 6 F-3 authorizing the listing of Satyam ADRs on the NYSE. As of March 31, 2008, Defendants 7 Ramalinga Raju and Rama Raju control SRSR Holdings Private Limited, which held 8 approximately 8.3% of Satyam's outstanding equity shares. 9 21. Defendant B. Rama Raju is the younger brother of Defendant Ramalinga Raju 10 and is the former Managing Director and Chief Executive Officer of Satyam. Rama Raju 11 resigned on January 7, 2009, the same day his brother announced his involvement in fraudulently 12 inflating the earnings and assets of Satyam by INR70 billion (equal to $1.4 billion USD). Rama 13 Raju signed the Form F-3 authorizing the listing of Satyam ADRs on the NYSE. As Chief 14 Executive Officer of Satyam, Rama Raju also certified the financial statements of Satyam filed 15 on Form 20-F pursuant to the Sarbanes-Oxley Act. As of March 31, 2008, Defendants 16 Ramalinga Raju and Rama Raju controlled SRSR Holdings Private Limited, which held 17 approximately 8.3% of Satyam's outstanding equity shares.
18 22. Defendant Srinivas Vadlamani is the former Chief Financial Officer of Satyam. 19 In his capacity as CFO, Srinivas Vadlamani was responsible for overseeing the finances of 20 Satyam and ensuring that the accounting for transactions at Satyam was done in accordance with 21 accounting rules. Nevertheless, either intentionally or recklessly, Srinivas Vadlamani failed to 22 detect and report the massive fraud occurring at Satyam. Srinivas Vadlamani signed the Form F-
23 3 authorizing the listing of Satyam ADRs on the NYSE. Srinivas Vadlamani also signed the 24 Annual Reports on Form 20-F that were filed with the SEC. 25 23. Defendants Ramalinga Raja and Rama Raju ("Raju Defendants"), by reason of 26 their stock ownership and positions with and relations to Satyam, and other affiliated companies, 27 were controlling persons of Satyam. Satyam in turn controlled the Raju Defendants. The Raju 28 LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 7 ase 5:09-cv-00117-RS Document 4 Filed 01/16/2009 Page 11 of 45
1 Defendants and Satyam are liable as control persons under Section 15 of the 1933 Act and 2 Section 20(a) of the 1934 Act.
3 24. Defendants Ramalinga Raju, Rama Raju and Srinivas Vadlamani (the "Individual 4 Defendants") served as senior officers, directors and/or employees of Satyam during the Class 5 Period and, because of their positions, were able to control the contents of the representations 6 made to stockholders and the public, had access to adverse undisclosed information regarding the 7 company which contradicted the information disseminated to the public, and had the authority to 8 prevent or correct the disseminations. Furthermore, the Individual Defendants each had an 9 affirmative duty to promptly disseminate accurate and truthful information and/or correct any 10 misleading and untrue information regarding Satyam's financial condition, performance, growth, 11 operations, financial statements, business, products, markets, management, earnings, and 12 business prospects. Despite this affirmative duty, the Individual Defendants knowingly and 13 intentionally made misleading statements and omissions in order to artificially inflate the price of 14 Satyam stock.
15 25. Defendants are liable for the false statements pleaded herein. The statements are 16 each "group-published" information for which they are responsible.
17 26. Defendants are not protected by any statutory safe harbor for forward-looking 18 statements because that protection does not extend to the allegedly false statements pleaded in 19 this complaint. First, many of the specific statements pleaded herein were statements of fact, 20 primarily assertions regarding the earnings and assets of Satyam that were simply fictitious and 21 non-existent. These statements are pure false statements of a material fact. Second, many of the 22 specific statements pleaded herein were not identified as "forward-looking statements" when 23 made. Third, to the extent there were any forward-looking statements, Defendants did not 24 provide meaningful cautionary statements identifying important factors that could cause actual 25 results to differ materially from those in the purportedly forward-looking statements pleaded 26 herein. Defendants are liable for those false forward-looking statements because they knew, at 27 the time each such statement was made, and/or authorized and/or approved by an executive 28 officer and/or director of Satyam, that those statements were false. LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 8
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1 3. Aiding and Abetting/Conspiracy 2 27. Defendants, and each of them, are sued as participants and as aiders and abettors 3 herein alleged. At all relevant times, each defendant was and is the agent of each of the 4 remaining Defendants, and in doing the acts alleged herein, was acting within the course and 5 scope of such agency. Each defendant ratified and/or authorized the wrongful acts of each of the 6 defendants. There is a unity of interest and ownership between the Defendants listed above, such 7 that the acts of the one are for the benefit and can be imputed as the acts of the other.
8 4. Unnamed Participants 9 28. Numerous individuals and entities participated actively during the course of and in 10 furtherance of the scheme described herein. The individuals and entities acted in concert by joint
11 ventures and by acting as agents for principals, in order to advance the objectives of the scheme 12 to benefit Defendants and themselves tlu-ough the purchase and sale of Satyam securities to the 13 detriment of Plaintiff and the Class. 14 IV. CLASS ALLEGATIONS
15 29. Plaintiff brings this action as a class action pursuant to Rule 23 of the Federal 16 Rules of Civil Procedure, on its own behalf and on behalf of the following class:
17 All persons and entities who, during the Class Period from January 1, 2004 through January 6, 2009, purchased shares in Satyam American Depository 18 Receipts ("ADR"). 19 Excluded from the Class are defendants herein, members of their immediate families and their 20 legal representatives, parents, affiliates, heirs, successors or assigns and any entity in which 21 defendants have or had a controlling interest, officers and directors of Satyam and any entity in 22 which they have or had a controlling interest, and any other person who engaged in the improper 23 conduct described herein (the "Excluded Persons"). Also excluded are any officers, directors, or 24 trustees of the Excluded Persons. 25 30. The members of the Class are so numerous and so widely dispersed throughout 26 the nation that joinder of all of them is impracticable. While the exact number of Class members 27 is unknown to Plaintiffs at the present time and can only be ascertained from books and records 28 LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 9
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1 maintained by defendants and/or their agents, Plaintiff believes that the Class members number 2 in the hundreds of thousands. 3 31. Plaintiff's claims are typical of those of other Class members. Plaintiff purchased 4 Satyam shares and sustained damages as a result of defendants' wrongful conduct complained of 5 herein.
6 32. Plaintiff will fairly and adequately protect the interests of the members of the 7 Class. Plaintiff has retained competent counsel experienced in class action securities litigation. 8 Plaintiffs have no interests that are adverse or antagonistic to those of the Class. 9 33. There are common questions of law and fact arising in this action with respect to 10 the Class, including, inter alia: 11 a. Whether Defendants' acts alleged herein violated federal securities 12 laws; and 13 b. Whether Plaintiff and members of the Class were damaged, and the 14 appropriate measure of damages.
15 34. These questions of fact and law that are common to the Class predominate over 16 any questions solely affecting individual members.
17 35. A class action is superior to all other available methods for the fair and efficient 18 adjudication of this controversy. Plaintiff knows of no difficulty likely to be encountered in the 19 management of this action that would preclude its maintenance as a class action. 20 V. FACTUAL ALLEGATIONS 21 A. Birth of Satyam and the Growth of the Computer Outsourcing Industry 22 36. Satyam was founded in Hyderabad in 1987 in order to meet a growing demand in 23 Silicon Valley for highly skilled and tech savvy workers at a reasonable cost. In the 1980's and 24 1990's, Silicon Valley became the heart of the global high technology boom. During that time, 25 computer outsourcing was in its infancy. Satyam rose to prominence in the late 1990's because 26 Chairman Raju was among the first to spot outsourcing opportunities throughout the United 27 States, especially with high technology companies in California. Ram Mynampati, the interim 28 LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 10
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1 Chief Executive Officer of Satyam in the aftermath of the accounting scandal, attended 2 California State University - Fullerton.
3 37. Tlu-oughout the late 1990's, Silicon Valley experienced explosive growth as it 4 became the global capital for information technology development. There was extremely high 5 demand in California for highly skilled workers who could handle a high tech work environment 6 at a reasonable cost. India, which had a highly skilled work force but a struggling economy, was 7 perfectly positioned to meet that demand. Satyam was one of the first corporations to recognize 8 that demand and take action to fulfill that demand. Satyam - California was founded in Santa 9 Clara, California due to the importance of California as one of the largest states taking advantage 10 of Indian software outsourcing. Satyam's Santa Clara office is Satyam's principal office in the 11 United States 12 38. By 2000, Satyam was a billion dollar corporation and one of the largest computer 13 outsourcing companies in the world. Satyam was also a pioneer in that field, being one of the 14 first companies to provide skilled labor outsourcing, particularly to high technology companies in 15 Silicon Valley. At its height, Satyam served as the back office for some of the largest banks, 16 manufacturers, health care and media companies in the world, handling everything from 17 computer systems to customer service. Satyam was touted as India's fourth-largest IT services 18 firm. Clients have included General Electric, General Motors, Nestle's, and the United States 19 government. In some cases, Satyam is even responsible for clients' finances and accounting.
20 B. Satyam Begins Filing Form 20-F's with the SEC, Audited by PwC 21 39. Beginning in 2001, Satyam began filing Annual Reports with the SEC on Form 22 20-F. These documents were audited by PwC as its outside auditor. PwC has served as 23 Satyam's outside auditor for at least seven years, during which it had unlimited access to 24 Satyam's financial information. No other individual or entity had the same level of access to 25 Satyam's financials during that time period. As Satyam's outside auditor, PwC was required to 26 scrutinize in detail the financial results of Satyam. An outside auditor must not be a cheerleader 27 for a company but has a fiduciary duty to act with due diligence by challenging and strenuously 28 LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 11
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1 testing the reported financial results of a company. An outside auditor cannot accept at face 2 value the assertions made by company management.
3 40. During those seven years, PwC apparently missed the fact that over 90% of 4 Satyam's reported assets were imaginary. Even if Chairman Raju's admissions are the full extent 5 of the fraud, the scope of the fraud is so large that it would have been impossible for a diligent 6 outside auditor to miss the fraud. Simple testing and questioning of corporate management's 7 assertions would likely have uncovered these gross violations of GAAP.
8 41. The Satyam scandal also brought into sharp focus the role of the auditor 9 PricewaterhouseCoopers, raising serious concerns that it was complicit in perpetrating a fraud 10 comparable to the accounting scandal at Enron in the United States PwC has taken temporary 11 shelter under the roof of client confidentiality, saying it is now examining the contents of the 12 statement made by Raju. However, it is impossible for any outside auditor, exercising minimal 13 diligence, to miss a fraud of this size. 14 42. The Economic Times wrote, "The image of Satyam's statutory auditors, 15 PricewaterhouseCoopers has been tarnished as voices are being raised at the possibility that the 16 auditors were hand-in-glove with the conspirators in the. .. scam."
17 43. Due to the scope of the scam, PwC was either complicit with Satyam in the 18 perpetration of this scheme to defraud or the competency of the accountants was far below 19 minimal standards.
20 C. Satyam Sells ADRs on the NYSE 21 44. On February 25, 2005, Satyam filed a Form F-3 with the SEC in order to list its 22 American Depository Receipts ("ADR") on the NYSE and sell them to American investors. The 23 Form F-3 was amended several times, the last amendment being filed on May 9, 2005. Satyam 24 ADRs were offered to the public on the NYSE on May 12, 2005 at an offering price of 25 approximately $21.50 per share. The final Form F-3 was signed by Defendants Ramalinga Raju 26 as Chairman of the Board of Directors of Satyam, Rama Raju as CEO of Satyam and by Srinivas 27 Vadlamani as CFO of Satyam. PwC audited the financial results that were incorporated into the 28 Form F-3 and certified that the financial results were accurate and presented in accordance with LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 12
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1 U.S. GAAP. The underwriters of the sale of Satyam ADRs were Merrill Lynch International,
2 J.P. Morgan Securities, Inc. Citigoup Global Markets, Ltd., Bear, Stearns & Co. (which was
3 acquired by J.P. Morgan Chase & Co.), Lehman Brothers, Inc. (which is currently bankrupt),
4 Gilford Securities, Inc., and Janney Montgomery Scott LLC.
5 45. Satyam's financial results filed with the SEC on Form F-3 were materially false
6 and misleading and all of the Defendants are liable for those misstatements pursuant to Section
7 11 of the 1933 Securities Act. In addition, all of the Defendants are liable for the misstatements
8 in the prospectus for this offering pursuant to Section 12 of the 1933 Securities Act. The
9 Defendants acted with fraudulent intent, as evidenced by the January 7, 2009 confession of
10 Chairman Raju and Satyam, as well as PwC's failure to detect the massive fraud at Satyam. 11 These Defendants acted with fraudulent intent and failed to exercise appropriate due diligence in
12 regards to Satyam's financial results. If they had done so, they would have detected the blatant
13 violations of U.S. GAAP, including the fact that over 90% of Satyam's assets were fictional.
14 46. In his January 7, 2009 letter, Chairman Raju admitted that Satyam's true cash and
15 bank balance was roughly INR3.21 billion (which equals about $66 million USD). In Satyam's
16 Form F-3 filing, Satyam states that, for the fiscal year ending March 31, 2005, Satyam had cash
17 and cash equivalents of $129.8 million USD (roughly INR 6.3 billion), investments in bank
18 deposits of $411.6 million USD (roughly INR 19.9 billion), and total assets of $884.1 million
19 USD (roughly INR42.8 billion). Satyam's financial results contained in its Form F-3 were
20 clearly false and misleading. Otherwise, Satyam had roughly twice as much cash only in 2005
21 than it had in cash and its bank balance in 2008.
22 D. In Late 2008, Warning Signs Emerge of Problems at Satyam
23 47. In December of 2008, Satyam attempted to acquire two infrastructure companies,
24 Maytas Infrastructure and Maytas Properties, for $1.6 billion. Both companies are owned by
25 Satyam CEO Ramalinga Raju's sons. This eventually led to the probing of the deal by the Indian
26 government, a veiled criticism by the Vice President of India and Satyam clients re-evaluating
27 their relationship with the company. The USD $1.6 billion (INR 8,000 crore) acquisition was
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1 met with skepticism. In his January 7, 2009 letter, Chairman Raju admitted that the Maytas 2 acquisition was intended to replace fictional assets with real assets.
3 48. Problems began on December 15, 2008 when Satyam announced it was seeking to 4 acquire Maytas Infrastructure and Maytas Properties. Shares of Saytam's ADRs ended at $12.55 5 per share on December 15, 2008.
6 49. On December 16, 2008, Satyam stated that it was cancelling plans to buy Maytas 7 Infrastructure and Maytas Properties for $1.6 billion just 12 hours after announcing the deal, 8 claiming that it was due to investor pressure. Analysts question the motives of Satyam's top 9 executives as they hold stakes in Maytas Infrastructure and Maytas Properties. 10 50. On December 18, 2008, Saytam announced that its Board of Directors would meet 11 on December 29, 2008, to consider a proposal for buyback of Satyam's shares. 12 51. Satyam had been under close scrutiny in recent months, after an October report 13 that the company had been banned from World Bank contracts for installing spy software on 14 some World Bank computers. Satyam denied the accusation but on December 23, 2008, the 15 World Bank confirmed without elaboration on the cause that Satyam had been banned. The 16 World Bank banned Satyam from doing business with it for a span of eight years for providing 17 "improper benefits to bank staff' in return for contracts and for lack of documentation on 18 invoices. The World Bank in its own statement has denied allegations of "data theft/malicious 19 attacks," but confirmed the bribery and improper invoicing allegations.
20 52. On December 24, 2008, rumors circulated about Satyam being a takeover target 21 due to the recent news. 22 53. On December 25, 2008, Satyam objected to the World Bank's statement and 23 asked that the World Bank withdraw its "inappropriate" statements. 24 54. On December 26, 2008, Mangalam Srinivasn, an independent director of Satyam 25 resigned.
26 55. On December 28, Satyam postponed its Board meeting scheduled for December 27 29, 2008 to January 10, 2009 to discuss a proposal for buy-back of shares. 28 LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 14
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1 56. On December 29, 2008, three more directors resigned from Satyam's Board of
2 Directors, fueling rumors that the number of resignations may go up.
3 57. On Dec. 30, 2008, analysts with Forrester Research warned that corporations that
4 rely on Satyam might ultimately need to stop doing business with the company. "Firms should
5 take the initial steps of reviewing the exit clauses in their current Satyam contracts," in case
6 management or direction of the company changed, Forrester said.
7 58. On January 6, 2009, reports circulated that Tech Mahindra approached Satyam to
8 consider a merger.
9 E. The Accounting Fraud Is Finally Revealed To The Market 10 59. On January 7, 2009, prior to the opening of trading on the NYSE, the Chairman of 11 Satyam announced in a letter that he had manipulated Satyam's financial results for several years.
12 In his letter to the Satyam Board of Directors, Chairman Raju announced that Satyam's reported
13 financial statements as of September 30, 2008 were false in the following ways:
14 • Inflated (non-existent) cash and bank balances of INR50.4 billion
15 (compared to INR53.61 billion reflected in Satyam's books). In other
16 words, instead of INR53.61 in assets, Satyam actually had only INR3.21
17 billion in assets. Approximately 94% of Satyam's cash assets were thus
18 non-existent.
19 • Non-existent accrued interest of INR3.76 billion.
20 • Understated liability of INR12.3 billion on funds arranged for himself.
21 • Overstated debtor's position of INR4.90 billion (compared to 26.5 billion
22 reflected in Satyam's books).
23 Over the last few years, Satyam has inflated its earnings and assets by over INR70 billion, which
24 equates to approximately $1.4 billion USD.
25 60. For the fiscal quarter ending September 30, 2008, Satyam reported revenues of
26 INR27 billion and operating margins of INR6.49 billion (24 percent of revenue). However, the
27 true operating margins for Satyam were a fraction of that. In his letter, Chairman Raju admitted
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1 (3 percent of revenues). In order to conceal this inflated operating margin, Satyam inflated its 2 cash and balances by INR588 million. 3 61. An investigation by SEBI was announced immediately after the fraud 4 announcement by Chairman Raju. Even if Chairman Raju's admissions are the full extent of the 5 accounting fraud at Satyam, the scope of this fraud is astounding. The size and scope of the 6 fraud is so large that no outside auditor, acting in a minimally responsible manner, would have 7 missed the fraud. Nor could any underwriter that was appropriately performing its duties.
8 62. Along with the fraud announcement, on January 7, 2009, both Chairman 9 Ramalinga Raju and CEO Rama Raju resigned from their positions at Satyam. Ram Mynampati 10 was named the interim CEO, pending ratification by the Board of Directors. In his letter,
11 Chairman Raju suggested the formation of a Task Force to tackle the operational problems at 12 Satyam in the aftermath of the announcement of this major fraud. 13 63. In his letter, Chairman Raju also stated that "Merrill Lynch can be entrusted with 14 the task of quickly exploring some merger opportunities." A copy of Chairman Raju's letter was 15 sent directly to DSP Merrill Lynch, a sister company of Merril Lynch International, who 16 underwrote Satyam's issuance of ADRs in the United States Immediately after Chairman Raju's 17 fraud announcement became public, DSP Merrill Lynch ended its relationship with Satyam.
18 64. According to a January 7, 2009, Satyam press release: "We are obviously 19 shocked by the contents of the letter. The senior leaders of Satyam stand united in their 20 commitment to customers, associates, suppliers and all shareholders. We have gathered together 21 at Hyderabad to strategize the way forward in light of this startling revelation," said Mr. Ram 22 Mynampati, Interim CEO (pending ratification by the Board) and Member of the Board, who has 23 been mandated by the Board to steer the company tlu-ough this crisis. 24 65. In that press release, Satyam confirmed that its immediate priorities are to protect 25 the interests of its shareholders, protect the careers and security of its approximately 53,000 26 associates, and meet all its commitments to its customers and suppliers. "We recognize that our 27 associates have committed a significant part of their careers to build Satyam. We will pursue all 28 avenues to secure their future in the company," added Mr. Mynampati. LAW 0,,i,E, COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 16
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1 66. Satyam's CFO Srinivas Vadlamani did not show up for work in the aftermath of 2 Chairman Raju's announcement of the fraud and was reported to have tendered his resignation. 3 In his letter, Chairman Raju claimed that certain individuals at Satyam had no knowledge of the 4 fraud. Srinivas Valdmani's name was the only significant one missing from Chairman Raju's list 5 of those who were 'tinware of the real situation' and Satyam's wrongdoing. On January 9, 2009,
6 The Times of Indza reported that Srinivas Vadlamani attempted to commit suicide but failed in 7 his attempt. Two days later, on January 11, 2009, it was announced that Srinivas Vadlamani had 8 been arrested and faces charges of criminal conspiracy, cheating and falsification of records.
9 67. On January 9, 2009, The Wall Street Journal reported that both Ramalinga Raju 10 and his brother, Rama Raju were arrested by Indian state police and face charges of criminal 11 conspiracy, cheating and falsification of records. "Ramalinga Raju has been arrested for having 12 violated several sections of the Indian Penal Code," S S P Yadav, director general of the police 13 of Andhra Pradesh told Dow Jones Newswires. 14 68. On January 12, 2009, it was announced that Satyam would begin looking for a 15 new Chief Executive Officer. 16 69. On January 15, 2009, as a result of the Satyam scandal, Prime Minister 17 Manmohan Singh stressed that his government would complete a speedy and thorough 18 investigation of the scam. The government's primary concern is that international clients, 19 particularly those in the United States, would have concerns regarding India's business and 20 securities environment and the safety of information and data that was managed by Satyam.
21 F. Market Responds to Fraud Announcement 22 70. In response to this news, Satyam's stock in India lost near 77% in value, 23 plummeting to near zero. According to its Annual Report on Form 20-F filed with the Securities 24 and Exchange Commission ("SEC"), as of March 31, 2008, Satyam had 670,479,293 shares of 25 outstanding equity securities. In the United States, shares of Satyam ADRs fell approximately 26 $8.42 per share to 93 cents, about 90% of its value, in market action prior to the opening of 27 trading on the NYSE. Trading in Satyam ADRs is currently suspended. Each share of Satyam 28 ADRs is currently worthless. In its latest Form 20-F with the SEC, Satyam stated that, as of LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 17
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1 March 31, 2008, it had 130,505,900 underlying equity shares supporting 65,252,950 ADRs. 2 Each ADR represents 2 shares of Satyam equity stock. The news of Satyam's fraud was enough 3 to cause the Sensex index (related to Indian securities) to lose over 77% in value in a single day. 4 71. This does not include the additional losses suffered by Satyam shareholders due to 5 the inflation of Satyam's share value over the last several years due to years of inflated financial 6 results, in particular the false rise in Satyam's share price caused by Chairman Raju's attempt to 7 complete the Maytas acquisition. As Chairman Raju admitted, his attempt to buy Maytas, which 8 is owned by his family members and has no reasonable connection to Satyam's business, was to 9 further prop up Satyam's fictional financial assets with real assets. As an additional bonus, it 10 would financially benefit his family. Prior to the Maytas announcement and the string of news 11 that put Saytam's finances in question, Saytam's ADRs traded over $12 per share. Saytam's 12 ADR traded over $9 per ADR the day before Chairman Raju's announcement, losing over 90% 13 of its value in a single day. 14 72. SEBI's chairman, Mr. Bhave said that the event is of horrifying magnitude. 15 "Something like this has happened for the first time in India so we are also in touch with the 16 ministry of corporate affairs on what all steps need to be taken," said Mr. Bhave.
17 73. "This is a black day for India, the software sector and corporate-governance 18 claims," Arun Kejriwal, founder of Kejriwal Research & Investment Services, told Bloomberg. 19 "If at all there's an event that could be the biggest setback for corporate India, it is this."
20 74. In the Wall Street Journal, Mohammed Hadi writes, "The whole affair - already 21 being dubbed India's Enron - tlu-ows India's corporate governance into sharp relief. That Mr. 22 Raju thought it appropriate to spend $1.6 billion on two firms so unrelated to Satyam's business 23 and in which he had a financial interest, without seeking shareholder approval, speaks volumes 24 about his sense of what his shareholders would tolerate."
25 75. In the aftermath of the fraud announcement, The Business Standard reported on 26 the scene outside Satyam's Hyderabad headquarters, "The otherwise lively campus wore a Dim 27 and somber look with high security all around" with employees reluctant to talk. "We are tense 28 after hearing about the developments in the company," said one employee, "Though the company LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 18
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1 has taken up an image-building exercise for the past few days, the reality is quite a contrast. The 2 chairman has been sending personal mails to all of us assuring things would be on track shortly. 3 But what we see is quite different."
4 G. PwC and the Pervasive Accounting Improprieties
5 76. During the Class Period, Defendants were focused on public reaction to its key 6 financial metrics, including earnings, assets and liabilities, in order to boost Satyam's stock price. 7 Satyam's goal was to continue to convince the market that it was a strong, growing company 8 with strong operating margins. Instead, by grossly inflating its revenues, Satyam was forced to 9 increase its costs in order to pretend to be able to generate those outsized revenues. In reality, 10 Satyam's operating margins were a mere fraction of what they were publicly portrayed to be.
11 The accounting improprieties were so pervasive that over 90% of the company's reported assets 12 were fictional. In his letter to the Satyam Board of Directors, Chairman Raju admitted that the 13 reason for the fraud was to maintain the false impression that Satyam was a strong corporation. 14 Chairman Raju admitted that the "concern was that poor performance would result in the 15 takeover, thereby exposing the gap. It was like riding a tiger, not knowing how to get off without 16 being eaten."
17 77. PwC was the auditor for Satyam for at least the last seven years in which they 18 failed completely to detect a INR70.1 billion (roughly $1.4 billion USD) fraud. Indeed, over 19 90% of Satyam's listed assets, according to Chairman, were completely fictional. PwC's failure 20 to detect a fraud of this scope is highly suspect and PwC either conspired along with Satyam and 21 its officers and directors, or failed to meet even minimal professional standards. 22 78. On January 8, 2009, PwC issued an e-mail stating that, "The audits were 23 conducted by Pricewaterhouse in accordance with applicable auditing standards and were 24 supported by appropriate audit evidence." PwC also stated that it was cooperating with 25 regulators.
26 79. According to PwC's interim CEO Ram Mynampati, Satyam's board relied on the 27 PricewarehouseCoopers verified results in their deliberations. Mr. Mynampati also stated that 28 the company is assessing whether it will change its auditor. LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 19
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1 80. Indian accounting standards are broadly similar to international standards. For the
2 last few years, because the company was listed on the NYSE, Satyam adopted international
3 financial reporting standards, including U.S. GAAP. Satyam was also subject to the
4 Sarbanes-Oxley financial standards regulation.
5 81. Chairman Raju admitted that the company stated the amount owed to it by debtors
6 as $545.65 million, compared with an actual position of $444.81 million.
7 82. According to Neeraj Bhagat, chief executive of accountancy firm Neeraj Bhagat &
8 Co. in New Delhi, "As part of an end-of-year audit, accountants would have had to verify the
9 amount of money owed to the client." Normally, auditors do this by contacting the client's
10 business partners directly and check that the amount of money owed tallies with what the client 11 says.
12 83. Also in his January 7, 2009, letter, Chairman Raju admitted that Satyam's cash
13 and bank balance had been inflated by more than Si billion dollars.
14 84. This is "the easiest thing to verify," said Vishesh Chandiok, national managing
15 partner in India of accountants Grant Thornton. Normally, checking bank statements wouldn't be
16 considered sufficient under Indian or U.S. rules -- the auditor would also need to get direct
17 confirmation from the bank.
18 85. "If you're an auditing company and your clients say they have Si billion in cash,
19 you do check with the bank," said Hugh Young, the head of equities for Aberdeen Asset
20 Management, which was a Satyam investor until it solds its holdings as problems came to light.
21 86. For investors, such as Plaintiff and Class members, who relied on Satyam's
22 financial statements, the fraud would have been difficult or impossible to discover. According to
23 Charles Mulford, an accounting professor at the Georgia Institute of Technology, "When a fraud
24 goes so far as to misreport cash, finding warning signs of the fraud becomes quite problematic."
25 87. There were red flags though that were missed by PwC. One indication of fraud
26 accountants often look for is a discrepancy between net income and operating cash flow, the
27 amount of cash a company spits out from its operations.
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1 88. In its fiscal year ending March 31, 2008, Satyam's net income grew 40%, while 2 operating cash flow grew by 30%. But in the previous fiscal year, net income rose by 20% 3 compared with a 61% increase in operating cash flow, a difference that would have been noted 4 by investors and analysts looking for signs of trouble.
5 89. Another warning sign was a sharp increase in assets held in the company's bank 6 deposits. In the fiscal year ending March 31, 2008, Satyam had $826.7 million worth of bank 7 deposits, a 7.7% increase from the fiscal year ending March 31, 2007 but more than double the 8 amount from the fiscal year ending March 31, 2006, when the company had $403.7 million in 9 bank deposits. 10 90. In addition, as a company selling securities in the United States to American
11 investors, Satyam also needed to comply with a Sarbanes-Oxley rule requiring companies to 12 document their internal controls for financial reporting. Both the chief executive officer and the 13 chief financial officer must certify the company has sufficient controls in place and to confirm 14 those controls are working effectively. This is then certified by the auditors. It is clear that 15 internal controls were seriously flawed to non-existent to permit a fraud of this size. Chairman 16 Raju, his younger brother Rama Raju, CFO Srinivas Vadlamani and PwC all made material 17 misrepresentations regarding the internal controls at Satyam for financial reporting.
18 91. India's professional body for accountants, the Institute of Chartered Accountants 19 of India ("ICAI"), is investigating PwC's auditing of Satyam, according to Ved Jain, the president 20 of the Institute of Charted Accountants of India. The Institute of Chartered Accountants of India 21 has the power to revoke licenses to practice and debar members. 22 92. On January 9, 2009, the ICAI served a show cause notice on PwC, demanding that 23 they provide a report regarding their audit of the Satyam account. The letter demanded further 24 information regarding the audit. According to ICAI president Ved Jain, "We today served show 25 cause notice on PriceWaterhouse and asked it to reply within 21 days." If the reply to the notice 26 does not come by 21 days, all members of PriceWaterhouse who audited the Saytam accounts 27 could be banned for life, Jain said. PwC has also been asked by the ICAI to submit balance 28 LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 21
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1 sheets, financial statements and other relevant documents of Satyam Computer audited by it for 2 the last five years.
3 93. On January 14, 2009, Satyam fired PwC as its auditor and replaced them with 4 Deloitte Touche Tohmatsu International and KPMG. That same day, PwC informed Satyam's 5 new Board of Directors that "[PwC's] opinions on the financial statements may be rendered 6 inaccurate and unreliable," in view of the financial irregularities disclosed by Chairman Raju. 7 94. In a letter to Satyam's new Board of Directors on or about January 14, 2009, PwC 8 wrote, "We wish to advise that the company should promptly notify any person or entity that is 9 known to relying upon our audit report that our audit opinion should no longer be relied upon." 10 In view of Chairman Raju's admission, PwC also advised the Board of Directors to promptly 11 commence an independent investigation as required under the U. S. Securities and Exchange Act 12 of 1934 to determine whether such illegal acts, indeed, occurred. 13 H. Defendants Concealed Accounting Improprieties And Misstated Satyam's 14 Financial Condition In Public Reports, Filings And Statements
15 95. During the Class Period, in each and every Form 20-F and in its Form F-3, first 16 filed on February 25, 2005, and later amended several times, filed with the SEC, and in each and 17 every press release announcing Satyam's financial results, Defendants concealed the deceptive 18 and improper accounting practices described above, and later revealed in Chairman Raju's 19 January 7, 2009 letter, and instead, repeatedly overstated the Company's financial condition. 20 Satyam both affirmatively lied about its financial results, overstating its earnings and assets, 21 while also omitting material facts regarding the true financial condition of Satyam from its 22 shareholders.
23 96. Satyam filed its Annual Reports on Form 20-F on the following days with the 24 SEC beginning in 2004: 25 • June 29, 2004 (Amended on July 26, 2004) 26 • April 28, 2005 27 • April 28, 2006 28 • April 30, 2007 LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 22
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1 • August 8, 2008 2 97. These financial results all listed the assets of Satyam, as well as its earnings. As 3 early as its financial statements for fiscal year ending March 31, 2006, Satyam announced it had 4 cash of $262 million USD (roughly $12.6 billion rupees), investments in bank deposits of $403.7 5 million USD (roughly 19.5 billion rupees), and total assets of $1.18 billion USD (roughly 57.1 6 billion rupees). If Satyam's true assets, as of September 30, 2008, were only $3.21 billion 7 rupees, it is clear that Satyam's financial statements have been fraudulent since at least 2005.
8 98. As Chairman Raju admitted in his January 7, 2009 letter, Satyam's reported assets 9 and earnings were false for several years. Notably, Satyam's reported cash and bank balances, as 10 of September 30, 2008 were inflated by over INR50 billion. Satyam's reported cash and bank 11 balances, at least since 2004, have thus been materially misstated. Also, Satyam's reported 12 accrued interest, as of September 30, 2008 was inflated by over INR3.76 billion. Satyam's 13 reported accrued interest, at least since 2004, has thus been materially misstated. Satyam also 14 falsely reported revenues of INR27 billion for the fiscal quarter ending September 30, 2008 when 15 its actual revenues were INR21.12 billion. Satyam also falsely reported operating margins of 16 INR6.49 billion for the fiscal quarter ending September 30, 2008 when its actual operating 17 margin was INR610 million. Satyam's reported revenues and operating margins, at least since 18 2004, have thus been materially misstated. 19 99. On January 13, 2009, Satyam CFO Srinivas Vadlamani alleged that he did not 20 know about the fraud because he "specifically" was told not to handle the company's bank 21 deposits and that he was "presented" with Satyam's balance sheets a week before board 22 meetings. As the CFO of Satyam, Srinivas Vadlamani had a duty to the owners of Satyam shares 23 not to accept this manner of handling financial statements. This is clearly evidence of highly 24 flawed to non-existent internal controls, a red flag that should have been detected and disclosed 25 by Srinivas Vadlamani and PwC.
26 100. In Chairman Raju's confession on January 7, 2009, he admitted that promoters 27 could have used forged bank deposits to show fictious deposits in order to inflate the assets of 28 Satyam. This is evidence of possible involvement, either willfully or recklessly by a number of LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 23
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1 financial institutions, including but not limited to ICICI Bank, Bank of Baroda, BNP Paribas, 2 Citibank, HDFC Bank, and HSBC Bank. 3 101. Satyam Computer Services Limited Chairman, B. Ramalinga Raju, confessed to 4 overstating the Company's financial condition in his letter to the Board Members. The 5 Company's Form 20-F from years 2004 to 2008 all stated increased revenue from the prior year. 6 Stated in Satyam Computer Services Limited's Form 20-F for the fiscal year ended March 31, 7 2005: "We have experienced significant growth in recent periods. In fiscal 2005 our total 8 revenues increased by 40.1% as compared to fiscal 2004, and in fiscal 2004 our total revenues 9 increased by 23.3% as compared to fiscal 2003." The Company's total revenues during this 10 period are $793,597,000 and its gross profit was $286,821,000. 11 102. In addition, PwC, having audited and authorized those financial results on Form 12 20-F also made material misstatements by certifying Satyam's reported financial results, at least 13 since 2004, as being accurate and being presented in accordance with U.S. GAAP. For the years 14 2004 through 2008, PwC provided unqualified audit opinions on Satyam's financial statements. 15 Its opinions certifying Satyam's financial statements were included in the Registration Statements 16 on Form F-3 for the issuance of Satyam ADRs on the NYSE and were included in Satyam's 17 Annual Reports on Form 20-F. PwC affirmatively consented to its opinions being included in 18 these public documents filed with the SEC. 19 103. Stated in Satyam Computer Services Limited's Form 20-F for the fiscal year ended 20 March 31, 2006: "We have experienced significant growth in recent periods. In fiscal 2006 our 21 total revenues increased by 38.1% as compared to fiscal 2005, and in fiscal 2005 our total 22 revenues increased by 40.1% as compared to fiscal 2004." The Company's total revenues during 23 this period are $1,096,300,00 and its gross profit was $407,300,000. 24 104. Stated in Satyam Computer Services Limited's Form 20-F for the fiscal year ended 25 March 31, 2007: "We have experienced significant growth in recent periods. In fiscal 2007, our 26 total revenues increased by 33.3% as compared to fiscal 2006, and in fiscal 2006, our total 27 revenues increased by 38.1% as compared to fiscal 2005." The Company's total revenues during 28 this period were $1,461,400,000 and its gross profit was $523,800,000. LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 24
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1 105. Stated in Satyam Computer Services Limited's Form 20-F for the fiscal year ended
2 March 31, 2008: "We have experienced significant growth in recent periods. In fiscal 2008, our
3 total revenues increased by 46.3% as compared to fiscal 2007, and in fiscal 2007, our total
4 revenues increased by 33.3% as compared to fiscal 2006." The company's total revenues during
5 this period were $2,138,100,000 and its gross profit was $778,900,000.
6 106. Each of these Annual Reports on Form 20-F contained the financial results of
7 Satyam that were certified by Satyam's CFO, Defendant Srinivas Vadlamani and Satyam's
8 outside auditor, PwC. Those financial statements were false because Chairman Raju and Satyam
9 had fabricated the earnings and assets of Satyam by billions of Indian rupees. By its own
10 admission, Satyam's financial results had been manipulated for years and the size of the 11 manipulation only grew each year.
12 107. In his January 7, 2009 letter, Chairman Raju stated that, "The gap in the balance
13 sheet has arisen purely on account of inflated profits over several years. What started as a
14 marginal gap between actual operating profits and the one reflected in the books of accounts
15 continued to grow over the years. It has attained unmanageable proportions as the size of the
16 company operations grew significantly (annualised revenue run rate of Rs 11,276 crore in the
17 September quarter, 2008, and official reserves of Rs 8,392 crore). The differential in the real
18 profits and the one reflected in the books was further accentuated by the fact that the company
19 had to carry additional resources and assets to justify a higher level of operations thereby
20 significantly increasing the costs."
21 108. In addition, Satyam issued false and fraudulent press releases, including earnings
22 announcements, since at least 2004. These results were false because Satyam falsely misstated
23 its revenues, earnings, assets, liabilities and operating margins.
24 1. 2005
25 109. In the "Operating and Financial Review and Prospects" section of the Form 20-F
26 for the year ended March 31, 2005, Satyam continued to express how great its gains are per year.
27 "Our total revenues for fiscal 2005 were $793.6 million and over the past three fiscal years our
28 revenues have grown at a compound annual growth rate of 24.2%." It continues by saying: "Our LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 25
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1 revenues and profitability have gown rapidly in recent years. In fiscal 2005, total revenues 2 increased by 40.1% as compared to fiscal 2004. Our revenues grew to $793.6 million in fiscal 3 2005 from $566.4 million in fiscal 2004. Our revenue and profitability growth is attributable to a 4 number of factors related to the expansion of our business, including increase in the volume of 5 projects completed for our widening customer base, increase in our associate numbers, increased 6 growth in our consulting and enterprise business solutions business and a strengthening of our 7 customer base in North America and Europe.
8 2. 2006 9 110. In the "Operating and Financial Review and Prospects" section of the Form 20-F 10 for the year ended March 31, 2006, Satyam continued to express how great its gains were per 11 year. "Our total revenues for fiscal 2006 were $1,096.3 million and over the past tlu-ee fiscal 12 years our revenues have grown at a compound annual growth rate of 33.7%." It continues by 13 saying, "Our revenues and profitability have gown significantly in the recent years. In fiscal 14 2006, our total revenues increased by 38.1% as compared to fiscal 2005. Our revenues grew to 15 $1,096.3 million in fiscal 2006 from $793.6 million in fiscal 2005. Our revenue and profitability 16 growth is attributable to a number of factors related to the expansion of our business, including 17 increase in the volume of projects completed for our widening customer base, increase in our 18 associate numbers, increased growth in our consulting and enterprise business solutions business 19 and a strengthening of our customer base in the United States and Europe. Our growth has 20 continued despite increasing pressure for higher wages for our associates coupled with pressure 21 for lower prices for our customers." 22 3. 2007
23 111. In the "Operating and Financial Review and Prospects" section of the Form 20-F 24 for the year ended March 31, 2007, Satyam continued to express how great its gains are per year. 25 "Our total revenues for fiscal 2007 were $1,461.4 million and over the past three fiscal years our 26 revenues have grown at a compound annual growth rate of 37.2%." It continues by saying, "Our 27 revenues and profitability have gown significantly in the recent years. Our total revenues 28 increased by 33.3% to $1,461.4 million in fiscal 2007 as compared to $1,096.3 million in fiscal LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 26 ase 5:09-cv-00117-RS Document 4 Filed 01/16/2009 Page 30 of 45
1 2006. Our net income increased by 19.6% to $298.4 million in fiscal 2007 from $249.4 million 2 in fiscal 2006. Our total revenues increased by 38.1% to $1,096.3 million in fiscal 2006 as 3 compared to $793.6 million in fiscal 2005. Our net income increased by 62.2% to $249.4 million 4 in fiscal 2006 from $153.8 million in fiscal 2005. Our revenue and profitability growth is 5 attributable to a number of factors related to the expansion of our business, including increase in 6 the volume of projects completed for our widening customer base, increase in our associate 7 numbers, increased growth in our consulting and enterprise business solutions business and a 8 strengthening of our customer base in the United States and Europe. Our growth has continued 9 despite increasing pressure for higher wages for our associates coupled with pressure for lower 10 prices for our customers." 11 4. 2008 12 112. In the "Operating and Financial Review and Prospects" section of the Form 20-F 13 for the year ended March 31, 2008, Satyam continued to express how great its gains are per year. 14 "Our total revenues for fiscal 2008 were $2,138.1 million and over the past three fiscal years our 15 revenues have grown at a compound annual growth rate of 39.1%." It continues by saying, "Our 16 revenues and profitability have gown significantly in the recent years. Our total revenues 17 increased by 46.3% to $2,138.1 million in fiscal 2008 as compared to $1,461.4 million in fiscal 18 2007. Our net income increased by 39.7% to $417.0 million in fiscal 2008 from $298.4 million 19 in fiscal 2007. Our total revenues increased by 33.3% to $1,461.4 million in fiscal 2007 as 20 compared to $1,096.3 million in fiscal 2006. Our net income increased by 19.6% to $298.4 21 million in fiscal 2007 from $249.4 million in fiscal 2006. Our revenue and profitability growth is 22 attributable to a number of factors related to the expansion of our business, including increase in 23 the volume of projects completed for our widening customer base, increase in our associate 24 numbers, increased growth in our consulting and enterprise business solutions business and a 25 strengthening of our customer base in the United States and Europe. Our growth has continued 26 despite increasing pressure for higher wages for our associates coupled with pressure for lower 27 prices for our customers." 28 111 LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 27
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1 1. The Securities and Exchange Board of India Investigates Fraud
2 113 Immediately after the announcement of the fraud by Chairman Raju, the Securities
3 and Exchange Board of India ("SEBI") announced it was opening a probe into Satyam's
4 finances. One SEBI regulator described the scope of the financial wrong-doing at Satyam as
5 being of "horrifying magnitude."
6 114. SEBI chairman C.B. Bhave stated that, "We are in touch with Ministry of
7 Corporate Affairs. We are also in discussion with them as to what steps need to be taken from the
8 perspective of power they have under the law and SEBI has under the law." The Indian
9 government has referred Satyam's case to the Serious Fraud Investigation Office, an official of
10 the Ministry of Corporate Affairs said. The official added that all regulators and government
11 agencies will make coordinated efforts to get to the bottom of the Satyam wrongdoings, stating
12 that company management has not been fair to the shareholders.
13 115. After the announcement of the fraud, Mr. Bhave went on to state that, "Our main
14 effort is to see that whatever facts are available with any regulatory agency, those are put out and
15 investors know the truth. I am sure we will have to learn few lessons from this as we get through
16 the facts."
17 116. SEBI has announced that it suspects that in the last month, some marketmen may
18 have unfairly traded in Satyam shares and made handsome gains. "In the interest of investors and
19 the general public, SEBI has decided to investigate into the affairs relating to buying, selling or
20 dealing in the shares of Satyam and more particularly to ascertain whether the provisions of the
21 SEBI Act and various regulations have been violated," the regulator said in a statement.
22 117. Kumar A. has been appointed as the investigating authority to investigate the issue
23 and submit a report.
24 118. According to SEBI, Chairman Raju's January 7, 2009, letter raised serious
25 questions over accounting and auditing standards in the country. "It was most surprising that a
26 cash balance that was non-existent got certified. The case raises the issue of authenticity of
27 accounts that have been audited," said Mr. Bhave.
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1 119. On January 9, 2009, it was announced that the SEBI had taken possession of
2 Satyam's books and were in the process of conducting a thorough and independent audit of the
3 financial statements of Satyam. According to Mr. Bhave, "The books will be seen by the
4 inspection team and they have been in conversation with the chief financial officer. They have
5 also requested to see Ramalinga Raju to question him on a few things. He's meeting the team
6 tomorrow."
7 120. The SEBI order also allowed the Indian government to replace Satyam's Board of
8 Directors. Minister for Corporate Affairs P.C. Gupta announced on January 9, 2009 that he
9 would dismiss Satyam's entire board immediately and constitute a new Board of Directors that
10 would meet within a week to make a decision on the management of the company. On January 11 12, 2009, tlu-ee new members of the Board of Directors were announced: Deepark Parekh,
12 chairman of the housing Development Finance Corp., Kiran Karnik, former president of the
13 National Association of Software and Service Co. (Nasscom), and C. Achutan, a former member
14 of SEBI.
15 121. That same day, it was reported that Satyam's CFO Srinivas Vadlamani had failed
16 to show up for work since the January 7, 2009, announcement and had attempted to commit
17 suicide. That same day, it was announced that Indian police had arrested the Raju brothers,
18 Ramalinga Raju and Rama Raju.
19 J. Violations of Accounting Rules
20 122. GAAP is recognized and used by the accounting profession in order to define
21 acceptable accounting practices at a particular time. Although Satyam is an Indian company, in
22 Satyam's Annual Reports on Form 20-F and in Satyam's registration statements filed on Form F-
23 3, Satyam states that its financial statements are presented in accordance with U.S. GAAP. The
24 SEC has also endorsed GAAP in Regulation S-X, 17 C.F.R. § 210.4-01(a)(1), which provides
25 that financial statements filed both annually and quarterly with the SEC must comply with
26 GAAP. If the filings do not comply with GAAP, they are presumed to be misleading and
27 inaccurate, despite footnote or other disclosure. Therefore, defendants' misleading statements
28 and omissions, described above, violated GAAP and SEC Regulations. LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 29
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1 123. Statements of Financial Accounting Standards ("FAS") are the highest authority
2 in GAAP and are created by the Financial Accounting Standards Board. GAAP provides other
3 authoritative pronouncements, including Accounting Principles Board Opinions ("APB") and
4 Statements of Position ("SOP") of the American Institute of Certified Public Accountants
5 ("AICPA").
6 124. The responsibility for preparing financial statements that conform to GAAP rests
7 with corporate management, as set forth in Section 110.03 of the AICPA Professional Standards:
8 The financial statements are management's responsibility. Management is responsible for adopting accounting policies and for establishing and maintaining 9 internal control, that will, among other things, record, process, summarize, and report transactions (as well as events and conditions) consistent with 10 management's assertions embodied in the financial statements. The entity's transactions and the related assets, liabilities, and equity are within the direct 11 knowledge and control of management . . Thus, the fair presentation of financial statements in conformity with [GAAP] is an implicit and integral part of 12 management's responsibility.
13 125. Pursuant to these requirements, Satyam represented in its reports filed with the
14 SEC that its financial results were presented appropriately in accordance with GAAP.
15 Nevertheless, defendants knowingly disregarded the following fundamental GAAP rules when
16 preparing Satyam's financial statements:
17 (a) Financial reporting should provide information that is useful to
18 present and potential investors, creditors and other users in making rational,
19 investment, credit and similar decisions (FASB Statement of Concepts No. 1, lf
zo 34);
21 (b) Financial reporting should provide information about the economic
22 resources of an enterprise, the claims to those resources, and matters that change
23 such resources (FASB Statement of Concepts No. 1, lf 40);
24 (c) Financial reporting should provide information about how
25 management of an enterprise has discharged its stewardship responsibility to
26 owners (stockholders) for the use of enterprise resources entrusted to it (FASB
27 Statement of Concepts No. 1, lf 50);
28 LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 30
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1 (d) Financial reporting should provide information about an
2 enterprise's financial performance during a time period. (FASB Statement of
3 Concepts No. 1, lf 42). This information is often used by investors and creditors
4 in order to evaluate whether they are interested in future investment and credit
5 offerings;
6 (e) Financial reporting should be reliable and relevant in that it
7 represents what it purports to represent (FASB Statement of Concepts No. 2 'If
8 58-59);
9 Financial reporting should be complete, in other words, all 10 information that may be necessary to assure that it validly represents underlying
11 events and conditions must be provided (FASB Statement of Concepts No. 2, lf
12 79); and
13 (g) Financial reports should be conservative. Preparers must
14 adequately consider uncertainties and risks inherent in business situations and
15 reflect those issues in the reports (FASB Statement of Concepts No. 2, tf 95, 97).
16 126. Throughout the Class Period, all the material misrepresentations and omissions
17 particularized in this Complaint were disseminated and/or approved by defendants and those
18 actions were a direct cause of the damages sustained by the plaintiffs and the Class.
19 127. The transactions described above were not properly accounted for, and Satyam's
20 financial statements during the Class Period were not prepared in accordance with GAAP. Due
21 to defendants' improper conduct, Satyam has revealed that it overstated its earnings and assets by
22 over INR70 billion, equal to about $1.4 billion USD. Critically, Satyam admitted that over 90%
23 of its listed assets during the Class Period were non-existent. This is a huge misstatement and
24 constitutes a material misstatement in Satyam's filings on Form 20-F and Form F-3. Based on
25 regulations by the SEC and national stock exchanges, as well as common sense, the undisclosed
26 information during the Class Period is the type investors and securities analysts expect to be
27 disclosed.
28 / / / LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 31
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1 K. Insider Trading 2 128. According to filing by Satyam to the Bombay Stock Exchange, since July 14, 3 2008, nine officials led by Satyam CFO Srinivas Vadlamani sold a combined 267, 358 shares of 4 Satyam in 32 transactions with a combined value of INR86.3 million, equal to about $1.8 million 5 USD. These transactions are evidence that individuals at Satyam were aware of the fraud and 6 acted with fraudulent intent, in order to personally profit at the expense of other Satyam security 7 holders, including the Plaintiff and other Class Members. 8 VI. SCIENTER ALLEGATIONS 9 129. Both Defendants Ramalinga Raju (as Chairman of Satyam) and Rama Raju (as 10 Managing Director and Chief Executive Officer of Satyam) have admitted to intentionally
11 manipulating the financial results of Satyam, Chairman Raju admits that he manipulated 12 Satyam's financial results in order to avoid any takeover bids since any takeover attempt would 13 lead to a review of Satyam's books and discovery of the fraud. 14 130. As R.K. Gupta, Managing Director of Taurus Asset Management in New Delhi 15 stated, "If a company's chairman himself says they built fictitious assets, who do you believe 16 here? This has put a question mark on the entire corporate governance system in India." 17 VII. FRAUD-ON-THE MARKET DOCTRINE
18 131. At all relevant times, the market for Satyam ADRs was an efficient market for the 19 following reasons, among others:
20 • Satyam ADRs met the requirements for listing, and was listed and actively 21 traded, on the NYSE, a highly efficient market, 22 • As a regulated issuer of securities in the United States, Satyam filed 23 Annual Reports on Form 20-F with the SEC. These reports were publicly available and could be 24 and were reviewed by the investing public, 25 • Satyam stock was followed by securities analysts employed by major 26 brokerage firms who wrote reports which were distributed to the sales force and certain 27 customers of their respective brokerage firms. Each of these reports were publicly available and 28 entered the public marketplace, LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 32
ase 5:09-cv-00117-RS Document 4 Filed 01/16/2009 Page 36 of 45
1 • Satyam regularly issued press releases that were carried by national 2 newswires. 3 Each of these releases was publicly available and entered the public marketplace, 4 132. As a result, the market for Satyam securities promptly digested current 5 information with respect to Satyam from all publicly-available sources and reflected such 6 information in Satyam's stock price. The price of Satyam ADRs moved in direct response to 7 information regarding the company that was put out in the public marketplace. For example, the 8 share price of Satyam ADRs plummeted to near zero when it was announced that the company 9 had perpetrated a fraud of over INR70 billion (roughly $1.4 billion USD). Under these 10 circumstances, all purchasers of Satyam ADRs during the Class Period, including Plaintiff, relied 11 on the market price of Satyam ADRs and suffered similar injury through their purchase of these 12 ADRs at artificially inflated prices and a presumption of reliance applies. 13 VIII. CAUSES OF ACTION 14 FIRST CAUSE OF ACTION
15 VIOLATION OF SECTION 10(b) OF THE EXCHANGE ACT 16 AND RULE 10b-5 PROMULGATED THEREUNDER 17 (Against All Defendants) 18 133. Plaintiff hereby incorporates by reference all of the allegations set forth above as 19 though fully set forth hereafter.
20 134. During the Class Period, each of the Defendants carried out a plan, scheme and 21 course of conduct which was intended to and, tlu-oughout the Class Period, did deceive the 22 investing public, including plaintiffs and other Class members, as alleged herein and caused 23 Plaintiff and other members of the Class to purchase Satyam securities at distorted prices that 24 they would not have paid had they known of the improper conduct alleged herein. In furtherance 25 of this improper scheme, plan and course of conduct, Defendants, and each of them, took the 26 actions set forth herein.
27 135. Defendants: (i) employed devices, schemes, and artifices to defraud; (ii) made 28 untrue statements of material fact and/or omitted to state material facts necessary to make the LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 33
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1 statements not misleading; and (iii) engaged in acts, practices, and a course of business which 2 operated as a fraud and deceit upon the purchasers of Satyam securities, including Plaintiff and 3 other members of the Class, in an effort to artificially inflate Satyam's purported financial health 4 and stock value and enrich themselves tlu-ough their personal holdings of Satyam securities, in 5 violation of Section 10(b) of the Exchange Act and Rule 10b-5. All Defendants are sued as 6 primary participants in the wrongful and illegal conduct and scheme charged herein. 7 136. Defendants, individually and in concert, directly and indirectly, by the use, means 8 or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a 9 continuous course of conduct to conceal adverse material information about Satyam's earnings 10 and assets, as specified herein. 11 137. Defendants employed devices, schemes and artifices to defraud and a course of 12 conduct and scheme as alleged herein to improperly manipulate and profit and thereby engaged 13 in transactions, practices and a course of business which operated as a fraud and deceit upon 14 Plaintiff and members of the Class.
15 138. Defendants had actual knowledge of the misrepresentations and omissions of 16 material facts set forth herein, or acted with reckless disregard for the truth in that they failed to 17 ascertain and to disclose such facts, even though such facts were available to them. Defendants' 18 material misrepresentations and/or omissions were done knowingly or recklessly and for the 19 purpose and effect of concealing the truth.
20 139. As a result of the dissemination of the materially false and misleading information 21 and failure to disclose material facts, as set forth above, the market prices of Satyam securities 22 were distorted during the Class Period such that they did not reflect the true financial health of 23 Satyam as alleged herein. In ignorance of these facts, the market prices of the shares were 24 distorted, and relying directly or indirectly on the false and misleading statements made by the 25 Defendants, or upon the integrity of the market in which the securities trade, and/or on the 26 absence of material adverse information that was known to or recklessly disregarded by 27 Defendants but not disclosed in public statements by Defendants during the Class Period, 28 Plaintiff and the other members of the Class acquired the shares or interests in Satyam during the LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 34
ase 5:09-cv-00117-RS Document 4 Filed 01/16/2009 Page 38 of 45
1 Class Period at distorted prices and were damaged thereby when the value of their shares fell
2 after the truth became known, representing the causal connection between defendants' fraud and
3 plaintiffs' damages.
4 140. At the time of said misrepresentations and omissions, Plaintiff and other members
5 of the Class were ignorant of their falsity, and believed them to be true. Had Plaintiff and other
6 members of the Class and the marketplace known of the truth concerning Satyam's operations,
7 which were not disclosed by Defendants, Plaintiff and other members of the Class would not
8 have purchased or otherwise acquired their shares or, if they had acquired such shares or other
9 interests during the Class Period, they would not have done so at the distorted prices which they 10 paid.
11 141. By virtue of the foregoing, Defendants violated Section 10(b) of the Exchange
12 Act, and Rule 10b-5 promulgated thereunder.
13 SECOND CAUSE OF ACTION
14 VIOLATION OF SECTION 20(a) OF THE EXCHANGE ACT
15 (Against the Individual Defendants and Satyam)
16 142. Plaintiff hereby incorporates by reference all of the allegations set forth above as
17 though fully set forth hereafter.
18 143. It is appropriate to treat the Individual Defendants and Satyam as a group for
19 pleading purposes and to presume that the materially false, misleading, and incomplete
20 information conveyed in the Satyam public filings, press releases and other publications are the
21 collective actions of the Individual Defendants and Satyam.
22 144. The Individual Defendants acted as controlling persons of Satyam within the
23 meaning of Section 20(a) of the Exchange Act for the reasons alleged herein. By virtue of their
24 operational and management control of Satyam's respective businesses and systematic
25 involvement in the fraudulent scheme alleged herein, the Individual Defendants named herein
26 each had the power to influence and control and did influence and control, directly or indirectly,
27 the decision-making and actions of Satyam, including the content and dissemination of the
28 various statements which Plaintiff contend are false and misleading. Indeed, two of the LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 35
ase 5:09-cv-00117-RS Document 4 Filed 01/16/2009 Page 39 of 45
1 Individual Defendants, Ramalinga Raju and Rama Raju have admitted to both knowing of and
2 intending to commit the fraud set forth herein. Each of the Individual Defendants named herein
3 had the ability to prevent the issuance of the statements alleged to be false and misleading or
4 cause such statements to be corrected.
5 145. Each of the Individual Defendants named herein had direct and supervisory
6 involvement in the operations of Satyam and, therefore, is presumed to have had the power to
7 control or influence the particular transactions giving rise to the securities violations as alleged
8 herein, and exercised the same.
9 146. Each of the Individual Defendants named herein, by virtue of their stock
10 ownership, high-level positions, and participation in and/or awareness of Satyam's operations, 11 had the power to influence and control and did influence and control, directly or indirectly, the
12 decision-making of Satyam, including the content and dissemination of the various statements
13 that Plaintiff contends are false and misleading. The Individual Defendants were provided with
14 or had unlimited access to copies of Satyam's reports, press releases, public filings and other
15 statements alleged by Plaintiff to be misleading prior to and/or shortly after these statements were 16 issued and had the ability to prevent the issuance of the statements or cause the statements to be
17 corrected. Satyam controlled the Individual Defendants and all of its employees.
18 147. As set forth above, each of the Defendants violated Section 10(b) and Rule 10b-5
19 by their acts and omissions as alleged in this Complaint. By virtue of their positions as
20 controlling persons, each of the Individual Defendants is liable pursuant to Section 20(a) of the
21 Exchange Act. Similarly, Satyam is liable pursuant to Section 20(a) of the Exchange Act as a
22 control person of the Individual Defendants. As a direct and proximate result of Defendants'
23 wrongful conduct, Plaintiffs and other members of the Class suffered damages in connection
24 with their purchases of Satyam securities during the Class Period at inflated prices and the losses
25 suffered when the value of their shares fell after the truth became known, representing the causal
26 connection between Defendants' fraud and the damages suffered by Plaintiff and the Class.
27
28 / / / LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 36
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1 THIRD CAUSE OF ACTION 2 VIOLATION OF SECTION 11 OF THE SECURITIES ACT 3 (Against All Defendants) 4 148. Plaintiff hereby incorporates by reference all of the allegations set forth above as 5 though fully set forth hereafter.
6 149. This claim is brought against all Defendants pursuant to Section 11 of the 7 Securities Act. This cause of action contains a claim of fraud, deceit, manipulation, or 8 contrivance in contravention of a regulatory requirement concerning the securities laws against 9 all of the Defendants. 10 150. Satyam issued and filed the materially false and misleading registration statement 11 on Form F-3 with the SEC. As the issuer of the security that was sold pursuant to a false and 12 misleading registration statement, Satyam is strictly liable for all damages resulting from the 13 false and misleading registration statement. 14 151. PwC was a chartered accounting firm retained by Satyam to, among other things, 15 audit Satyam's financial statements. Pursuant to that retention, Andersen issued unqualified 16 opinions validating Satyam's financial statements on Form 20-F for fiscal years ending 2001, 17 2002, 2003, 2004, 2005, 2006, 2007 and 2008.
18 152. PwC expressly consented to having its unqualified audit opinion for Satyam's 19 financial results incorporated into the registration statement for the Satyam ADR issuance on 20 Form F-3. As such, PwC expressly consented to serving as an accounting "expert" with respect 21 to the offering of the Satyam ADRs. 22 153. The ADRs were purchased by Plaintiffs and Class members pursuant to or 23 traceable to the registration statement. 24 154. PwC's unqualified opinions of Satyam's financial statements were materially false 25 and misleading. Contrary to its representations, PwC's audit of those financial statements had not 26 been conducted in accordance with GAAS and other appropriate auditing standards, and 27 Satyam's financial condition had not been presented in conformity with U.S. GAAP, as set forth 28 above. Instead, Satyam's financial statements contained untrue statements of material facts and LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 37
ase 5:09-cv-00117-RS Document 4 Filed 01/16/2009 Page 41 of 45
1 failed to state other facts necessary to make the statements not misleading, and were in violation
2 of GAAP.
3 155. As an accounting expert which consented to the use of its unqualified audit
4 opinions, PwC is liable under Section 11 of the Securities Act for the material misrepresentations
5 or omissions contained in its unqualified audit opinion and in Satyam's false financial statements
6 contained in Form F-3. PwC did not make a reasonable investigation and did not possess
7 reasonable grounds for believing that its representations in its audit opinions and Satyam's
8 financial statements were true, did not omit any material facts, and were not materially
9 misleading. 10 156. Plaintiffs did not know or in the exercise of reasonable diligence could not have 11 known of the misstatements and omissions of material fact contained in the registration statement
12 and prospectus.
13 157. Plaintiffs have suffered damages as a result of the misstatements and omissions of
14 material fact contained in the Form F-3 registration statement and prospectus for which they are 15 entitled to compensation. 16 FOURTH CAUSE OF ACTION
17 VIOLATION OF SECTION 15 OF THE SECURITIES ACT
18 (Against the Individual Defendants and Satyam)
19 158. Plaintiff hereby incorporates by reference all of the allegations set forth above as
20 though fully set forth hereafter.
21 159. It is appropriate to treat the Individual Defendants and Satyam as a group for
22 pleading purposes and to presume that the materially false, misleading, and incomplete
23 information conveyed in the Satyam's filing on Form F-3 and the documents incorporated by
24 reference into Satyam's filing on Form F-3 are the collective actions of the Individual Defendants
25 and Satyam.
26 160. The Individual Defendants acted as controlling persons of Satyam within the
27 meaning of Section 15 of the Securities Act for the reasons alleged herein. By virtue of their
28 operational and management control of Satyam's respective businesses and systematic LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 38 ase 5:09-cv-00117-RS Document 4 Filed 01/16/2009 Page 42 of 45
1 involvement in the fraudulent scheme alleged herein, the Individual Defendants named herein 2 each had the power to influence and control and did influence and control, directly or indirectly, 3 the decision-making and actions of Satyam, including the content and dissemination of thefiling 4 on Form-3 and the documents incorporated by reference into that filing which Plaintiff contend 5 are false and misleading. Indeed, two of the Individual Defendants, Ramalinga Raju and Rama 6 Raju have admitted to both knowing of and intending to commit the fraud set forth herein. Each 7 of the Individual Defendants named herein had the ability to prevent the issuance of the filing on 8 Form F-3 and the documents incorporated by reference into that filing alleged to be false and 9 misleading or cause such statements to be corrected. 10 161. Each of the Individual Defendants named herein had direct and supervisory 11 involvement in the operations of Satyam and, therefore, is presumed to have had the power to 12 control or influence the particular transactions giving rise to the securities violations as alleged 13 herein, and exercised the same. 14 162. Each of the Individual Defendants named herein, by virtue of their stock 15 ownership, high-level positions, and participation in and/or awareness of Satyam's operations, 16 had the power to influence and control and did influence and control, directly or indirectly, the 17 decision-making of Satyam, including the content and dissemination of the filing on Form F-3 18 and the documents incorporated by referenece into that filing that Plaintiff contends are false and 19 misleading. The Individual Defendants were provided with or had unlimited access to the filing 20 on Form F-3 and the documents incorporated by reference into that filing and had the authority to 21 correct or prevent the filing of materially false and misleading information with the SEC. 22 Satyam controlled the Individual Defendants and all of its employees.
23 163. As set forth above, each of the Defendants violated Section 11 by their acts and 24 omissions as alleged in this Complaint. By virtue of their positions as controlling persons, each 25 of the Individual Defendants is liable pursuant to Section 15 of the Securities Act. Similarly, 26 Satyam is liable pursuant to Section 15 of the Securities Act as a control person of the Individual 27 Defendants. As a direct and proximate result of Defendants' wrongful conduct, Plaintiff and 28 other members of the Class suffered damages in connection with their purchases of Satyam LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 39
ase 5:09-cv-00117-RS Document 4 Filed 01/16/2009 Page 43 of 45
1 securities during the Class Period pursuant to Satyam's misleading registration statement filed on
2 Form F-3.
3 PRAYER FOR RELIEF
4 WHEREFORE, Plaintiff, on behalf of himself and the Class, prays for judgment as
5 follows:
6 1. Declaring this action to be a proper class action pursuant to Rules 23(a) and
7 23(b)(3) of the Federal Rules of Civil Procedure on behalf of the Class defined herein;
8 2. Awarding Plaintiff and all members of the Class damages against the Defendants,
9 jointly and severally, in an amount to be proven at trial; 10 3. Awarding Plaintiff and members of the Class appropriate equitable relief;
11 4. Awarding Plaintiff and members of the Class pre-judgment interest, as well as
12 reasonable attorneys' fees and other costs;
13 5. Awarding such other relief as this Court may deem just and proper.
14
15 Dated: January 16, 2009 COTCHETT, PITRE & McCARTHY
16
17 By: /s/ Joseph W. Cotchett 18 JOSEPH W. COTCHETT 19 Cotchett, Pitre & McCarthy 840 Malcolm Road, Suite 200 20 Burlingame, California 94010 Phone: (650) 697-6000 21 Fax: (650) 697-0577
22 Attorneys for Plaintiff and the Class
23
24
25
26
27
28 LAW 0 FFIC ES COTCHETT, PITRE, SIMON & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 40 ase 5:09-cv-00117-RS Document 4 Filed 01/16/2009 Page 44 of 45
1 JURY TRIAL DEMAND
2 Plaintiff, pursuant to Federal Rule of Civil Procedure 38, individually and on behalf of all
3 others similarly situated, demands a trial by jury of all issues which are subject to adjudication by
4 a trier of fact.
5
6 Dated: January 16, 2009 COTCHETT, PITRE & McCARTHY
7
8 By: /s/ Joseph W. Cotchett 9 JOSEPH W. COTCHETT 10 Cotchett, Pitre & McCarthy 840 Malcolm Road, Suite 200 11 Burlingame, California 94010 Phone: (650) 697-6000 12 Fax: (650) 697-0577
13 Attorneys for Plaintiff and the Class
14
15
16
17
18
19
20
21
22
23
24
25
26
27
2 28 EEETEEEKEs COTCHETT, PITRE,SRVION & MCCARTHY FIRST AMENDED COMPLAINT FOR VIOLATION OF FEDERAL SECURITIES LAWS 41 Case 5:09-cv-00117-RS Document 4 Filed 01/16/2009 Page 45 of 45
PLAINTIFF'S CERTIFICATE
The undersigned ("Plaintiff') declares, as TO the claims asserted under the federal securities laws, that
1. Plaintiff has reviewed the complaint against Satyam Computer Services, Ltd_ ("Satyanal and certain other defendants.
2. Plaintiff did not acquire the security that is the subject of this action at the direction of Plaintiff's counsel or in order to participate in this private action or any other litigation under thc federal securities laws.
3_ Plaintiff is willing to serve as a representative party on behalf of a class, including providing testimony at deposition and trial, if necessary.
4. Plaintiff will not accept any payment for serving as a representative party on behalf of thc class beyond the Plaintiff's pro rata share of any recovery, except such reasonable costs and expenses (including lost wages) directly relating to the representation of the class as approved by the court.
5. Plaintiff made the following transactions during the Class Period in Satyam American Depository Receipts!
Purchases Date(s) Number of Shares Price +/J 5T0 7 SOD • 45 •251/68-5" /2R] Is 7 ho • a .2/. 5-0
Sales
Date(s) Number of Shares Price 7 /04 02.3-3115-
6. During the three years prior to the date of this Certification, Plaintiff has not sought to serve or served as a representative party for a class in an action filed under the federal securities laws.
7. I declare under penalty of pedury that the information above is accurate. Executed this • eXln day of January, 2009 in \--..\cop:VeS , Arizona. 7
Saji Vettiyil • Exhibit 4 Satyam to axe 4,500 employees - India Business - Business - The Times of India Printed from THE TIMES OF INDIA Satyam to axe 4,500 employees 15 Se:..) 2005. tus ST. Debasmit.a G hush TNN
HYDERABAD: Satyam Computers, which has just started giving pink slips to its employees, could potentially downsize its workforce by a whopping 4,500 employees.
This translates to a little less than 9% of the 51,000 employees that the company employs. Company sources say 1,500 employees have been put under the performance improvement plan (PIP), euphemism for employees put on watch list and asked to shape up or ship out. Apart from this, 3,000 others have not been given any increment in the last appraisal cycle, thereby indicating that their services are dispensable.
"This 1,500 plus 3,000 equals 4,500, which indicates the total number of persons who could be eased out of the company," the source said.
On Friday, all employees received an e-mail from the company chief Ramalinga Raju warning them, especially the ones on the bench, to not bunk office and be in their best dress code, failing which they may face strict disciplinary action.
Last week, some 400 employees from across different locations were given the pink slip. Sources also indicated that after getting the message many among the 3,000 have also started leaving jobs. But an estimate of the employees who have left is not known.
A Satyam spokesperson said: "The bottom 5% of those who have got a bad appraisal are put under PIP and given dummy projects to prove themselves. If they fail they will be shown the door. But some of them marked for PIP said they have been given very little time to come up as winners." However, even as it downsizes, Satyam continues to hire new employees in thousands. Over 40% of them are fresh blood just passing out of college.
The spectre of retrenchment is creating panic among employees of the company. "Of the 12 people working in my project, five were suddenly asked to resign, failing which, the company warned, it would fire us. Everything came without warning," said a techie pleading anonymity.
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http://timesofindia.indiatimes.com/articleshow/msid-3483165,prtpage-1.cms[3/26/2009 7:49:17 PM] Exhibit 5 Kommunernes Pensionsforsikring a/s
— ANNU REP° RT2.05—
Kommunernes PensionsforsikrIng ais Tuborg Havnevei 14 DK-2900 Hellerup Tit 71 33 18 77 Fax 77 33 14 85 www sampension dk CVR nr 55839911 Board of Directors KP's Board of Directors comprises representatives of the labour market parties behind the majority of the pension schemes in KP, and representatives of the Group's employees.
Members representing local authorities, county councils and joint local- authority institutions: Erik Fabrin (chairman), Mayor of SoHerod local authority Berner Nielsen, Mayor of Purhus local authority Poul Arne Nielsen, Mayor of Vallo local authority Members representing negotiation organisations of the insured:
Kim Simonsen, Chairman of HK/Municipal Authorities (Vice Chairman) Bodil Otto, Vice Chairman of HK/Municipal Authorities Peter Waldorff, Chairman of the Association of Danish State Employees' Organisation Kenneth Bergen, Secretary of the Danish Metalworkers' Union (became a member on 1 December 2005 succeeding Bjarne Weiler Madsen, Consultant of the Danish Metalworkers' Union)
Members elected by the employees: Majbritt Pedersen, Chief Adviser Jan S. Johansen, Principal Clerk Bjorn Kroghsbo, Portfolio Manager John Ilene, Principal Administrative Officer
Internal Audit Michael Ravbjerg Lundgaard, Group Chief Internal Auditor
External audit PricewaterhouseCoopers Statsautoriseret Revisionsinteressentskab Strandvejen 44 DK-2900 Hellerup
Annual General Meeting The Annual General Meeting will be held at the Company's address on 20 April 2006.
5
--7 - -
==.-.= Kommunerne--.--y....PensionsfOrsikring-ais ,.:-.. --
--,_7:2. . 2. J.--7---:------ANNUAL÷=REPORT 2007.
Kommunernes Pensionsforstkring als Tuborg Havnevej 14 2900 Hellerup Tlf. 77 33 18 77 Fax 77 33 14 85 www sampension dk CVR nr 55834911 Board of Directors KP's Board of Directors consists of representatives of the labour market parties behind the majority of the pension schemes in KP, and representatives of the Group's employees.
Members representing local authorities, regions and jointly-controlled local authority institutions are:
Johnny Sotrup (Chairman), Mayor of Esbjerg local authority Berner Nielsen, Deputy Mayor of Randers local authority Poul Arne Nielsen, Mayor of Stevns local authority
Members representing negotiation organisations of the insured are:
Kim Simonsen, Chairman of HK (Deputy Chairman) Bodil Otto, Deputy Chairman of HK/Municipal Authorities Kenneth Bergen, Secretary of the Danish Union of Metalworkers Thora Petersen, Deputy Chairman HK/Government Authorities (joined the Board on 1 January 2008)
Peter Waldorff, Chairman of HK/Government Authorities (resigned on 1 January 2008)
Board members elected by the employees are:
John Helle, pension advisor Jan S. Johansen, pension advisor Bjorn Kroghsbo, portfolio manager Johnny Vesti Morch, pension advisor
Internal audit Michael Ravbjerg Lundgaard, group audit manager
External audit PricewaterhouseCoopers Statsautoriseret Revisionsaktieselskab Strandvejen 44 DK-2900 Hellerup, Denmark
Annual General Meeting The Annual General Meeting will be held on 16 April 2008 at the company's address.
2 Exhibit 6
tattaitttMOSIMI/ Annual Report (AGEN FONDENE 2004
CONTENTS Click on the arrow to go directly to Atin th r ratifp .n4 yea r the page you want to read. is Use the up and down arrows to our ,8.8H.a 1, r, ,,vith posit; , re4 urns browse back and forth.
2 Invitation to Electoral Meeting
3 Highlights/Equity funds total costs
4 Board of directors' report
9 Ownership structure
10 Portfolio managers' report
24 Return and risk measurements
25 Fund ranking
26 Annual financial statment
27 SKAGEN Global !!.other or SKAGEN Fondene. Our fun delivered 29 SKAGEN Vekst goo( returns to the ur we had a strong influx of new clients nd :apital. To rn airL ! h quality, and service level, the organisation 31 SKAGEN Kon-Tiki was considerably stren 7.nd board sf direaors' report page 4 Click here! 33 SKAGEN Hoyrente mood4r), results in a decent investment elinzate 35 SKAGEN Avkastning As predicted in last year's annual report, 2004 was not another top year for the share t it did provide opportu nit •;• " • x stock pickers". The World 37 SKAGEN Hoyrente I nstitusion v. only up 4.5 percent, measured in Nor. ; •!1 kroner. Our three equity Mach achieved returns of bemeen 25 and 32 percent. 38 Notes Board sf direaors' report page 4 and ponds issge 10 Click here! 40 Auditor's report Fallin risk premium in share marlzet in 2005? 41 Our employees With continued low interest rates globally.* p.:; could be the year when the relatively high -risk premium in di, ••:!:, re lila rketc Falk The g.n• n:,••,•r; ;inn, is related to die 42 Activities in Sweden/Partner still gtowing US twin dcri.-P • .••• well as th• banks i y '0 Click here!
43 History highlights SKACFN Fondene Stavanger ckanen (6tIt. floor), 44 Business concept and philosophy Stavany : othh.lor PO. Box tiger. Nonvay Telephone ( 0.: 0 Bergen For, .11o2, 5015 Ehnen, Norway Emmil Oslo Klingenber., 5, ')161 Oslo, Norway Mesuad My iabdJri Nxringssenter. 6010 Alesuhd, Norway
Note! • crIvano-r e often 'Trondheim Kongensgate 8, Merkursenteret, our visi ClIct011' I S. Thetelore rhe branch 7011 Trondheim. Norway offic, . rwa alwar m mned. It may be Stockholm Kungsgatan 72A smart to make an appointment in advance. 111 22 Stockholm, Sweden :§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§ „=„.„...... „.„=„=„...... 8333 3333 §a233 3333 3333 3333 3333 3333 3333 g 33x,. 8333: 8333: 8333 3333 3333 3333 3333 is issued seven rimes a year with a distribution of 60,000. The sur- In 2.004 the board of direcrors set up an internal auditing function vey provided us with extremely positive feedback in toral bur also in addition to our existing external auditor. This involves increased with important improvement ideas which we will bear in mind in examination of our operations by external partners, and is a natural 2005 when the publication will be levhened with four additional funaion of our strong growth. KPMG were selected as internal pages. In December the publication was issued for the First- time auditor, whilst- Pricewaterhouse Coopers continues as our external ever in Swedish, in electronic format. auditor. Use of inc inremet bank -My Account" increased in 2004, both in Future Prospects rerms of subscriptions and redemptions via the intemet and in In accordance with 53-3 of the Accounting Act inc annual_ repom obtaining information regarding the value development of fund shall contain information regarding cond FIRMS for continued ope- units. 36 percent of our transactions are now carried out dectroni- rations. Mter evaluation by the board this condition is considered tally, compared with 32 percent last year. irrelevant for the funds' accounts, since the ackounrs are based on actual values. -Wide partner hank network SKAGEN Fondene has now set up co-operation agreemenrs with The recommendation for profit allocation and profit coverage is in total 23 banks spread over the entire country. We are now acces- included in each fund's accounts on page 17. sible ro the savings market via a considerable bank network and are optimistic regarding future co-operation with our new --)artners. In It is with great pleasure that we can confirm that- our value based 2004 we also set up distribution agreements with Srore prand for invesrment philosophy has worked as well in 2004 as in the previous both Unit Link products and defined conffibution pension plans eleven years, both in good and difficult markets. The philosophy and with Dan ica for Unit Link. has remained unchanged since conception in 1993, and is just as racy= today as it was then. In the future we will continue to From 38 to 31 employees resist inc rnany fads and fashions of the financial markets. Index The number of employees in Stavanger Fondsforvalming increased focus, both in irs pure form and in the index near mentality, in 2004 from 38 to 51. All functions in the organisation were amti rules to be prevalent on the investor side internationally. This strengthened, that is to say portfolio management, communication, provides us with opportunities. since this index focus ignores a asset management (customer service), accounting and ad ministra- company's fundamental values, in such a way that the share value tion. The increase is a result of the growth in capital and acriviry, of the companies deviate from the fundamental value. and also the desire to upgrade the organisation in terms of competence. In 2005 we will continue to increase on thepersona side. Three appointments have already been made, coming into effect in 2005. After the establishment of the offic,e in Stockholm we are now pre- The portfolio department will be further strengthened by means of sem in six rowns and two counffies. Our focus on compemnce inc appointmenr of a new portfolio manager on the fixed development has been increased through the establishment of the income side. Nevv appoint menrs throughout the year are planned position of comperence manager. We have entered inro an agree- to strengthen the entire organisation. mem web inc Norwegian School of Economics and Business Administrarion regarding employee development in various subjects Our communication platform will be further enhanced 111 2005. valid] are relevant- for asser management. The frequency and scope Our homepages www.skagenfond memo will be thoroughly of our internal company rraining, has been increased. In line with upgraded throughout the year, and more complere Scandinavian the increase in the number of our employees we have also increased and English sites will be launched. The Markedsrapport will be the focus on cultural and value building, activities. lengthened from 16 to 20 pages to increase the amount of material adapted to a wide spectre of iinir holden. Ma tkedsrapport will also The work environmenr is stimulating and demanding. Incentive be published in Swedish and English, with local adaptation of the schemes stimulate inc employees to achieve the best possible material. returns for our clients. No incentive scheme is directly linked to subscription results. We expect to enter into further co-operation agreements M Sweden, and to see an increase in the number of Swedish clients. The board of direaors would inc ro thank the employees for their great efforts in a successful year. The economic upsvvina is expected to continue in 2005, but at a slower tempo than we taw seen in inc last year. We will probably Letal and ethical framework see a morc differentiated interest rate situation worldwide. This due 'Fhe Finance Secror Union of Norway, the Norwegian Financial to the facr that different parts of the world are at different &ages M Services Association, the Norwegian Savings Bank Association and their economic cydes and therefore require different- monetary poll- the Norwegian Mutual Fund Association set out ar the beginning, of cies. The considerable risk premium we see in even solid companies 2004 a proposal for minimum competenc,e requirements for finan- means that we are relatively optimistic in the new year as well. cial advisors. The report also contains a proposal regarding advisory ethics. The board of directors in the Norwegian Mutual Fund The board would like to thank our unit holders for the confidence Association, where. SKAGEN Fondene is rePresented, is laying the they have shown in us this year as well. In return we promise that foundations for financial consultancy To also be subjected ro stronger our resources will be used to provide link holders with inc besr regulation by inc authorities when inc so-called securities marker possible returns at inc lowest possible risk and offer great cornrnu- directive is implemented, mosr likely during, the course of 2006. nicarion, service and competent follow-up. Nine Norwegian organisations connected to the securities market, including the Norvvegian Mutual Fund Association, published in Sravanger 24' January 2005 December 2004 a revised version of the Norwegian recommendation Board of direaors, Stavanger Fondsforvaltning regarding corporate governance in listed companies. ,...--, , association ' wy SKAGEN Eondene has participated actively in inc in /FY 2. 14AI ,A ,u, t t.,-: _ , -.„3._-?:,,,,, connection with the. revision of the recommendation. The board Tor Dagfinn Veen ItIrik Schoen has ddegated ,power of ownership on behalf of the funds we manage ro the admintstrarion,` valid] reports back to the board regarding 7') how this authoriry has been exercised. Power of attorney :hall be ...AS4.),---- '. -.C7.54‹.-. 'F.L_::-.'....- _-_-_--- used with the goal of contributing to providing unit holders the Ade Stromme Sigve Edand highest possible rerums at the lowest possible risk. / A pet, , up In December 2004 the governmenr published a pension report ,-)f(-:ri -,1__ 1 ed....4— which conta ined both suggestions for reforms of the national insu- 4.4,,,,—. rance scheme and altemarive models for the introduction of occu- Wenthe Shortie/ e tan Erik Iveteraas paricmal pension plans for all employees. The board of directors is r, „„„ confident thar the introducrion of obligatory occupational pension gVILI ni- ' plans will lead To securities funds increasingly being used for pension rit.ht.4 , ,c, h ? (4k :fra.,40.2, ncl,p1 III teat, ',k,.., savings in inc future. Anne Sophie K. Stensrud Martin Gjelsvik U§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§."?..".§ ...... :::::::""" """""""""""""""""""""""""""""""""""' a " ...... :83...... x..,...... :8:8:8:S...... ALX...1k:RictifFati8:8:8:8:8:8: Lf‘j
', , , PFtICEMTERi iOUSCCOPERS 0 , PricewaterbonseCoopers AS , 1 Fong Atrium ,1 Postboks 8017 i N-4068 Stavanger Telephone 1-47 02 16 , 1, Auditor's report for 2004 1 , , We have audited the annual financial statements of the mutual fords as of December 31,2004, showmg the followmg results ' n ,' , SKAGEN Vekst NOK 1 361 166 126 , SKAGEN Global NOK 1 184 431 932 n, SKAGEN Kon-Tda NOK 636 433 791 ' , SKAGEN Avkastn mg NOK 30 214 706 ,' SKAGEN Hgyrente NOK 23 072 050 ' , SKAGEN Hgyrente Institusr on NOK 4 214 434 , n n We have also audited the mfonnation m the directors report concemmg the financial statements the gomg concem ' , asstunption, and the proposal for the allocation of the profit The financial statements comprise the balance sheet the ' , statements of mcome and cash flows and the accompanying notes These financial statements are the responsibility of the , , Fund Management Company's Board of Directors and Managmg Dwector Ow responsibility is to express an opinion on , , these financial statements and on other mfonnation accordmg to the requirements of the Norwegian Act on Auditmg and , Auditors ' n n We conducted our audit m accordance with the Norwegian Act on Auditing and Auditors and auditmg standards and 1 practices generally accepted m Norway Those standards and practices require that we plan and perform the audit to obtam , reasonable assurance about whether the financial statements are free of material misstatement An audit mcludes exammmg, ' , on a test basis, evidence supportmg the amounts and chsclostuos m the financial statements An audit also mcludes assessmg , , the accounting principles used and significant estimates made by management as well as evaluatmg the overall financial , , statement presentation To the extent required by law and auchtmg standards an audit also comprises a review of the , , management of the mutual funds financial affairs and accountmg and internal control systems We believe that our audit ,' provides a reasonable basis for our opinion n' n In our opinion, ', , • the financial statements have been prepared m accordance with the law and rogulations for mutual funds and present the ,' financial position of the mutual funds as of December 31, 2004, and the results of operations and cash flows for the year ' , then ended, m accordance with accountmg standards principles and practices generally accepted m Norway , , • the management has fulfilled its duty to produce a proper and clearly set out registration and doctunentation of , , accotmtmg information as required by law and accountmg standards principles and practices generally accepted m ' , Norway n', • the mfonnation given in the directors' report concemmg the financial statements the going concem asstunption, and the I proposal for the allocation of the profit m each mutual ftmd is consistent with the financial statements and comply with n ' the law and regulations n' ,' Stavanger January 24, 2005 , , PricewaterhouseCoopers AS , , ,' , Gunnar Slettebo ', , State Authorrsed Publm Accountant (Nonvay) , Note Nod translatton from Nonvegran has been prepared for mfonnatton pi/poses only ' , ,' , New md meted Bergen Dreamer Fredranted Fade Hamar lenstaramt Nadu ste, RanaSwvanger Tromso Northern Tranberg Ak:und PnetwaterhouseCoopers refers to an member fame °take worldwide Pt gewaterhouseCoopers orgeturntor ,' Members of Der norske Revttortorenmg I Forenktregtsteret NOSS? Oen 713 , , wary pwr no ,
I Annual Report 2008
SKAGEN INNEN
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Market Acaued Pilarketvaiue Unrealised Risk Face value Cost price mice interest Market m.raccrueol gam/loss Share of Mass Security Maturity Coupon 40n8nt9 NOK NOK ell ss Duration', NOK NOK 4a048 508 intsr e589100 NOK fund 44(380 041850400(1(85
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TOTAL EQUITYPORTF011O t.." . un 254 042 9 792 636 528892 353 538 984 989 57 638 312 98 62.5
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41(7441 7440 , / NNU/L 44PO47:748 Exhibit 7 Pricewaterhouse Partners Arrested in Satyam Probe - WSJ.com
ITO Dow Jones Reprints This copy w for your personak non-commerciai use only. To order presentabonweady copes for distribution to your colleagues, cents or customers, use the Order Reprints tool at the bottom of any article or visit wawa djreprints com • See a sample reprint in PDF format • Order a reprint of this article now
THE
ASIA TECHNOLOGY 1 JANUARY 25, 2009 10:08 EM. ET Pncewaterhouse Partners Arrested in Satyam Probe
By JACKIE RANGE
NEW DELHI -- Indian police arrested two partners of an Indian arm of accounting giant PricewaterhouseCoopers Saturday on charges of criminal conspiracy and cheating in connection with the fraud investigation at Satyam Computer Services Ltd., according to senior police official A. Siva Narayana.
Satyam, a big Indian technology outsourcing company, was thrown into turmoil this month after founder B. Ramalinga Raju said he overstated the company's profit over several years and created a fictitious cash balance of more than $1 billion.
Srinivas Talluri and S. Gopalakrishnan, the two partners at Price Waterhouse, one of PricewaterhouseCoopers' Indian businesses, couldn't be reached for comment Sunday. The men are in judicial custody. Police didn't give further details of the arrests.
A PricewaterhouseCoopers spokesman Sunday said the partners would have an opportunity to apply for bail Tuesday; Monday is a holiday in India.
Price Waterhouse, the Indian firm, said Saturday that it didn't know on what basis the partners were being detained but that the firm is cooperating with authorities. The firm said it shares the regulators' concern in understanding the full extent of the fraud at Satyam and how it was accomplished. "Like everyone else, we were shocked by the massive fraud at Satyam and by the steps undertaken to conceal it," Price Waterhouse said.
Price Waterhouse began working for Satyam, which is based in Hyderabad, in southern India, about eight years ago. PricewaterhouseCoopers and its precursor firms have operated in India for about 130 years. The firm has offices in nine Indian cities. PricewaterhouseCoopers said that the Indian firm is a member of its international network and is owned by the Indian partners.
Mr. Raju, the company's founder and former chairman, his brother B. Rama Raju, its former managing director; and Srinivas Vadlamani, Satyam's former chief financial officer, have been arrested on charges of forgery, cheating and breach of trust. B. Ramalinga Raju confessed to the fraud in a letter to the Satyam board. The lawyer for B. Rama Raju and Mr. Vadlamani has declined to comment.
—Eric Bellman in Hyderabad contributed to this article
Write to Jackie Range atjackiemangeOmvsPeom
http://online.wsj.com/article/SB123281062240513003.html#printMode[3/26/2009 12:02:10 PM] Exhibit 8 RD
net Nnv _5 02
UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ALABAMA SOUTHERN DIVISION
In re HEALTHSOUTH CORPORATION ) Consolidated Case No. CV-03-BE-1500-S SECURITIES LITIGATION ) ) CLASS ACTION ) This Document Relates To: ) MOTION FOR WITHDRAWAL OF ) ORACLE PARTNERS, L.P. AS LEAD In re HealthSouth Corporation Stockholder PLAINTIFF Litigation, Consolidated Case No. CV-03-BE- ) 1501-S ) Lead Plaintiff Oracle Partners, L.P. ("Oracle") hereby requests entry of an order granting
Oracle's request to withdraw as Lead Plaintiff in this action. Oracle has determined to retain Ernst &
Young LLP ("E&Y") as its auditor. Oracle does not believe that withdrawal is mandated. E&Y believes that there is an independence issue and will not undertake to serve as Oracle's auditor
unless Oracle withdraws. In the best interests of the Stockholder Class, Oracle seeks to avoid even the suggestion of a conflict, and has therefore determined that the best course of action is to
withdraw at this time. Oracle does not, however, waive any of its rights as a member of the putative
class.
Due to the circumstances of the withdrawal, Oracle also seeks an order providing that it shall
not be required to respond to discovery following withdrawal as if it had remained Lead Plaintiff in
this action.
Finally, although Oracle is withdrawing, it does not withdraw its Motion to Modify the
Court's Order of June 24, 2003 ("Motion to Modify"), and continues in its support of the
appointment of Central States, Southeast and Southwest Areas Pension Fund, Employer-Teamsters
Local Nos. 175 & 505 Pension Trust Fund and the International Union of Operating Engineers,
Local 132 Pension Plan as Co-Lead Plaintiffs for the Stockholder Class in this action. The
appointment of these three large Taft-Hartley funds as Co-Lead Plaintiffs represented by present Co-
Lead Counsel Lerach Coughlin Stoia Geller Rudman & Robbins LLP and Lowey Dannenberg , . .
Bemporad & Selinger P.C., will protect the Stockholder Class from any prejudice resulting from
Oracle's withdrawal.
DATED: November 5, 2004 Respectfully submitted, WHATLEY DRAKE, LLC JOE R. WHATLEY P RUSSELL JACKS° D' i KE G. DOUGLAS JON' S OTHNI J. LAa -V • fr , ,/
dikAsf AA A _ G. D,I5U tr AS JONES 2323 Second Avenue North Birmingham, AL 35202 Telephone: 205/328-9576 205/328-9669 (fax) Liaison Counsel LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP WILLIAM S. LERACH EDWARD P. DIETRICH KATHLEEN A. HERICENHOFF DEBRA J. WYMAN VALERIE L. McLAUGHLIN ELIZABETH J. ARLEO ERIN P. McDAN1EL 401 13 Street, Suite 1700 San Diego, CA 92101 Telephone: 619/231-1058 619/231-7423 (fax) LERACH COUGHLIN STOIA GELLER RUDMAN & ROBBINS LLP PATRICK J. COUGHLIN LESLEY E. WEAVER 100 Pine Street, Suite 2600 San Francisco, CA 94111 Telephone: 415/288-4545 415/288-4534 (fax)
1 LOWEY DANNENBERG BEMPORAD & SELINGER, P.C. NEIL L SELINGER RICHARD BEMPORAD THOMAS SKELTON VINCENT BRIGANTI The Gateway — 11th Floor One North Lexington Avenue White Plains, NY 10601 Telephone: 914/997-0500 914/997-0035 (fax) Co-Lead Counsel for Plaintiffs
C \Documents and StitingsCSancha \ Lacal Seinngffemporara Internal Fdes‘OLJC2 I nnnan:00 I 5470.doc DECLARATION OF SERVICE
I hereby certify that on this 5th day of November, 2004, a copy of the foregoing MOTION
FOR WITHDRAWAL OF ORACLE PARTNERS, L.P. AS LEAD PLAINTIFF was served by electronic means, except as otherwise noted, pursuant to the Court's January 6, 2004 electronic service order, and addressed to the attorneys listed on the attached Appeni". A and Service by Mail list.
G. D ',COLA ; JO S, OF COUNSEL APPENDIX A
IN RE HEALTH8OUTH CORP. STOCKHOLDER LITIGATION fCV-03-BE-1501-S]
Party Name of Person to Email Address Serve Stockholder Plaintiffs Patrick Coughlin patcelerachlaw.com Edward Dietrich eddelerachlaw.com Kathleen Herkenhoff kathvhelerachlaw.com Debra Wyman debrawelerachlaw.com Elizabeth Arleo ELIZAelerachlaw.com Jill De Carvalho JILLDDelerachlaw.com (paralegal) Valerie McLaughlin valeriemelerachlaw.com Lesley E. Weaver lesleywelerachlaw.com Erin McDaniel erinmelerachlaw.com Elise Cohen elisecelerachlaw.com Neil Selinger [email protected] Richard Bemporad rbemporadeldbs.com Thomas M. Skelton tskeltoneldbs.com G. Douglas Jones [email protected] Joe R. Whatley, Jr. [email protected] Russell Jackson Drake [email protected] Othni J. Lathram [email protected] Chianne Sanchez (DJ csanchezewhatlevdrake.com para.) Katherine Gault (DJ [email protected] asst.)
Merger Plaintiffs Horizon/CMS M. Clay Ragsdale clavradsdalellc.com Stockholders NSC Stockholders Andrew M. Schatz sn06106aol.com
HealthSouth Corporation Edward P. Welch ewelcheskadden.com Stephen Dargttz sdaroitzskadden.com J. Michael Rediker imrhsv.com Michael K.K. Choy mkcahsv.com Lisa M. Rios Imrahsv.com David Anderson dandersoaalstonwells.com Julia Boaz Cooper jbcooperawalstonwells.com
Defendants Chamberlin, Givens, Gordon, Newhall, Striplin and Strong J. Mark Hart jrnhhsv.com
Paul C. Gluckow paluckow(a,stblaw.com Allison R. Kimmel [email protected]
Defendant Anthony Jackson R. Sharman, isharman(@lfwlaw.com Tanner 111 Jim Hughey jhudhey(&lfwlaw.com
Defendant Edwin M. W. Michael Atchison WMAAstarneslaw.com Crawford Anthony C. Harlow [email protected]
Defendant Russell H. C. Lee Reeves Ireevesaisirote.com Maddox Outside Directors/ Current Officers/ Unindicted Individual Defendants N. Lee Cooper Icooperamcolaw.com Jim Goyer icloverRmcolaw.com Jim Bussian ibussianamcolaw.com Peter Basset( pbassetta,alston.com Betsy Collins bcollinsalston.com Susan Hurd shurdalston.com Patrick Cooper pcooperamcolaw.com
Defendant Thomas W. Joseph A. Fawal [email protected] Carman
Former Director Larry R. N. Lee Cooper Icooper(d)mcolaw.com House Patrick C. Cooper pcooper(a/mccilaw.com Carl S. Burkhalter cburkhalteremcolaw.com Scott S. Brown scottbrownamcolaw.com Amye Carle (paralegal) acarle(M.mccilaw.com
Unindicted Individual Defendant James Bennett Don B. Long, Jr. dblaibpp.com Julie Cadden (DL asst.) jacibpp.com James Henry IThaibpo.com Alan D. Mathis adm(kbpp.com
Richard M. Scrushy Thomas Sjoblom tsioblomechadbourne.com Scott Balber sbalberAchadbourne.com Thomas Hall thallAchadbourne.com H. Lewis Gillis hloillisratmnoc.com April D. Williams adwilliams(Wtmopc.com Gary H. Baise obaiseabaisemillercom Donald V. Watkins donaldywatkinsAaol.com
Pleading Defendants Kenneth Livesay Joseph A, Fawal jfawalAbellsouth.net Michael D. Martin C. Lee Reeves Ireevesa,sirote.com Michael D. Martin Robert Fleishman rfleishmannsteptoe.com Weston Smith and Susan Charles A. Dauphin cdauphinl©cs.com Smith (Jones) Tad McVay J. Donald Foster idfniacksonfosterlaw.com Angela Ayers Henry I. Frohsin hfrobsinnbakerdonelson.com Cathy Edwards James L. O'Kelley jlokelleyaJawyer.com Virginia Valentine Erskine R. Mathis erskinelawaaol.com Emery Harris Pro se (unknown) Physical address is: 2009 Eagle Crest Court Birmingham, AL 35242 Rebecca Kay Morgan Stephen A. Strickland stephenariaffelaw.com Aaron Beam Jeremy HazeIton JHazelton©briskman- binion.com Aaron Beam Mack B. Binion, Ill [email protected] William T. Owens Frederick G. Helmsing fqh(@helmsinglaw.com Patrick Finnegan pcf(ftelmsinglaw.com Carolyn Reid cerAhelmsinolaw.com Joy Rhodes Brewer mibOhelmsinolaw.com
Defendant Catherine Leon Ashford leonhwnn.com Fowler Defendant Will Hicks Teresa Tanner Pulliam ttpulliamAmsn.com
Ernst & Young Henry Simpson henntsimoson@arlawcom Steven M. Farina sfarinaPwc.com
Investment Bank Defendants W. Stencil Starnes sstamesAstameslaw.com Carmine D. Boccuzzi [email protected] Jay M. Ezelle jmeAstarneslaw.com Robin Houston Jones rhastarneslaw.com Mitchell A. Lowenthal mlowenthalg2ccish.com Stephen T. Ostrowski sostrowskicosh.com Jeffrey Jordan jiordanacosh.com Bradley T. Meissner bmeissnercqsh.com Michael McIntyre mmcintyreAccish.com Richard V. Conza rconza(Mcosh.com Nancy I. Ruskin nruskin(accish.com Robert J. Giuffra oiuffrarasullcrom.com Thomas L Leuba leubatAsullcrom.com Julia M. Jordan jordanimAsullcrom.com Brian Frawley frawlevb(Wsullcrom.com
Defendant William C. Helen A. Gredd horedd(lswlaw.com McGahan W. Stencil Starnes [email protected] Jay M. Ezelle jmestarneslaw.com Robin Houston Jones rhiAstarneslaw.com Defendant Howard Capek Thomas Fitzpatrick TFitzpatrick(QTFitzpatrick.com W. Stancil Starnes sstames@stameslawcom Jay M. Ezelle jmenstarneslaw.com Robin Houston Jones rhia,stameslaw.com
, .
SERVICE BY MAIL In re HeaIthSouth Sec. aig. Master File No. CV-03-BE-1500-S
Served by first-class U.S. Mail:
Jason Brown, Pro Se 652 Paden Drive Richard H. Deane, Jr. Birmingharn, AL 35226 Jones Day 3500 SunTrust Plaza Emery Harris, Pro Se 303 Peachtree Street, N.E. 2009 Eagle Crest Court Atlanta, GA 30308-3242 Birmingham, AL 35242 Robert F. McDermott, Jr. Richard E. Botts, Pro Se Jonathan Rose 3239 Heathrow Downs Jones Day Birmingham, AL 35226 51 Louisiana Avenue, N.W. Washington, DC 20001-2113 Kenneth 0. Simon Christian & Small LLP Law Offices of Teresa Tanner Pulliam 505 North 20th Street, Suite 1800 2229 1st Avenue North Birmingham, AL 35203-2696 The Black Diamond Building Birmingham, AL 35203 William P. Hammer, Jr. Ernst & Young LLP 5 Times Square, 36t1i Floor New York, NY 10036 UNITED STATES DISTRACT COURT
NORTHERN DISTRACT OF ALABAMA
SOUTHERN DIVISION
In re HEALTHSOUTH CORPORATION ) Consolidated Case No. CV-03-BE-1500-S SECURITIES LITIGATION ) ) CLASS ACTION ) This Document Relates To: ) [PROPOSED] ORDER GRANTING ) MOTION FOR WITHDRAWAL OF In re HealthSouth Corporation Stockholder ) ORACLE PARTNERS, L.P. AS LEAD Litigation, Consolidated Case No. CV-03-BE- ) PLAINTIFF 150I-S ) ) The Court, having considered the Motion for Withdrawal of Oracle Partners, L.P. as Lead
Plaintiff, and being fully advised in the premises, and good cause appearing therefor, HEREBY
ORDERS THAT the Motion is granted, and Oracle Partners, L.P. ("Oracle") is withdrawn as a lead
plaintiff in this action. Oracle shall not be required to submit to formal or informal discovery
following withdrawal as if it had remained Lead Plaintiff,
IT IS SO ORDERED,
DATED: KARON 0. BOWDRE UNII ED STA IES DISTRICT JUDGE
C `Documents and Scrimp CSanchcz Local Setting,3 \Trrnpoinry Intunei OLK2 I \ord00015470.doc Exhibit 9 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
) TILLIE SALTZMAN, Individually and On ) CIVIL ACTION NO. 07-9901-SHS Behalf of All Others Similarly Situated, ) ) ECF Filed Plaintiff, ) ) vs. ) ) ) CITIGROUP INC., CHARLES 0. PRINCE, ) ROBERT E. RUBIN, STEPHEN R. VOLK, ) SALLIE L. KRAWCHECK, GARY L. ) CRITTENDEN and ROBERT DRUSKIN, ) ) Defendants. )
LENNARD HAMMERS CHLAG, ) CIVIL ACTION NO. 07-10258-RJS Individually, and On Behalf of All Others ) Similarly Situated, ) ) Plaintiff, ) ) vs. ) CITIGROUP INC., CHARLES PRINCE, ) SALLIE KRAWCHECK, GARY ) CRITTENDEN, ) ) Defendants. )
THE U S PUBLIC FUND GROUP'S MEMORANDUM OF LAW IN FURTHER SUPPORT OF ITS MOTION FOR APPOINTMENT AS LEAD PLAINTIFF AND IN OPPOSITION TO ALL COMPETING MOVANTS TABLE OF CONTENTS
Page
PRELIMINARY STATEMENT 1
ARGUMENT 3
I. The U.S. Public Fund Group Is The Most Adequate Plaintiff 3
A. The U.S. Public Fund Group Has The Largest Financial Interest Of Any Qualified Applicant 4
II. The Global Pension Funds' Motion Should Be Denied Because They Are Not A Proper Group 8
A. The Global Pension Funds Are An Aggregation Of Unrelated Entities Joined Together By Their Lawyers 8
B. The Global Pension Funds Lacks Cohesion 12
III. The ATD Group Should Be Disqualified Because It Is Atypical And Subject To Unique Defenses 17
CONCLUSION 25
- i - TABLE OF AUTHORITIES
Page(s) FEDERAL CASES
Barnet v. Elan Corp., 236 F.R.D. 158 (S.D.N.Y. 2005) 3, 7, 11
Basic, Inc. v. Levinson, 485 U.S. 224 (1988) 22
Bhojwani v. Pistiolis, No. 06 Civ. 13761(CM)(KNF) 2007 WL 2197836 (S.D.N.Y. July 31, 2007) 12
Borochoff v. Glaxosmithkline PLC, 246 F.R.D. 201 (S.D.N.Y. 2007) 3, 15, 17
City of Brockton Ret. Sys. v. Shaw Group, Inc., No. 06 Civ. 8245(CM)(MHD), 2007 WL 2845125 (S.D.N.Y. Sept. 26, 2007) 5, 8
Coopersmith v. Lehman Bros., Inc., 344 F. Supp. 2d 783 (D. Mass. 2004) 24
Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 903 F.2d 176 (2d Cir. 1990) 22
Glauser v. EVCI Career Colleges Holding Corp., 236 F.R.D. 184 (S.D.N.Y. 2006) 12, 26
Goldberger v. PXRE Group, Ltd, No. 06 Civ. 3410(KMK), 2007 WL 980417 (S.D.N.Y. March 30, 2007) 11
Grace v. Perception Tech. Corp., 128 F.R.D. 165 (D. Mass. 1989) 23
Hevesi v. Citigroup Inc., 366 F.3d 70 (2d Cir. 2004) 26
Hilton v. Guyot, 159 U.S. 113 (1895) 16
In re Baan Co. Sec. Litig., 186 F.R.D. 214 (D.D.C. 1999) 6
- 11 - In re Bally Total Fitness Sec. Litig., No. 04 C 3530, 2005 U.S. Dist. LEXIS 6243 (N.D. Ill. March 15, 2005) 15
In re Cendant Corp. Litig., 264 F.3d 201 (3d Cir. 2001) 11, 13
In re Critical Path, Inc. Sec. Litig., 156 F. Supp. 2d 1102 (N.D. Cal. 2001) 23, 24, 25
In re Donnkenny Inc. Sec. Litig., 171 F.R.D. 156 (S.D.N.Y. 1997) 6
In re eSpeed, Inc. Sec. Litig., 232 F.R.D. 95 (S.D.N.Y. 2005) 6, 13, 15
In re Flight Safety Techs., Inc. Sec. Litig., 231 F.R.D. 124 (D. Conn. 2005) 13
In re Gemstar-TV Guide Int'l Sec. Litig., 209 F.R.D. 447 (C.D. Cal. 2002) 13
In re Indep. Energy Holdings PLC, 210 F.R.D. 476 (S.D.N.Y. 2002) 19
In re Network Assocs., Inc. Sec. Litig., 76 F. Supp. 2d 1017 (N.D. Cal. 1999) 14, 23
In re Peregrine Sys., Inc. Sec. Litig., No. Civ. 02 CV 870-J(RBB), 2002 WL 32769239 (N.D. Cal. Oct. 11, 2002) 24, 25
In re Razorfish, Inc. Sec. Litig., 143 F. Supp. 2d 304 (S.D.N.Y. 2001) 6, 12
In re Royal Ahold N. V Sec. & ERISA Litig, 219 F.R.D. 343 (D. Md. 2003) 15, 17
In re Vivendi Universal, S.A. Sec. Litig., 242 F.R.D. 76 (S.D.N.Y. 2007) 3, 15, 16, 17
Olsen v. N.Y. Comm. Bancorp, Inc., 233 F.R.D. 101 (E.D.N.Y. 2005) 8
Sczensy Trust v. KPMG LLP, 223 F.R.D. 319 (S.D.N.Y. 2004) 4, 13, 26
Smith v. Suprema Specialties, Inc., 206 F. Supp. 2d 627 (D.N.J. 2002) 15
- 111 - Xianglin Shi v. SINA Corp., No. 05 Civ. 2154(NRB), 2005 WL 1561438 (S.D.N.Y. July 1, 2005) 8
FEDERAL: STATUTES, RULES, REGULATIONS, CONSTITUTIONAL PROVISIONS
15 U.S.C. § 78u-4(a)(3)(B) et seq 4, 6, 22
Fed. R. Civ. P. 23 4, 5, 17, 18
OTHER AUTHORITIES
Stefano M. Grace, Strengthening Investor Confidence in Europe: U.S.-Style Securities Class Actions and the Acquis Communautaire, 15 J. Transnat'l Law and Pol. 281 (2006) 17
Travis Newport, Tortious Interference with International Contracts, Int'l Trade L J. 80 (2000) 16
Yoav Oestreicher, The Rise and Fall of "Mixed" and "Double" Convention Models Regarding Recognition and Enforcement of Foreign Judgments, 6 Wash. U. Global Stud. L. Rev. 339 (2007) 16
- iv - PRELIMINARY STATEMENT
The U.S. Public Fund Group l suffered a loss of more than $50 million from its trading in
shares of Citigoup, Inc. ("Citigroup" or "the Company") 2 and is the only adequate and cohesive
group seeking appointment as Lead Plaintiff in this case. As established in its initial application
seeking Lead Plaintiff status, the U.S. Public Fund Group is a group of sophisticated domestic
public pension funds represented by responsible public officials, which is precisely the type of
movant that the Private Securities Litigation Reform Act of 1995 (the "PSLRA") prefers to serve
as Lead Plaintiff. Moreover, as noted in the Joint Declaration supporting their initial application, the members of the U.S. Public Fund Group, on their own accord, decided to pursue joint
appointment as Lead Plaintiff given the important domestic public policy concerns underlying this case. Appointing the U.S. Public Fund Group as Lead Plaintiff thus serves the fundamental
purpose of the PSLRA to ensure that this litigation will be controlled by Citigoup investors, and
not their lawyers.
In contrast, the Global Pension Funds, which claim an ostensibly larger financial interest than the U.S. Public Fund Group, are a group of twelve entities comprised of eight Danish
pension funds, two Swedish pension funds and two U.S. pension funds that, collectively, lack the
1 The U.S. Public Fund Group is comprised of the State Teachers Retirement System of Ohio ("Ohio STRS") and the State Universities Retirement System of Illinois ("SURS"). The Division of Investment of the Treasury of the State of New Jersey ("New Jersey") originally sought to be appointed Lead Plaintiff together with Ohio STRS and SURS but withdrew after deciding to make an investment in Citigroup after the U.S. Public Fund Group filed its Lead Plaintiff motion. See Notice of Withdrawal of New Jersey Division of Investment, Docket #27. Accordingly, the U.S. Public Fund Group is no longer seeking approval of New Jersey's counsel, the law firm of Berger Montague, as Lead Counsel for the Class.
2 Specifically, the U.S. Public Fund Group incurred a loss of approximately $51 million during the period from January 1, 2004 through November 5, 2007 — the longest class period in a complaint filed prior to the lead plaintiff deadline and for which a notice was published in accordance with the PSLRA. Applying the shorter class period in Saltzman, the first filed and noticed action (April 17, 2006 to November 2, 2007), the U. 5. Public Fund Group incurred a loss of approximately $45 million. On the day of the lead plaintiff motion deadline, just before the close of business, the Global Pension Funds filed their own complaint that purported to extend the class period to November 21, 2007. The Global Pension Funds failed to publish notice of the filing of that complaint as required by the PSLRA. During the class period alleged in the Global Pension Funds' complaint (January 2, 2004 to November 21, 2007), the U.S. Public Fund Group has a loss of $53 million. necessary cohesion to effectively manage this case and supervise counse1. 3 In addition, it seems
rather clear that the Global Pension Funds were joined together at the eleventh hour by their
counsel, not on their own accord, in order to outmatch the anticipated application of the U.S.
Public Fund Group. Indeed, counsel for the Swedish funds, now part of the Global Pension
Funds, repeatedly approached the Office of the Ohio Attorney General and Ohio STRS in an
effort to persuade Ohio STRS to act as the Swedish funds' domestic partner. Ohio STRS and the
Ohio Attorney General rejected that proposal. The paradigmatic display of lawyer-driven
conduct evinced by the Global Pension Funds' counsel is precisely the type of activity the
PSLRA sought to end and is, in and of itself, a sufficient basis for denying their motion. See,
e.g., Barnet v. Elan Corp., PLC, 236 F.R.D. 158, 162 (S.D.N.Y. 2005) (Holwell, J.) (noting
courts' concern that "allowing unrelated groups to aggregate losses in an effort to generate the
'largest financial interest,' the possibility emerges that lawyers will form such groups to
manipulate the selection process, and in that way gain control of the litigation").
Finally, recent decisions in this District raise questions concerning whether the foreign
funds that are members of the Global Pension Funds group can serve as Lead Plaintiffs. These
decisions have found that such foreign funds could face challenges by defendants at class
certification on the ground that they are subject to unique defenses because this Court's orders
may not be enforceable in their respective home jurisdictions. See Borochoff v. Glaxosmithkline
PLC, 246 F.R.D. 201, 204-05 (S.D.N.Y. 2007) (refusing to appoint as lead plaintiff a group of
foreign institutional investors in light of the possibility that a foreign court would not give a U.S.
3 The Global Pension Funds are: Pensionskassen for Kontorpersonale, Pensionskassen for Kost- og Emxringsfaglige, Pensionskassen for Bioanalytikere, Pensionskassen for LxgesekretTrer, Pensionskassen for Jordemodre, Pensionskassen for Ergoterapeuter og Fysioterapeuter, Pensionskassen for Socialradgivere og Socialpxdagoger and Pensionskassen for Sygeplejersker (collectively, the "Danish Funds"), Sjunde AP-Fonden and Fjarde APFonden (collectively, the "Swedish Funds") and the Public Employees' Retirement Association of Colorado ("ColPERA") and the Tennessee Consolidated Retirement System ("TCRS").
-2- judgment res judicata effect); In re Vivendi Universal, S.A. Sec. Litig., 242 F.R.D. 76, 105
(S.D.N.Y. 2007) (excluding foreign shareholders from class based on concern that foreign courts
would not give res judicata effect to U.S. judgment). This issue subjects the Global Pension
Funds to unique defenses that the Class would not be burdened with if the U.S. Public Fund
Group is appointed the Class representative.
The other group seeking appointment as Lead Plaintiff, the "ATD Group," consists of
individuals who obtained their shares of Citigroup when they sold their business, Automated
Trading Desk, LLC ("ATD"), to Citigroup in a privately negotiated transaction for $102.6
million in cash and 11,171,938 million shares of unregistered Citigyoup common stock. Courts
have repeatedly refused to appoint as Lead Plaintiff investors who acquired their shares in a
defendant issuer tlu-ough a privately negotiated transaction, rather than on the open market.
Further, in this case, the close ties between the ATD Group's members and Citigyoup go well
beyond this privately negotiated sale and include the fact that the ATD Group's members are
presently directors of ATD, which is wholly owned by Citigroup, rendering the ATD Group a
particularly inappropriate representative for the Class.
Lastly, an individual movant, David Garden, who incurred a loss of just $2 million, seeks to be appointed Lead Plaintiff. Mr. Garden clearly does not have the largest financial interest
required by the PSLRA for appointment as Lead Plaintiff. 15 U.S.C. § 78u-4(a)(3)(B).
For these reasons, as set forth more fully below, the U.S. Public Fund Group should be
appointed Lead Plaintiff.
ARGUMENT
1. The U.S. Public Fund Group Is The Most Adequate Plaintiff
Under the PSLRA, this Court is directed to "appoint as lead plaintiff the member or
members of the purported plaintiff class that the court determines to be most capable of
-3- adequately representing the interests of class members." 15 U.S.C. § 78u-4(a)(3)(B)(i); Sczensy
Trust v. KRAIG LLP, 223 F.R.D. 319, 323 (S.D.N.Y. 2004) (Stein, J.) The PSLRA provides a
rebuttable presumption that the "most adequate plaintiff' is the movant or group of movants that
"has the largest financial interest in the relief sought by the class," and also satisfies the elements
of Rule 23 of the Federal Rules of Civil Procedure. 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I)(bb).
A. The U.S. Public Fund Group Has The Largest Financial Interest Of Any Qualified Applicant
The U.S. Public Fund Group claims the largest financial interest of any adequate and typical lead plaintiff gyoup, 4 having suffered approximately $51 million in losses. 5 Given their
common thread of significant losses and public policy concerns regarding the mortgage lending
and structured finance industries, as well as the numerous other facts reflecting the U.S. Public
Fund Group's cohesion set forth in its Joint Declaration, the losses of the two members of the
U.S. Public Fund Group are properly aggregated under the PSLRA.
The PSLRA must be read in light of the "understanding that Congress intended to avoid
'the manipulation by class action lawyers of the clients whom they purportedly represent.' City
4 Competing movants might challenge the U.S. Public Fund Group on the grounds that it is a "net seller" or "net gainer" based on its transactions in Citigroup shares. The challenge is baseless. First, SURS is neither a net seller nor net gainer and has the largest financial interest under the last-in, first-out methodology ($5.4 million) or the first- in, first-out methodology ($12.9 million) of any single movant that satisfies the adequacy and typicality requirements of Rule 23. Second, Ohio STRS is only a net seller and net gainer under the class period alleged in the second filed complaint. However, under the class period alleged in the first filed and noticed case, Ohio is neither a net gainer nor net seller. See Certification of Ohio STRS, attached as Exhibit A to the Declaration of Gerald H. Silk, dated Jan. 7, 2008 ("Silk Decl.") (Docket # 24). Thus, Ohio STRS' status as a net gainer or net seller depends upon the operative class period that is ultimately asserted in the consolidated complaint filed by the Court-appointed Lead Plaintiff and, subsequently, determined by the Court on class certification. It is therefore premature to make any determination of Ohio STRS' status based solely on the application of differing class periods.
5 As required under the PSLRA, the Certifications of the U. 5. Public Fund Group filed together with its Lead Plaintiff motion set forth all of Ohio STRS' and SURS' transactions during class periods alleged in each of the filed complaints. In support of its motion, the U. 5. Public Fund Group also submitted exhibits reflecting the calculation of their losses that included post-class period transactions relevant to those loss calculations. One of those exhibits inadvertently omitted certain post-class period transactions of Ohio STRS. A corrected loss calculation exhibit is provided as Exhibit A attached to the Supplemental Declaration of Gerald H. Silk ("Suppl. Silk Decl."). These additional transactions have no impact on the U.S. Public Fund Group's loss when calculated on a first-in, first-out basis; the impact when losses are calculated on a last-in, first-out basis is approximately $200,000.
-4- of Brockton Ret. Sys. v. Shaw Group, Inc., No. 06 Civ. 8245(CM)(MHD), 2007 WL 2845125, at
*3 (S.D.N.Y. Sept. 26, 2007) (citing H.R. Conf. Rep. No. 104-369, at 31 (1995), reprinted in
1995 U.S.C.C.A.N. 730). Given this statutory purpose, one of the primary questions courts have
addressed in relation to the appointment of lead plaintiffs under the PSLRA concerns which
groups of movants can appropriately be considered together for purposes of identifying the
movant with the largest financial interest and, in contrast, which groups must be rejected as
lawyer-driven aggregations that are not suitable for appointment because they will not be able to
supervise counsel's prosecution of the litigation. These courts have held that permitting
"lawyers to designate unrelated plaintiffs as a 'group' and aggregate their financial stakes would
allow and encourage lawyers to direct the litigation" and defeat one the primary purposes of the
PSLRA. In re Razorfish, Inc. Sec. Litig., 143 F. Supp. 2d 304, 308-09 (S.D.N.Y. 2001) (Rakoff,
J.) (rejecting group because its members had no independent existence or prior relationship and
appeared to be an "artifice cobbled together by cooperating counsel"); In re Donnkenny Inc. Sec.
Litig., 171 F.R.D. 156, 158 (S.D.N.Y. 1997).
Consistent with this reasoning, the majority of courts, including those in the Second
Circuit, allow movants to aggregate their losses in seeking lead plaintiff status under the PSLRA
when a group is client-driven and cohesive. See, e.g., In re eSpeed, Inc. Sec. Litig., 232 F.R.D.
95, 97 (S.D.N.Y. 2005); see also 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I) (providing for the
appointment of the "person or group of persons" that meets the PSLRA's rebuttable presumption
requirements). Along these lines, the Securities and Exchange Commission has consistently
cautioned that lead plaintiff groups should set forth information about their members, structure,
and intended functioning so that courts can independently assess the propriety of any aggregation
of losses. See Memorandum of Securities and Exchange Commission, Amicus Curiae, appended
-5- to In re Baan Ca Sec. Lztzg., 186 F.R.D. 214, 229 (D.D.C. 1999). In Baan, the SEC
recommended that such information include:
detailed descriptions of its members, including their background, experience, and capabilities relating to the role of lead plaintiff; any pre-existing relationships among them; the manner in which the "group" was formed; an explanation of how its members would function collectively; and a description of the mechanism that the group members and lead counsel have established to communicate with one another about the litigation.
While the U.S. Public Fund Group clearly met the requirements set forth by the SEC in its
opening papers, the Global Pension Funds made no such showing. An after-the-fact filing of a
declaration is insufficient to "cure" the Global Pension Funds lawyer-driven group and establish,
instead, that the members of the group came together, on their own, with a litigation plan to
satisfy the SEC's recommendation. Similarly, an after-the-fact meeting simply strengthens the
appearance if not the likelihood that such a meeting was orchestrated by counsel.
In Barnet, the court set forth the primary factors used in determining the propriety of a
lead plaintiff group:
Recognizing that the question is one of degree, several courts have adopted a "rule of reason" test, pursuant to which the acceptability of the proposed "group" is tested against its ability to represent the interests of the class, and only allowed to proceed as a group if the court determines that "lawyer-driven" litigation is not likely to result.
236 F.R.D. at 162. The "rule of reason" requires consideration of (1) the size of the group; (2)
evidence whether the group was formed in bad faith; and (3) the relationship between the parties.
Id. The U.S. Public Fund Group clearly satisfies the rule of reason as it is comprised of two
public pension systems that came together independently of their outside counsel to jointly seek
appointment as Lead Plaintiffs in this Action. See generally Joint Declaration of the Honorable
Marc Dann, William J. Neville, John Michael Vazquez, William G. Clark and Dan Slack in
-6- Support of the Motion of the U.S. Public Fund Group for Appointment as Lead Plaintiff (the
"Joint Decl."), attached as Exhibit H to the Silk Decl. (Docket #24). The independence of the
U.S. Public Fund Group from the control of their counsel, and their ability to work together cohesively to manage this litigation, is demonstrated by, among other things:
1. The U.S. Public Fund Group was formed at the initiative of Attorney General Dann and Ohio STRS, in recognition of the critical importance of this litigation and the broad impact of Defendants' misconduct upon the institutional investor community. Joint Dec1.1j6.
2. The Ohio Attorney General's Office directly contacted the office of the Executive Director of SURS without the involvement of outside counsel. Joint Decl. tf6, 9, 12.
3. Ohio STRS and SURS determined to move jointly for appointment as Lead Plaintiff in this litigation without the participation of outside counsel. Joint Decl. tf6, 9, 12.
In the recent lead plaintiff decision in City of Brockton, the court appointed two public pension funds to serve as co-lead plaintiffs, holding that the aggregation of such proactive institutional investors was appropriate in the circumstances:
These pension systems have vast assets, apparent investment sophistication, experience in some prior and current class-action lawsuits, and an administrative structure under which they fulfill their fiduciary obligations to their members by choosing counsel to represent them and then maintaining oversight over those attorneys. Under these circumstances, the legislative concern that class actions not be controlled by counsel is plainly satisfied regardless of how close or attenuated is the relationship between Brockton and Norfolk.
City ofBrockton, 2007 WL 2845125, at *12.6
6 As a small, cohesive group of sophisticated domestic institutions, the U. S. Public Fund Group is the exact type of .`group" that courts have found to be appropriate under the PSLRA. See, e.g., Olsen v. N. Y. Comm. Bancorp, Inc., 233 F.R.D. 101, 107 (E.D.N.Y. 2005) ("Here, given the PSLRA's preference for institutional investors, and given that the NYCB Group consists of a manageable number of members, the Court finds that the two member NYCB Group is a valid group under the PSLRA."); Xianglin Shi v. SINA Corp., No. 05 Civ. 2154(NRB), 2005 WL 1561438, at *5 (S.D.N.Y. July 1, 2005) (Buchwald, J.) (appointing plaintiff group consisting of three Michigan city employee pension funds).
-7- Here, the interests of the domestic U.S. Public Fund Group are aligned squarely with the
interests of the Class, both in seeking to recover and maximize damages for similarly-situated
Citigroup investors, and to address the core subprime mortgage practices and other misconduct through corporate governance changes as appropriate Joint Decl. ilf13-15 ("it is an important
function of United States public pension funds to serve the public interest as Lead Plaintiffs in
securities class actions that raise significant public policy concerns," and that the instant
litigation against Citigoup "is just such a case."). In addition, these state pension funds, and their representatives, are highly-motivated in pursuing this litigation as the alleged subprime
mortgage practices and other corporate misconduct have had devastating effects on these pension
funds, as well as other adverse economic consequences in their home states.
The Global Pension Funds' Motion Should Be Denied Because They Are Not A Proper Group
The attempt by the Danish Funds, Swedish Funds, ColPERA and TCRS to artificially
inflate their financial interest in this litigation by aggregating their losses as the "Global Pension
Funds" must be rejected as lawyer-driven litigation denounced by the PSLRA. 7 The twelve
funds from three different countries that comprise the Global Pension Funds clearly fail the "rule
of reason" test, as they have not demonstrated — and cannot demonstrate — that their group was
formed for any reason other than to aggregate their losses to obtain control over this litigation.
A. The Global Pension Funds Are An Aggregation Of Unrelated Entities Joined Together By Their Lawyers
There is no question that the combination of Swedish, Danish and U.S. funds lacks any
rational basis and that these funds were evidently joined for the sole purpose of aggregating a
7 Eight of these funds submitted a single certification executed by Pensionskassemes Administration A/S ("PKA"), and purport to act as a single entity. As discussed below, because PKA is merely an administrator for eight independent pension funds each of which has its own Board of Directors, separate assets and a narrowly defined group of beneficiaries, each must be considered a separate movant under the PSLRA.
- 8- loss large enough to secure appointment as Lead Plaintiffs. 8 The Global Pension Funds have not
submitted a declaration or any evidence demonstrating that they came together independently of their lawyers for some legitimate purpose. Nor can they. The evidence indicates further that this
effort by the Global Pension Funds was, and continues to be, sustained by confidential
information obtained from Ohio STRS and put to use only after Ohio STRS spurned an offer to
form an artificial group with the Swedish Funds. As set forth below, the prospect that the Global
Pension Funds utilized confidential information obtained from Ohio STRS in creating the
competing group and did so only after Ohio STRS refused to work together with them speaks
volumes regarding the adequacy of their group.
Specifically, the law firm of Schiffrin Barroway Topaz & Kessler, LLP ("Schiffrin
Barroway") — one of the counsel to the Global Pension Funds — approached the Office of the
Ohio Attorney General to propose that Ohio STRS move jointly with the Swedish Funds that
Schiffrin Barroway represents in connection with the pending Lead Plaintiff motions in this case.
See Declaration of the Honorable Marc Dann and William J. Neville in Further Support of the
U.S. Public Fund Group's Motion for Appointment as Lead Plaintiff ("Ohio Decl."), attached as
Exhibit B to the Supp. Silk Decl., at 1f5. Schiffrin Barroway knew that Ohio STRS intended to
seek appointment as Lead Plaintiff in this Action, and was privy to confidential information
concerning Ohio STRS' strategy and financial interest in this Action through Schiffrin
Barroway's attorney-client relationship with Ohio STRS. See Ohio Decl. 1f4. Schiffrin
Barroway continued to press that proposal as late as the afternoon of January 4, 2007 — the last
business day prior to the January 7 Lead Plaintiff deadline. Ohio Decl. 1f5. Ohio STRS never
received any indication that the Swedish Funds were working together with any other investors
8 Whatever connections the two Swedish Funds or the eight Danish Funds may have to the other funds from their own countries (which has not been established), there appears no relationship between the Swedish Funds, the Danish Funds and ColPERA or TCRS.
-9- with which it might jointly move for appointment as Lead Plaintiff. Ohio Decl. 1 5. Thus, it appears that, after unsuccessfully presenting their Swedish clients as potential partners to Ohio
STRS, and after having their proposal rejected by Ohio STRS, Schiffrin Barroway and their co- counsel reached out to the Danish Funds, ColPERA and TCRS to form a group with a facially larger financial interest than Ohio STRS. It seems fairly clear that Schiffrin Barroway felt compelled to combine the foreign funds with a U.S.-based institutional investor in order to inoculate those foreign institutions from a potential challenge by defendants on typicality grounds. Ohio STRS was unwilling to assist Schiffrin Barroway in that regard.9
As the Third Circuit noted in In re Cendant Corp. Litig., 264 F.3d 201, 267 (3d Cir.
2001), when there is evidence that the group claiming the largest losses has been formed in bad faith as part of the "efforts of lawyers hoping to ensure their eventual appointment as lead counsel," a court "could well conclude, based on this history, that the members of that 'group' could not be counted on to monitor counsel in a sufficient manner." Courts in this District also consider whether there is evidence that a group of movants was formed in bad faith in determining whether to allow unrelated investors to aggregate their losses. Barnet, 236 F.R.D. at
162.
Indeed, the law is well-established that groups which fail to explain their formation and purpose violate the very purpose of the PSLRA to empower plaintiffs and must be rejected. See, e.g., Goldberger v. PXRE Group, Ltd., No. 06 Civ. 3410(KMK), 2007 WL 980417, at *5
(S.D.N.Y. March 30, 2007) ("one cannot but suspect that the Campfield Group comprised, as it
9 It its worth noting that, given the significant time difference between the United States and Sweden, by the time Ohio STRS and the Office of the Attomey General had again rejected the proposed partnership with the Swedish Funds on Friday, January 4, the business week in Europe was long since over. This left just a single business day — the day the Lead Plaintiff motions were due — for Schiffrin Barroway and its co-counsel to orchestrate the combination of these twelve funds. The eight hour time difference between Colorado and Sweden and Denmark makes it highly improbable that those funds conferred at all — let alone at their own initiative or in any depth — before their lawyers moved to have them appointed co-Lead Plaintiffs.
- 10 - is, of disparate and apparently unrelated plaintiffs is itself the result of the type of lawyer-
driven action that the PSLRA eschews"); Glauser v. EVCI Career Colleges Holding Corp., 236
F.R.D. 184, 190 (S.D.N.Y. 2006) ("The Kahn Group appears to be nothing more than a lawyer-
created group of unrelated investors who were cobbled together in the hope of thereby becoming the biggest loser for PSLRA purposes — a tactic disapproved of by this Court.") (internal
quotation marks omitted).
That the PSLRA does not explicitly prohibit a group of persons from being appointed lead counsel is not, in the Court's view, a sufficient reason to allow otherwise unrelated group members to aggregate their losses for the sole purpose of claiming to have the largest financial interest in the relief sought by the class. The possibility that lawyers formed these groups to manipulate the selection process, and thereby gain control of the litigation is too great to be disregarded because such machinations are precisely what PSLRA was enacted to restrict.
Bhojwani v. Pistiolis, No. 06 Civ. 13761(CM)(KNF) 2007 WL 2197836, at *6 (S.D.N.Y. July
31, 2007) (internal citations and quotations omitted). Courts have long rejected attempts by
counsel to "cobble together" an artificial group of investors simply to secure appointment as lead
plaintiff and lead counsel:
The tenuous connection and inadequate communication between counsel and client also infects, in a different way, the motion brought by the collection of counsel purporting to represent what they term the "Azimut Group," an ad hoc combination of a large financial institution, two smaller "day-trading" companies, and an individual investor, that have no prior connection with each other or with each other's counsel. ... The "Azimut Group" is simply an artifice cobbled together by cooperating counsel for the obvious purpose of creating a large enough grouping of investors to qualify as "lead plaintiff," which can then select the equally artificial grouping of counsel as "lead counsel" and its "executive committee."
In re Razorfish Sec. Litig., 143 F. Supp. 2d 304, 308 (S.D.N.Y. 2001) (Rakoff, J.).
- 11 - B. The Global Pension Funds Lacks Cohesion
One of the principal reasons that courts routinely reject unrelated plaintiff groups is the
concern that they lack the cohesion necessary to jointly oversee counsel's prosecution of a
complex securities class action. As Judge Scheindlin observed, "Appointing a group of
unrelated investors lead plaintiff could lead to fragmentation and the problem of determining
whose voice reigns when the group cannot agree." In re eSpeed, 232 F.R.D. at 99.
The concern that the Global Pension Funds will not be able to control their counsel or the
litigation effectively is particularly acute because of the size of their group and the far-flung
nature of the twelve entities. The lack of any explanation as to how they came together and
intend to jointly lead the prosecution of this complex litigation raises additional concerns.10
Accordingly, any declaration submitted after the fact by the Global Pension Funds will not cure their deficiencies because it will not demonstrate that these twelve entities came together through their own initiative (rather than at the direction of their counsel) as the U.S. Public Fund Group
did.
Despite the Global Pension Funds' claim that they are a group of just five movants, there
See In re Flight Safety Techs., Inc. Sec. Litig., 231 F.R.D. 124, 128 (D. Conn. 2005) ("Moreover, the joint motion submitted by the parties contains no indication of how the newly expanded group would function, such as whether certain lead plaintiffs would handle certain aspects of the litigation or whether decisions would be made by group consensus. Therefore, the Court finds that appointing eight unrelated and unfamiliar plaintiffs as co-lead plaintiffs, when no preexisting relationship is evident, would be counter to both the terms and the spirit of the PSLRA."); In re Gemstar-TV Guide Int'l Sec. Litig., 209 F.R.D. 447, 451 (C.D. Cal. 2002) (rejecting group that failed to detail any procedures by which they would "provide for efficient prosecution of the action," conduct meetings, or participate in the discovery process given that its members and attorneys were geographically scattered, or how the group would reach a consensus when intra-group conflicts arose); Sczesny Trust, 223 F.R.D. at 323 (rejecting attempt by shareholder to aggregate losses suffered by members of group that "banded together" where group members had not proffered "sufficient evidence... to support aggregation of the financial interests of that putative group of shareholders for purposes of determining which moving party has the largest financial interest.").
- 12 - are in fact twelve independent entities that comprise the Global Pension Funds. 11 That is because
"PKA" is not a Citigroup investor itself but a mere "administrator" for eight different Danish
pension funds. See www.pka.dk/public/forside/this is_pka.htm ("This Is PKA"), Silk Supp.
Decl. Exhibit C. Each of the Danish Funds has its own independent Board of Directors which
determines an investment plan appropriate to its respective fund. Id. Neither does PKA make the investment decisions on behalf of the Danish Funds; rather, independent, external investment
advisors made the decision for the Danish Funds to invest in Citigroup shares. Id. PKA is therefore not an "investment advisor" which, in certain limited circumstances, might have
standing to bring suit on behalf of its clients. In In re Network Assocs., Inc. Sec. Litig., 76 F.
Supp. 2d 1017, 1027-28 (N.D. Cal. 1999), the court refused to appoint a "fund administrator"
similar to PKA as Lead Plaintiff because it was a group of movants rather than a single movant.
[ING Fund Management] manages a number of separate funds, each fund being the actual owner of the shares. These funds are separate legal entities with their own directors. The funds were the entities that actually bought and sold the Network securities. ING Fund Management is the business unit that by contract provides administrative support to the funds. This candidate is, thus, a group of investment funds (or investors). It would qualify as a "group" within the meaning of the PSLRA
Even if PKA is construed as an "investment advisor" it has failed to establish that it has
standing to serve as a lead plaintiff on behalf of the Danish Funds. The conclusory statement in
PKA's Certification that it has "authority" to bring suit does not satisfy the requirement that an
investment advisor be "attorney-in-fact" for its clients and have full investment discretion. As
Judge Scheindlin held in eSpeed, "In order for an investment advisor to attain standing on behalf
11 Courts routinely hold that groups of more than five participants are too large and unwieldy to function cohesively and exercise the necessary control over counsel. In re Cendant, 264 F.3d at 267 (appointing group of three U.S. public pension fund and stating "We do, however, agree with the Securities and Exchange Commission that courts should generally presume that groups with more than five members are too large to work effectively.") (citing SEC Amicus Brief, at 17 n.13).
- 13 - of investors the transaction in question must have been executed as if by a single person.
Moreover, the advisor must be the attorney in fact for his clients, and he must be granted both
unrestricted decision-making authority and specific right to recover on behalf of his clients."
232 F.R.D. at 98. Moreover, even an investment advisor with true authority to bring suit can
serve as lead plaintiff on behalf of its clients only because it also has full investment discretion, a
fact that PKA has not established with regard to its eight clients here. PKA has failed to
establish these requirements and thus does not have standing to maintain this action on behalf of the eight funds for which it provides administrative services.12
In addition, the Global Pension Funds are not typical of the Class because ten of them
could face challenges by defendants as a result of their status as foreign investors from Sweden
and Denmark. Defendants will certainly challenge whether those funds can serve as
representative plaintiffs by raising questions concerning whether any judgment of this Court will
be afforded res judicata effect in their home jurisdictions. See Borochoff, 246 F.R.D. at 204-05
(refusing to appoint as lead plaintiff a group of foreign institutional investors in light of the
possibility that a foreign court would not give a U.S. judgment res judicata effect); In re Vivendi,
242 F.R.D. at 107 (excluding foreign shareholders from class because foreign courts "w[ould]
not give res judicata effect to judgments or settlements in a U.S. opt-out class action."); In re
Royal Ahold N. V. Sec. & ERISA Litig, 219 F.R.D. 343, 352 (D. Md. 2003) (refusing to appoint
foreign lead plaintiff because "ffloreign courts might not recognize or enforce such a decision
12 Moreover, none of the Danish Funds "administered" by PKA submitted a Certification as required by the PSLRA. Even if PKA's Certification provided all of those funds' transactions in Citigroup (a fact that cannot be verified absent a signed Certification by representatives of each of the Danish Funds), PKA's Certification does not satisfy the PSLRA requirement that each movant affirm that it has approved the filing of a lead plaintiff motion and is willing to serve as a representative party. Smith v. Suprema Specialties, Inc., 206 F. Supp. 2d 627, 636 (D.N.J. 2002) (rejecting motion of putative representative of 22 different investors where "the 22 entities did not satisfy the procedural requirements of the Reform Act because they neither submitted certifications nor moved individually for lead plaintiff status."). The Danish Funds have thus failed to comply with the PSLRA's Certification requirements, and cannot serve as Lead Plaintiffs.
- 14 - from an American court, which would allow foreign plaintiffs in the class to file suit against the
defendant again in those foreign courts").13
Because they might not be bound by a dismissal of the claims in this Court, and could
have a second opportunity to prosecute those claims in a foreign jurisdiction, defendants would
likely argue that these foreign funds are not in the same position as the U.S. Public Fund Group
and other members of the Class. Indeed, if defendants succeed in arguing that this Court's judgments will not be given preclusive effect in Sweden and Denmark, investors from those
countries could be excluded from the Class entirely. See Vivendi, 242 F.R.D. at 107.
The Supreme Court's seminal decision in Hilton v. Guyot provides support for the
proposition that Swedish and Danish courts have traditionally declined to give res judicata effect to judgments of U.S. courts absent a treaty. See Hilton v. Guyot, 159 U.S. 113, 218 (1895) ("In
Sweden the principle of reciprocity has prevailed from very ancient times. The courts give no
effect to foreign judgments, unless upon that principle; and it is doubtful whether they will even then, unless reciprocity is secured by treaty with the country in which the judgment was
rendered."); id. ("In Denmark the courts appear to require reciprocity to be shown before they
will execute a foreign judgment.") (internal citations omitted). Likewise, defendants might cite to more recent commentators who note that Swedish and Danish courts remain reluctant to
recognize judgments of foreign jurisdictions. See, e.g., Yoav Oestreicher, The Rise and Fall of
"Mixed" and "Double" Convention Models Regarding Recognition and Enforcement of Foreign
Judgments, 6 Wash. U. Global Stud. L. Rev. 339, 345 n.35 (2007) ("For example, Sweden and the Netherlands seem to refrain from enforcing foreign judgments if no treaty is available.")
(citing Symeon Symeonides et al., Conflict of Laws: American, Comparative, International 860
13 See In re Bally Total Fitness Sec. Litig., No. 04 C 3530, 2005 U.S. Dist. LEXIS 6243, at *19 (N.D. Ill. March 15, 2005) ("The PSLRA... provides that we ask simply whether [a proposed lead plaintiff] is likely to be 'subject to' [a] unique defense... we do not have to determine that the defense is likely to succeed") (emphasis added).
- 15 - (St. Paul 1998)); Travis Newport, Tortious Interference with International Contracts, 9 Int'l
Trade L.J. 80, 87 (2000) ("Many nations including China, Denmark, Sweden and the
Netherlands, only give a foreign judgment persuasive authority when a party attempts to enforce
it.") (emphasis added). The fact that Sweden's version of the class action, put into effect just
over five years ago, requires class members to affirmatively "opt in," and is thus fundamentally
different from Rule 23 of the Federal Rules of Civil Procedure, will also likely be cited by
defendants in furtherance of that argument. See Stefano M. Grace, Strengthening Investor
Confidence in Europe: U.S.-Style Securities Class Actions and the Acquis Communautaire, 15 J.
Transnat'l Law and Pol. 281, 294-95 (2006) (describing features of Lag om Gruppr tteg ng,
Sweden's "Group Proceeding Act").14
That defendants, armed with these arguments and others, might attempt to challenge the typicality of the Swedish and Danish Funds, presents a risk that is appropriately considered on this lead plaintiff motion. See Glaxosmithkline, 246 F.R.D. at 203-05; Vivendi, 242 F.R.D. at
105; In re Royal Ahold, 219 F.R.D. at 352. 15 Indeed, this potential risk to the Swedish and
Danish Funds reveals why their counsel may have been so focused on partnering these funds
with a domestic co-Lead Plaintiff. Recognizing these potential problems, Schiffrin Barroway
sought to persuade Ohio STRS to move jointly with the Swedish Funds. After those efforts
failed, and with the Lead Plaintiff deadline looming, it appears that Schiffrin Barroway hastily
14 The differences between the Swedish group action and U.S. class action mirror those between the German and U.S. systems identified in Glaxosmithkline, 246 F.R.D. at 204, and Viventh, 242 F.R.D. at 104, that led those courts to conclude that recognition of a U. S. class action judgment would be contrary to German public policy. For example, the Swedish parliament specifically adopted "opt in" procedures based on policy concems that the U.S. class action model created incentives for abuse. See Grace, supra, at 294.
15 Indeed, ColPERA — itself a member of the Global Pension Funds — has previously argued that foreign investors should not be allowed to serve as Lead Plaintiffs because they are subject to unique defenses that threaten to derail the focus of the litigation. For example, ColPERA argued previously that "[s]imply stated, the Foreign Purchasers carry 'baggage' that should not be allowed to distract from them prosecution of this case." Reply Memorandum in Further Support of the Motion of the Public Employees' Retirement Association of Colorado and Generic Trading of Philadelphia, LLC, at 5, In re Royal Ahold N. E Sec. & "ERISA "Litig., 1:03-MDL-01539 (N.D. Md. filed July 18, 2003), attached as Exhibit D to the Supp. Silk Decl.
- 16 - combined the Swedish and Danish funds with ColPERA and TCRS. Defendants, of course, will
not view that "partnership" as insulating the foreign funds from the unique defenses that
defendants will raise, as every class representative and lead plaintiff must independently satisfy the requirements of Rule 23.
III. The ATD Group Should Be Disqualified Because It Is Atypical And Subject To Unique Defenses
The ATD Group cannot serve as the Lead Plaintiff on behalf of Citigoup investors in this action because the ATD Group's members are far from typical of other Class members and
are subject to defenses unique to the ATD Group's atypical circumstances.
The ATD Group consists of several individuals who acquired their Citigoup shares in a
privately negotiated sale of their company, Automated Trading Desk ("ATD"), to Citigroup
during 2007. Several of these individuals continue to serve as members of the Board of
Directors of ATD, and are thus presently directors of a wholly-owned unit of Citigroup hardly the typical profile for an appropriate Lead Plaintiff in this action against Citigroup. Indeed, by
virtue of their close relationship with Citigoup and the consequent mechanics of the private sale
of ATD, members of the ATD Group are themselves potentially liable to Citigoup investors
under the Securities Act for the very same statements that form the basis of Citigroup's liability
under the Securities Exchange Act, and thus have a strong incentive to defend those statements
as accurate in contrast to the interests of Class members. Recognizing the manifold problems
such as preferential access to nonpublic information created by such close contacts between
Defendants and proposed Lead Plaintiffs, courts have repeatedly barred atypical investors such
as the ATD Group from serving as Lead Plaintiffs.
The ATD Group concedes that it acquired all of its Citigoup shares as the result of a
privately negotiated transaction, unlike the U.S. Public Fund Group and the rest of the Class. On
- 17 - October 2, 2007, Citigroup closed on its acquisition of ATD, a closely-held South Carolina
company. According to the Declaration of David Whitcomb (the "Whitcomb Decl."), co-
founder of ATD and the only member of the ATD Group to submit a declaration in this matter, the members of the ATD Group "received Citigroup stock as part of the consideration of our
agreement on June 30, 2007, to sell ATD to Citigroup." See Whitcomb Decl., attached as
Exhibit E to Affidavit of Ira M. Press, dated Jan. 7, 2008 ("Press Aff."), (Docket # 16).
According to a press release by the ATD Group's counsel, Blank Rome, ATD was sold to
Citigroup for $680 million in cash and stock. See Press Release, Automated Trading Desk Sold to Citigoup for $680 Million (Oct. 3, 2007), attached as Exhibit E to the Supp. Silk Decl. Based
on the registration statement for the transaction subsequent filed with the SEC, the total
consideration for Citigroup's purchase of ATD appears to have been $102.6 million in cash and
11,171,938 shares of unregistered Citigroup stock.16
As a result of this transaction, members of the ATD Group continue to have significant
close ties to Citigroup. As presently reflected on ATD's own website, three of the ATD Group's
members Messrs. Altman, Butler, and Whitcomb are currently members of the Board of
Directors of ATD. See ATD — Team Director Biographies, attached as Exhibit F to the Supp.
Silk Decl. As the ATD Group itself makes clear, Citigroup now owns all of ATD as a result of
purchasing all of ATD outstanding shares in a private transaction with the ATD Group.
Accordingly, the ATD Group's members are presently on the Board of Directors of a wholly-
owned unit of Citigoup and are, therefore, entirely atypical of other Class members. See, e.g.,
In re Indep. Energy Holdings PLC, 210 F.R.D. 476, 481 (S.D.N.Y. 2002) (Scheindlin, J.)
16 On October 2, 2007—the date the transaction closed and the ATD Group aquired their Citigroup shares—the high price of Citigroup stock was $48 per share. The Certifications submitted by the members of the ATD Group state that they acquired their Citigroup shares at a price of $52 per share, demonstrating that the ATD Group did not pay market price for those shares and, accordingly, cannot avail themselves of the fraud-on-the-market theory.
- 18 - ("[C]ourts have routinely found a disqualifying unique defense where the potential named
plaintiff has had a direct or personal relationship with a board member or officer of the issuing
company.")
Further highlighting the close connections and identity of interest between the ATD
Group's members and the Citigroup defendants in this action is the fact that the ATD Group's
members could actually be liable as defendants for the very same misstatements that Citigroup
is charged with in this action. The Citigroup shares that the ATD Group received in their
private sale were initially unregistered. However, the day after the deal closed, on October 3,
2007, Citigoup filed an SEC Form S-3ASR registration statement commonly known as a
"shelf registration" allowing the former ATD shareholders to sell their Citigroup shares "from time to time" and "in various types of transactions, including sales in the open market." See
ATD Registration Statement, Supp. Silk Decl., Exhibit G. Significantly, that registration
statement incorporates by reference the very financial statements that the class members in
this action allege are false and misleading, including Citigroup's Annual Report on Form 10-K
for the year ended December 31, 2006 and Citigroup's quarterly reports on Form 10-Q for the
quarters ended March 31, 2007 and June 30, 2007. See Id. at 4. See Memorandum in Support of the Motion of the ATD Group ("ATD Mem."), at 2 (Docket # 20) (stating that the "suits allege that Citigroup's class period financial statements were materially inaccurate in their description
of Citigroup's exposure to subprime mortgage related securities").
Sales of Citigoup shares by former ATD shareholders pursuant to this registration
statement could give rise to liability on the part of the ATD Group. Two members of the ATD
Group have already sold shares pursuant to this registration statement, the Whitcomb Trust and
Butler, (see Butler and Whitcomb Lead Plaintiff Certifications, attached as Exhibit C to the Press
- 19 - Aff. (Docket # 16)), and they could be defendants in a suit by Citigroup investors under Sections
11 and 12(a)(2) of the Securities Act of 1933, for the identical reasons being asserted in this class
action. The ATD Group thus has interests that are directly contrary to the Class because its
members will be forced to argue, in their own defense, that the Citigoup financial statements
incorporated in their registration statement were accurate, while the Class is seeking to prove that those statements were false and misleading.
Indeed, members of the ATD Group have already publicly demonstrated their willingness to overlook Citigoup's transgressions and shown their disinclination to zealously advocate the
claims in this action. For example, David Whitcomb who submitted the only Declaration on
behalf of the ATD Group would now have the Court believe in the "close alignment of
interests between [the ATD Group] and other Class Period purchasers" and his "strong desire to
prosecute the claims on behalf of' the Class. ATD Mem. at 9 (Docket # 20). On November 5,
2007, however, Mr. Whitcomb had the following to say in a message he posted on Marketbeat,
an online blog maintained by the Wall Street Journal:
Citi's loss of $50 billion in market cap is a ridiculous over-reaction. While there may be write-downs in excess of what they have taken and forecast to date, there is no possible way Citi could lose $50 billion. That would be more than half of their total exposure. The credit instruments in question are just not that bad.
By way of full disclosure, I should note that I am Chairman Emeritus of ATD, which was sold to Citi recently, so I hold a lot of Citi stock and am NOT a disinterested party. However, as a retired professor of finance (Rutgers Univ), I'd say this whether I owned Citi stock or not.
Posting of David K. Whitcomb, PhD, MarketBeat Blog — WSJ.com: Erasing $120 Billion in
Market Cap, http ://blogs.wsj. c om/marketb eat/2007/11/05/erasing- 1 20- billion- in-market- c ap/,
attached as Exhibit H to the Supp. Silk. Dec. With public statements such as this one effectively
conceding key elements of the Class's claims to the defendants, there is little reason to believe
- 20 - that the ATD Group will, in light of the unusual circumstances of its members, be able to
effectively fulfill the obligations of a Lead Plaintiff.
The close relationship between the members of the ATD Group and Citigroup, and their joint involvement in a sophisticated privately negotiated sale, also suggest a strong likelihood that unlike other Class members the ATD Group did not acquire its shares based purely on
public information. Rather, through their access to nonpublic information, the members of the
ATD Group would not have relied on the integrity of the public markets in the same way that
other Class members necessarily did thereby subjecting the ATD Group to unique defenses and
rendering the group an inappropriate Lead Plaintiff. See 15 U.S.C. § 78u-4(a)(3)(B)(iii)(II)
(barring a movant that "is subject to unique defenses that render such plaintiff incapable of
adequately representing the class"); see also Basic, Inc. v. Levinson, 485 U.S. 224, 247-48
(1988) ("An investor who buys or sells stock at the price set by the market does so in reliance on the integrity of that price.... [But any showing that severs the link between the alleged
misrepresentation and either the price received (or paid) by the plaintiff, or his decision to trade
at a fair market price, will be sufficient to rebut the presumption of reliance.... [The presumption
would be rebutted as to] plaintiffs who would have divested themselves of their ... shares
without relying on the integrity of the market.").
The Second Circuit has explained why the presence of unique defenses can result in a
finding of atypicality:
While it is settled that the mere existence of individualized factual questions with respect to the class representative's claim will not bar class certification, class certification is inappropriate where a putative class representative is subject to unique defenses which threaten to become the focus of the litigation. Regardless of whether the issue is framed in terms of the typicality of the representative's claims or the adequacy of its representation, there
- 21 - is a danger that absent class members will suffer if their representative is preoccupied with defenses unique to it.
Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 903 F.2d 176, 180
(2d Cir. 1990) (internal citations omitted).
Thus, as explained in Grace v. Perception Tech. Corp., 128 F.R.D. 165, 169 (D. Mass.
1989), a problem can arise when the proposed class representative has relied upon "information that is not generally available to the public, and hence to the unnamed class representatives."
Even though questions of reliance virtually disappear when plaintiffs employ a fraud on the market theory, if a plaintiff has relied on non-market information that plaintiff may be subject to unique defenses at trial. Such a plaintiff could hurt the class he seeks to represent by having to litigate issues that solely relate to his special reliance. The fraud on the market theory is specifically aimed at protecting open market purchasers who did not directly rely on any representations regarding the stock. Thus, if a plaintiff relies on representations, specifically those which are not available through market sources, then he cannot be said to have relied on the integrity of the market, and is atypical of those who have so relied.
Id. (internal citations omitted). Likewise, in Network Assocs., the court denied the application of
a party seeking to be appointed lead plaintiff where "the lion's share of [its] acquisition of
Network [Associates] securities was not in open-market transactions but via a merger." 76 F.
Supp. 2d at 1029. The court, noting the importance of the fraud-on-the-market presumption in
securities class actions, found that "KBC, unfortunately, would be encumbered with the unique
question whether it acquired its Network shares on better terms than the investing public and not
fully in reliance on the market price." Id. at 1029-30.
Similarly, in In re Critical Path, Inc. Sec. Litig., 156 F. Supp. 2d 1102 (N.D. Cal. 2001), three members of a family who acquired shares of Critical Path stock in exchange for shares in
PeerLogic sought appointment as lead plaintiff. The court concluded that the group was "not
- 22 - adequate because of the manner in which it acquired its shares, which was the apparently
privately negotiated acquisition of PeerLogic." Id. at 1110. Finding that "the concerns raised by
a private transaction are appropriately addressed at this stage," the court held that "[appointing
as lead plaintiff one who acquired its shares in a private transaction invites lengthy litigation both
at the class certification stage and thereafter of whether that plaintiff is subject to unique
defenses. Certainly the Court should not appoint as lead plaintiff one whose appointment will
invite scrutiny of the details of a private transaction." Id. at 1110-11 (emphasis added). The
court further concluded that leixposure to the concerns raised by a private transaction would
disserve the class that the Court is charged with protecting." Id. at 1111.17
While the ATD Group claims that no confidential information was provided, see ATD
Mem. at 9 (Docket # 20), it has refused to provide a copy of the June 30, 2007 Purchase
Agreement or the "acquisition documents" that it claims establish that it did not receive any non-
public representations or information concerning Citigroup. See Letter from Peter S. Linden to
Michael J. Pucillo (Jan. 11, 2008), attached as Exhibit I to the Supp. Silk Decl. Instead, it has
submitted a declaration from only one of its five members, David Whitcomb, stating that
Citigroup's SEC filings and information on Citigroup's website "represented the sole sources of
information that the ATD Group had respecting the financial condition of Citigoup." See
17 See also Coopersmith v. Lehman Bros., Inc., 344 F. Supp. 2d 783, 788 (D. Mass. 2004) (noting that court had previously denied party's motion for appointment as lead plaintiff where that party "had not purchased her shares on the open market, but had actually obtained her shares when she sold a company ... in a private transaction"); In re Peregrine Sys., Inc. Sec. Litig. §, No. Civ. 02 CV 870-J(RBB), 2002 WL 32769239, at *6-7 (N.D. Cal. Oct. 11, 2002) (denying motion for appointment as lead plaintiffs where movants acquired shares via a merger transaction rather than on the open market, thereby raising issues as to whether those movants were privy to non-public information that would subject them to unique defenses that they did not acquire their shares solely in reliance on the market price).
- 23 - Whitcomb Decl., at 3.18
In In re Peregrine, 2002 WL 32769239, at *6-7, as in this case, not all of the members of the group submitted declarations to support their assertion that they did not rely on non-public
information. The court rejected the movant group because it "ha[d] not presented sufficient
evidence of the information on which it did rely in obtaining its shares." Id. at *7. Noting that it
could not resolve questions as to reliance at the lead plaintiff stage, the court found nonetheless that "[t]he fact that plaintiffs will be subject to such defenses renders their claims atypical of
other class members." Id. at *7 (quoting Landry v. Pricewaterhouse Chartered Accountants, 123
F.R.D. 474, 476 (S.D.N.Y. 1989).
The exact financial knowledge held by these individuals at the time they acquired their shares will no doubt be fleshed out during discovery and issues unique to the Group raised at that time. Those issues loom too large for the court to determine at this preliminary stage that the Remedy Group is able to adequately represent the interests of the remaining class members.
Id.
Similarly, in Critical Path, 156 F. Supp. 2d at 1110-11, the court noted that in an effort to
demonstrate its suitability as lead plaintiff, the movant had "submitted a declaration stating that it
'did not rely on non-public information in making the decision to exchange [its] PeerLogic
shares for Critical Path shares. Rather, [its] investment decision was based upon publicly
available information that was known to the entire market." Id. The court found the applicant's
18 In addition to the right of indemnification provided to the ADT Group by Citigroup, there may well be various warranties and representations contained in the June 30, 2007 Purchase Agreement between Citigroup and ATD that would raise typicality concerns. Indeed, it would be customary for representations and warranties to be made in a deal of this magnitude. In response to a request by the U.S. Public Fund Group, counsel for ATD Group refused to provide a copy of the June 30, 2007 "agreement" referenced in the Whitcomb Declaration that would speak to those issues. As a result, there are many unanswered questions conceming those representations and warranties that raise possible conflicts and typicality problems. Because the ATD Group's counsel have not made the Purchase Agreement part of the record, and refused to provide it when asked, it is impossible for the Court to determine whether the ATD Group relied on warranties not made to the general public, or whether there might be potential counterclaims that Citigroup might bring against the ATD Group. The likelihood that defendants will focus on these issues if the ATD Group is appointed Lead Plaintiff — and thereby distract from the prosecution of this litigation — is sufficient basis to find that the ATD Group is atypical of the Class.
- 24 - "conclusory statement that it did not rely on nonpublic information" insufficient to satisfy the
court's concerns regarding typicality and possible unique defenses. Id.
The concerns expressed in Peregrine and Critical Path apply with equal force here. The
ATD Group's motion for appointment as lead plaintiff lacks the necessary information to put these concerns to rest. One conclusory declaration, from one of five group members, without the
documentation relating to the underlying acquisition of Citigroup stock, is simply not sufficient.
In sum, given the ATD Group members' current direct affiliation with Citigoup, their
potential liability as defendants to Citigroup investors, their public declarations against the
interest of the Class, and the likelihood that they acquired Citigroup shares based on preferential
access to nonpublic information, the ATD Group is inappropriate Lead Plaintiff and should not
be appointed by the Court.
CONCLUSION
For all the above reasons, the U.S. Public Fund Group respectfully requests that the
Court: (1) appoint the U.S. Public Fund Group as Lead Plaintiff pursuant to Section
21D(a)(3)(B) of the PSLRA; (2) approve the U.S. Public Fund Group's selection of Lead
Counsel for the Class; (3) consolidate all related securities class actions; and (4) giant such other
and further relief as the Court may deem just and proper.
Dated: January 28, 2008 Respectfully submitted,
/s/ Gerald H. Silk BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP Gerald H. Silk (GS-4565) Avi Josefson (AJ-3532) Noam Mandel (NM-0203) 1285 Avenue of the Americas, 38th Floor New York, New York 10019 Telephone: 212-554-1400 Facsimile: 212-554-1444
- 25 - BERMAN DEVALERIO PEASE TABACCO BURT & PUCILLO Jeffrey C. Block (JB-0387) Kathleen M. Donovan-Maher Leslie R. Stern One Liberty Square Boston, Massachusetts 02109 Telephone: 617-542-8300 Facsimile: 617-542-1194
Michael J. Pucillo Anne O'Berry Esperante Building 222 Lakeview Avenue, Suite 900 West Palm Beach, FL 33401 Telephone: 561-835-9400 Facsimile: 561-835-0322
Counsel to the U.S. Public Fund Group and Proposed Lead Counsel for the Class
- 26 - Exhibit 10 International Business & Economics Research Journal — March 2007 Volume 6, Number 3 Weak Form Efficiency In Indian Stock Markets Rakesh Gupta, (E-mail: [email protected]), Central Queensland University, Australia Parikshit K. Basu, (E-mail: [email protected]), Charles Sturt University, Australia
ABSTRACT
Hypothesis of Market Efficiency is an important concept for the investors who wish to hold internationally diversified porifolios. With increased movement of investments across international boundaries owing to the integration of world economies, the understanding of efficiency of the emerging markets is also gaining greater importance. In this paper we test the weak form efficiency in the framework of random walk hypothesis for the two major equity markets in India for the period 1991 to 2006. The evidence suggests that the series do not follow random walk model and there is an evidence of autocorrelation in both markets rejecting the weak form efficiency hypothesis.
INTRODUCTION
he term market efficiency in capital market theory is used to explain the degree to which stock prices reflect all available, relevant information. The concept of Efficiency Market Hypothesis (EMH) is r based on the arguments put forward by Samuelson (1965) that anticipated price of an asset fluctuate randomly. Fama (1970) presented a formal review of theory and evidence for market efficiency and subsequently revised it further on the basis of development in research (Fama 1991).
Efficiency of equity markets has important implications for the the investment policy of the investors. If the equity market in question is efficient researching to find miss-priced assets will be a waste of time. In an efficient market, prices of the assets will reflect markets' best estimate for the risk and expected retum of the asset, taking into account what is known about the asset at the time. Therefore, there will be no undervalued assets offering higher than expected return or overvalued assets offering lower than the expected return. All assets will be appropriately priced in the market offering optimal reward to risk. Hence, in an efficient market an optimal investment strategy will be to concentrate on risk and retum characteristics of the asset and/or portfolio. However, if the markets were not efficient, an investor will be better off trying to spot winners and losers in the market and correct identification of miss-priced assets will enhance the overall performance of the portfolio Rutterford (1993). EMH has a twofold function - as a theoretical and predictive model of the operations of the financial markets and as a tool in an impression management campaign to persuade more people to invest their savings in the stock market (Will 2006).
The understanding of efficiency of the emerging markets is becoming more important as a consequence of integration with more developed markets and free movement of investments across national boundaries. Traditionally more developed Western equity markets are considered to be more efficient. Contribution of equity markets in the process of development in developing countries is less and that resulted in weak markets with restrictions and controls (Gupta, 2006)
In the last three decades, a large number of countries had initiated reform process to open up their economies. These are broadly considered as emerging economies. Emerging markets have received huge inflows of capital in the recent past and became viable altemative for investors seeking intemational diversification. Among the emerging markets India has received it's more than fair share of foreign investment inflows since its reform process began. One reason could be the Asian crisis which affected the fast developing Asian economies of the time (also some times collectively called ,,tiger economies'). India was not affected by the Asian crisis and has maintained its high economic growth during the period (Gupta and Basu 2005).
57 International Business & Economics Research Journal — March 2007 Volume 6, Number 3
Today India is one of the fastest growing emerging economies in the world. The reform process in India officially started in 1991. As a result, demand for investment funds is growing significantly and capital market growth is expected to play an increasingly important role in the process. The capital market reforms in India present a case where a judicious combination of competition, deregulation and regulation has led to sustained reforms and increased efficiency (Datar and Basu 2004).
At this transitional stage, it is necessary to assess the level of efficiency of the Indian equity market in order to establish its longer term role in the process of economic development. However, studies on market efficiency of Indian markets are very few. They are also dated and mostly inconclusive. The objective of this study is to test whether the Indian equity markets are weak form efficient or not. EMEL similar to other theories that require future expected prices or returns, use past actual prices or retums for the tests. Sets of share price changes are tested for serial independence. Random walk theory for equity prices show an equities market in which new information is quickly discounted into prices and abnormal or excess returns can not be made from observing past prices (Poshakwale 1996).
The next section of this paper provides a brief background of the Indian equity market and a brief literature review of studies testing market efficiency in emerging markets. Section 3 explains the methodology used in this study and data sources, followed by the results of the analysis in section 4. The last section summarizes the conclusions and their implications.
BACKGROUND
Equity Market In India
The reform process in India began in early 1990s with stock exchanges and then spread to banks, mutual funds, NBFCs and of late, to insurance companies. However, reforms in equity market in particular commenced in mid-1980s (Datar & Basu 2004). Mumbai (formerly known as Bombay) Stock Exchange (BSE) has always played the dominant role in the equity market in India. Traditionally, stock exchanges were govemed by brokers leading to conflict of interest situation between the interest of common investors and those of brokers/owners of stock exchanges. With the establishment of National Stock Exchange (NSE), a new institutional structure was introduced in India that could ensure smooth functioning of market through a combination of new technology and efficient market design. The Securities Exchange Board of India (SEBI) was set up as a market regulator with statutory powers to control and supervise operations of all participants in the capital market viz. stock exchanges, stock brokers, mutual funds and rating agencies. The development of debt market is another significant development, which has been facilitated by deregulation of administered interest rates. Opening of stock exchange trading to Foreign Institutional Investors (FIIs) and permission of raising funds from international market through equity linked instruments have introduced a degree of competition to domestic exchanges and other market participants. Operations of FIIs have facilitated introduction of best practices and research inputs in trading and risk management systems.
Mumbai stock exchange (BSE), the premier stock exchange of India is probably the oldest stock exchanges in Asia, established in 1875. It was initially named as "Native Share and Share Broker Association" (Poshakwale 1996). Stability in prices for the BSE was considered to be an important feature. During the period 1987 to 1994, average annual price fluctuations of ordinary shares on B SE were 25.1% as compared with London Stock Exchange (22%), and the New York Stock Exchange (23.9%) (Poshakwale 1996).
In this study, to determine market efficiency of equity markets in India, we considered two stock exchanges — BSE and NSE. Market capitalization of BSE in July, 2006 was INR 19,871 billion and that of NSE at the same time was INR 18,487 billion. BSE is the oldest stock exchange in India and has the longest data series available. NSE is one of the newer stock exchanges in India. The purpose of establishing NSE was to provide transparency and a better functioning market for the investors. Because of government's support, NSE is fast becoming more accessible market to domestic and foreign investors. The perceived liquidity and accessibility of the NSE market is an important factor and may have different impact on the market efficiency. High liquidity in the market is an important pre-condition for the market efficiency, since a thinly traded market is not in a position to adjust to the new information quickly and
58 International Business & Economics Research Journal — March 2007 Volume 6, Number 3
accurately. Thus, analysis of two major equity markets in India together should provide a more comprehensive and complete picture.
Studies On Market Efficiency
The efficient market hypothesis is related to the random walk theory. The idea that asset prices may follow a random walk pattern was introduced by Bachelier in 1900 (Poshakwale 1996). The random walk hypothesis is used to explain the successive price changes which are independent of each other.
Fama (1991) classifies market efficiency into three forms - weak, semi-strong and strong. In its weak form efficiency, equity retums are not serially correlated and have a constant mean. If market is weak form efficient, current prices fully reflect all information contained in the historical prices of the asset and a trading rule based on the past prices can not be developed to identify miss-priced assets. Market is semi-strong efficient if stock prices reflect any new publicly available information instantaneously. There are no undervalued or overvalued securities and thus, trading rules are incapable of producing superior returns. When new information is released, it is fully incorporated into the price rather speedily. The strong form efficiency suggests that security prices reflect all available information, even private information. Insiders profit from trading on information not already incorporated into prices. Hence the strong form does not hold in a world with an uneven playing field.
Studies testing market efficiency in emerging markets are few. Poshakwale (1996) showed that Indian stock market was weak form inefficient; he used daily BSE index data for the period 1987 to 1994. Barua (1987), Chan, Gup and Pan (1997) observed that the major Asian markets were weak form inefficient. Similar results were found by Dickinson and Muragu (1994) for Nairobi stock market; Cheung et al (1993) for Korea and Taiwan; and Ho and Cheung (1994) for Asian markets. On the other hand, Bames (1986) showed a high degree of efficiency in Kuala Lumpur market. Groenewold and Kang (1993) found Australian market semi-strong form efficient.
Some of the recent studies, testing the random walk hypothesis (in effect testing for weak form efficiency in the markets) are; Korea (Ryoo and Smith, 2002; this study uses a variance ratio test and find the market to follow a random walk process if the price limits are relaxed during the period March 1988 to Dec 1988), China, (lee et al 2001; find that volatility is highly persistent and is predictable, authors use GARCH and EGARCH models in this study), Hong Kong (Cheung and Coutts 2001; authors use a variance ratio test in this study and find that Hang Seng index on the Hong Kong stock exchange follow a random walk), Slovenia (Dezlan, 2000), Spain (Regulez and Zarraga, 2002), Czech Republic (Hajek, 2002), Turkey (Buguk and Brorsen, 2003), Africa (Smith et al. 2002; Appiah-kusi and Menyah, 2003) and the Middle East (Abraham et al. 2002; this study uses variance ratio test and the runs test to test for random walk for the period 1992 to 1998 and find that these markets are not efficient).
METHODOLOGY & DATA
To test historical market efficiency one can look at the pattem of short-term movements of the combined market retums and try to identify the principal process generating those retums. If the market is efficient, the model would fail to identify any pattern and it can be inferred that the retums have no pattern and follow a random walk process. In essence the assumption of random walk means that either the returns follow a random walk process or that the model used to identify the process is unable to identify the true retum generating process. If a model is able to identify a pattern, then historical market data can be used to forecast future market prices, and the market is considered not efficient.
There are a number of techniques available to determine patterns in time series data. Regression, exponential smoothing and decomposition approaches presume that the values of the time series being predicted are statistically independent from one period to the next. Some of these techniques are reviewed in the following section and appropriate techniques identified for use in this study.
Runs test (Bradley 1968) and LOMAC variance ratio test (Lo and MacKinlay 1988) are used to test the weak form efficiency and random walk hypothesis. Runs test determines if successive price changes are independent. It is
59
International Business & Economics Research Journal — March 2007 Volume 6, Number 3
non-parametric and does not require the retums to be normally distributed. The test observes the sequence of successive price changes with the same sign. The null hypothesis of randomness is determined by the same sign in price changes. The runs test only looks at the number of positive or negative changes and ignores the amount of change from mean. This is one of the major weaknesses of the test. LOMAC variance ratio test is commonly criticised on many issues and mainly on the selection of maximum order of serial correlation (Faust, 1992). Durbin-Watson test (Durbin and Watson 1951), the augmented Dickey-Fuller test (Dickey and Fuller 1979) and different variants of these are the most commonly used tests for the random walk hypothesis in recent years (Worthington and Higgs 2003; Kleiman, Payne and Sahu 2002; Chan, Gup and Pan 1997).
Under the random walk hypothesis, a market is (weak form) efficient if most recent price has all available information and thus, the best forecaster of future price is the most recent price. In the most stringent version of the efficient market hypothesis, st is random and stationary and also exhibits no autocorrelation, as disturbance term cannot possess any systematic forecast errors. In this study we have used returns and not prices for test of market efficiency as expected returns are more commonly used in asset pricing literature (Fam a (1998).
Returns in a market conforming to random walk are serially uncorrelated, corresponding to a random walk hypothesis with dependant but uncorrelated increments. Parametric serial correlations tests of independence and non- parametric runs tests can be used to test for serial dependence. Serial correlation coefficient test is a widely used procedure that tests the relationship between retums in the current period with those in the previous period. If no significant autocorrelation are found then the series are expected to follow a random walk.
A simple formal statistical test was introduced was Durbin and Watson (1951). Durbin-Watson (DW) is a test for first order autocorrelation. It only tests for the relationship between an error and its immediately preceding value. One way to motivate this test is to regress the error of time t with its previous value.
ut = put.1 + vt (1) where vt N(0,o2v).
DW test can not detect some forms of residual autocorrelations, e.g. if corr(u t, ut.i) = 0 but corr(ut, ut.2) 0, DW as defined earlier will not find any autocorrelation. One possible way is to do it for all possible combinations but this is tedious and practically impossible to handle. The second-best alternative is to test for autocorrelation that would allow examination of the relationship between u t and several of its lagged values at the same time. The Breusch- Godfrey test is a more general test for autocorrelation for the lags of up to r'th order.
Aut-2 P3ut-3 P rut, ± vt, (2) vt N (0 , 2
Because of the abovementioned weaknesses of the DW test we do not use the DW test in our study. An altemative model which is more commonly used is Augmented Dickey Fuller test (ADF test). Three regression models (standard model, with drift and with drift and trend) are used in this study to test for unit root in the research, (Chan, Gup and Pan 1997; Brooks 2002). In this study we followed the test methodologies from Brooks (2002) with slight adjustments.
S = aSt-1 + Et (3) St = u* + a* St-1 ±E*t (4) St =u 13(t -T)+ a*$ S1-1 + s (5) Where: St = the stock price u* and u** = the drift terms T = total number of observations * . St, s, st = error terms that could be ARMA processes with time dependent variances.
60 International Business & Economics Research Journal — March 2007 Volume 6, Number 3
Where St is the logarithm of the price index seen at time t, u is an arbitrary drift parameter, a is the change in the index and sk is a random disturbance term. Equation (3) is for the standard model; (4) for the standard model with a drift and (5) for the standard model with drift and trend.
Augmented Dickey-Fuller (ADF) unit root test of nonstationarity is conducted in the form of the following regression equation. The objective of the test is to test the null hypothesis that 0 = 1 in: Y, = +U against the one-sided alternative 0 < 1. Thus the hypotheses to be tested are:
Ho: Series contains a unit root against Series is stationary
In this study we calculate daily retums using daily index values for the Mumbai Stock Exchange (BSE) and National Stock Exchange (NSE) of India. The data is collected from the Datastream data terminal from Macquarie University. The time period for BSE is from 24 th May 1991 to 26th May 2006 and for NSE 27 th May to 26th May 2006. Stock exchanges are closed for trading on weekends and this may appear to be in contradiction with the basic time series requirement that observations be taken at a regularly spaced intervals. The requirement however, is that the frequency be spaced in terms of the processes underlying the series. The underlying process of the series in this case is trading of stocks and generation of stock exchange index based on the stock trading, as such for this study the index values at the end of each business day is appropriate (French 1980).
Table 1 presents the characteristics of two data sets used in this study. During the period covered in this study, the mean retum of the NSE index is much lower than that of the BSE, similarly the variance of NSE is lower as compared with BSE index suggesting a lower risk and a lower average retum at NSE as compared with BSE. It is relevant to note that NSE was established by the government of India to improve the market efficiency in Indian stock markets and to break the monopolistic position of the BSE. NSE index is a more diversified one as compared to the same of BSE. This can also be due to the unique nature of India's equity markets, the settlement system on BSE was intermittent (Badla system up until 2" July 2001) and on NSE it was always cash.
Table 1:
Data characteristics — BSE and NSE — 1991-2006 Index Mean Variance Minimum Maximum Observations Skewness Kurtosis BSE 0.068138 2.652610 -11.251518562 18.105585826 3915 0.328482 9.051393 NSE 0.000591 0.000256 -0.1334028662 0.1329113192 3915 -0.209051 8.192904
RESULTS
This study conducts a test of random walk for the BSE and NSE markets in India, using stock market indexes for the Indian markets. It employs unit root tests (augmented Dickey-Fuller (ADF)). We perform ADF test with intercept and no trend and with an intercept and trend. We further test the series using the Phillips-Perron tests and the KPSS tests for a confirmatory data analysis.
In case of BSE and NSE markets, the null hypothesis of unit root is convincingly rejected, as the test statistic is more negative than the critical value, suggesting that these markets do not show characteristics of random walk and as such are not efficient in the weak form. We also test using Phillip-Perron test and KPSS test for confirmatory data analysis and find the series to be stationary. Results are presented in Table 2. For both BSE and NSE markets, the results are statistically significant and the results of all the three tests are consistent suggesting these markets are not weak form efficient.
61 International Business & Economics Research Journal — March 2007 Volume 6, Number 3
Table 2:
Results of ADF, PP Index ADF Test Statistic ADF Test Statistic PP unit root test, with KPSS (Tau statistic) for (5 lags with intercept and (5 lags with intercept and intercept and 4 lags in lag parameter 4, 3 and 2 no trend) trend) error process respectively BSE -24.80770 -24.80455 -56.22748 .13264, .13762, .14178 NSE -24.16392 -24.16776 -54.82289 .11710, .12203, .12576 Note: ADF critical values with an intercept and no trend are: -3.435, -2.863 and -2.567 at 1%, 5% and 10% levels; with and intercept and trend are: -3.966, -3.414 and -3.129 at 1%, 5% and 10% levels. PP critical values are: -3.435, -2.863 and -2.567 at 1%, 5% and 10% respectively. KPSS critical values are: 0.216, 0.176, 0.146 and 0.119 at 1%, 2.5%, 5% and 10% levels. Null of stationarity is accepted if the tests statistic is less than the critical value The null hypothesis in the case of ADF and PP is that the series is non-stationary, whereas in the case of KPSS test it is series is stationary.
Results of the study suggest that the markets are not weak form efficient. DW test, which is a test for serial correlations, has been used in the past but the explanatory power of the DW can be questioned on the basis that the DW only looks at the serial correlations on one lags as such may not be appropriate test for the daily data. Current literature in the area of market efficiency uses unit root and test of stationarity. This notion of market efficiency has an important bearing for the fund managers and investment bankers and more specifically the investors who are seeking to diversify their portfolios intemationally. One of the criticisms of the supporters of the international diversification into emerging markets is that the emerging markets are not efficient and as such the investor may not be able to achieve the full potential benefits of the international diversification.
CONCLUSIONS & IMPLICATIONS
This paper examines the weak form efficiency in two of the Indian stock exchanges which represent the majority of the equity market in India. We employ three different tests ADF, PP and the KPSS tests and find similar results. The results of these tests find that these markets are not weak form efficient. These results support the common notion that the equity markets in the emerging economies are not efficient and to some degree can also explain the less optimal allocation of portfolios into these markets. Since the results of the two tests are contradictory, it is difficult to draw conclusions for practical implications or for policy from the study.
It is important to note that the BSE moved to a system of rolling settlement with effect from 2" July 2006 from the previously used ,Badla' system. The ,Badla' system was a complex system of forward settlement which was not transparent and was not accessible to many market participants. The results of the NSE are similar (NSE had a cash settlement system from the beginning) to BSE suggesting that the changes in settlement system may not significantly impact the results. On the contrary a conflicting viewpoint is that the results of these markets may have been influenced by volatility spillovers, as such the results may be significantly different if the changes in the settlement system are incorporated in the analysis. The research in the area of volatility spillover has argued that the volatility is transferred across markets (Brailsford, 1996), as such the results of these markets may be interpreted cautiously. For future research, using a computationally more efficient model like generalized autoregressive conditional heteroskesdasticity (GARCH) could help to clear this.
REFERENCES
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5. Barua, S. K. (1987). Some Observations on the Report of the High Powered Committee on the Stock Exchange Reforms, Annual Issue of ICFAI, Dec. 6. Basu, P. and Gupta, R. (2005). Is India vulnerable to financial crisis?: Lessons from the Asian experience. Paper presented at The 18 th Australian Finance and Banking Conference 2005, Sydney, December, 14-16, 2005. 7. Brailsford, T. J. (1996). Volatility Spillovers Across the Tasman, Australian Journal of Management, Vol 21, No 1, June. 8. Brooks, C. (2002). Introductory Econometrics for Finance, Cambridge University Press, Cambridge. 9. Chan, K. C., Gup, B. E., and Pan, M. S. (1997). International Stock Market Efficiency and Integration: A Study of Eighteen Nations, Journal of Business Finance and Accounting, 24 (6). 10. Cheung, K.C. and Coutts, J.A. (2001) A note on weak form market efficiency in security prices: Evidence from the Hong Kong stock exchange, Applied Economics Letters, 8(6), 407-410. 11. Cheung, Y. L., Wong, K. A., and Ho, Y. K. (1993) The Pricing of Risky Assets in two Emerging Asian Markets - Korea and Taiwan, Applie d Financial Economics 3, Issue 4 Dec. 315-324. 12. Datar, M. K. and Basu, P. K. (2004) Financial sector reforms in India: Some institutional imbalances, Conference Volume, Academy of World Business, Marketing and Management Development Conference, Gold Coast, Australia, July. 13. Dezelan, S. (2000) Efficiency of the Slovenian equity market, Economic and Business Review, 20), 61-83. 14. Dickinson, J. P. Muragu K. (1994). Market Efficiency in Developing Countries: A Case Study of the Nairobi Stock Exchange, Journal of Business Finance & Accounting Vol. 21, No. 1, 133-150. 15. Dickey, D. A. and Fuller, W. A. (1979). Distribution of the estimates for autoregressive time series with a unit root. Journal of American Statistical Association, 74, 427-431. 16. Durbin, J. and Watson, G. S. (1951), Testing for Serial Correlation in Least Squares Regression II. Biometrika 38, 159-178. 17. Fama, E. (1970). Efficient Capital Markets: A Review of Theory and Empirical Work, Journal of Finance, 25, 283-306. 18. Fama, E. (1991). Efficient Capital Markets II, Journal of Finance, 46, 1575-1671. 19. Fama, E. (1998). Market Efficiency, Long-Term Returns, and Behavioural Finance, Journal of Financial Economics, 49:3, 283-306. 20. Faust, J. (1992). When Are Variance Ratio Tests For Serial Dependence Optimal?, Econometrica, Vol. 60, No. 5, 1215-1226. 21. French, K. (1980). Stock Returns and the Weekend Effect, Journal of Financial Economics, 8, 55-69 22. Gupta, R. (2006), Emerging Markets Diversification: Are Correlations Changing Over time? International Academy of Business and Public Administration Disciplines (IABPAD) Conference, January 3-6, 2006, Orlando. 23. Groenewold, N. and Kang, K.C. (1993). The Semi-strong Efficiency of the Australian Share Market, Economic Recora Vol. 69, Iss. 207, December, 405-410. 24. Ho, R. Y. and Cheung, Y. L. (1994). Seasonal pattern in volatility in Asia stock markets, Applied Financial Economics, 4, 61-67. 25. Kleiman, R. T. Payne, J. E., and Sahu, A. P. (2002). Random Walks and Market Efficiency: Evidence from Intemational Real Estate Markets, Journal of Planning Education and Research, Vol. 24, no. 3, 279-297 26. Lee, C.F., Chen, G.M., and Rui, O.M. (2001) Stock returns and volatility on China's stock markets, Journal of Financial Research, 24(4), 523-543. 27. Lo, A. and MacKinlay, A. C. (1988). Stock market prices do not follow random walks: Evidence from a simple specification test, Review of Financial Studies, 10), 41-66. 28. Poshakwale, S. (1996). Evidence on Weak Form Efficiency and Day of the Week Effect in the Indian Stock Market. Finance India, Vol X, No. 3. 605-616. 29. RegUlez, M. and Zarraga, A. (2002) Common features between stock retums and trading volume, Applied Financial Economics, 12(12), 885-893. 30. Rutterford, J. (1993). Introduction to Stock Exchange Investment, Second Edition, 281-308, The Macmillan Press Ltd., London. 31. Ryoo, H.J. and Smith, G. (2002) Korean stock prices under price limits: Variance ratio tests of random walks, Applied Financial Economics, 12(8), 545-553.
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32. Samuelson, P. (1965). Proof that Properly Anticipated Prices Fluctuate Randomly. Industrial Management Review. Spring 6, 41-49. 33. Smith, G., Jefferis, K., and Ryoo, H.J. (2002) African stock markets: multiple variance ratio tests of random walks, Applied Financial Economics, 12(4), 475-484. 34. Will, M. (2006) The Role of Performances in an Accounting Scandal: An Insider's Perspective on How Things Went Wrong', Proceedings of 5th Global Conference on Business & economics, Cambridge University, UK, Paper No. 152. 35. Worthington, A. C. and Higgs, H. (2003). Weak-form Market Efficiency in European Emerging and Developed Markets, Discussion paper no. 159, School of Economics and Finance, Queensland University of Technology, Brisbane, Australia http://nseindia.com/content/indices/ind faq8.htm accessed on 1" September 2006.
NOTES
64 Exhibit 11 EFFICIENCY OF INDIAN STOCK
MARKET*
Anand Pandeyt
October 2003
*The paper was a part of project for the Time Series Course by Dr. Susan Thomas. I A:nand Pandey is Research Scholars at IGIDR, Mumbai. E-Mail: ananclAigidnac.in Abstract
Market efficiency has an influence on the investment strategy of an investor because if market is efficient, trying to pickup winners will be a waste of time. In an efficient market there will be no undervalued securities offering higher than deserved expected returns, given their risk. On the other hand if markets are not efficient, excess returns can be made by correctly picking the winners. In this paper, an analysis of three popular stock indices is carried out to test the efficiency level in Indian Stock market and the random walk nature of the stock market by using the run test and the autocorrelation function ACF (k) for the period from January 1996 to June 2002. The study carried out in this paper has presented the evidence of the inefficient form of the Indian Stock Market. From autocorrelation analyses and runs test we are able to conclude that the series of stock indices in the India Stock Market are biased random time series. The auto correlation analysis indicates that the behavior of share prices does not confirm the applicability of the random walk model in the India stock market. Thus there are undervalued securities in the mar- ket and the investors can always excess returns by correctly picking them.
Keywords: Random Walk, Market Efficiency, Hypothesis testing JEL Classification: CE C14, C120
2 1 INTRODUCTION
Market efficiency has an influence on the investment strategy of an investor because if market is efficient, trying to pickup winners will be a waste of time. In an efficient market there will be no undervalued securities offering higher than deserved expected returns, given their risk. On the other hand if markets are not efficient, excess returns can be made by correctly picking the winners. In this paper, an analysis of three popular stock indices is carried out to test the efficiency level in Indian Stock market and the random walk nature nature of the stock market by using the run test and the autocorre- lation function ACF (k).
The Random Walk Hypothesis of stock market prices is concerned with the question of whether one can predict future prices from past prices. In its simple form, it states that price changes cannot be predicted from earlier changes in any meaningful manner. Successive price changes in individual securities are independent over time and price changes occur without any significant trends or patterns. Thus past prices contain no useful informa- tion as to their future price behaviour.
Efficient Market Hypothesis (EMH) states that security prices fully reflect all available information. The weak form of EMH states that the current prices fully reflect the information implied by the past prices (historical se- quence of prices). In an efficient market at a given instant of time the prices
3 are assumed to reflect all available information. One would expect the cur- rent price of security to be good estimate of its intrinsic values. If the ad- justment to new information is instantaneous successive price changes will be independent.
2 Literature Survey
Sharma and Kennedy (1977) compared the behaviour of stock indices of the
Bombay, London and New York Stock Exchanges during 1963-73 using run test and spectral analysis. Both run tests and spectral analysis confirmed the random movement of stock indices for all the three stock exchanges. They concluded that stock on the BSE obey a random walk and are equivalent in the markets of advanced industrialized countries".
Kulkarni (1978) investigated the weekly RBI stock price indices for Bom- bay, Calcutta, Delhi, Madras and Ahmedabad stock exchanges and monthly indices of six different industries of six different industries by using spectral method. He concluded that there is a repeated cycle of four weeks for weekly prices and seasonality in monthly prices. This study has thus rejected the hypothesis that stock price changes were random.
Yalawar (1988) studied the month end closing prices of 122 stocks listed on the Bombay Stock Exchange during the period 1963-82. He used only the non-parametric tests Spearman's rank correlation test and runs test. 21 out
4
of 122 lag 1 correlation coefficients were significant at 5significant difference for 9 out of 122 stocks.
Thus in the Indian context, except for some of the studies, the available ev- idence in general indicates that the successive price changes are independent
and the random walk model is appropriate to describe the stock behaviour.
3 METHEDOLOGY
Since the test of weak form of EMH, in general, have come from the random walk literature, so I am interested in testing whether or not successive price
changes were independent of each other. In this paper, I will use Autocorre- lation and Runs Test for testing the efficiency of the stock market.
3.1 Autocorrelation ACF (k)
Autocorrelation is one of the statistical tools used for measuring the depen-
dence of successive terms in a given time series. Therefore it is used for mea- suring the dependence of successive share price changes.It is the basic tool used to test the weak form of EMH.The autocorrelation function ACF(k) for
the time series Yt and the k-lagged series Yt_k is defined as :-
vn (t=1-k)(Yt /Y)Ot-k /Y) ACF(k) (1) En(t=i) — 9)2
5
where y is the overall mean of the series with n observations.
The standard error of ACF(k) is given by:
SeACF(k) (2) —k)
where n is sufficiently large (n > 50), the approximate value of the standard
error of ACF(k) is given by:-
SeACF(k) (3) f(rt)
To test whether ACF (k) is significantly different from zero, the following
distribution of 't' is used, i.e. t—ACF (k)/ SeAcF(k).
For both random variable series and series with trends, ACF (k) are very high and decline slowly as the lag value (k) increases. At the same time the
ACF (k) of the first difference series (price changes or returns) are statis- tically insignificant when the series is a random walk series.A random walk
series drifts up and down over time. In some situation it may be difficult to judge whether a trend or drift is occuring. Hence to determine whether a series has significant trend or whether it is a random walk, the t-test is
applied on the series of first differences.
6 3.2 Run Test
Run test is a non-parametric test. It depends only on the sign of the price changes but not on the magnitude of the price. It does not require the spec- ification of the probability distribution. It depends only on the sign of the price. They are essentially concerned with the direction of changes in the time series.
" A Run test may be defined as a sequence of price changes of the same sign preceded and followed by price changes of different sign." In a given time series of stock prices there are three possible types of price changes, namely positive, negative and no change. This gives three types of runs. A positive (negative) run is a sequence of positive (negative) price changes preceded and succeeded by either negative (positive) or zero price change. Similarly, a zero run is sequence of zero price changes preceded and succeeded by either negative or positive price change.
Under the hypothesis that the successive price changes are independent and the sample proportion of positive, negative and zero price changes are unbiased estimates of the population proportions, the expected number of runs of all the types is computed as follows, (by Wallis, Robert (1956)).
N(N 1) — E?_iq M — (4)
7 where M = Expected number of runs, = Number of price changes of each sign (1 = 1,2,3) and
N = Total number of price changes = n1 + n2 + n3
The standard error of the expected number of runs of all signs may be obtained as :-
E irt(E 177, N(N +1)) — 2NE 177, - N3 2 N3 (N — 1) (5)
When N is sufficiently large, the sampling distribution of expected number of runs of all types is approximately normally distributed with mean M and standard error o-,
4 DATA
The sample period is January 1996 to June 2002. The data consist of daily and weekly closing values of three leading stock indices namely CNXdefty,
CNX Nifty, CNX Nifty Junior.
5 RESULTS and DISCUSSION
Autocorrelations of the weekly changes in the three stock indices are given in table-1:-
8 Table 1: Autocorrelations of Weekly Changes in stock Indices
Lag(k) CNX Defty CNX Nifty CNX Nifty Junior n 296 312 312 1 0.1018 0.1041 0.2966 2 -0.0460 -0.0455 0.3418 3 -0.0647 -0.0403 0.1621 4 -0.0224 -0.0143 0.1394 5 0.0047 0.0015 -0.0135 6 -0.0800 -0.1269 -0.0255 7 0.0750 0.0215 -0.0851 8 0.0545 0.0367 -0.0299 9 0.0441 0.0216 -0.1249 10 -0.0219 -0.0326 -0.0428 11 -0.0139 -0.0101 -0.1146 12 0.0432 0.0348 -0.053 13 0.0410 0.0471 -0.1535 14 -0.0264 -0.0822 -0.0486 15 -0.1214 -0.1327 -0.1608 16 -0.0508 -0.0270 -0.0085 17 0.0635 0.0610 -0.0926 18 0.0541 0.0438 0.0761 19 0.0167 -0.0494 -0.0078 20 0.0335 0.0207 0.0624 Standerror 0.0130149 0.0135627 0.030879
For CNX Defty, the autocorrelation coefficient for lag 1 is 0.1018, which is very much larger than twice the standard error ( =2*0.0130). Thus the autocorrelation differ significantly from zero.From the table, we can see that out of the 60 autocorrelation computed for the three stock indices, 39 differ significantly from zero. That is 65% of the autocorrelations differ signifi- cantly.
9 The t-values of the autocorrelations corresponding to the stock indices CNX Defty, CNX Nifty and CNX Nifty Junior were computed. It was found that the autocorrelations are significantly different from zero and the corre- sponding t-values are greater than 1.96 (at 5% level of significance). Thus the stock indices are biased random time series and the stock market is not weakly efficient in pricing its securities.
To verify this, in the next section we perform the runs test. We test the null hypothesis that price changes are independent. The result of three stock indices are given in table-2 :-
Table 2: Run Analysis of Week End Changes in Stock Indices
Index n n1 n2 n3 R o-, CNX Defty 295 147 148 0 137 38.27 -1.34 0.18 CNX Nifty 311 155 156 0 141 44.17 -1.76 0.08 CNX Nifty Jr. 311 155 156 0 139 104.96 -1.99 0.05
Where n = Total numbar of observations; n1 = Ups; n2 = Downs; n3 — zeros; N = n1 +n2 + n3; R = Total number of observed Runs; o-, = Standard error; z = Standardised Variable
The results show that all indices of NSE(except CNX Nifty Junior) show weak form of market efficiency.The information regarding yesterday's indices are effectively absorbed by today's indices.The stocks in the index absorb the price information effectively. But the results regarding CNX Nifty Junior is different, having Z value of -1.99 which is significant at 5% level.
10 6 CONCLUSION
The assumption that the stock prices are random is basic to the Efficient
Market Hypothesis and Capital Asset Pricing Models. The study carried out in this paper has presented the evidence of the inefficient form of the Indian Stock Market. From autocorrelaion analyses and runs test we are able to conclude that the series of stock indices in the India Stock Market are biased random time series. The auto correlation analysis indicates that the behaviour of share prices does not confirm the applicability of the random walk model in the Indian stock market. Thus there are undervalued securities in the market and the investors can always make excess returns by correctly picking them.
11 References Yalawar, Y.B. [1988] " Bombay Stock Exchange: Rates of Return and Efficiency", Indian Economic Journal, Vol. 36, No.4 (April-
June), 68-121
Kulkarni, S.N. [1978] "Share Price Behaviour in India: A spectral Anal- ysis of Random Walk Hypothesis", San khya, Vol. 40, series D, Pt. II, 135-162
Sharma J. L. and Robert E. Kennedy [1977] "A Comparative Analysis of Stock Price Behaviour on the Bombay, London and New York Stock Ex- changes", Journal of Financial and Quantitative Analysis Sep 1977.
12 Exhibit 12 EVALUATING FINANCIAL DEVELOPMENT IN EMERGING CAPITAL MARKETS WITH EFFICIENCY BENCHMARKS
ANDREW C. WORTHINGTON HELEN HIGGS
University of Wollongong Queensland University of Technology
This paper examines the weak-form market efficiency of twenty-seven emerging markets. The sample encompasses three markets in Africa (Egypt, Morocco and South Africa), ten in Asia (China, India, Indonesia, Korea, Malaysia, Pakistan, the Philippines, Sri Lanka, Taiwan and Thailand), four in Europe (Czech Republic, Hungary, Poland and Russia), seven in Latin America (Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela) and three in the Middle East (Israel, Jordan and Turkey). Daily market retums are tested for random walks using serial correlation coefficient and runs tests, Augmented Dickey-Fuller (ADF), Phillips-Perron (PP) and Kwiatkowski, Phillips, Schmidt and Shin (KPSS) unit root tests and multiple variance ratio tests. The serial correlation and runs tests conclude that most emerging markets are weak-form inefficient. However, the unit root tests suggest the presence of weak-form efficiency in many emerging markets, but with some exceptions. The results from the most stringent multiple variance ratio tests are in general agreement with the serial correlation and runs tests. On this basis, only Hungary, Jordan and Israel are weak-form market efficient, with Egypt, Korea, Malaysia and Argentina meeting at least some of the requirements of a random walk.
Keywords: Market efficiency, Random walks, Emerging markets. JEL classification: C10, G14, 016
1. INTRODUCTION
Stock markets play a crucial role in financial development. However, the ability of stock markets to play the role that is ascribed to them — attracting foreign investment, boosting domestic saving and improving the pricing and availability of capital — depends upon the presence of market efficiency. In an efficient market, the prices of stocks fully incorporate all relevant information, and hence stock returns will display unpredictable (or random walk) behaviour. A market following a random walk is consistent with equity being appropriately priced at an equilibrium level, whereas the absence of a random walk infers distortions in the pricing of capital and risk. This has important implications for the allocation of capital within an economy and hence overall financial development. In this manner, tests of market efficiency and, more particularly, random walks, provide an important means by which financial development can be appraised. Only in fully deregulated and liberalised markets characterised by appropriate incentives and institutional 2 WORTHINGTON & HIGGS frameworks can we expect the necessary prerequisites for market efficiency — including market liquidity, breadth and depth — to be satisfied. But the issue of how efficient markets actually are in the real world is clearly a question that can only be resolved by resorting to empirical evidence. This can be problematic in that the measurement of market efficiency is beset with a number of conceptual and methodological difficulties. In this paper an attempt is made to examine the random walk behaviour (and hence market efficiency) of emerging markets using a number of alternative, though complementary, testing procedures. The paper itself is divided into five main areas. Section 2 provides a synoptic review of the different techniques for the measurement of market efficiency on the basis of random walks and deals with the literature on the empirical measurement of market efficiency. Section 3 provides a description of the data employed in the analysis. Section 4 discusses the empirical methodology used. Attention is paid to the four types of tests employed and their differing assumptions regarding the random walk hypothesis. The results are dealt with in Section 5. The paper ends with some concluding remarks in the final section.
2. RANDOM WALKS AND MARKET EFFICIENCY
Random walks in stock returns are crucial to the formulation of rational expectations models and the testing of (weak-form) market efficiency. In an efficient market, the prices of stocks fully incorporate all relevant information, and hence stock returns will display unpredictable (or random walk) behaviour. In stock prices not characterised by a random walk the return generating process is dominated by a temporary component and therefore future returns can be predicted by the historical sequence of returns. Tests for weak form market efficiency then focus on the predictability of stock returns. Despite its apparent singularity, the random walk model actually comprises three successively more restrictive hypotheses with sequentially stronger tests for random walks (Campbell et al. 1997). The least restrictive of these is that in a market that complies with a random walk it is not possible to use information on past prices to predict future prices (RW3). That is, returns in a market conforming to RW3 are serially uncorrelated, corresponding to a random walk hypothesis with dependent but uncorrelated increments. However, it may still be possible for information on the variance of past prices to predict the future volatility of the market. A market that conforms to these conditions implies that returns are serially uncorrelated, corresponding with a random walk hypothesis with increments that EFFICIENCY IN EMERGING CAPITAL MARKETS 3 are independently, but not identically, distributed (RW2). Finally, if it is not possible to predict either future price movements or volatility on the basis of information from past prices, then such a market complies with the most restrictive notion of a random walk (RW1). In such a market, returns are serially uncorrelated and conform to a random walk hypothesis with independent and identically distributed increments. A variety of tests have been employed within this framework to examine random walks (and hence tests for weak-form efficiency) in real-world markets (Fama 1970; 1991). One approach is to test the serial correlation of returns. Since under the random walk hypothesis the increments are uncorrelated at all leads and lags, autocorrelation tests form the basis of a large number of studies. Another approach is to examine the sequence of returns, of which the runs test is well known. This is regarded as a more appropriate test of the assumption of independence under the non-normal distribution of returns. However, more recent work often employs variance (or multiple variance) ratio and unit root tests. An important property of the former is that it entails testing not only the RW1 hypothesis, but also RW2 and RW3. In the case of the latter, though they imply non-zero serial autocorrelation under both the null and alternative hypothesis, they are useful for the identification of nonstationarity as a necessary condition for a random walk, with other tests used to verify the independence assumption. To this end, an ever-increasing number of studies have examined random walks in the world's stock markets. Some of these have chosen to concentrate on individual markets. These include studies of random walks in Korea (Ayadi and Pyun 1994, Ryoo and Smith 2002), China (Lee et al. 2001), Hong Kong (Cheung and Coutts 2001), Slovenia (Dezlan 2000), Spain (RegUlez and Zarraga 2002), the Czech Republic (Hajek 2002), the United Kingdom (Poon 1996) and Turkey (Zychowicz et al. 1995, Buguk and Brorsen 2003). Others have elected instead to focus on emerging markets on a regional basis. Markets in Asia (Huang 1995, Groenewold and Ariff 1998), Latin America (Urrutia 1995, Ojah and Karemera 1999. Grieb and Reyes 1999, Karemera et al. 1999), Africa (Smith et al. 2002, Appiah-Kusi and Menyah 2003) and the Middle East (Abraham et al. 2002) have been addressed in this manner. However, these studies generally concentrate on developed markets and none have examined a large number of markets across regions. Similarly, with few exceptions these studies have employed a single testing procedure for random walks and market efficiency. Some, such as Poshakwale (1996) and Abraham et al. (2002), have concentrated on tests for serial dependence, while others, including Karemara et al. (1999) and Ryoo and Smith (2002), have employed variance ratio tests. The low power 4 WORTHINGTON & HIGGS of unit root tests and the restrictive assumptions of tests for serial dependence are well known, but even the variance ratio test (as against multiple variance ratio tests) is shown to be inexact under certain conditions. In addition, nearly all of these studies have specified returns as weekly or longer. For example, Karemara et al. (1999) employed monthly data, while Los (2000), Abraham et al. (2002) and Ryoo and Smith (2002) used weekly. An obvious qualification is the lack of suitable return series in the past, seeing as some random walk tests have been shown to be imprecise in the presence of infrequent or non-synchronous trading. Nevertheless, this is still an important omission since it is likely that some violations of the random walk hypothesis are likely to be obscured at the longer sampling frequencies.
3. DESCRIPTION AND PROPERTIES OF THE DATA
The data employed in the study is composed of market value-weighted equity indices for twenty-seven emerging markets. Three of these markets are in Africa (EGY — Egypt, MOR — Morocco, SAF — South Africa), ten in Asia (CHN — China, IND — India, INA — Indonesia, KOR — Korea, MLY — Malaysia, PAK — Pakistan, PHL — Philippines, SRI — Sri Lanka, TWN — Taiwan, THA — Thailand), four in Europe (CZH — Czech Republic, HGY — Hungary, POL — Poland, RUS — Russia), seven in Latin America (ARG — Argentina, BRZ — Brazil, CHL — Chile, COL — Columbia, MEX — Mexico, PRU — Peru, VEN — Venezuela) and three in the Middle East (ISR — Israel, JOR — Jordan, TUR — Turkey). All data is obtained from Morgan Stanley Capital International (MSCI) and specified in US dollar terms. The series encompass dissimilar sampling periods given the varying availability of each index. The end date for all series is 28-May-2003 with EGY commencing on 1-Sep-1997, PAK on 1- Nov-1995, MOR, CZH, HGY and RUS on 2-Jan-1995, SAF, CHN, IND, SRI, POL, COL, PRU, VEN and ISR on 1-Jan-1998 and the remaining markets on 31-Dec-1987. MSCI indices are widely employed in the financial literature on the basis of the degree of comparability and avoidance of dual listing, and are constructed to overcome problems associated with infrequent trading in markets. Daily data is specified. By way of comparison, Poshakwale (1996) and Cheung and Coutts (2001) also used daily returns to test for random walks in emerging markets. The natural log of the relative price is computed for the daily intervals to produce a time series of continuously compounded returns, such that rt = logGit hot-11i x 100, where pr and Pt-i represent the stock index price at time t and t-1, respectively. Figure 1 includes graphs of all series. Table 1 presents a summary of descriptive statistics of the daily returns for the twenty- EFFICIENCY IN EMERGING CAPITAL MARKETS 5 seven markets. Sample means, maximums, minimums, standard deviations, skewness, kurtosis and Jacque-Bera statistics and p-values are reported. The lowest mean returns are in China (-0.0007), Egypt (-0.0006) and Pakistan (-0.0002) and the highest mean returns are for Hungary (0.0005), Russia (0.0006) and Mexico (0.0007). The lowest minimum returns are in Argentina (-0.9270), Venezuela (-0.7124) and Indonesia (-0.4308), and the highest maximum returns are in Hungary (0.3796), Indonesia (0.4551) and Argentina (0.4559). The standard deviations of returns range from 0.0077 (Morocco) to 0.0401 (Argentina). On this basis, of the twenty-seven markets the returns in Morocco, Jordan and Chile are the least volatile, with Turkey, Russia and Argentina being the most volatile.
By and large, the distributional properties of all twenty-seven return series appear non- normal. Given that the sampling distribution of skewness is normal with mean 0 and standard deviation of .\16IT where T is the sample size, all of the return series, with the exception of Taiwan, Mexico and Peru, are significantly skewed. Indonesia, China, Egypt, Columbia, Korea, Morocco, Thailand, Philippines, Sri Lanka and Hungary are positively skewed, indicating the greater probability of large increases in returns than falls, while the remaining markets are negatively skewed, signifying the greater likelihood of large decreases in returns than rises. The kurtosis, or degree of excess, in all market returns is also large, ranging from 5.0435 for the Czech Republic to 309.6680 for Jordan, thereby indicating leptokurtic distributions. Given the sampling distribution of kurtosis is normal with mean 0 and standard deviation of j24/T where T is the sample size, then all estimates are once again statistically significant at any conventional level. Finally, the calculated Jarque-Bera statistics and corresponding p-values in Table 1 are used to test the null hypotheses that the daily distribution of market returns is normally distributed. All p-values are smaller than the .01 level of significance suggesting the null hypothesis can be rejected. None of these market returns are then well approximated by the normal distribution.
4. EMPIRICAL METHODOLOGY
4.1 Random walk hypothesis Consider the following random walk with drift process:
Pt = ± 16 + Et (1) 6 WORTHINGTON & HIGGS or
r, = = fi + Et (2) where pi is the logarithm of the index price observed at time t, fi is an arbitrary drift parameter, ri is the change in the index and St is a random disturbance term satisfying E(s1) = 0 and E(stsi_g)= 0, g # 0, for all t. Under the random walk hypothesis, a market is (weak-form) efficient if the most recent price contains all available information and therefore the best predictor of future prices is the most current price. In the strictest version of the efficient market hypothesis, E t is not only random and stationary, but exhibits no autocorrelation, since the disturbance term cannot possess any systematic forecast errors. This provides three complementary testing procedures for random walks or weak-form market efficiency. To start with, the parametric serial correlation test of independence and the non-parametric runs test can be used to test for serial dependence in the series. Alternatively, unit root tests can be used to determine if the series is difference or trend non-stationary as a necessary condition for a random walk. Finally, multiple variance ratio procedures can focus attention on the uncorrelated residuals in the series, under assumptions of both homoskedastic and heteroskedastic random walks. 4.2 Senal dependence tests Two approaches are employed to test for serial dependence in the returns. First, the serial correlation coefficient test is a widely employed procedure that tests the relationship between returns in the current period and those in the previous period. If no significant autocorrelations are found then the series are assumed to follow a random walk. Second, the runs test determines whether successive price changes are independent and unlike the serial correlation test of independence, is non-parametric and does not require returns to be normally distributed. Observing the number of 'runs' - or the sequence of successive price changes with the same sign - in a sequence of price changes tests the null hypothesis of randomness. In the approach selected, each return is classified according to its position with respect to the mean return. That is, a positive change is when the return is greater than the mean, a negative change when the return is less than the mean, and zero change when the return equals the mean. To perform this test A is assigned to each return that equals or exceeds the mean value and B for the items that are below the mean. Let nA and nB be the sample sizes of items A and B respectively. The test statistic is U, the total number of runs. For large sample sizes, that is EFFICIENCY IN EMERGING CAPITAL MARKETS 7
where both nA and n B are greater than twenty, the test statistic is approximately normally distributed:
— Z —U (3) o-
2n 2nAnB(2nAnB— n) AnB 1, au where NT — and n = nA -F nB n2 (n— 1)
4.3 Unit root tests Three different unit root tests are used to test the null hypothesis of a unit root or random walk: namely, the Augmented Dickey-Fuller (ADF) test, the Phillips-Peron (PP) test, and the Kwiatkowski, Phillips, Schmidt and Shin (KPSS) test. To start with, the well-known ADF unit root test of the null hypothesis of nonstationarity or random walk is conducted in the form of the following regression equation.
AP it = ao t PoPit-i + IPi AP + It (4) 1=1 where p, denotes the logarithm of the price for the z-th market at time t, Ap„ = p„ — p„ A , p are coefficients to be estimated, q is the number of lagged terms, t is the trend term, al is the estimated coefficient for the trend, cco is the constant, and E is white noise. MacKinnon's critical values are used in order to determine the significance of the test statistic associated with po. The PP incorporates an alternative (nonparametric) method of controlling for serial correlation when testing for a unit root by estimating the non-augmented Dickey-Fuller test equation and modifying the test statistic so that its asymptotic distribution is unaffected by serial correlation. Finally, the KPSS test differs from these other unit root tests in that the series is assumed to be stationary under the null. Of course, it is well known that ADF unit root tests fail to reject the null hypothesis of a unit root for many time series, and that allowing for error autocorrelation using the PP test does not necessarily improve these results. However, the KPSS test complements the standard unit root tests since it can distinguish between the logarithm of the prices that appear to be stationary, those that appear to have a unit root, and those that are not sufficiently informative to be sure whether they are either. 4.4 Multiple variance ratio tests
The multiple variance ratio (MVR) test as proposed by Chow and Denning (1993) is used to detect autocorrelation and heteroskedasticity in the returns. Based on Lo and MacKinlay's
(1988) earlier single variance ratio (VR) test, Chow and Denning (1993) adjusts the focus of
8 WORTHINGTON & HIGGS
the tests from the individual variance ratio for a specific interval to one more consistent with the random walk hypothesis by covering all possible intervals. As shown by Lo and MacKinlay (1988), the variance ratio statistic is derived from the assumption of linear relations in observation interval regarding the variance of increments. If a series follows a random walk process, the variance of a qth-differenced variable is q times as large as the first- differenced variable. For a series partitioned into equally spaced intervals and characterised by random walks, one qth of the variance of (p, - p,-q) is expected to be the same as the variance of (pt — pm): Var(p, — pt_g )= qVar(p, — Pt_i) (5) where q is any positive integer. The variance ratio is then denoted by:
Var(p, — p,-q) a(q)(q) VR(q)— 2 (1) (6) Var(Pt Pt_1) cr such that under the null hypothesis VR(q) = 1. For a sample size of nq + 1 observations (po, p„q), Lo and Mackinlay's (1988) unbiased estimates of (1(1) and d2 (q) are computationally denoted by:
ng l(Pk Pk_i 1E02 est 2 (1) = k=1 (7) (nq —1) and
ng
l(Pk — Pk-q qE)2 k=g (8)
where EC = sample mean of (p, — p 1 ) and:
q(nq +1— q)(1— ) (9) nq Lo and Mackinlay (1988) produce two test statistics, Z(q) and Z*(q), under the null hypothesis of homoskedastic increments random walk and heteoskedastic increments random walk respectively. If the null hypothesis is true, the associated test statistic has an asymptotic standard normal distribution. With a sample size of nq + 1 observations (po, p ...,p„q) and under the null hypothesis of homoskedastic increments random walk, the standard normal test statistic Z(q) is: VR(q)-1 Z (q)— (10) a0 (q)
EFFICIENCY IN EMERGING CAPITAL MARKETS 9
where
[2(2q —1)(q —1)11/2 o( ) (11) a q — 3q(nq)
The test statistic for a heteroskedastic increments random walk, Z * (q) is:
VR(q)— 1 Z * (q) — (12) a e (q) where , 1/2 q-1 7 lc \ - 5-e (q)=[ 41 1— — (5k (13) k=1 \ q i
and
nq
10 ij — I0 1_1 — 102 (10 J _k — PJ_k_i — 1)2 j=(k+1) uk 2 (14) 1(1) j — I) j-i— )2] pqj=1 Lo and MacKinlay s (1988) procedure is devised to test individual variance ratios for a specific aggregation interval, q, but the random walk hypothesis requires that VR(q) = 1 for all q. Chow and Denning's (1993) multiple variance ratio (MVR) test generates a procedure for the multiple comparison of the set of variance ratio estimates with unity. For a single variance ratio test, under the null hypothesis, VR(q) = 1, hence WO = VR(q) — 1 = 0. Consider a set of m variance ratio tests 0/1,.(q)1 z = 1,2,...,14 Under the random walk null hypothesis, there are multiple sub-hypotheses: II,: _A 4(0 = 0 for z = 1,2,...,m Ili,: 11/1,.(q) # 0 for any z = 1,2,...,m (15) The rejection of any one or more IL, rejects the random walk null hypothesis. For a set of test statistics, say Z (q), {Z (01 z = 1,2,...,14 the random walk null hypothesis is rejected if any one of the estimated variance ratio is significantly different from one. Hence only the maximum absolute value in the set of test statistics is considered. The core of the Chow and Denning's (1993) MVR test is based on the result:
PR{max(Z(qi),..., Z(qm )) SAB I (a; m; T)} 1— a (16)
where SA/IM(a;m;T) is the upper a point of the Standardized Maximum Modulus (SABI) distribution with parameters m (number of variance ratios) and T (sample size) degrees of freedom. Asymptotically when T approaches infinity: 10 WORTHINGTON & HIGGS
lim SMM (a; m; 00= Z * (17) a/2
where Z. 12 = standard normal distribution and a* = 1— (1— ce)lim . Chow and Denning control the size of the MYR test by comparing the calculated values of the standardized test statistics, either Z (q) or Z *(q) with the SAM critical values. If the maximum absolute value of, say Z (q) is greater than the SABI critical value than the random walk hypothesis is rejected. Importantly, the rejection of the random walk under homoskedasticity could result from either heteroskedasticity and/or autocorrelation in the equity price series. If the heteroskedastic random walk is rejected then there is evidence of autocorrelation in the equity series. With the presence of autocorrelation in the price series, the first order autocorrelation coefficient can be estimated using the result that /12/,. (q) is asymptotically equal to a weighted sum of autocorrelation coefficient estimates with weights declining arithmetically:
q-1 k\ M (q) = 21 1— — j5(k) (18) k=1 \ where q = 2:
M (2) VR(2)-1 = 15(1) (19)
5. EMPIRICAL RESULTS
Table 2 provides two sets of test statistics. The first set includes the statistics and p- values for the tests of serial independence, namely, the parametric serial correlation coefficient and the nonparametric one sample runs test. The null hypothesis in the former is for no serial correlation while in the latter it is the random distribution of returns. The second set of tests is unit root tests and comprises the ADF tests (pure random walk) and PP t- statistics and p-values and the KPSS LW-statistic and asymptotic significance. In the case of the former the null hypothesis of a unit root (random walk) is tested against the alternative of no unit root. For the latter, the null hypothesis of no unit root is tested against the alternative of a unit root (random walk).
Turning first to the tests of independence, all of the null hypotheses of no serial correlation for the twenty-seven emerging markets are rejected at the .10 level or lower, with the exception of Egypt and Jordan. The null hypothesis of no serial correlation is rejected at the .10 level for Israel and the .05 level for Hungary and Argentina and at the .01 level EFFICIENCY IN EMERGING CAPITAL MARKETS 11 elsewhere. The significance of the autocorrelation coefficient indicates that the null hypothesis of weak-form market efficiency may be rejected and we may infer that twenty-five of the markets are weak-form inefficient over the various sample periods. With the exception of Argentina, all of the significant coefficients are positive indicating persistence in returns, with persistence being higher in Columbia (0.3390), Sri Lanka (0.2640) and Chile (0.2270) and lower in Israel (0.0290), Hungary (0.0420) and Taiwan (0.0600). The average persistence is 0.1374 in these emerging markets. For Argentina the serial correlation coefficient of -0.0310 is indicative of a mean reversion process. However, it should be noted that over shorter horizons the markets exhibiting persistence (mean-reversion) could also exhibit mean-reversion (persistence). In terms of the runs tests, the negative z-values for all of the markets indicates that the actual number of runs falls short of the expected number of runs under the null hypothesis of return independence at the .01 level or lower for all markets, except Egypt. These likewise indicate positive serial correlation. We then also reject the null hypothesis of weak-form efficiency when employing the nonparametric assumptions entailed in runs tests. By way of comparison, Karemera et al. (1999) used monthly data and runs tests to conclude that only the Philippines, Singapore, Taiwan and Thailand were not weak-form efficient from an international investor's perspective (when measured in US dollars) while Korea, Indonesia, Malaysia and Thailand were weak-form efficient on this basis. Poshakwale (1996) also rejected the null hypothesis of weak form efficiency using runs tests, though only for the Indian market. The unit root tests in Table 2 are supportive of the hypothesis that most of these emerging equity markets are weak-form efficient. The ADF and PP t-statistics fail to reject the null hypotheses of a unit root at the .01 level or lower, thereby indicating that all of the return series examined are non-stationary (weak form efficient) with the exception of Mexico, Poland and Taiwan. For the KPSS tests of the null hypothesis of no unit root, the LM-statistic exceeds the asymptotic critical value at the .01 level for all emerging markets with the exception of Czech Republic, Poland and Taiwan. As a necessary condition for a random walk, the ADF and PP unit root tests fail to reject the requisite null hypothesis in the case of all twenty-four emerging markets except Mexico, Poland and Taiwan, while the KPSS unit root tests reject the required null in twenty-four emerging markets, with the exception of the Czech Republic, Poland and Taiwan. From the three unit root tests, the results indicate that a majority of emerging markets are weak-form efficient. However, since it is well know that unit root tests have very poor power properties, a preferred alternative is to use multiple variance ratio tests. 12 WORTHINGTON & HIGGS
Table 3 presents the results of the multiple variance ratio tests of returns in the twenty- seven emerging equity markets. The sampling intervals for all markets are 2, 5, 10 and 20 days, corresponding to one-day, one week, one fortnight and one month calendar periods. For each interval Table 3 presents the estimates of the variance ratio VR(q) and the test statistics for the null hypotheses of homoskedastic, Z(q) and heteroskedastic, Z*(q) increments random walk. Under the multiple variance ratio procedure, only the maximum absolute values of the test statistics are examined. For sample sizes exceeding at least 1,498 observations (Egypt) and where m = 4, the critical value for these test statistics is 2.49 at the .05 level of significance. For each set of multiple variance ratio tests, an asterisk denotes the maximum absolute value of the test statistic that exceeds this critical value and thereby indicates whether the null hypothesis of a random walk is rejected.
Consider the results for India. The null hypothesis that daily equity returns follow a homoskedastic random walk is rejected at Z(2) = 7.0171. Rejection of the null hypothesis of a random walk under homoskedasticity for a 2-day period is also a test of the null hypothesis of a homoskedastic random walk under the alternative sampling periods and we may therefore conclude that Indian equity returns do not follow a random walk. However, rejection of the null hypothesis under homoskedasticity could result from heteroskedasticity and/or autocorrelation in the return series. After a heteroskedastic-consistent statistic is calculated, the null hypothesis is also rejected at Z*(2) = 5.2580. The heteroskedastic random walk hypothesis is thus rejected because of autocorrelation in the daily increments of the returns on Indian equity. We may conclude that the Indian equity market is not weak form efficient. Further, Lo and MacKinlay (1988) show that for q=2, estimates of the variance ratio minus one and the first-order autocorrelation coefficient estimator of daily price changes are asymptotically equal [India's serial correlation coefficient in Table 2 is 0.13401. On this basis, the estimated first order autocorrelation coefficient is 0.1347 corresponding to the estimated variance ratio VR(2) of 1.1347 (i.e. 1.1347 - 1.0000). Further, persistence is suggested where VR(2)>1, whereas when VR(2)<1 a mean reverting process is indicated. This indicates there is positive autocorrelation (or persistence) in Indian equity returns over the long horizon. By way of comparison, observe the results for Hungary. At none of the sampling intervals are the test statistics for the null hypotheses of homoskedastic, Z(q) and EFFICIENCY IN EMERGING CAPITAL MARKETS 13 heteroskedastic, Z*(q) random walks greater than the critical value of 2.49. This suggests that the Hungarian equity market is weak-form efficient. Alternatively, in the case of Egypt the null hypotheses of a homoskedastic random walk is rejected [Z(q)=2.69161, but the null hypothesis of heteroskedastic random walk is not [Z *(q)=1.98621. This indicates that rejection of the null hypothesis of a homoskedastic random walk could be the result, at least in part, of heteroskedasticity in the returns, and cannot be assigned exclusively to the autocorrelation in returns. This is especially important in the case of Egypt since the serial correlation and runs tests were both suggestive that returns in that market followed a random walk. In fact, it is likely that the apparent random walk was partly a product of heteroskedasticity in daily returns, and not the absence of autocorrelation. Of the twenty-seven emerging markets, the multiple variance ratios testing procedure rejects the null hypothesis of a random walk under assumptions of both homoskedasticity and heteroskedasticity for all with the exception of Egypt, Korea, Malaysia, Hungary, Argentina, Israel and Jordan. We may then conclude that none of the former is weak-form efficient. With Egypt, Korea, Malaysia and Argentina the null hypothesis of a homoskedastic random walk is rejected, but not that for a heteroskedastic random walk. This infers that the random walk violation could be the result of heteroskedasticity and autocorrelation in daily returns. On this basis, there is strong evidence that Israel, Jordan and Hungary are weak-form efficient, while Egypt, Korea, Malaysia and Argentine have weaker evidence of weak-form efficiency. Nevertheless, the multiple variance ratio technique indicates the presence of positive autocorrelation (or persistence) in all these markets (except Argentina where negative autocorrelation or mean reversion is indicated) and thereby provides comparable evidence to the results of the serial correlation coefficients and runs tests. A summary of random walk test results is presented in Table 4.
As noted, few studies exist by which a direct comparison of results can be made, primarily because most specified monthly, rather than daily, returns. In Asia, Karemera et al. (1999) concluded that domestic investors would perceive Indonesia, Korea, Malaysia, Philippines, Taiwan and Thailand as following a random walk under Chow and Denning's (1993) multiple variance ratio procedure, with Korea, Malaysia and Taiwan following a random walk under Lo and MacKinlay's (1988) earlier single variance ratio approach. More recently, Ryoo and Smith (2002) found that as price limits were removed for individual securities, the Korean market progressively approached a random walk, while Lee et al. 14 WORTHINGTON & HIGGS
(2001) concluded that random walks could be rejected in all of China's stock exchanges on the basis of variance ratio tests. A similar situation exists in previous work covering European emerging equity markets. Rockinger and Urga (2000: 471) used daily data and GARCH analysis to also conclude that of the markets considered (Czech Republic, Hungary, Poland and Russia) only "...the Hungarian market is nonpredictable over the entire sample and, therefore, satisfies our criteria for weak efficiency. This result is in line with the fact that this market has existed for 10 years longer than the other markets and is strongly regulated". Hajek (2002: 377) likewise found in a study of the Czech market that "results from serial correlation, Box-Pierce and Variance Ratio tests provide evidence that a random walk hypothesis cannot be validated with respect to the daily returns. The weak-form of efficiency on the Czech equity markets was thus not proved". Finally, the results strongly contradict earlier evidence on market efficiency in Latin American emerging markets. Urrutia (1995) and Ojah and Karemera (1999), for instance, concluded that Argentina, Brazil, and Chile were weak-form efficient, though Urrutia (1995) and Karemera et al. (1999) surmised that Mexico was weak-form inefficient. They do, however, substantiate Hague et al. (2001) conclusion that all of these markets are not weak- form efficient on the basis of testing the earlier Lo and MacKinlay (1988) single variance ratio procedure using weekly returns.
6. CONCLUSION AND POLICY OUTCOMES
Financial development is an important determinant of an economy's ability to grow and develop over time. At the various national levels, the many types of financial regulatory reforms pursued and the different financial frameworks established come together, however the ability of these differently deregulated and liberalised markets to perform their role ultimately depends upon the level of market efficiency. In this manner, a quantitative knowledge of market efficiency allows the past progress in financial development to be assayed, and gives direction on suitable national benchmarks for policymakers and others in the future. This paper examines the weak-form market efficiency of twenty-seven emerging equity markets. Three different procedures are employed to test for random walks in daily returns: (i) the parametric serial correlation coefficient and the nonparametric runs test are used to test for serial correlation; (ii) Augmented Dickey-Fuller, Phillips-Perron and EFFICIENCY IN EMERGING CAPITAL MARKETS 15
Kwiatkowski, Phillips, Schmidt and Shin unit root tests are used to test for non-stationarity as a necessary condition for a random walk; and (iii) multiple variance test statistics are used to test for random walks under varying distributional assumptions. The results for the tests of serial correlation are in broad agreement, categorically rejecting the presence of random walks in daily returns in most markets, with the exception of Egypt and Jordan, while the runs tests produce similar results, with the exception of Egypt. Contrary to the serial correlation and runs tests, the unit root tests conclude that unit roots, as necessary conditions for a random walk (weak-form market efficiency), are present in all, or nearly all, of the log of the price series, with the exception of Mexico, Poland and Taiwan for the ADF and PP tests and the Czech Republic, Poland and Taiwan for the KPSS test. Finally, the multiple variance ratio procedure conclusively rejects the presence of random walks in most emerging markets. Only Hungary, Jordan and Israel satisfy the most stringent random walk criteria with Egypt, Korea, Malaysia and Argentina meeting at most some of the requirements of a random walk. The results of this analysis are consistent with the generalisation that emerging markets are unlikely to be associated with the random walks required for the assumption of weak-form market efficiency. This says that much progress is still needed in terms of financial development. Furthermore, the results offer contradictory evidence to earlier work using a variety of tests for random walks, of which the most likely contributory factor in those instances is the use of weekly and monthly sampling frequencies, rather than any variation in testing procedure. The policy outcomes of this analysis are less certain. This is because while market efficiency has been measured, no attempt has been made to link this with market breadth, depth and liquidity or with the underlying pace of deregulation and liberalisation. However, depending upon the test employed, some markets are obviously more efficient than others and this provides useful benchmarks, both regionally and globally. Such benchmarks include Hungary in Europe, Egypt in Africa, Argentina in Latin America, Israel and Jordan in the Middle East and Malaysia and Korea in Asia. Closer examination of the developments in these markets is then warranted. One common feature is their relatively long tenure when compared to other emerging markets. This suggests that institutional maturity is an important determinant of market efficiency. These markets are also generally larger and this could also be linked with their efficiency. There are, of course, a number of ways in which this research could be extended. One possible extension would be to use the multiple variance ratio test procedure in conjunctions with intraday data. While Ronen (1997) and Andersen et al. (2001) have shown that the single 16 WORTHINGTON & HIGGS variance ratio test is not robust and can be misleading in a high-frequency context, no such evidence concerns the more developed multiple variance ratio test. A second extension would be to examine more fully the relationship between the evolving characteristics of emerging stock markets and market efficiency. It is generally known that weak-form inefficiency is linked with the newer, small capitalisation markets with low levels of liquidity and turnover but little is known about how quickly markets approach a random walk as they become more liquid and institutionally mature. Stock level data may be able to throw some light on this question with the contrast between large and small capitalisation stocks, as would the decomposition of the data used in this analysis into shorter periods.
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Mailing Addresses: Professor A.C. Worthington, School of Accounting and Finance, University of Wollongong, Wollongong NSW 2522, Australia. Email. [email protected] Ms. H. Higgs, School of Economics and Finance, Queensland University of Technology, GPO Box 2434, Brisbane QLD 4001, Australia. Email. [email protected]
•
Table 1. Descriptive Statistics for Emerging Capital Markets Market Start End Observations Mean Maximum Minimum Std. Dev. Skewness Kurtosis Jarque-Bera JB p-value • EGY 01-Sep-1997 28-May-2003 1498 -6.43E-04 0.0929 -0.0900 0.0163 0.1948 6.9287 9.73E+02 0.0000 MOR 02-Jan-1995 28-May-2003 2192 1.74E-04 0.0625 -0.0482 0.0077 0.3841 9.1153 3.47E+03 0.0000 SAF 01-Jan-1993 28-May-2003 2714 1.53E-04 0.1126 -0.1302 0.0155 -0.3884 9.8804 5.42E+03 0.0000 CHIN 31-Dec-1992 28-May-2003 2714 -6.92E-04 0.1274 -0.1444 0.0206 0.1499 7.8377 2.66E+03 0.0000 IND 31-Dec-1992 28-May-2003 2714 -5.51E-05 0.0886 -0.0896 0.0160 -0.1047 5.9132 9.65E+02 0.0000 [NA 31-Dec-1987 28-May-2003 4019 4.63E-05 0.4451 -0.4308 0.0287 0.1186 46.3110 3.14E+05 0.0000 KOR 31-Dec-1987 28-May-2003 4019 4.10E-05 0.2688 -0.2167 0.0238 0.3767 15.3820 2.58E+04 0.0000 . ciMLY 31-Dec-1987 28-May-2003 4019 1.19E-04 0.2585 -0.3697 0.0196 -0.7903 60.5769 5.56E+05 0.0000 Figure 1. Daily Returns for Emerging Capital Markets Africa
10 8 15
06 10 05 04
02 1 00 098 ,1 00 1 , -.95 1 -.92 I 1 -.95 - 04 - 10
-.19 . , -.96 . „ „ „ „ 15 250 500 700 1999 1050 95 96 97 98 99 00 01 02 500 10410 15410 2900 2400
1— ERN - 1 Sep 1997 to 28 May 20031 1— MOR - 2 Jan 1995 to 28 May 20031 1— SAF - 1 Jan 1993 to 28 May 20031
Asia
15 10 6 3
10 4 2 05i 05 . 1 2 1 1
00 00 0 0 1 -.95 1 - 2 - 1 -.95- -.19 -.4 -.2
-.15 „ „ , -.19 „ „ , „ „ , 6 i i i i i i i i i i i i i i i 3 93 94 95 96 97 98 99 00 01 02 93 94 95 96 97 98 99 00 01 02 88 90 92 94 96 98 00 02 88 90 92 94 96 98 00 02
1— CNN - 31 Dec 1992 to 28 May 20031 1— IND - 31 Dec 1992 to 28 May 20031 1— INA - 31 Dec 1987 to 28 May 20031 1— KOR - 31 Dec 1987 to 28 May 20031
3 16 24 3 2 12 20 2 16 1 08 12 04 0 1 08 00 - 1 04 0 -.94 1 -.2 00 -.99 1 -.3 i - 12 - 08 -Ã , „ „ „ „ „ , „ , -.16 „ - 12 „ „ „ „ , „ , „ 2 88 90 92 94 96 98 00 02 1996 1997 1998 1999 2000 2001 2002 88 90 92 94 96 98 00 02 93 94 95 96 97 98 99 00 01 02
ML(- 31 Dec 1997 to1— 29 May 29931 1— PAK - 1 Nov 1995 to 29 May 29931 PHIL- 31 Dec 1—1997 to 29 May 29 31 1— SRI - 31 Dec1992 to 29 May 29931
15 20
10 15 10 05 11 05 00 00 05 1 05 10 10
19 1 9 88 90 92 94 96 98 00 02 88 90 92 94 96 98 00 02
1— NVN 31 Dec 1987 to 28 may 20031 1— THA 31 Dec 1987 to 28 May 20031
Europe
8 4 15 3 06 3 2 10 04 2 1 05 02 n 1 1 Api00000 1 I 0 00 00 0 1 1 02 1 1 1 1 05 1 2 04 10 06 2 1 3 08 3 15 4 95 96 97 98 99 00 01 02 95 96 97 98 99 00 01 02 93 94 95 96 97sH 98 99 00 01 02 95 96 97 98 99 00 01 02 1— CZH 30 Dec 1994 to 28 May 20031 1— HGY 20 Dec 1994 to 28 May 20031 1— POL 31 Dec 1992 to 28 May 20031 1— RUS 2 Jan 1995 to 28 May 20031
Latin America
06 3 10 16 0.4 2 05 12 0.2 1 1 0 0 00 08
-0.2 1 0 05 04 -0.4 1 10 00 0 6 2 15 04 -0.9
-1.0 3 20 08 1 88 90 92 94 96 98 00 02 88 90 92 94 96 98 00 02 88 90 92 94 96 98 00 02 93 94 95 96 97 98 99 00 01 02
1— ARG 31 Dec 1997 to 29 May 2003 1 1— BRZ 31 Dec 1997 to 29 May 2003 1 1— CHL 31 Dec 1997 to 29 May 2003 1 1— COL 31 Dec 1992 to 29 May 20031 2 12 4
2 1 08
04 1 0 0 I t 00 2 1 04 4
2 08 6
3 12 8 88 90 92 94 96 98 00 02 93 94 95 96 97 98 99 00 01 02 93 94 95 96 97 98 99 00 01 02
1— MEX 31 Dec 1987 to 28 May 20031 1— PRU 31 Dec 1992 to 28 Dec 20031 1— VEN 31 Dec 1992 to 28 MAY 20031
Middle East
1 1 3
2 0 05
1 1 I 1 00 0 2 I 1 r 11 I I 05 1 3 2
10 500 1000 1500 2000 2500 1000 2000 3000 4000 1000 2000 3000 4000
1— ISR 1Jan 1993 to 28 May 20031 1— JOR 1Jan 1998 to 28 May 20031 1— TUR 1 Jan 1998 to 28 May 20031
Table 2. Independence and Unit Root Tests for Emerging Capital Markets Serial correlation Runs test Unit root tests Cases < Cases > Total Number Runs Z- ADF ADF PP PP KPSS LAI- KPSS Market Coefficient p-value Mean p-value mean mean cases of runs value t-statistic p-value t-statistic p-value statistic significance ci EGY 0.0210 0.2083 -6.43E-04 631 867 1498 704 -1.4529 0.1462 -0.9003 0.7886 -0.9066 0.7866 3.6860 0.0100 (44 MOR 0.1410 0.0000 1.74E-04 1127 1066 2193 1023 -3.1487 0.0016 -1.6989 0.4317 -1.6817 0.4405 1.4754 0.0100 SAF 0.0900 0.0000 1.63E-04 1357 1357 2714 1235 -4.7229 0.0000 -2.5872 0.0957 -2.5750 0.0983 1.5328 0.0100 CHIN 0.1800 0.0000 -6.92E-04 1348 1366 2714 1181 -6.7944 0.0000 -0.8120 0.8151 -0.7555 0.8306 5.9522 0.0100 IND 0.1340 0.0000 -5.51E-05 1302 1412 2714 1147 -8.0295 0.0000 -2.1261 0.2344 -2.0892 0.2492 0.9207 0.0100 [NA 0.1850 0.0000 4.63E-05 2064 1955 4019 1745 -8.3365 0.0000 -1.3241 0.6205 -1.3887 0.5894 3.8200 0.0100 KOR 0.0730 0.0000 4.10E-05 2171 1848 4019 1837 -5.0977 0.0000 -2.1096 0.2410 -2.1864 0.2114 1.4078 0.0100 MLY 0.0920 0.0000 1.19E-04 2040 1979 4019 1763 -7.7963 0.0000 -1.8086 0.3767 -1.9145 0.3258 1.0652 0.0100 PAK 0.0700 0.0009 -1.82E-04 869 1106 1975 906 -3.1185 0.0018 -1.6106 0.4769 -1.7596 0.4010 3.0615 0.0100 PHL 0.1790 0.0000 -4.53E-05 1940 2079 4019 1777 -7.3003 0.0000 -0.8497 0.8042 -0.8561 0.8023 1.7749 0.0100 SRI 0.2640 0.0000 -1.34E-04 1292 1422 2714 1079 -10.6178 0.0000 -1.0677 0.7305 -1.1639 0.6921 5.0127 0.0100 TWN 0.0600 0.0001 1.14E-04 2139 1880 4019 1911 -2.8881 0.0039 -2.9705 0.0378 -3.0367 0.0317 0.4037 - THA 0.1840 0.0000 -2.61E-05 1958 2061 4019 1767 -7.6463 0.0000 -1.0626 0.7325 -0.9995 0.7556 3.6711 0.0100 ru CZH 0.1200 0.0000 1.60E-04 1092 1101 2193 987 -4.7196 0.0000 -1.5711 0.4973 -1.4422 0.5628 0.4740 - ft HGY 0.0420 0.0246 5.28E-04 1453 740 2193 731 -11.9708 0.0000 -1.5549 0.5056 -1.5627 0.5016 2.8771 0.0100 POL 0.1430 0.0000 4.82E-04 1411 1303 2714 1255 -3.8786 0.0001 -4.0981 0.0010 -4.0842 0.0010 0.4490 - u-1 RUS 0.0930 0.0000 5.80E-04 1113 1079 2192 957 -5.9720 0.0000 -1.4691 0.5493 -1.5553 0.5054 1.5524 0.0100 ARG -0.0310 0.0247 4.52E-04 2106 1913 4019 1867 -4.3916 0.0000 -2.6501 0.0831 -2.6549 0.0822 3.1939 0.0100 c.)i BRZ 0.1520 0.0000 3.98E-04 2054 1965 4019 1791 -6.8979 0.0000 -2.4406 0.1307 -2.4976 0.1161 5.0290 0.0100 CHL 0.2270 0.0000 4.19E-04 2126 1893 4019 1585 -13.2568 0.0000 -2.6332 0.0863 -2.5961 0.0938 4.1724 0.0100 -aZ COL 0.3390 0.0000 -8.87E-05 1315 1399 2714 1043 -12.0569 0.0000 -1.1330 0.7048 -1.2526 0.6535 4.2617 0.0100 MEX 0.1230 0.0000 6.87E-04 2074 1945 4019 1775 -7.3727 0.0000 -3.2238 0.0187 -3.2635 0.0167 4.7819 0.0100 PRU 0.1810 0.0000 2.69E-04 1404 1310 2714 1245 -4.2816 0.0000 -2.2022 0.2057 -2.1284 0.2335 1.0369 0.0100 VEN 0.0930 0.0000 8.45E-06 1454 1260 2714 1185 -6.4093 0.0000 -2.7039 0.0734 -2.5935 0.0944 0.7922 0.0100 ISR 0.0290 0.0655 1.30E-04 1357 1357 2714 1276 -3.1486 0.0016 -1.6349 0.4645 -1.6961 0.4332 2.2301 0.0100 JOR -0.0090 0.2842 -4.79E-05 1473 2546 4019 1695 -5.8525 0.0000 -1.9622 0.3039 -1.9779 0.2968 0.8947 0.0100 TUR 0.1030 0.0000 5.65E-05 2092 1927 4019 1799 -6.5774 0.0000 -2.2665 0.1831 -2.2930 0.1743 1.4955 0.0100 Notes: Africa: EGY - Egypt, MOR - Morocco, SAF - South Africa; Asia: CHIN - China, IND - India, INA - Indonesia, KOR - Korea, MLY - Malaysia, PAK - Pakistan, PHL - Philippines, SRI - Sri Lanka, TWN - Taiwan, THA - Thailand; Europe: CZH - Czech Republic, HGY - Hungary, POL - Poland, RUS - Russia; Latin America: ARG - Argentina, BRZ - Brazil, CHL - Chile, COL - Columbia, MEX - Mexico, PRU - Peru, VEN - Venezuela; Middle East: ISR - Israel, JOR - Jordan, TUR - Turkey. For Augmented Dickey-Fuller (ADF) tests hypotheses are Ho: unit root, HI : no unit root (stationary). The lag orders in the ADF equations are determined by the significance of the coefficient for the lagged terms. Pure random walk only in the series. The Phillips-Peron (PP) unit root test hypotheses are Ho: unit root, H I : no unit root (stationary). Intercepts only in the series. The Kwiatkowski, Phillips, Schmidt and Shin (KPSS) unit root test hypotheses are Ho: no unit root (stationary), H I : unit root. The asymptotic critical values for the KPSS LM test statistic at the .10, .05 and .01 levels are 0.3470, 0.4630 and 0.7390 respectively. Table 3. Multiple Variance Ratio Tests for Emerging Capital Markets Market Statistics q = 2 q = 5 q = 10 q = 20 Market Statistics q = 2 q = 5 q = 10 q = 20 Market Statistics q = 2 q = 5 q = 10 q = 20 EGY VRq 1.0220 1.1524 1.1940 1.2429 PHL VRq 1.1816 1.3061 1.3347 1.5881 BRZ VRq 1.1530 1.3386 1.4444 1.5376 Zq 0.8515 *2.6916 2.2244 1.8915 Zq *11.5136 8.8576 6.2843 7.5022 Zq 9.6965 *9.7974 8.3445 6.8571 Z*q 0.6255 1.9862 1.6646 1.4923 Z*q *6.1956 5.1894 3.9776 5.0838 Z*q 5.0969 *5.3539 4.9252 4.3488 MOR VRq 1.1458 1.4130 1.6097 1.8559 SRI VRq 1.2646 1.5524 1.8235 2.0574 CHL VRq 1.2299 1.3986 1.5281 1.7725 Zq 6.8295 8.8272 *8.4570 8.0644 Zq *13.7825 13.1355 12.7055 11.0840 Zq *14.5756 11.5350 9.9155 9.8541 Z*q 4.3886 6.2088 6.2832 *6.2868 Z*q 6.8487 *7.0220 6.8004 6.5137 Z*q *9.4875 7.7593 7.0012 7.4213 SAF VRq 1.0917 1.1729 1.1962 1.2640 TWN VRq 1.0614 1.1812 1.2226 1.3759 COL VRq 1.3402 1.8039 2.0702 2.4869 Zq *4.7789 4.1118 3.0275 2.7669 Zq 3.8896 *5.2418 4.1790 4.7952 Zq 17.7205 *19.1145 16.5124 15.5860 Z*q *2.8062 2.6131 2.0168 1.9497 Z*q 2.9760 *3.8226 3.0566 3.5432 Z*q 10.1606 *11.9481 11.0265 11.0981 CHIN VRq 1.1805 1.3272 1.3081 1.4551 THA VRq 1.1849 1.3216 1.3007 1.4653 MEX VRq 1.1244 1.1939 1.2105 1.3425 Zq *9.4053 7.7807 4.7532 4.7705 Zq *11.7214 9.3069 5.6452 5.9350 Zq *7.8833 5.6113 3.9516 4.3690 Z*q *5.5254 4.8829 3.1739 3.3900 Z*q *6.3203 5.0496 3.2070 3.5353 Z*q *3.6223 2.8368 2.1745 2.5795 IND VRq 1.1347 1.2674 1.3008 1.4189 CZH VRq 1.1221 1.1910 1.1723 1.3414 PRU VRq 1.1818 1.2814 1.2651 1.3679 Zq *7.0171 6.3577 4.6420 4.3912 Zq *5.7185 4.0822 2.3902 3.2165 Zq *9.4709 6.6907 4.0902 3.8568 Z*q *5.2580 4.7768 3.5559 3.4763 Z*q *4.6378 3.2832 1.9160 2.6147 Z*q *5.8074 4.3022 2.7807 2.7895 [NA VRq 1.1863 1.3268 1.2810 1.4412 HGY VRq 1.0427 1.0437 1.0233 1.1223 VEN VRq 1.1342 1.1300 1.1495 1.1610 Zq *11.8110 9.4556 5.2762 5.6282 Zq 1.9987 0.9331 0.3228 1.1520 Zq *6.9890 3.0900 2.3061 1.6876 Z*q *3.2535 2.9189 1.7275 2.0253 Z*q 1.9141 0.9187 0.3273 1.1975 Z*q *4.0589 1.8932 1.5833 1.2960 KOR VRq 1.0740 1.0164 0.9255 1.0246 POL VRq 1.1452 1.3358 1.4047 1.6208 ISR VRq 1.0301 1.0862 1.0760 1.1142 Zq *4.6891 0.4738 -1.3979 0.3136 Zq 7.5629 *7.9845 6.2440 6.5076 Zq 1.5663 2.0507 1.1724 1.1975 Z*q 2.3758 0.2243 -0.6490 0.1474 Z*q 5.2307 *5.3495 4.2133 4.5407 Z*q 1.0966 1.4564 0.8604 0.9065 MLY VRq 1.0929 1.1896 1.1459 1.1864 RUS VRq 1.0939 1.2094 1.2882 1.4989 JOR VRq 0.9915 0.9974 1.0197 1.0416 Zq *5.8880 5.4877 2.7393 2.3779 Zq 4.3948 *4.4755 3.9960 4.6997 Zq -0.5376 -0.0756 0.3702 0.5310 Z*q 1.8517 1.9006 1.0602 1.0158 Z*q 1.9353 2.3035 2.3310 *2.9737 Z*q -0.3659 -0.0541 0.2730 0.3966 PAK VRq 1.0717 1.2034 1.3401 1.5342 ARG VRq 0.9698 0.8321 0.7445 0.7630 TUR VRq 1.1031 1.1511 1.1964 1.3430 Zq 3.1850 4.1249 4.4767 *4.7767 Zq -1.9147*-4.8571 -4.7980 -3.0226 Zq *6.5369 4.3720 3.6871 4.3755 Z*q 2.2264 2.7516 3.0597 *3.3991 Z*q -0.6659 -1.4829 -1.5782 -1.0872 Z*q *3.6577 2.5756 2.3516 3.0378 Notes: Africa: EGY - Egypt, MOR - Morocco, SAF - South Africa; Asia: CHN - China, IND - India, INA - Indonesia, KOR - Korea, MLY - Malaysia, PAK - Pakistan, PHL - Philippines, SRI - Sri Lanka, TWN - Taiwan, THA - Thailand; Europe: CZH - Czech Republic, HGY - Hungary, POL - Poland, RUS - Russia; Latin America: ARG - Argentina, BRZ - Brazil, CHL - Chile, COL - Columbia, MEX - Mexico, PRU - Peru, VEN - Venezuela; Middle East: ISR - Israel, JOR - Jordan, TUR - Turkey. VR(q) - variance ratio estimate, Z(q) - test statistic for null hypothesis of homoskedastic increments random walk, Z*(q) - test statistic for null hypothesis of heteroskedastic increments random walk; the critical value for Z(q) and Z*(q) at the 5 percent level of significance is 2.49, an asterisk indicates significance at this level; Sampling intervals (q) are in days. Table 4. Summary Efficiency Outcomes Serial ADF PP KPSS Multiple Market Runs correlation unit root unit root unit root variance ratio EGY Efficient Efficient Efficient Efficient Efficient Weakly efficient MOR Inefficient Inefficient Efficient Efficient Efficient Inefficient SAF Inefficient Inefficient Efficient Efficient Efficient Inefficient CHN Inefficient Inefficient Efficient Efficient Efficient Inefficient [ND Inefficient Inefficient Efficient Efficient Efficient Inefficient [NA Inefficient Inefficient Efficient Efficient Efficient Inefficient KOR Inefficient Inefficient Efficient Efficient Efficient Weakly efficient MLY Inefficient Inefficient Efficient Efficient Efficient Weakly efficient Evidence on Weak Form Efficiency and Day of the Week Effect in the Indian Stock Market
SUNIL POSHAKWALE*
ABSTRACT Stock market efficiency is an important concept, for understanding the working of the capital markets particularly in emerging stock market such as India. The efficiency of the emerging markets assumes greater importance as the trend of investments is accelerating in these markets as a result of regulatory refonns and removal of other barriers for the international equity investments. There is enough evidence on market efficiency and day of the week effect in the developed markets, however, the same is not true for the emerging stock markets. This study provides empirical evidence on weak fonn efficiency and the day of the week effect in Bombay Stock Exchange over a period of 1987-1994. The results provide evidence of day of the week effect and that the stock market is not weak form efficient. The day of the week effect observed on the BSE pose interesting buy and hold strategy issues.
Introduction STOCK MARKET EFFICIENCY is an important concept, in terms of an understanding of the working of the capital markets. The efficiency of the emerging markets assumes greater importance as the trend of investments is accelerating in these markets as a result of regulatory reforms and removal of other barriers for the intemational equity investments. The term market efficiency is used to explain the relationship between information and share prices in the capital market literature. Fama (1970 and 1991) provides the formal definition of "Market Efficiency". He classifies market efficiency into three categories namely, weakfomi, semi strongfomi and strongfomi. In its weak form, market efficiency hypothesis (EMR) states that the stock returns are serially un-correlated and have a constant mean. In other words, a market is considered weak form efficient if current prices fully reflect all information contained in historical prices, which implies that no investor can devise a trading rule based solely on past price patterns to eam abnormal returns. A market is semi strong efficient if stock prices instantaneously reflect any new publicly available information and Strong form efficient if prices reflect all types of information whether available publicly or privately.
* Commonwealth Scholar, Manchester Business School, Manchester. Submitted September '95, Accepted October '95 606 Finance India
Market Efficiency has an influence on the investment strategy of an investor because if securities markets are efficient trying to pick winners will be a waste of time. Since in an efficient market, the prices of securities will reflect the market's best estimate of their expected return and risk, taking into account all that is known about them. Therefore, there will be no undervalued securities offering higher than deserved expected retums, given their risk. So, in an efficient market, an investment strategy concentrating simply on the overall risk and return characteristics of the portfolio will be more sensible. If however, markets are not efficient, and excess returns can be made by correctly picking winners, then it will pay investors to spend time finding these undervalued securities (Rutterford, 1983 pp. 282). The day of the week effect refers to the existence of a pattern on the part of stock returns, whereby these retums are linked to the particular day of the week. Such relationship has been verified mainly in the USA. The last trading days of the week, particularly Friday, are characterised by the positive and substantially positive retums, while Monday, the first trading day of the week, differs from other days, even producing negative retums (Cross, 1973; Lakonishok and Levi, 1982; Rogalski 1984; Keim and Stambaugh, 1984; Harris, 1986). Once again the day of the week effect in emerging stock market have not been extensively researched. The presence of such an effect would mean that equity returns are not independent of the day of the week, an evidence against random walk theory. Studies on testing of market efficiency of Asian emerging stock markets are also surprisingly few. Chan, Gup, and Pan (1992), show that there is no evidence that the stock prices in major Asian Markets and U.S. markets are weak form efficient individually and collectively in the long run. Dickinson and Muragu (1994) provide evidence of market efficiency in Nairobi Stock Exchange. They conclude that small market such as Nairobi Stock Exchange provides empirical results consistent with weak-form efficiency. Cheung, Wong and Ho (1993) report inefficiency of stock markets of Korea and Taiwan on the basis of weak theoretical form of Capital Asset Pricing Model in both the markets. Groenewold and Kang (1993) have conducted weak and semi-strong efficiency tests of Australian stock market by using aggregate share price indexes and find the data consistent with the weak form efficiency. Ho, Richard and Cheung (1994) study the seasonal pattern in volatility of Asian Stock Markets. Using Levene (1960) test, they report that there exist day-of-the-week variations in volatility in most of the emerging Asian markets. Barnes (1986) tests the weak form market efficiency of the Kuala Lumpur Stock Exchange and concludes that the stock exchange exhibited a surprisingly high degree efficiency, inspite of thinness of the market. This research study examines weak-form efficiency and the day of the week effect on the Bombay Stock Exchange using daily BSE national index data for the period 1987 to 1994. The next section explains the theory of efficient markets. Hypotheses and the data used in the study are described in section 3. Market characteristics of Indian stock market are given in Poshakwale, Evidence on Market Efficiency and 607
section 4. Descriptive statistics, non-parametric tests, analysis and results are given in sections 5 and 6. Day of the effect is described in section 7 and finally in section 8 main conclusions of the study are given. Efficient Markets Theory The efficient market hypothesis is inextricably related to the random walk theory. The idea that security prices might follow random was put forward by Bachelier' in 1900. The random walk is used to refer to successive price changes which are independent of each other. In other words, tomorrow's price change (and therefore, tomorrow's price) cannot be predicted by looking at today's price change, Pt+, - Pt is independent of ;Jr p11. There should be no trends in price changes. Proofs of the random walk theory can take several forms. As with all tests of theories involving future expected prices or retums, past actual prices or returns are used for the tests. So for the random walk theory, sets of share price changes are tested for serial independence. Random walk theory for share prices reflects a securities market where new information is rapidly incorporated into prices and where abnormal retums or'excess' retums cannot be made from spotting trends or from trading on new information. That share prices appear to follow a random walk is an interesting result and proving it or attempting to disprove it occupied significant proportion of research in 1970's. But what remained to be shown was why share prices followed a random walk. There was plenty of evidence, but a formal theory was missing. What was needed was a model of share price behaviour to explain the random walk. The gap was filled by more general model based on the concept of efficiency of the markets in which shares are traded - the efficient market hypothesis (EMH). According to EMH, the ability of investor to pick winners and make excess retums using new information is directly related to the speed and efficiency of a market at absorbing that information. So, efficiency is considered in terms of the 'fair game' concept. A market is regarded as efficient with respect to a particular set of information if investors using that information are faced with fair game, that is, they receive on average the return expected for the risk involved and make no consistent abnormal returns. This can be expressed in the following way. If (I), is defined to be a particular set of information conceming security j available at time t, then any abnormal return achieved at time t+1 on security j can be written sj,t+1 = where sj, t+1= (E(Rj,t+1)/ 0. The equation shows that the excess retums will be the difference between the return actually achieved and the return expected given the risk. The solidus/simply means that the retums are achieved or expected knowing information (I), at time t. The EMH does not say that investors will never beat the market and will never make large profits. In other words, sj,t+1 can be large and positive and sometimes negative, with the result that the sum of the excess returns over a number of periods of time will average zero st++, = a 1. Bachelier, L., 1900, Th'eorie de la sp' eculation, Gauthiers-Villars 608 Finance India
The fair game for investors is an outcome of a market being efficient. If a market is efficient, then investing is a fair game. This fair game concepts is useful in that it allows the different levels of the EMEI to be tested. Hypotheses and Data Hypotheses 1. The null hypothesis is that prices on India stock market follow random walk. 2. That the Indian Stock Market is efficient in weak form i.e., first order autocorrelations are not present. 3. There is no difference in the returns between the days of the week. The market is also efficient in terms of autocorrelations coefficient up to five lags or weeks demonstrating no day of the week effect. Data The study use daily prices of the Bombay Stock Exchange National Index (BSENI) from 2nd January 1987 to 31st October, 1994. The Index values in local currency are taken from Data Stream International. In order to compare the performance with a World Portfolio, Morgan Stanley World Dollar Index is used and, therefore, index values are converted into US Dollar by using daily quotations of exchange rates of the Indian Rupee to the U.S dollar. Indian Stock Market Bombay Stock Exchange (BSE) is perhaps one of the oldest stock exchanges in Asia. The BSE was established in 1875 with the formation of "Native Share & Share Broker Association". The BSE has more than 628 members and account for more than 65% trading volume with over 70% of listed capital in India. Trading volume exceeds 215000 transactions with a turnover of $130 million per day. The market capitalisation of the 1900 stocks on which data is available, is about US$115 billion, on May 6th, 1994. Indian stock markets have also demonstrated remarkable stability and resilience in general and BSE in particular. According to a special report in Euromoney (Sept., 1994), average annual price fluctuations of ordinary shares on BSE have been quite stable, at about 25. 1% during the past 10 years. This compares favourably with figures from the London Stock Exchange (22%) and the New York Stock Exchange (23.9%). The Indian stock market largely remained unaffected during the world stock market crash in Oct. 1987. See Figure 1 for the behaviour of BSE national index (converted in to US$) as compared to Morgan Stanley World Dollar Index and Table 1 for the major market characteristics of BSE. There are three main indices on the BSE, Bombay Stock Exchange Sensitive Index (SENSEX), Economic Times Ordinary Share Price Index (ET), and Bombay Stock Exchange National Index (BSENI). The BSE Sensitive Index includes 30 companies and is meant to capture the market leaders. The Economic Times Ordinary Share Index includes 72 companies. Recently another share index, BSE 200 has been launched by Bombay Stock Exchange P oshakw ale, Evidence on Market Efficiency and 609
for exclusive use of the brokers who deal in Bombay only. The BSENI is the most commonly used index and considered as the most representative of all three. See Table 2 for the description of the BSENI. Figure 1
BSE National and Morgan Stanley Index in US Dollars
80 800
_ 70C
LAI 60 - r -690
JCIA stvl'MY _530 \ff ,I v I "re 40 - „MIA,/ T. pl - 400 0 = MSCI $ - 20 - BSE $ - 230
0 '30 Jan ury 1987- October 1994
Table 1 Major Market Characteristics of Indian Capital Market Market Capitalisation (USDb) 126.80 Daily Turnover (USDm) 3160.00 Trading Volume (USDb) 675.2 (93) New Issue Volume (USDb) 94.78 (93) Trading System Open outcry auction system. Settlement and Transfer System T+14 for A list securities. T+7 for B list. Clearing house of BSE handles settlement. Transfer carried out through transfer deeds. Regulatory Agency Securities and Exchange Board of India (SEBI) is authorised to regulate the functions of stock exchanges and implement disclosure norms. Derivatives Market Trading of Index Futures on BSE likely to be introduced by the end of 1994.
Source: Euromoney, September, 1994 610 Finance India
Table 2 Bombay Stock Exchange National Index (BSEND Base Period 1978-70 = 100 Stock Exchanges Covered Bombay Number of Scrips 100.00 Method of Compilation The Index for a day is calculated as the percentage of aggregate market value of the equity stocks of all companies in the sample on that day to the average market value of the equity stocks of the same companies during the base period. In case where a scrip is actively quoted on more than one exchange, the average price of that scrip on these exchanges is used in the compilation of the index. Weighting System The price of each component share in the Index is weighted by the number of shares outstanding so that it will influence the index in proportion to its respective market importance. Criteria for Selection of Selection of Scrips is on the basis of their market Scrips activities and adequate representation of the various Industry groups. Dividend Adjustments None Bonus Adjustments The new weighting factor will be the number of equity shares outstanding after the bonus issue has been effective. Rights Issue adjustments The new weighting factor will be the number of equity shares outstanding after the rights issue, and an offsetting or proportionate adjustments is made of the base year average. Descriptive Statistics Frequency Distribution One of the basic assumptions underlying the random walk theory and, therefore, EMH is that if the stock prices are random then its distribution should be normal. Any normal distribution is an advantage because we need only two summary measures, mean and variance, to describe the entire distribution. The normality of distribution is also one of the basic assumptions underlying the capital asset pricing models. The Histograms of the index is computed and curve for normal distributions have been fitted in order to ascertain whether the distribution of index values fits the normal distribution. A distribution that is not symmetric but has more cases, or more of a tail toward one end of the distribution than the other is called skewed If the tail is toward larger values, the distribution is positively skewed or skewed to the right. If the tail is toward smaller values, the distribution is negatively skewed or skewed to the left. Kurtosis indicates the
Poshakwale, Evidence on Market Efficiency and 611
extent to which, for a given standard deviation, observations cluster around a central point. If cases within a distribution cluster more than those in the normal distribution (that is the distribution is more peaked), the distribution is called leptokurtic. If cases cluster less than in the normal distribution (that is, it is flatter), the distribution is termed platokurtic. Values for skeweness and Kurtosis are 0 if the observed distribution is exactly normal. As can be seen from Figure 2, that the frequency distribution is not normal. The distribution is positively skewed and with a value of -0.530 kurtosis. The descriptive statistics are given in Table 3. The results indicate that the distribution is not normal and, therefore, the prices on BSE do not follow random walk. Figure 2 Frequency Distribution Histogram BSE National Index 401
301
201
101 Std. Dev = 570.97 1111111iih, Mean = 80t6 0 Th" N = 2042.00 dr dr .0 . 0 .0 .0 %Qq7 TC19 % °et'
2nd January 1987 - 31st October 1994
Table 3 Descriptive Statistics Mean 801.61 Std Deviation 570.97 Variance 326,008.81 Kurtosis -0.53 S.E. Kurt 0.11 Skewness 0.84 S.E. Skew 0.05 Range 1968.61 Minimum 207.87 Maximum 2176.48 612 Finance India
To confirm this non-parametric tests are used which will provide further evidence whether the distribution conforms to a normal distribution or not. Non-Parametric Tests Kolmogorov Smirnov Goodness of Fit Test To test whether the observed distribution fit theoretical normal or uniform distribution we use non-parametric test. Kolmogorov Smirnov Goodness of Fitness Test (KS) is a non-parametric test and is used to determine how well a random sample of data fits a particular distribution (uniform, normal, poisson). It is based on comparison of the sample's cumulative distribution against the standard cumulative function for each distribution. The Kolmogorov- Smimov one sample goodness of fit test compares the cumulative distribution function for a variable with a uniform or normal distributions and tests whether the distributions are homogeneous. We use both normal and uniform parameters to test distribution. The Kolmogorov Smirnov Goodness of Fit Test (KS) shows 0.0000 probability for the Z at the 5 percent level of significance, in case of normal as well as uniform distribution. The results clearly indicate that the frequency distribution of the daily values of BSENI does not fit either normal or uniform distribution. Table 4 show the results of the KS Test. Table 4 Kolmogorov Smirnov Goodness of Fit Test Absolute Positive Negative K-S Z Z-Tailed P Norm al 0.18 0.18 -0.15 8.30 0.00 Uniform 0.33 0.33 0.00 15.06 0.00 Tests For Serial Dependence Runs Test We use the Wald-Wolfowitz Runs Test for the randomness of the series. Runs testing is a strong test for randomness in investigating serial dependence in share price movements and compares the expected number of runs from a random process with the observed number of runs. The test is non-parametric and is independent of the normality and constant variance of data. A run is defined as a series of identical signs that are preceded or are followed by a different sign or no sign at all. That is given a sequence of observations, the runs test examines whether the value of one observation influences the values taken by later observations. If there is no influence (the observations are independent), the sequence is considered random. It is assumed that the sample proportion of positive, negative and zero price changes are good estimates of the population's proportions. Runs test shows the cutting point, the number of runs, the number of cases below the cutting point, the number of cases greater than or equal to the cutting point, and the test statistics Z with its observed significance level. The total number of runs is a measure of randomness, since too many or too few runs, suggest dependence between observations.
Poshakwale, Evidence on Market Efficiency and 613
The results of the runs test are given in Table 6. The runs test converts the total number of runs into a Z statistic. As can be seen that the total number of runs are just 14 with a zero observed significance level. Therefore, the hypothesis that the series is random is rejected. Table 5
Cases Test value Runs Z 2-Tailed P (Median) LT Median 1,019.00 593.12 14.00 -44.62 0.00 GE Median 1,023.00 Total 2,042.00 Serial Correlation Coefficients Test For testing the Efficient Market Hypothesis (EMR) in the weak form, Serial Correlation Coefficient Test is widely used. The Serial Correlation Coefficient measures the relationship between the values of a random variable at time t and its value in the previous period. The population serial correlation (Pa) coefficient is estimated using the sample serial correlation coefficient (Ra). For complete independence Pa = 0, a significant test may be performed on the variation of Ra from 0. Here confidence intervals of two and three standard errors are used. Autocorrelations are reliable measures for testing of dependence/independence of random variables in a series. If no autocorrelations are found in a series then the series is considered random. We transform the series by taking the first difference and compute the autocorrelations. The autocorrelation coefficients have been computed for the transformed index in order to establish whether information is obtained even with transformation of the higher order. Figure 3
Autocorrelation (First Difference) BSE National Index
08
0.4
0.2
0 a a
-0.4
-06 11111111111111 n 1111i 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 2nd January 1987 - 31st October 1994 614 Finance India
By referring to the Figure 3 it is evident that information available is available at several lags. There is significant negative autocorrelation on the first lag. The autocorrelations on the 9th and 10th lags may be ascribed to the two week settlement period (a week comprise of five working days), followed at the Bombay Stock Exchange. On BSE the year is divided into two week settlement periods. All transactions entered into a particular settlement period are to be settled at the end of the period. Settlement period is normally a fortnight but at times can extend beyond a fortnight. The evidence of presence autocorrelation coefficients in the transformed series on the lst, 4th, 9th, 10th 14th and the 15th lags suggest that there is serial dependence between the values. Therefore, the null hypothesis that there are no first order autocorrelations present in the series is rejected. Day of the Week Effect The series of returns on BSENI are also tested for 'day of the week effect'. If there is no day of the effect then the mean found at the end of each day of the week would be same. The Table 6 shows the mean retums and the standard deviation for each day of week. Table 6 Weekend Effect in the Daily $ Returns of BSENI
Monday Tuesday Wednesday Thursday Friday Mean Retum -0.09 0.10 -0.04 0.13 0.28 Standard Deviation 2.22 1.79 1.36 1.78 2.21 Range Maximum 20.64 12.90 9.37 27.33 10.65 Range Minimum -15.58 -9.76 -7.14 -6.11 -19.27 As can be seen that the mean retums except for the Monday and Wednesday are positive. It can also be seen that the standard deviation is larger for the first and the last days of the week, which is almost similar to the evidence from other countries. The hypothesis used is that because Monday closing price entails the events of three days, the standard deviation should be higher compared to that of other days, while only significantly higher dispersion for this day would also indicate the effects of risk in determining daily retums (Jacobs and Levy, 1988). In case of BSE the high level of dispersion for Monday seems to point out the risk effect on daily returns. There are also a few markets where the standard deviation for Monday is smaller than that for other days (Solnik and Bousquet, 1990). In most of these studies it is implicitly assumed, along with the standard deviation for Monday and low one for Friday, that Monday returns are low or negative as compared to Friday returns - which seems also to be the cause for the BSE excepting that standard deviation on Friday is not low. The day of the week effect seems to conform to the familiar pattern observed in other stock markets, according to which the market has a tendency to end each week strong and start weak on Monday with the exception of negative returns on Wednesday. From the results it is evident that there is weekend (Friday) effect on the retums from Poshakwale, Evidence on Market Efficiency and 615
BSENI which supports the presence of first order autocorrelation and provides the indication of non-random nature of stock prices in the BSE. Findings and Conclusions The assumption that stock prices are random is basic to the efficient market hypothesis and capital asset pricing models. This study has presented evidence concentrating on the weak form efficiency and on the day of week effect in the Bombay Stock Exchange under the consideration that variance is time dependent. Moving from its traditional functioning to that required by the opening of the capital markets, the BSE has presented different pattems of stock retums and supports the validity of day of the week effect. The frequency distribution of the prices in BSE do not follow a normal or uniform distribution which is also confirmed by the non-parametric KS Test. The results of runs test and serial correlation coefficients tests indicate non- random nature of the series and, therefore, violation of weak form efficiency in the BSE. The other null hypothesis that there is no difference between the returns achieved on different days of the week is also rejected as there is clear evidence that the average returns are different on each day of the week. The weekend effect is evident as the retums achieved on Fridays are significantly higher compared to rest of the days of the week. However, the results presented in the study are not adjusted for transaction costs. Nor have the results been adjusted for non-synchroneous trading which may influence the serial correlation coefficients. The implication of rejection of weak form efficiency for investors is that they cannot adopt a 'fair return for risk' strategy, by holding a well diversified portfolio while investing in the Indian stock market. What will be the appropriate investment strategy for an intemational investor for investing in Indian market and how efficiency/inefficiency will influence his choice of investments are the issues worth researching. Also the day of the week effect observed on the BSE pose interesting buy and hold strategy issues. References Anonymous, 1994, " India steps into the big league", Euromoney, September, Supplement, 1-25. 1994, "Guide to World Equity Markets", Euromoney, September, 20-86 Barnes P., 1986, "Thin Trading and Stock Market Efficiency: The Case Study of the Kuala Lumpur Stock Exchange", Journal of Business Finance & Accounting, Vol. 13(4), Winter, 609-617. Chan, K.C., Gup, B.E., and Pan, M.S., 1992, "An Empirical Analysis of Stock Prices in Major Asian Markets and the United States", Financial Review, Vol. 27, Iss. 2, May, 289-307. Cheong, K., 1993, "A Test of the Multifactor Asset-Pricing Model in Korea", Research in International Business and Finance, Rising Asian Capital Markets: Empirical Studies, Vol. 10, Jai Press Inc., London, 199-212. Chu Po-Young, 1993, "Multivariate Models of the Taiwan Equity Capital Market Incorporating Changing Regulatory Financial Issues", Research in International 616 Finance India
Business and Finance, Rising Asian Capital Markets: Empirical Studies, Vol. 10, Jai Press Inc., London, 213-219. Cross, F., 1973, "The Behaviour of Stock Prices on Fridays and Mondays, Financial Analysts Journal, 29, November/December, 67-69. Dickinson, J., and Muragu, K., 1994, "Market Efficiency in Developing Countries: A Case Study of the Nairobi Stock Exchange", Journal of Business Finance & Accounting, January, 210), 133-150. Fama, E., 1970, "Efficient Capital Markets: A Review of Theory and Empirical Work", The Journal of Finance, 25, 383-417. Fama, E.F., 1991, "Efficient Capital Markets II", The Journal of Finance, XLVI, 5, December 1991. Groenewold, N., and Kang,K.C., 1993, "The Semi-strong Efficiency of the Australian Share Market", Economic Record, Vol. 69, Iss. 207, December, 405- 410. Harris, L., 1986, "A Transaction Data Study of Weekly and Intradaily Patterns in Stock Returns", Journal of Financial Economics, 16, 99-117. Ho, Y.K., Richard, and Cheung, Y.L., 1994, "Seasonal Pattern in Volatility in Asian Stock Markets", Applied Financial Economics, Vol. 4, Iss. 1, February, 61-67. Jacobs, B.J., and Levy, K.N., 1988, "Calendar Anomalies: Abnormal Returns at Calendar Turning Points, Financial Analysts Journal, November/December, 28- 39. Keim, D., and Stambaugh, R., 1984, "A Further Investigation of the week-end Effect in Stock Returns", Journal of Finance, 30, 819-835. Lakonishok, H. J., and Levy, M., 1982, "Week-end Effects on Stock Returns: A Note", Journal of Finance, 37, 883-889. Rogalski, R., 1984, "New Findings Regarding Day of the Week Returns over Trading and Non-trading Periods", Journal of Finance, 39, 1603 -14. Rutterford, J., 1993, Introduction to Stock Exchange Investment, Second Edition, 281-308, The Macmillan Press Ltd., London. Solnik, B. and Bousguet, L., 1990, "Day of the Week Effect on the Paris Bourse", Journal of Banking and Finance, 14, 461-68. Exhibit 14 An Empirical Study of Exchange-Traded ADRs from India
Rajesh Chalcrabarti Dupree College of Management, Georgia Institute of Technology, 755 Ferst Drive, Atlanta GA 30332, USA
Tel: 404-894-5109; Fax: 404-894-6030 E-Mail: [email protected]
Abstract
Depositary Receipts have emerged as a favored vehicle to access developed stock markets for many emerging market companies. India has been no exception. While several Indian companies have issued ADRs in the 1990's only a few of these securities are listed in US exchanges. We study the return and volume dynamics of these exchange- listed ADRs of Indian origin. We End that the underlying stock returns, exchange rate and market indices in the US and India together often explain less than half of the movement in ADR returns. Returns and volumes also exhibit low cross-border correlations. Indian ADRs often enjoy large premiums, indicating effective market segmentation between the two countries. Finally ADR issuance often has a temporary positive effect on the underlying stock price, but usually does not materially alter the stock's relationships with the US and Indian markets. An Empirical Study of Exchange-Traded ADRs from India
1. Introduction
With the opening up of the financial markets, Indian companies joined the 1990's worldwide rush to raise capital by issuing Depository Receipts. While Indian companies have issued American Depository Receipts (ADRs) since the early 90s, most of these earlier issues were privately placed. Exchange-traded ADRs of Indian origin have been a relatively recent phenomenon. Currently there are close to 80 active Depository Receipts of Indian origin. A dozen of them trade in US exchanges — the New York Stock Exchange and the NASDAQ — all issued during or after 1999 (see Table 1). This article examines their market performance. It attempts to identify the drivers of market returns of these ADRs and investigates their relationship with the underlying securities. It also studies the effect of issuance of such ADRs on the issuing company's shares in the domestic (Indian) market.
[Table 1 about here]
American Depository Receipts are instruments issued in the United States in lieu of a non-US company's shares. They are tradable in the USA (or in another country, though usually the term Global Depository Receipt (GDR) is used for Depository Receipts outside the USA) though the company itself is not listed in a US exchange. Depository Receipts thus provide companies in emerging economies with a way of tapping industrialized markets, particularly the United States market, for equity capital arguably the least expensive way to make a company's equity available to foreign investors. The 1990s witnessed an explosion in the number of ADRs issued and the amount of capital raised by companies mostly from developing countries. (See Box 1 for a brief description and history of ADRs.)
[Box 1 about here]
1 In this study we explore various aspects of the returns and prices of ADRs of Indian origin. We explore the dynamics of ADR returns and seek to explain them with the variables we would a priori expect to affect them. We study the nature of premiums enjoyed by these ADRs and their determinants. We examine the extent of cross-border connection in trading volume and market return between the ADRs and their underlying stocks. Finally we research the effects of ADR issuance on the returns of the underlying stocks and their relationship with the Indian and the US markets.
2. Related Research
The past few years have seen several papers researching different aspects of Depositary Receipts. Some have even focused on Indian Depositary Receipts, though exchange-traded ADRs from India have not been the focus of much research, largely because they have been a relatively recent phenomenon. Nonetheless, the existing research does bring out some important facts about ADRs in general and Depositary Receipts from India in particular. The issue of relative pricing of stocks in segmented markets, i.e. in the US markets through ADRs and in India have received some attention. Retums on Global Depositary Receipts (GDRs — DRs existing both in the US and other countries) from India between 1992 and 1998 and the returns on the corresponding stocks in India have been examined to better understand this relationship l. It is observed that these GDRs enjoy a considerable premium over their underlying stock price. This is particularly noteworthy since during the period the Indian market was open to foreign institutional investors and existence of such premium appear to have presented arbitrage opportunities. The very existence of such premiums, therefore, has been viewed as evidence of de facto market segmentation between India and the countries where they are traded. Also the GDR returns have been found to be influenced by not just Indian returns but particularly market returns in the host country — a widespread phenomenon in the world of ADRs.
1 See hthendranathan et al (2000)
2 Several studies have also investigated the effect of ADR issue on underlying stock returns. The accumulated evidence appears to suggest that ADR issuance increases stock prices permanently — probably by reducing cost of capital and increasing liquidity. This has been generally found to be true for ADRs from a large set of countries 2. In particular, Global Depositary Receipts from India between 1992 and 1998, operating under Regulation S and SEC's Rule 144A appear to exhibit these tendencies as wel13. Another area that has received considerable attention is the effect of ADRs on the underlying stock's relationship with the local and the US markets. The local market beta is generally found to decline with ADR listing, but the rise of the US market beta of the stock is often not significant.4 Exchange-traded ADRs are by far the most important foreign securities from India with enough liquidity to provide reliable price and return information. However, because they are both fewer and of much more recent origin, there has been relatively less analysis of the market performance of these securities and its determinants. Nonetheless, the relationship between these exchange-traded ADRs and their underlying stocks have recently been explored. It has been documented that as expected, the returns on stocks and their ADRs have a strong correlation in prices in the two markets as well as indications of causality in both directions between the two markets.5 The present paper looks at exchange-traded stocks and asks a different set of questions. The focus here is more on the analysis of the returns and trading volume rather than prices. Besides the present study goes beyond establishing the expected relationship between the two markets to assess the extent and importance of that relationship. Finally the effects of ADRs on the underlying stock retums are also explored.
3. The analysis of ADR prices and returns
Ten Indian-origin ADRs are actively traded in American markets and also have the company's stock publicly trading in India. We consider these ten stocks and their
2 See Miller (1999). 3 See Pinegar and Ravichandran (2002). 4 See Jayaraman et al (1993), Karolyi (1998) and Foerster and Karolyi (1999) 5 See Hansda and Ray (2003)
3 ADRs in our study. The Appendix discusses the data and its sources. Table 2 provides some descriptive statistics of the data.
[Table 2 about here]
A. What determines ADR returns?
To start our empirical investigation of ADRs we inquire how much of the variation in daily retums can be explained using variables that we a priori believe to be determining them. It is noteworthy that ADRs are, in a sense, derivative securities, i.e. assets that derive their value from the value of other financial assets. Abstracting from transaction costs and restrictions on cross-border investment, it is possible to arbitrage ADRs with the underlying stocks. Thus in a no-arbitrage sense, exchange rate changes and return on the underlying stock together should be able to explain ADR returns completely. However, previous research has suggested that the returns in the market where the ADR trades (i.e. the US market) affects the retums on the ADRs. This is because to the US investors, ADRs provide an easy way to achieve international diversification. Consequently, ADRs are also related to US market returns. Finally, it may be argued that the return on an ADR from a particular country is also affected by the returns on the market of their origin as well. Based on these observations, we regress the daily retums on the Indian origin ADRs on the retum on the underlying stocks, the change in US-India exchange rate, the BSE national index as well as two important stock indices from the USA — the S&P 500 and the NASDAQ.
[Figure 2 about here]
Figure 2 shows the R2 of these regressions for the ten stocks under consideration. The proportion varies from about 5% for HDFC to slightly over 60% for Satyam Computer Services. The average R is slightly over 32% and the median is slightly over
4 30%. In 80% of the cases, less than 50% of the variation is explained and in half of the cases less than a third of the variation is captured by the variables identified. One is, therefore, challenged to speculate on the causes of this low explanatory power of the variables considered. It may be argued that the fact that Indian stock markets are open not to individual foreign investors, but only to institutional investors beyond a certain size registered with Indian regulatory authorities, makes international arbitrage with ADRs almost an impossibility. This lack of arbitrage opportunity would substantially weaken the relationship between the ADR returns and the dollar returns on the underlying stock (the Rupee returns and the changes in the exchange rate).
B. The premium on ADRs
Like all ADRs (and country funds too for that matter) Indian ADR prices are almost never equal to the price of Indian shares they represent, after correcting for the exchange rate Derivative instruments like ADRs trade at a premium or discount in relation to their underlying assets within the band of transaction costs so that there is no arbitrage opportunity. In the case of ADRs, however, the "transaction cost" barrier necessary to prohibit arbitrage is difficult to determine a priori, particularly in light of restrictions to cross-border investment, as is the case in India. Table 3 presents the descriptive data about premiums on ADRs. Premiums are calculated as the percentage excess of price of the ADR over the Indian market value of the number of shares it represents converted to US dollars. Figure 3 presents the sketches the daily premiums over time. All stocks under study enjoyed a statistically significant premium on an average. Infosys and HDFC enjoyed the most spectacular premiums. The premium on Infosys ranged between 12% to a whopping 194% while that on HDFC ADRs never fell below 40%.
[Table 3 about here] [Figure 3 about here]
5 In terms of market performances for ADRs, HDFC seems to have maintained a very stable and high premium. The premium on Infosys ADR, on the other hand, has closely tracked the fortunes of the technology-heavy NASDAQ index in the United States Clearly, the excitement about Infosys in the US market was closely related to that market's fascination with technology stocks till 2000 and Infosys ADRs suffered the same fate as other technology stocks after the market meltdown. What is, however, particularly worth noting is the fact that Infosys stock price itself is very highly correlated with NASDAQ — a correlation level of close to 0.75. One would assume that all the NASDAQ-related technology effects of Infosys would already be taken care of in its stock price. The fact that on top of this stock price, the premium too has a very high correlation with NASDAQ — about 0.63 — suggests that Infosys ADRs are even more closely related to the index than the Indian markets. Another striking feature is the relatively lackluster performance of another feted Indian IT stock — Wipro. Compared to high-flyers like Infosys and HDFC, Wipro has exhibited a rather modest show in terms of its premium. Wipro's premium has averaged a little over 3% over the entire period ranging from a discount of about 8.5% to a premium of 31.5%. Much of the astronomical premiums on Infosys come from the heydays of tech stocks, a boom that Wipro has partially missed out, being over a year-and-a half behind Infosys in bringing out is publicly traded ADR. But even for the period when both of the ADRs were trading, the average premium on Infosys is over 18 times that of Wipro. Given that the two stocks operate in similar environments and have a correlation of 0.87 in prices and 0.64 in returns, such a huge difference in their premiums as well as the extremely low correlation between the two premiums — 0.06 — suggest that the explanation lies more on investor perception and behavior than fundamentals. Infosys appears to have been much more successful than Wipro in projecting itself in the US markets as the "Microsoft of India", creating a large demand for its ADRs among US investors. Financial sector ADRs, like those of HDFC, ICICI and ICICI Bank, have enjoyed high premiums. As an industry probably the financial companies have been able to command the highest and most stable premiums among the Indian companies.
6 How much of these premiums are explained by the movements in the US markets? The last column of table 3 lists the R 2 of the regressions of the premium of the different ADRs on the S&P 500 and NASDAQ. Econometrically speaking, given the fact that these two factors are correlated and integrated, we cannot put too much faith in the coefficient estimates themselves but the R 2 of these equations still serve as reliable measures of the effect of US markets on the premiums on Indian ADRs. The figures range from a minimum of about 3% for Wipro to a maximum of 57% for Infosys with a median value of about 27%. In brief, US market movements do have a big role in explaining the premiums on exchange-traded ADRs of Indian origin.
C. The Relationship between Indian and US market returns
What is the relationship between retums on stocks in the Indian markets and the returns on their ADRs in the US markets? To answer this question we investigate if US ADR markets reacted systematically to Indian markets on a day-to-day basis. Given the time zone difference between the two countries, trading in the Indian market is over before US markets open for the same date Thus comparing US market ADR returns with the same-date returns in India on the corresponding stocks would provide us with an idea of the relationship between the two markets. Table 4 presents the correlations between daily returns on ADRs and the daily retum on the underlying stocks and the exchange rate. The return on the exchange rate is defined here as the depreciation of the Indian rupee against the US dollar. Given that ADRs are essentially securities certifying the underlying shares, the correlations in returns appear to be generally on the lower side. They range from 0.18 for HDFC to 0.75 for Satyam. The relationship with exchange rate changes also appears to be rather tenuous. The expected sign here is negative. The highest absolute value is 0.33 while the average is 0.1. Evidently the impact of the Indian market return varies considerably across stocks. These results confirm the generally low explanatory power of the variables in Fig.2.
[Table 4 about here]
7 Now that we know that ADRs do not move exactly in step with the underlying stocks, an alternative way of examining the relationship between these two returns is to study the "excess return" of the ADRs over the underlying stocks. The last column of Table 4 presents the average excess retums for the different stocks during the period under consideration. Without exception, they are essentially zero. Thus while there is considerable randomness in the returns of ADRs, there is no systematic bias or over or under-reaction in ADR retums with respect to the underlying stock returns.
D. Trading Volume
Next we look at the relationship between trading volume of ADRs and that of their underlying shares in India. As a first brush, we look at the correlations between the trading volumes presented in Table 5. They range from 0.12 to 0.54 with the average of 0.31. Only one of the ten, Infosys, has a correlation over 0.5. The second column of table 5 shows the R2 of the univariate regression of ADR volume on underlying stock volume. The average R2 is 0.05. Thus, it appears that like returns, trading volumes of the underlying stocks have little explanatory power over ADR volume.
[Table 5 about here]
The low explanatory power of share trading volume on ADR volume indicates the fact that much of ADR trading is motivated by local factors in the country they are traded in.
E. Effect of ADR issue on stock return
Are ADR issues good news for domestic markets? In order to investigate this issue we define daily abnormal returns on a stock as the daily return on the stock less the contemporaneous return on the BSE national index. A study of these abnormal returns gives us an indication whether Indian markets consider the issuance of ADRs a cause for
8 celebration. The consideration of abnormal returns rather than raw returns themselves takes the overall effect of the market from the returns. The cumulative abnormal returns (CAR) over 20-day periods (roughly corresponding to a month) are computed by adding these abnormal returns, going both ways from the ADR issuance date. Next the cumulative abnormal return over the 20-day period immediately preceding the ADR issuance date is compared with the average cumulative abnormal returns over the entire period. The results of this comparison are shown in table 6 below.
[Table 6 about here]
Table 6 gives a mixed picture. Six of the ten ADR issuing companies witness a significantly higher than average CAR while tlu-ee experience significantly negative average CAR while one is insignificant. Thus it does not appear that issuance of ADRs unambiguously boosts the market returns of the issuing company. Sometimes it does, and sometimes it does the opposite. To get an overall impression of the effect of ADR issuance on stock returns, as well as to study the evolution of the cumulative abnormal retums around the issuance (from about a month prior to a month after the issuance date), we plot the average CAR of these ten ADR-issuing stocks in Figure 4. On the whole, it appears that ADR issuance is indeed associated with a statistically szgnzficant rise in the abnormal retum of the stock beginning about a week before the issuance date However, a large part of the increase appears to be short-lived with the cumulative ADR dropping to prior levels within a week of the ADR issue.
[Figure 4 about here]
F. Effect of ADR on a stock's relationship with US market
Prior research has suggested that the existence of an ADR and the resulting access of foreign investors to a company's stock often weakens its relationship with the
9 domestic market. Sometimes there is a strengthening of its relation with the US market. In this sub-section we look at whether that has been the case for Indian stocks with exchange-traded ADRs .
[Table 7 about here]
Table 7 shows the beta of the ten stocks under consideration with respect to the Indian market (the BSE National Index) and the US market (the S&P 500 Index) before and after the issue of ADRs. The R2 of the regressions of weekly retums of the stock on the weekly returns on these two indices are also provided for both these sub-periods. We use weekly returns here to avoid potential problems with GARCH effects in daily data The final column checks if there is actually a statistical break in the relationship of the stock and the two indices with the issue of the ADR. The result shows that only in two cases — the infotech companies Infosys and Wipro — have the issue of ADRs resulted in an increased the beta of the stock with the US market. Even out of these two companies, only in the case of Infosys has the relationship witnessed a structural change with the issue of the ADR. Notably, for both these stocks the betas with the Indian market have also slightly increased in the post-ADR period, contrary to what the literature would predict. Interestingly MTNL's US beta did experience a significant change after the issue of the ADR, but in the opposite direction — its US beta became negative significant! Its local beta also increased. However, there is no evidence of a structural change in this case from the Chow test, so the result is not exactly unambiguous. Only four out of the ten stocks witness a weakening of their estimated relationship with the Indian market while the others appear to experience the opposite. Even these four cases are not backed by the Chow test and are statistically insignificant. On the whole then, these results indicate that it is difficult to generalize the impact of ADRs on the qualitative relationship of the stock with US market, but the generally held belief that ADRs lead to lower co-movement of the underlying stock with the domestic market is far from strongly applicable for Indian companies with exchange-
10 traded ADRs. In only one of the ten cases — Infosys — has ADR issue unambiguously coincided with a rise in the US beta.
4. Conclusions
In this paper, we examined various aspects of exchange-traded ADRs from India. Considering the ten ADRs of Indian origin that currently trade in the Ameriacn stock exchanges and also have the underlying stocks trading in Indian bourses, we studied the extent to which the usual predictions about ADR returns hold for this important type of cross-border securities. ADR returns appear to have unanticipated movers. The return on the underlying stock, the US-India exchange rate, the BSE national index movements as well as the movement on two important US indices — the S&P 500 and NASDAQ — together account for less than half of the total volatility of ADR returns in most cases. The ADRs enjoy considerable premium over their underlying stocks, indicating effective market segmentation between the US and Indian markets. Infosys enjoys particularly high premiums but much of its premium is determined by the swings in the NASDAQ index. US market indices also affect the premium on other ADRs from India, though to a smaller extent. The ADR returns also have low correlation with the underlying stock returns and the exchange rate, but there is no evidence of any systematic bias in the ADR returns — their excess return over their underlying stock is essentially zero in all cases. As with returns, volumes appear to have little cross-border connection as well. Only a small part of the variation in traded volume for ADR is explained by the variation in traded volume for the underlying stock. ADR issue appears to boost underlying stock prices temporarily. There is an increase in abnormal returns of the stocks (stock retum less the BSE national index retum) just prior to the ADR listing, but this increase is mostly ephemeral. There is, however, considerable variation in this effect. Finally, ADR issues do not appear to have made the Indian stocks less connected to the Indian market. The impact of the US market also does not increase in most cases.
11 Thus, the inclusion of foreign investors in a stock's pool of shareholders do not appear to have made a considerable impact in the pattern of returns for the Indian companies with exchange traded ADRs.
12 References
Foerster, S.R., Karolyi, A.G., 1999. "The long-run performance of global equity offerings", Working Paper, Ohio State University, Columbus, OH
Hansda, S.K. and P. Ray, 2003. "Stock Market Integration and Dually Listed Stocks: Indian ADRs and Domestic Stock Prices", Economic and Political Weekly, February 22, 2003.
Jayaraman,N., Shastri,K., Tandon,K.,1993. "The impact of international cross-listings on risk and retum: The evidence from American depositary receipts", Journal of Banking and Finance, vol. 17, pp.91-104.
Jitendranathan, T, T.R. Nirmalanandan and K. Tandon, 2000. "Barriers to intemational investing and market segmentation: Evidence from Indian GDR market", P acific- Basin Finance Journal, vol. 8, pp. 399-417
Karolyi, G. A, 1998. "Why Do Companies List their Shares Abroad? A Survey of the Evidence and itsManagerial Implications", New York University Salomon Bros. Center Monograph Series, Volume 7, Number 1.
Miller, D.P.,1999. "The market reaction to international cross-listings: Evidence from depositary receipts", Journal of Financial Economics, vol. 51,103 .123.
Pinegar, J.M. and R. Ravichandran, 2002. "Global and local information asymmetries, illiquidity and SEC Rule 144A/Regulation S: The case of Indian GDRs", Journal of Banking and Finance, vol. 26, pp. 1645-1673
Miller, D.P., 1999. "The market reaction to international cross-listings: Evidence from depositary receipts", Journal of Financial Economics, vol. 51,103 .123.
13 Appendix: The Data
This study looks at the 10 Indian origin ADRs that trade in US markets with their underlying shares trading in Indian bourses (those listed in Table 1 except Rediff.com and Satyam Infoway). The data comprises daily closing price observations on the ADRs and the underlying stocks, the exchange rate between the US dollar and the Indian Rupee, the value of the Bombay Stock Exchange National Index, the S&P 500 Index and the NASDAQ Index. Our data ranges from March 16, 1999 to January 17, 2003 for all stocks, except Infosys for which we our data begins on January 1, 1998, to cover a substantial pre-ADR period. The daily volume of trade for the ADRs and their underlying stocks are also recorded. All data used in this study come from DATASTREAM. Continuously compounded daily returns are computed from the closing prices as the difference in the logarithm of two consecutive daily prices (or exchange rates). Continuously compounded weekly returns are computed using closing prices. Note that for the same date in the two markets — India and the US — the Indian market actually leads the US market for time zone differences. Thus Indian markets are already closed for the day when the US markets open. Hence, in studying the effects of events in Indian markets on US markets using regressions, there is no need to consider lags, the necessary lags are already built in the data.
14 Box 1: American Depository Receipts — nature and brief history
American Depositary Receipts (ADRs) are instruments representing a foreign (non-US) stocks (or debt) that tradable in the USA. They serve as evidence of the original share being held in an American bank, known as the custodian. They are quoted and pay dividends in US dollars.
Depositary receipts can be "sponsored" or "unsponsored". Most ADRs trading today — and all from India — belong to the former category. Sponsored ADRs are issued by a depositary appointed by the company under a Deposit Agreement. Bank of New York is the most frequent sponsor of ADRs issued by Indian companies (both exchange-traded and others) followed closely by Citibank, Deutsche Bank and Morgan Stanley. There are at least tlu-ee distinct levels of sponsorship. For a Level-I sponsored ADR, the issuing company does not have to comply with the US accounting procedures or the disclosure requirements mandated by the SEC. Such ADRs are tradable in the US over-the-counter (OTC) markets. In order to be listed on an American stock exchange, Level-II sponsorship is necessary and Level-III sponsorship is required if the issuing company is raising money in the US market. ADRs can also be privately placed in the USA under what is known as the "Rule 144A" (they are called RADRs and can be traded on PORTAL, a screen-based market) or sold to non-US investors under "Regulation S". A vast majority of Indian ADRs belong to these categories and do not trade in American exchanges.
The main benefits of ADRs include easier cross-border trading and settlement and minimum transaction costs. They help American investors diversify intemationally, and foreign companies to tap the US financial markets in relatively inexpensive way. A public offer of ADRs usually took about 10 weeks for Level-I and II sponsorship and 14 weeks for Level-III sponsorship while private placement could be achieved in 16 days in 1995. Transaction costs ranged from less than $25,000 to about $ 2 million for public issues and between $250,000 to $500,000 for private placement*.
Though the first Depositary Receipts were created by J.P. Morgan, way back in 1927, and there were several unsponsored ADRs in the 1950's, the ADR market began to show moderate activity in the 70's and 80's and virtually exploded in the 90's. In 1994 about $20 billion was raised through the DR market. Out of this about $ 11 billion was raised by Level III DRs representing an increase of 633% from 1990 and over $8 billion was raised using 144A DRs, an increase of over 980% over 1990 (Miller (1999)). Figure 1 shows the growth of share volume and dollar volume of exchange-listed Depositary Receipts during the late 90's.
[Figure 1 about here]
1995 figures Source Miller (1999)
15 Table 1: ADRs of Indian origin trading in major US Exchanges
Company Exchange Effective Date Ratio (ADR: shares) Dr. Reddy's Laboratories Ltd. NYSE 11/04/2001 1:1 HDFC Bank Ltd. NYSE 25/07/2001 1:3 ICICI Bank Ltd. NYSE 31/03/2000 1:2 ICICI Ltd (now merged) NYSE 1/11/1999 1:5 Infosys Technologies Ltd NASDAQ 16/03/1999 2:1 Mahanagar Telephone Nigam Ltd NYSE 28/09/2001 1:2 Rediff.Com India Ltd* NASDAQ 19/06/2000 2:1 Satyam Computer Services NYSE 14/05/2001 1:2 Satyam Infoway Ltd * NASDAQ 1/10/1999 4:1 Silverline Technologies NYSE 19/06/2000 1:2 Videsh Sanchar Nigam Ltd NYSE 15/08/2000 1:2 Wipro Ltd. NYSE 24/10/2000 1:1
* Trading solely in US markets, not listed in India.
Source: Bank of New York website
16
Table 2: Descriptive Statistics of the data
Mean Median Maximum Minimum Std. Dev. Rs Rs Rs Rs Rs Stocks HDFC 199.17 221.75 283.95 53.55 59.59 ICICI 85.55 83.10 190.05 40.45 30.43 ICICI Bank 122.81 131.98 271.25 23.05 57.21 Infosys 4726.67 3906.70 12789.70 1294.37 2201.89 MTNL 162.89 150.23 378.55 82.20 47.72 Dr. Reddy's Lab 738.95 708.93 1130.10 343.50 181.18 Silverline Tech 244.47 190.20 1360.75 15.20 263.48 Satyam Comp Serv 322.52 256.80 1427.00 105.82 204.57 VSNL 301.08 278.00 1023.97 84.40 162.58 Wipro 1934.88 1577.18 9624.00 636.10 1220.30
US$ US$ US$ US$ US$ ADRs HDFC 14.52 14.60 17.19 12.12 1.07 ICICI 12.48 11.30 40.50 4.95 6.64 ICICI Bank 7.33 6.40 17.63 2.70 3.30 Infosys 91.14 67.43 345.00 20.00 59.76 MTNL 5.36 5.54 7.40 3.50 0.83 Dr. Reddy's Lab 19.06 19.45 25.40 10.10 3.15 Silverline Tech 5.58 2.40 27.63 0.50 6.44 Satyam Comp Serv 10.32 10.41 14.60 5.41 2.06 VSNL 9.44 9.40 17.58 3.55 3.61 Wipro 35.67 33.41 67.63 16.99 10.87
Indices BSE NATIONAL 1920.95 1745.89 3839.09 1216.37 450.79 BSE SENSEX 3896.05 3680.72 5933.56 2600.12 728.13 S&P500 1230.58 1281.42 1527.45 776.76 188.12 NASDAQ 2518.38 2345.61 5048.62 1114.11 960.69
17 Table 3: Descriptive Statistics on the ADR Premiums
Std. Effect of US Mean Median Maximum Minimum Dev. markets
HDFC 60.65% 61.30% 96.28% 41.96% 7.16% 0.15
ICICI 25.48% 22.27% 128.37% -5.67% 19.56% 0.37
ICICI Bank 15.38% 10.07% 80.74% -10.62% 18.37% 0.50
Infosys 67.97% 61.95% 194.31% 11.98% 28.68% 0.57
MTNL 1.89% 0.90% 24.12% -7.09% 4.71% 0.21
Dr. Reddy's Lab 4.04% 1.34% 33.21% -11.95% 7.74% 0.16
Silverline Tech 1.30% -0.89% 37.25% -21.20% 10.22% 0.27
Satyam Comp Serv 12.18% 12.23% 44.59% -2.64% 5.32% 0.38
VSNL 1.67% -0.52% 55.91% -10.02% 8.20% 0.24
Wipro 3.24% 2.24% 31.54% -8.50% 5.37% 0.03
18 Table 4: Characteristics of Daily Returns of ADRs
Correlation with Average Underlying Exchange Excess Stock Rate Return
HDFC 0.18 0.01 -0.00
ICICI 0.46 -0.06 -0.00
ICICI Bank 0.54 0.00 -0.00
Infosys 0.57 -0.16 0.00
MTNL 0.63 -0.06 -0.00
Dr. Reddy's Lab 0.56 0.02 -0.00
Silverline Tech 0.68 -0.16 -0.00
Satyam Comp Serv 0.75 -0.28 -0.00
VSNL 0.32 -0.03 -0.00
Wipro 0.72 -0.33 -0.00
Average 0.54 -0.10 -0.00
19 Table 5: ADR Volume and underlying share volume
Correlation R2
HDFC 0.17 0.00
ICICI 0.13 0.00
ICICI Bank 0.12 0.00
Infosys 0.54 0.02
MTNL 0.22 0.02
Dr. Reddy's Lab 0.39 0.16
Silverline Tech 0.42 0.04
Satyam Comp Serv 0.36 0.09
VSNL 0.33 0.12
Wipro 0.46 0.09
Average 0.31 0.05
20
Table 6: Effect of ADR issuance on stock returns
20-trading-day cumulative t-ratio of the abnormal returns (CAR) over the 20-day CAR difference of CAR period prior to ADR prior to issuance Mean Std. Dev. n issuance over mean CAR ** HDFC 0.026 0.130 49 0.110 4•54
ICICI 0.006 0.110 41 0.010 0.22
ICICI Bank 0.035 0.180 49 0.279 9.50**
Infosys 0.042 0.122 65 0.136 6.21**
MTNL -0.010 0.114 50 0.183 11.91**
Dr. Reddy's Lab 0.021 0.124 50 -0.187 -11.92**
Silverline Tech -0.054 0.252 49 0.269 8.97**
Satyam Comp Serv 0.013 0.188 49 0.075 2.29*
VSNL -0.016 0.152 49 -0.227 -9.74
Wipro 0.014 0.222 50 -0.098 -3.58**
Significant at 5% level ** Significant at 1% level
21 Table 7: Effect of ADR issuance on relationship of companies with domestic and US market
Pre-ADR Post-ADR Chow test
PIndia PUSA R2 PIndia PUSA R2 p-value
HDFC 0.49** 0.03 0.10 0.45** -0.07 0.10 0.24
ICICI 1.44** -0.01 0.50 0.70** 0.19 0.15 0.18
ICICI Bank 0.66* 0.07 0.08 0.46** 0.04 0.06 0.11
Infosys 1.05** -0.29 0.32 1.54** 0.36* 0.52 0.00
MTNL 0.94** -0.21 0.26 1.58** -0.51* 0.43 0.28
Dr. Reddy's Lab 0.51** -0.29 0.13 0.78** -0.11 0.25 0.48
Silverline Tech 1.86** -0.66 0.56 2.36** -0.20 0.54 0.08
Satyam Comp Serv 1.84** -0.30 0.54 2.09** 0.02 0.67 0.61
VSNL 1.19** -0.32 0.25 0.71** 0.14 0.13 0.37
Wipro 2.16** -0.26 0.61 2.22** 0.44* 0.73 0.17
* Significant at 5% level ** Significant at 1% level
22
Fig. 1: The Growth of ADRs during the late 90's
35 1400
30 - 1 !Share Volume - 1200 —0—Dollar Volume
n(1 25 - -1000
c 20- -800 ta
15-a) -600
a) 10- -400 0 .c 5- -200
0 0 1996 1997 1998 1999 2000 Years
Source Bank of New York (2001)
23
Fig. 2: The Proportion of Variation in ADR Retums Explained (R-squared)
0.7
0.6 WAMTewermwe aWe WM 1MM11MM WAMM 1MMIMMO a -o WIT WAMM . 0.5 1MM VMMWO c al aWAMM a WAMM al%%MY( a g a WAMMVMMWO al WAMM g 0.4 am mem WAMMVMMWO 1111111111 WITa WAMM 1111111111 WIT WAMMVMMWO MIMI %%MY( WAMM > 1111111111 WIT %We m M4444441 1111111111a WM WIT a M11111111 a 1111111111 al WM CPc 0 3 al• ++.,,,.,..rrn al alIT ++.,,,.,.,rtrt o !NW al alIT al alIT a a'15 M11111111 1111111111 MIIIIIIT 1111111111 111111111T %We 2 MAWm,,,,,,T all% al alIT al alIT al a 0_ 0 2 MIIIIWO MIMI (MM. MIMI %%MY( WTI~MI a YMMA alanati 1111111111 WIT MIMI %We 1111111111 al ave WTI 1111111111 MIIIIIIT>TM> M11111111MIMI 1111111111MIMI MIIIIIITMIIIIWO WWI WM%We ,,,,,n,, alIT all a alIT aIIIIIIm alIT al ++.,,,.,.,rtn 1111111111 mmIIII a 1111111111 111111111T WWI VMMWO 1111111111 MIIIIIITWIT M11111111 1111111111a MIIIIIITWIT al1111111111 aTe111111111T WTIWWI a%We 0 1 al•al al "wava MIMI VMMWO a1111111111 alIT al a WIT WINTMMW WM1•%Wea IIIIIIm MAW mmIIII wawa Nife*WeMIIIIWO a a MIMIMAIM W(MYM ~AV al MIIT al ap, MIIT wawa/111111111 a; al ++.,,,.,.,rtn MAW 0 HDFC ICICI ICICI Ba k Int osy MTNL Dr Reddy s Silveri' e Satyam VSNL Wipro Computer Services Companies
24
Figure 3: Percentage Premiums on ADRs
200 200 2
150- 150 150 150 )
100- 100 100 100 W
eli II- 50 50 50 1414"‘14 k 0- 0 0 fiSt44#040001‘4040 0
.... , .... , .... , ...... , .... , .... , .... , 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 3/1999 1221/99 92900 7/0301 4/09/02 1/1403 3/1999 1221/99 92900 74301 4/09/02 1/14/03 3/1999 1221/99 92600 7/0301 409/02 1/14/03 3/1999 1221/99 92600 70301 409/02 1/14/03
1 — PREMIUM HDFC 1 1— PREMIUM 101 01 1 1— PREMIUM I CI CIBK 1 1— PREMIUM INF) 1
200 200 2
150150 150 150
100 100 100 100
T 50 50 50
0 0 0 0
3/1 9 12/21/9 926,00 7/03/01 902 1/1 3 3/1 9 12/21/9 926/00 7/03/01 902 1/1 3 3/1 9 12/21/9 9/2600 7/03/01 902 1/1 3 311. • 9 1221199 92600 7/0301 • 19/02 1/1 , 13
1 — PREMIUM MTN L 1 1— PREMIUM REDDY 1 1— PREMIUM SILVR 1 1— PREMIUM 3/100 1
200 2
150
100
50 T -
el#A,Alkeltorplien 0 COO/AVIIVLI 0 -
211999• 12214 92900 7/02101 4/09/02 1/14/03 2/199912214 92900 70301 4/09/02 1/1403
1 — PREMIUM VSNL 1 1— PREMIUM ". NPRO 1
25 Fig. 4: Average CAR around ADR issuance
12%
10%
Ajt 2%
2% -25 -20 -15 -10 -5 0 5 10 15 20 25 Event Date
26 Exhibit B
Part 2 Exhibit 15 INDIAN • JOURNAL OF FINANCE AND RESEARCH filA oig _____„, t . i - --Alt.' 411." i,,-----41i 011040 i tp.40.- _,. 0 011. go__Imett I,' Nat- 0.1"1111 ...1"11.41.ITP" ! Al.. 411110- '10ilhb.‘Wn II boo...... A101111' I 1 4410.1 0 0 -W A i •,,. - 4 I I I 111 - '
, Awgzem,.‘•;:i-a.FAII1 A a at nia n Indian Financial 1 Management Association isnImemommemmommmir.- _
Indian Financial Management Association
Indian Journal of Finance and Research vol. v, No. 2 July, 1994
CONTENTS
M. Obaidullah Internationalisation of Equity 1-6 Portfolios: Risk and Return in South Asian Security Markets
Devashis Mitra and The Impact of Expected Inflation 7-12 Muhammad Rashid on Corporate Capital Structure : A Diagrammatic Review of the Literature
' Sidharth Sinha High Price-Earnings Ratio of the 13-25 Indian Stock Market and Investment by Foreign Financial Institutions
R. Vaidyanathan and Efficiency of the Indian 27-40 Kanti Kumar Gali Capital market
Sanjay Sehgal The Distribution of Stock 41-54 Market Returns : Test of Normality
Jasim Abdulla Nominal Stock Returns ind 55-65 and P.L. Joshi Inflation Rates : Indian Evidence
Adesh Sharma Investment and Financing in 67-83 Pesticides Industry in India
K.S. Sastry Use of 2' Score in Selective 85-88 Privatization in Mauritius—A Note
IFMA Annual Conference
Printed and Published by Dr. G.L. Sharma, Managing Editor, on behalf of the Indian Financial Management Association, and printed at Ashish printers & Publication Pvt. Ltd., 1815 Udai Chanel Marg, Kotla Mubarakpur, New Delhi-110 003, Td: 4618335, 4633131 28 Indian Journal of Finance and Research
Fora market to be efficient in the strong or semi-strong form, it must be efficient in the weak form. In this paper, a test of the weak form of efficiency is done for some actively traded stocks on the Bombay Stock Exchange. Weak Form Efficiency If the market is weakly efficient past security prices cannot be used to predict future prices. This means that there are no patterns in share prices and prices do not exhibit any kind of momentum. In other words, the price changes are random. However, this does not mean that there cannot be trends in prices in the long term. Over a period of time, there may be a secular rise in prices but the changes in prices are random. When a sequence of prices is such that the expected value of price in one period is equal to or greater than the price in the previous period, it is said to follow a stochastic process known as a submartingale. In such a process the expected value of future price changes is independent of past price changes.
The Random Walk model of efficiency is more stringent. I t asserts not only that the expected value of future price changes is independent of past price changes bu t also that the whole probability distribution of fu Lure changesbe independent of past changes and identical from period to period.
The random walk hypothesis holds that all price changes are serially indepen- dent; that trends are spurious or imaginary manifestations, and that tools of technical analysis such as charts or the Dow Theory are without much investment value. t is to be noted that randomness does not imply that stock prices cannot have an upward or downward trend over a long period of time. Trends in stock prices are perfectly consistent with the random walk hypothesis. The objective of our paper is to test for randomness in the movement of share prices of selected shares. Establishing randomness in the movement of share price would eonsti tute evidence in support of the weakly efficient market hypothesis. We have used the runs test for four different points of time during the period 1980 to 1990. This would enable us to see whether there is any change in the weak form of efficiency of the Indian stock markets over the years, i.e., during the decade of the eighties. Further, we have also examined the share prices during the 1989-90 period more closely using serial correlation and filter tests, in addition to the runs test. • 111.Mn70- IM 9111-
Efficiency of the Indian Capital Market 29
Literature Review Several authors have tested for randomness of the Indian capital market. Most Indian studies have used the runs test and serial correlation test for testing for the weak form of EMH. Other techniques used were spectral analysis, filter rules and Spearman's rank correlation test. Barua, Raghunathan and Varma (1994) have given a detailed listof studies on the India n capital market. Obaidullah (1994) also provides a review of the literature on the Indian capital market. Rao and Mukherjee (1971) used spectral analysis to test the random walk model. However, they used the weekly average prices of only one company over a 16 year period (1955 to 1970). They separated the trend component using simple moving averages, and the deterended series was used as the input for spectral analysis. A large number of spectral estimates were found to fall within the appropriate 95% confidence band. I t wasconcluded that the random-walk-hypoth- esis held for the company studied (Indian Aluminium Company). However, it is difficult to generalize the results since the sample consisted of only one company. Ray (1976) studied seven daily index series and conducted runs test, serial correlation test and spectral analysis. He studied the period from January 1966 to July 1972. He found that the random walk model held only for iron and steel, and cement industries. The behaviour of market indices of Bombay, London and New York stock exchanges was compared by Sharma and Kennedy (1977). They used the runs test and spectral analysis techniques on the monthly data from 1963-73 and found that BSE stocks obey random-walk model. Banta (1981) analyzed daily price changes of 20 securities from July 1977 to June 1979. He found no dependency in individual security price changes but the market index exhibited significant serial dependence.
Sharma (1983) analyses weekly returns from 23 actively traded stocks in BSE over the period 1973-78. The integrated moving average form of the Random-walk model was fitted and was found to be an adequa te representation of price changes except for two stocks. The two stocks which did not find the fit were those for which adjustment was not made for rights and bonus issues. Rarnachandran (1986) tested for the weak form of EIvIH using weekend prices of 60 scrips covering the period 1976-81. He used filter rule tests in addition to runs and serial correlation tests, and found support for the weak font of EMH. For filter 30 Indian Journal of France ami Research rule tests, he used filters ranging from 1% to 49% and assumed transaction costs of 2.5% and carry forward charges of 20% per annum. Assuming that the investor utilizes the carry forward facility, he compared the filter returns from a buy-and- hold strategy and a sell-and-hold strategy. He found that filter rule strategy provided inferior returns. Rao (1988) has done three tests on his sample data covering 10 blue chip companies from July 1982 to June 1987, using week-end prices. All the three tests, namely serial correlation, runs and filter tests, confirmed the weak form of effi- ciency. Serial correlation test was done for lags from 1 to 10 periods. 80 out of 100 coefficients were found to be within the two-standard deviation band and only four coefficients are beyond three standard deviations. Using fitters of 3, 5 and 10 percent, he found that even without providing for any transaction costs, the buy-and-hold strategy outperformed the filter rule trading strategy in all the cases. Yalawar (1986) examined Spearman's rank correlation in addition to perform- ing the runs test and found support of the weak form of EMH. Gupta (1989) used week-end closing prices of 39 shares from January 1971 to March 1976 and tested the log random walk model, and found support for the weak form of efficiency using serial correlation and runs tests. Obaidullah (1990) used weekly prices covering the period 1985-88 and examined serial correlation and runs, and found support for the weak form of the EMH. Chaudhuri (1991) also tested the log random walk model, but 1 reached different conclusions. He used daily price quotations of 93 actively traded shares for the period January 1988 to April 1990. 70 shares were found to have significant autocorrelation for 1 day lag. 17 shares were significant for a lag of 2 days or more. The results do not seem to support the weak form of efficiency. However, the correlation coefficients area of small magnitude. None of them are greater than 0.5. The results are also confirmed by the runs test where the difference between expected and actual number of runs is significant for 49 shares. The difference of the findings from that of earlier research findings was attributed to the shift in markers pricing efficiency with respect to individual shares. Many of the above studies used weekly or monthly data. Some patterns may escape detection when we use longer intervals. Use of daily data may improve chances of detecting any patterns or serial dependency. Among the above studies, Barua (1981), Ray (1976), and Chaudhuri (1991) have used daily data. While most studies found evidence in support of the weak form of EMH, Ray (1976) and Efficiency of the Indian Capital Market 31
Chaudhuri (1991) seem to contradict the findings of the others. We use daily data and test for serial dependency using run s test and serial correlation test. We also use filter rule tests to see if the serial dependencies, if any, are profitable.
Methodology
The sample covered in our stud y consi sts of ten acti vely traded companies.The runs test was done at four different poin ts in time, namely 1980,1985,1989 and 1990. In each year the period from A pril to November wa s covered so tha t at Ices t 120 da ily data points are available for each company. The test was done over four different periods separately. This will give us an idea of the efficiency of the Bombay Stock Exchange over a period of time.
In addition, we also used data for the period April 1989 to November 1990(20 months) and performed the analysis for the ten scrips and three market indices, namely the Economic Times Index of Ordinary Shares-All India (ET Ind.), the BSE Sensitive Index (Sensex) and the BSE National Index (Natex). This extended period was used to see whether using more data would affect the results.
A sample of ten companies listed on the Bombay Stock Exchange were selected from the specified group. The criteria used in the selection were availability of data over the study period and the scrip being actively traded so that missing data is minimized. The scrips selected are given below with their respective short forms that we used for the companies in the brackets:
The Associated Cement Companies (ACC) Bombay Dying (B.DYE.) Century (CENTURY) The Great Eastern Shipping Co. Ltd. (G.E.S.) Hindustan Level Ltd. (H.L.L.) Larsen & Toubro Limited (L&T) Reliance Industries Limited (RELIANCE) Tata Engg. & Locomotive Co. Limited (TELCO) The Tata Iron & Steel Co. Ltd. (TISCO) Zuari Agro (ZUARI) In each period closing share prices are collected over a period of eight months from The Economic Times and the Stock Exchange Review. Closing share prices are used for all days to ensure consistency. Further, utilising closing prices facilitate 3. 1fl.; ,ILTWY1,1 C n i?:,41 in c , t 1P. cross-checking since the previous day's closing prices are also given. The periods covered by our study are: 1.4.1980 to 30.11.1980 1.4.1985 to 30.11.1985 1.4.1989 to 30.11.1989 1.4.1990 to 30.11.1990 1.4.1989 to 30.11.1990
The last period included the third and fourth periodsgiven above. Some of the shares were not traded on a few days. The occasions are very few and it is expected that this will not have any significant effect on the test. The Runs Test This test analyses changes in sign of price changes, and checks for randomness I based on number of run. This test tries to detect temporary trends for varying periods, which may not be detected by filter tests and correlation tests. Since each observation is counted equally regardless of size, it removes potential problems of non normality in identifying independence. However, run analysis is not a powerful test and it is suggested by some that they have stronger statistical than economic interpretation. From the price series of each scrip, the return over the previous trading day was computed. The runs test was done using the return series. No adjustment has been made for di vid ends, bonus or rights issues. Since the tests use only the direction of change and not magnitude, we feel that this would not significantly affect the results. The runs test was done using SPSS. One group consisted of the negative price changes (-'s) and the second group consisted &positive and zero price cha nges (+' s). From the return series constructed by us the number of 'runs' is determined. A run is a continuous sequence of changes of the same sign in the difference series. The total number of such runs in the difference series gives the value of the runs- statistic (r-statistic). The r-statistic follows a normal distribution with a mean and standard deviation given by the following formulae.
g(ri) - 2/11 n2 + 1 (n1 + n2)
2 ni n2(2 ni n2 - - n2) a(r) - (n1 + n2) (ni + n2 - 1) Efficiency of the Indian Capital Market 33
where ni = No. of occurrences of +'s in the series n2 = No. of occurrences of —'s in the series The normal distribution .statistic 'z' is given by
z . ri— WO a( ri)
If the price changes are random then the value of r is expected to be equal to the mean value of r. The hypothesis to be tested may be stated as follows for each case (series). , Ho : r = -01 ; Price changes are random. I-1, : r <>11(r) ; Price changes are not random. The hypotheses are tested at 5% and 10% significance levels.
Runs Test Results and Interpretation The results are summarized in Table 1 which shows the series which are significant at 5% or 10% levels (2-tailed test).
Table 1: Summary of Runs Test Results
1 YEAR COMPANY 1980 1485 1989 1990 1989-90 ACC NS NS NS NS NS BOMBAY DYEING SSS NS NS NS NS CENTURY S NS NS NS NS . G.E.S. NS NS S NS S 1 H.L.L. NS NS NS NS NS I Uri' NS NS SSS NS NS RELIANCE NS NS NS NS NS TELCO NS S NS NS NS TISCO NS NS NS NS NS ii:UARI NS NS NS NS NS i ET Ind. S Sensex NS Natex 9 • Legend: NS : Not significant - i.e., at neither 5% nor 10% S :Significant at 5% . SSS : Significant at 10% .111,1/4o-1 ji 14 Ina/ of 1 ilititic -C anti Rt :Wein 11
When the r-statistic is 'not significant' it means that it is not significantly different from its mean p.(r), implying that the price changes are random. From the above table it can be seen that except for the series CENTURY (1980), TELCO (1985) and G.E.S. (1989) none of the null hypotheses can be rejected at 5% significance level. At 10% significance level the hypothesis can be rejected in two additional cases, namely BOMBAY DYEING (1980) and L&T (1989). Out of a total of 40 cases thenull hypothesis can be rejected only in 1 ive cases at a significance level of 10%. The results suggest that the market was weakly efficient throughout the period under study. We have also done the test for the extended period from April 1989 to November 1990 for the ten scrips and also for three market indices. We found for three series the number of runs is significantly different from the expected number of runs. Out of these three, two are market indices, namely BSE National Index and the ET All India index. Perhaps, wecan interpret thisas theseriesbeing random only for very actively tradcd scrips. Tests of Serial Correlation The return series were calculated for the individual scrips and for the three indices in the following manner. R, = (P, —P ,)/P, where R, = Return over the previous trading day Price at period t P, 1 = Price a t period t — 1. The autocorrela tion of the return series wasexamined for the period April 1989 to November 1990. The autocorrelation coefficients were computed using the SPSS package. The returns have been adjusted for stock splits and bonus issues where data was available. For the other series, we observed the price series and could not find any drastic changescharacteristic of bonus or rights issues, and no adjustments have been made for these series. No adjustment has been made for dividends. Serial Correlation Test Results and Interpretation The a utocorrelation coefficients were computed from the return series using SPSS, and the results are given in Table 2.
Efficiency of The Indian Capital Market 35
Table 2: Serial Correlation Coefficients Lag ACC BDYE Lk T REL TELCO TISCO CENT 1 -.111* -.035 -.042 .013 -.077 .028 -.076 2 .061 -.084 -.106 .054 -.086 -.108* -.019 3 .084 .086 .015 -.004 -.037 -.002 -.049 4 -.029 .078 .104 .103 .108* .160* .108* 5 -.024 -.055 -.006 .073 -.013 -.076 -.138* 6 .013 .072 .102 -.003 -.068 -.047 .040 7 .043 .030 .076 -.043 .040 .000 -.018 8 .103 -.006 -.206* -.011 -.031 -.032 -.069 9 .084 -.060 .033 -.075 .042 -.082 -.036 10 .029 .162* .065 .016 -.043 -.017 .046 11 .093 .043 -.052 .012 .057 .089 .072 12 -.100 -.075 -.073 .085 -.133* -.026 -.017 13 .097 .033 .014 .073 .098 .057 .026 14 .001 .065 -.056 .039 -.011 .004 -.037 15 -.004 -.109* -.051 -.009 -.046 .037 -.019 16 .061 -.002 .071 .077 .034 .053 .011 BL 27.166** 30.268** 38475** 16.777 25.172 24.668 20.066
Table 2 (Continued) ET Lag CES HLL ZUA RI SENSEX NATEX INDEX 1 .081 .030 -.119* .042 .056 .291* 2 -.109* .059 -.123* -.191 .005 .011 3 -.159* -.036 .095 -.013 -.086 -.025 4 .037 .001 -.039 .169* .171* -.023 5 -.054 -.045 -.046 -.110* -.054 .088 6 .048 .055 .079 -.029 .056 .051 7 -.018 .018 -.032 .028 .012 .010 8 -.060 -.063 -.067 .016 -.044 .062 9 -.029 -.010 .090 -.014 .008 .046 10 .055 -.100 .036 -.023 .040 -.040 11 , .086 .033 .026 .083 .086 -.007 12 .014 -.041 -.099 .063 .029 .037 13 -.007 .094 -.012 .085 .062 .044 14 -.010 -.091 -.082 -.078 -.026 .095 15 -.016 .002 -.063 -.015 -.020 .124* 16 .021 -.037 .007 .073 .046 .065 BL 23.282 16.478 29.663** 30.097** 22.838 53393** Legend; * Autocorrelation coefficient is outside the two standard deviation limits. L: Box-Ljung statistic for 16 lags tt ** : Box-Ljung statistic is significant at 5% ihi Indian journal ( I Fwanee and 1:t m41 t
Out of the 208 autocorrelation coefficients computed, only 19 are outside their two-standard-deviation limits. Thus this test gives supportive evidence for the weak form of efficiency. However, the Box-Ljung statistic is significant at 5% level for 6 series. Thatmeans that in the caseof these 6 series, the joint hypothesis, that the autocorrelation coefficients for all the 16 lags are zero, is rejected . That is, at least the coefficient is significant for at least one out of the 16 coefficients. Looking at the magnitude of the coefficients. we can see that the maximum absolute value of the coefficients is 0.206. There may not be profitable opportunities because of these low magnitudes, even in cases where the coefficients are statistically significant. We get further confirmation on this from the tests on the filter rule trading strategy. Filter Rule Tests Fitter rule tests have a direct economic interpretation. We can see the return earned by using a certain trading rule and comparei it with the buy-and-hold strategy in the same stock. We can easily make inferences about whether the trading rule is profitable by adjusting the excess returns for transaction costs. In the case of runs test and serial correlation test, we cannot easily determine whether the statistically significant results provide any profitable opportunities. The filter rule has been defined with the assumption that short-sales are not allowed. The rule we have used can be stated as follows: If the price of a security rises at least x percent, buy and hold the security until its price drops at least x percent from a subsequent high. Then, liquidate the long position and retain cash until the price reaches its next trough and then rises x percent. A filter rule test basically tests whether the stock price series exhibits any momentum and if so whether it is profitable. The price series has been adjusted for stock splits and bonus issues where data was available, but no adjustments have been made for dividends. Initially, the trader was assumed to have a cash position. He will keep monitoring the price level for troughs. When the price rises by x% from the trough (least price from April 1989 to date), he will purchase the securities for a notional amount of Rs.1,000. Then, he will monitor the peaks and compare with the current price. When the price falls by x% from the high (the peak price from the date of purchase), he will sell his holdings and retain cash. Then he will monitor the price and compare with the troughs. When the price rises by x% from the trough (lowest price since the previous sale date), he will convert his cash position to a longposition in the security. It may be noted that the operator can also go short in the scrip, while retaini ng his holding. When the rule gives a buy signal, he covers his short position and
Efficiency of the Indian Capital Market 37
reinvests the gain (or disinvests to cover the loss) in the scrip. In terms of return computation, his procedure is the same as the procedure outlined earlier. We have assumed, however, that unlimited short-sale is not allowed. It has been assumed that the trading strategy will be self-sufficient. We have not considered separately the transactions of each settlement period falling within our study period. It may mentioned that if carry-forward charges are incorporated then the excess returns will be lower. The return from the trading rule was computed for the overall period based on the value of the final investment on 30 November 1990 and the initial investment on 1 April 1989 (which was assumed to be Rs.1,000). This was compared to the strategy of buying the securities on the starting date and liquidating the position on the ending date. For each series, seven filter rules were examined with fil ters of 0.5%, 1%, 2%, 3%, 5%, 10% and 20%. The excess of returns from the trading strategy were computed with two different assumptions about transaction costs, namely 0% and 1%. The actual brokerage cost will be different for different scrips. According to the official brokerage schedule of the Madras Stock Exchange, the brokerage as a percentage of the scrip price declines as the scrip price increases. The brokerage approaches 1% for high priced scrips like Century. For our study, we have assumed a brokerage of 1% taking this as the minimum brokerage that is charged to investors. If the filter rule is not profitable at this cost, it will not be profitable at higher brokerage costs either. These returns were compa red with the returns from the buy- and-hold strategy.
Filter rule test results and interpretation: The res ults of the test are given in Tables 3 and 4. Table 3 gives the excess of returns obtained using the filter rule over the Table 3: Excess Returns of the filter rule over the buy Sc hold strategy Filters Coeff. of Company 0.005 0.01 0.02 0.03 0.05 0.1 0.2 Variation ACC -3.9837 -3.6171 -3.1613 -2.8759 -3.5647 -0.9364 -0.9191 0.9581 B.DYE. -0.8444 -0.8260 4)5278 -0.5354 -0.6247 -0.3375 -0.2799 0.4128 L & T 1.5143 0.8210 03287 0.4496 0.6986 0.7975 0.2629 02519 RELIANCE 0.0089 0.0288 0.6910 0.2667 0.1168 0.3169 0.1738 0,4021 TELCO -1.4883 -1.1467 -0.6928 -1.3940 -1.5475 -1.0473 -0.4409 0.3619 TISCO -0.1205 0.0024 0.0738 0.0650 0,1485 -0.1992 -0.0687 0,1958 CENTURY -03539 -0.6480 -0.7182 -116408 -0.0537 -0.6743 -0.4362 02994 0.5836 0.3839 0.2407 0.0701 0.0237 -0.1072 0.2361 0.0992 H.L.L. -0.1091 -0.0126 -0.0803 0.0837 -0.1782 -0.2760 -0.2574 0.1832 ZUAR1 -0.0446 -0.0760 -0.0710 -0.0780 0.0370 -05002 -0.0924 0.1163 SENSEX 0.0380 00838 -0.0684 -0.1087 -0.0847 -0.0954 -0.1344 0.2410 NATEX 0.2078 0.2062 -0.1174 -0.0610 -0.1755 -0.4241 -0.1887 0.2151 ET IND. 0.4986 0.3238 -0.0318 0.1460 -0.0307 0.0227 -0.1271 0.1997 AVERAGE -0.3303 41.3443 -0.3027 -0.3548 -0.4027 -0.2662 -0.1748
L 38 Indian Journal of Finance and Research return obtained from a simple buy-and-hold strategy, assuming that there are no transaction costs. Table 4 gives the figures for the case when tra nsaction costs are 1%.
From Table 3 we can see that in 34 out of 91 cases the excess return is positive, though at higher filter levels, the number of positive return cases is lesser. We could not observe any consistent pattern in the relationship between excess return and filter level, or between the excess return and the number of transactions. We also examined the coefficients of variation (standard deviation/mean) of the various series. However, there does not seem to be any relationship either between the coefficient of variation and the excess return, or between the coefficient of variation and the absolute magnitude of the excess return. Interestingly, in the ca se of Reliance, L & T and G. E. Shipping (GES) the excess return is positive for almost ail the cases. For GES, we obtain similar results with the runs test and serial correl a ti on test for the 1989-90 period. The runs test is significant and the au tocorrelation coefficients for lags 2 and 3 are significant. For the other two series, the results are not supported by the other two tests. The runs test does not show significance for either of the two scrips. For Reliance, none of the autocorrelation coefficients is significant. For L & T, the autocorrelation coefficient with lag 8 is significant at 5% (falls outside the two standard deviation band). This shows that for operators with no transaction costs, the filter rule is profitable forsome scrips. However, the operator can only makea profit if he knows, in advance, which scrips and which filter is profitable. When we introduced transaction costs, the number of positive excess return cases has reduced dramatically. With transaction costs at 1%, Table 4 shows that
Table 4: Net Excess Returns of the Filter Rule Over the Buy & Hold Strategy with Brokerage at 1% Filters Company 0.005 0.01 0.02 0.03 0.05 0.1 0.2 ACC -5.9896 -5.6671 -5.0102 -4.5311 -4.4499 -1.5825 -1.1438 B.DYE. -2.0684 -1.9769 -1.5749 -1.3394 -1.1281 -0.6154 -0.3656 L &T -0.4620 -0.5139 -0.3981 -0.3329 0.0839 0.4607 0.1331 RELIANCE -0.9546 -0.9181 -0.5257 -0.5439 -0.4234 0.0314 0.0638 TELCO -2.5336 -2.2786 -1.7768 -2.0322 -1.9393 -12185 -0.4649 TISCO -1.0639 -0.9126 -0.6528 -0.5112 -0.2061 -0.3767 -0.1209 CENTURY -1.7491 -1.6402 -L3696 -1.1458 -0.3396 -0.8232 -0.4541 G.E.S. -0.3293 -0.3320 -0.2662 -0.2738 -0.1777 -0.1861 0.2173 I-LL.L -1.0400 -0.7769 -0.5867 -0.2586 -0.3956 -0.3559 -0.2850 ZUARI -0.6590 -0.6448 -0.5474 -0.5071 -0.2666 -0.5994 -0.1351 SENSEX -1.0929 -0.9355 -0.7319 -0.5988 -0.3957 -0.2157 -01646 NATEX -0.8559 -0.6659 -0.6496 -0.4719 -0.4038 -415115 -0.2159 ET. IND. -0.6016 -0.5039 -0.5049 -0.1728 -0.1932 -0.0358 -0.1537 AVERAGE -1.4924 -1.3666 -14227 -0.9784 -0.7873 -0.4637 -0.2377 Efficiency of the Indian Capital Market 39 only 6 out of 91 cases have positive excess returns. These six cases are in the scrips Reliance, L T and G.E. Shipping. As the filter level increases from 0.5% to 20%, the number of transactions comes down. (The number of transaction costs would be higher with the lower filter levels. These transaction costs have a substantial effect on the returns. For example, consider the case of ACC which has given a return of 562% over the period under consideration with a simple buy-and-hold trategy. Using a filter of 05%, the strategy generates a total return of only 164%, However, the filter rule strategy also results in 142 transactions. Assuming a brokerage cost of 1%, the return from the strategy is -37%. The loss due to transactions is not limited to the 142 cases of brokerage paid out at 1% each time- it also includes the opportunity cost of not investing the amount paid out as brokerage in the stock. Thus, though opera tors wi th zero transaction costs may be able to make profi ts from using the filter rule trading strategy, general investors cannot hope to make profits from such a strategy. However, the filters for which the rule is profitable are different for different scrips. For the operators to profit from the rule, they should know in advance which filter level is profitable. Thus, unless the profitable rules are stable over time, even these operators may not be able to make profits. On the average, as we can see from the bottom row of Table 3 no rule is profitable. The average excess return for all the filters is substantially negative even for the case where there are no transaction costs. We have also computed excess returns assuming a brokerage of 2% though we have not shown the full results here. In this case, we found that in two of the above six cases of excess return (with 1% brokerage) became negative. Thus only 4 cases out of 91 were positive. Conclusion We have tested the weak form of efficiency using three tests, namely the runs test, seriai correlation test and the filter rule test using daily data. For the runs test, we have covered four different time periods. For all these periods, the runs test provides supportive evidence for the weak form of the efficient market hypothesis (EMH). The serial correlation and filter nile tests a Iso were performed for the period from April 1989 to November 1990 in addition to the runs test. The evidence from all the three tests support the weak form of EM H. With an unrealistic assumption like zero transaction cost, it may be possible to identify profitable opportunities for using filter rules provided the patterns are stable over time. 40 Indian Journal of Finance and Research
REFERENCES Ba rua, 5.K. (1981). 'The Short-run Price Beha viour of Securities- Some Evidence of Efficiency on Indian Capital Market", Vikalpa Vol. 6, No.2. Barua, Samir K., V. Raghunathan and Jayanth R. Varma (1994), "Research on the Indian Capital Market: A Review", Vikalpa, Vol. 19, No. 1 (Jan-Mar.), pp. 15-31. Chaudhuri S.K. (1991). "Short-run Price Behaviour: New Evidence on Weak Form of Market Efficiency", Vikalpa, Vol. 16, No. 4 (Oct-Nov), pp. 17-21. Gupta, 0.1'. (1989), "An Empirical Testing of Random Walk Hypothesis in India", in Gupta, 0.1'. (1989) (ed.) Stock Market Efficiency and Price Behaviour : The Indian Experience, New Delhi Anmol Publications, pp. 133-160. Madras Stock Exchange (1991), The Madras Stock Exchange Official Year Book. Obaidullah, M. (1990), "Stock Market Efficiency: A Statistical Inquiry", Chartered Financial Analyst, July-August. Obaidullah, M (1994) Indian Stock Market : Theories and Evidence, Hyderabad : ICFAI. Ramachandran, J. (1988), Behaviour of Stock Market Prices, Information Assimilation and Market Efficiency, unpublished FPM thesis, [IM Ahmedabad. Rao, N.K. and Mukheriee, K. (1971). "Random Walk Hypothesis : An Empirical Study", Arthaniti, vol. 14, No. 1 & 2, pp 53-49. Rpt_ in Gupta 0.1'. (1989) (ed.), Stock Market Efficiency and Price Behaviour: The Indian Experience, New Delhi : Anrnol Publications. • Rao, Krishna N. (1988). "Stock Market Efficiency : The Indian Experience", Proceedings of National Seminar on Indian Securities Market : Thrust and Challenges, March 24-26. University of Delhi. Rpt. in Gupta. 0.1' (1989) (ed.). Stock Market Efficiency and Price Behaviour : The Indian Experience, New Delhi : Anmol Publications. Ray. D. (1976). "Analysis of Securi ty Prices in India", Sankhya, vol. 38, series C, part 4, pp.149- 164.
Sharma, J. L. and Kennedy, E. (1977). "A Comparative Analysis of Stock Price Behaviour on the Bombay, London and New Stock Exchanges", journal of Financial and Quantitative Analysis, September. Sharma, J.L. (1983). "Efficient Capital Ma rkets and Random Character of Stock Price Behaviour in a Developing Economy', Indian Economic Journal, vol. 31, no. 2 (Oct-Dec), pp. 53- 70, Rpt, in Gupta, 0.1'. (1989) (ed) Stock Market Efficiency and Price Behaviour: The Indian Experience, New Delhi : Anmol Publications. Yalawar, Y.13. (1986), Rates of Return & Efficiency on Bombay Stock Exchange, Research Monograph, I IM, Bangalore
1, Exhibit 15 INDIAN • JOURNAL OF FINANCE AND RESEARCH filA oig _____„, t . i - --Alt.' 411." i,,-----41i 011040 i tp.40.- _,. 0 011. go__Imett I,' Nat- 0.1"1111 ...1"11.41.ITP" ! Al.. 411110- '10ilhb.‘Wn II boo...... A101111' I 1 4410.1 0 0 -W A i •,,. - 4 I I I 111 - '
, Awgzem,.‘•;:i-a.FAII1 A a at nia n Indian Financial 1 Management Association isnImemommemmommmir.- _
Indian Financial Management Association
Indian Journal of Finance and Research vol. v, No. 2 July, 1994
CONTENTS
M. Obaidullah Internationalisation of Equity 1-6 Portfolios: Risk and Return in South Asian Security Markets
Devashis Mitra and The Impact of Expected Inflation 7-12 Muhammad Rashid on Corporate Capital Structure : A Diagrammatic Review of the Literature
' Sidharth Sinha High Price-Earnings Ratio of the 13-25 Indian Stock Market and Investment by Foreign Financial Institutions
R. Vaidyanathan and Efficiency of the Indian 27-40 Kanti Kumar Gali Capital market
Sanjay Sehgal The Distribution of Stock 41-54 Market Returns : Test of Normality
Jasim Abdulla Nominal Stock Returns ind 55-65 and P.L. Joshi Inflation Rates : Indian Evidence
Adesh Sharma Investment and Financing in 67-83 Pesticides Industry in India
K.S. Sastry Use of 2' Score in Selective 85-88 Privatization in Mauritius—A Note
IFMA Annual Conference
Printed and Published by Dr. G.L. Sharma, Managing Editor, on behalf of the Indian Financial Management Association, and printed at Ashish printers & Publication Pvt. Ltd., 1815 Udai Chanel Marg, Kotla Mubarakpur, New Delhi-110 003, Td: 4618335, 4633131 28 Indian Journal of Finance and Research
Fora market to be efficient in the strong or semi-strong form, it must be efficient in the weak form. In this paper, a test of the weak form of efficiency is done for some actively traded stocks on the Bombay Stock Exchange. Weak Form Efficiency If the market is weakly efficient past security prices cannot be used to predict future prices. This means that there are no patterns in share prices and prices do not exhibit any kind of momentum. In other words, the price changes are random. However, this does not mean that there cannot be trends in prices in the long term. Over a period of time, there may be a secular rise in prices but the changes in prices are random. When a sequence of prices is such that the expected value of price in one period is equal to or greater than the price in the previous period, it is said to follow a stochastic process known as a submartingale. In such a process the expected value of future price changes is independent of past price changes.
The Random Walk model of efficiency is more stringent. I t asserts not only that the expected value of future price changes is independent of past price changes bu t also that the whole probability distribution of fu Lure changesbe independent of past changes and identical from period to period.
The random walk hypothesis holds that all price changes are serially indepen- dent; that trends are spurious or imaginary manifestations, and that tools of technical analysis such as charts or the Dow Theory are without much investment value. t is to be noted that randomness does not imply that stock prices cannot have an upward or downward trend over a long period of time. Trends in stock prices are perfectly consistent with the random walk hypothesis. The objective of our paper is to test for randomness in the movement of share prices of selected shares. Establishing randomness in the movement of share price would eonsti tute evidence in support of the weakly efficient market hypothesis. We have used the runs test for four different points of time during the period 1980 to 1990. This would enable us to see whether there is any change in the weak form of efficiency of the Indian stock markets over the years, i.e., during the decade of the eighties. Further, we have also examined the share prices during the 1989-90 period more closely using serial correlation and filter tests, in addition to the runs test. • 111.Mn70- IM 9111-
Efficiency of the Indian Capital Market 29
Literature Review Several authors have tested for randomness of the Indian capital market. Most Indian studies have used the runs test and serial correlation test for testing for the weak form of EMH. Other techniques used were spectral analysis, filter rules and Spearman's rank correlation test. Barua, Raghunathan and Varma (1994) have given a detailed listof studies on the India n capital market. Obaidullah (1994) also provides a review of the literature on the Indian capital market. Rao and Mukherjee (1971) used spectral analysis to test the random walk model. However, they used the weekly average prices of only one company over a 16 year period (1955 to 1970). They separated the trend component using simple moving averages, and the deterended series was used as the input for spectral analysis. A large number of spectral estimates were found to fall within the appropriate 95% confidence band. I t wasconcluded that the random-walk-hypoth- esis held for the company studied (Indian Aluminium Company). However, it is difficult to generalize the results since the sample consisted of only one company. Ray (1976) studied seven daily index series and conducted runs test, serial correlation test and spectral analysis. He studied the period from January 1966 to July 1972. He found that the random walk model held only for iron and steel, and cement industries. The behaviour of market indices of Bombay, London and New York stock exchanges was compared by Sharma and Kennedy (1977). They used the runs test and spectral analysis techniques on the monthly data from 1963-73 and found that BSE stocks obey random-walk model. Banta (1981) analyzed daily price changes of 20 securities from July 1977 to June 1979. He found no dependency in individual security price changes but the market index exhibited significant serial dependence.
Sharma (1983) analyses weekly returns from 23 actively traded stocks in BSE over the period 1973-78. The integrated moving average form of the Random-walk model was fitted and was found to be an adequa te representation of price changes except for two stocks. The two stocks which did not find the fit were those for which adjustment was not made for rights and bonus issues. Rarnachandran (1986) tested for the weak form of EIvIH using weekend prices of 60 scrips covering the period 1976-81. He used filter rule tests in addition to runs and serial correlation tests, and found support for the weak font of EMH. For filter 30 Indian Journal of France ami Research rule tests, he used filters ranging from 1% to 49% and assumed transaction costs of 2.5% and carry forward charges of 20% per annum. Assuming that the investor utilizes the carry forward facility, he compared the filter returns from a buy-and- hold strategy and a sell-and-hold strategy. He found that filter rule strategy provided inferior returns. Rao (1988) has done three tests on his sample data covering 10 blue chip companies from July 1982 to June 1987, using week-end prices. All the three tests, namely serial correlation, runs and filter tests, confirmed the weak form of effi- ciency. Serial correlation test was done for lags from 1 to 10 periods. 80 out of 100 coefficients were found to be within the two-standard deviation band and only four coefficients are beyond three standard deviations. Using fitters of 3, 5 and 10 percent, he found that even without providing for any transaction costs, the buy-and-hold strategy outperformed the filter rule trading strategy in all the cases. Yalawar (1986) examined Spearman's rank correlation in addition to perform- ing the runs test and found support of the weak form of EMH. Gupta (1989) used week-end closing prices of 39 shares from January 1971 to March 1976 and tested the log random walk model, and found support for the weak form of efficiency using serial correlation and runs tests. Obaidullah (1990) used weekly prices covering the period 1985-88 and examined serial correlation and runs, and found support for the weak form of the EMH. Chaudhuri (1991) also tested the log random walk model, but 1 reached different conclusions. He used daily price quotations of 93 actively traded shares for the period January 1988 to April 1990. 70 shares were found to have significant autocorrelation for 1 day lag. 17 shares were significant for a lag of 2 days or more. The results do not seem to support the weak form of efficiency. However, the correlation coefficients area of small magnitude. None of them are greater than 0.5. The results are also confirmed by the runs test where the difference between expected and actual number of runs is significant for 49 shares. The difference of the findings from that of earlier research findings was attributed to the shift in markers pricing efficiency with respect to individual shares. Many of the above studies used weekly or monthly data. Some patterns may escape detection when we use longer intervals. Use of daily data may improve chances of detecting any patterns or serial dependency. Among the above studies, Barua (1981), Ray (1976), and Chaudhuri (1991) have used daily data. While most studies found evidence in support of the weak form of EMH, Ray (1976) and Efficiency of the Indian Capital Market 31
Chaudhuri (1991) seem to contradict the findings of the others. We use daily data and test for serial dependency using run s test and serial correlation test. We also use filter rule tests to see if the serial dependencies, if any, are profitable.
Methodology
The sample covered in our stud y consi sts of ten acti vely traded companies.The runs test was done at four different poin ts in time, namely 1980,1985,1989 and 1990. In each year the period from A pril to November wa s covered so tha t at Ices t 120 da ily data points are available for each company. The test was done over four different periods separately. This will give us an idea of the efficiency of the Bombay Stock Exchange over a period of time.
In addition, we also used data for the period April 1989 to November 1990(20 months) and performed the analysis for the ten scrips and three market indices, namely the Economic Times Index of Ordinary Shares-All India (ET Ind.), the BSE Sensitive Index (Sensex) and the BSE National Index (Natex). This extended period was used to see whether using more data would affect the results.
A sample of ten companies listed on the Bombay Stock Exchange were selected from the specified group. The criteria used in the selection were availability of data over the study period and the scrip being actively traded so that missing data is minimized. The scrips selected are given below with their respective short forms that we used for the companies in the brackets:
The Associated Cement Companies (ACC) Bombay Dying (B.DYE.) Century (CENTURY) The Great Eastern Shipping Co. Ltd. (G.E.S.) Hindustan Level Ltd. (H.L.L.) Larsen & Toubro Limited (L&T) Reliance Industries Limited (RELIANCE) Tata Engg. & Locomotive Co. Limited (TELCO) The Tata Iron & Steel Co. Ltd. (TISCO) Zuari Agro (ZUARI) In each period closing share prices are collected over a period of eight months from The Economic Times and the Stock Exchange Review. Closing share prices are used for all days to ensure consistency. Further, utilising closing prices facilitate 3. 1fl.; ,ILTWY1,1 C n i?:,41 in c , t 1P. cross-checking since the previous day's closing prices are also given. The periods covered by our study are: 1.4.1980 to 30.11.1980 1.4.1985 to 30.11.1985 1.4.1989 to 30.11.1989 1.4.1990 to 30.11.1990 1.4.1989 to 30.11.1990
The last period included the third and fourth periodsgiven above. Some of the shares were not traded on a few days. The occasions are very few and it is expected that this will not have any significant effect on the test. The Runs Test This test analyses changes in sign of price changes, and checks for randomness I based on number of run. This test tries to detect temporary trends for varying periods, which may not be detected by filter tests and correlation tests. Since each observation is counted equally regardless of size, it removes potential problems of non normality in identifying independence. However, run analysis is not a powerful test and it is suggested by some that they have stronger statistical than economic interpretation. From the price series of each scrip, the return over the previous trading day was computed. The runs test was done using the return series. No adjustment has been made for di vid ends, bonus or rights issues. Since the tests use only the direction of change and not magnitude, we feel that this would not significantly affect the results. The runs test was done using SPSS. One group consisted of the negative price changes (-'s) and the second group consisted &positive and zero price cha nges (+' s). From the return series constructed by us the number of 'runs' is determined. A run is a continuous sequence of changes of the same sign in the difference series. The total number of such runs in the difference series gives the value of the runs- statistic (r-statistic). The r-statistic follows a normal distribution with a mean and standard deviation given by the following formulae.
g(ri) - 2/11 n2 + 1 (n1 + n2)
2 ni n2(2 ni n2 - - n2) a(r) - (n1 + n2) (ni + n2 - 1) Efficiency of the Indian Capital Market 33
where ni = No. of occurrences of +'s in the series n2 = No. of occurrences of —'s in the series The normal distribution .statistic 'z' is given by
z . ri— WO a( ri)
If the price changes are random then the value of r is expected to be equal to the mean value of r. The hypothesis to be tested may be stated as follows for each case (series). , Ho : r = -01 ; Price changes are random. I-1, : r <>11(r) ; Price changes are not random. The hypotheses are tested at 5% and 10% significance levels.
Runs Test Results and Interpretation The results are summarized in Table 1 which shows the series which are significant at 5% or 10% levels (2-tailed test).
Table 1: Summary of Runs Test Results
1 YEAR COMPANY 1980 1485 1989 1990 1989-90 ACC NS NS NS NS NS BOMBAY DYEING SSS NS NS NS NS CENTURY S NS NS NS NS . G.E.S. NS NS S NS S 1 H.L.L. NS NS NS NS NS I Uri' NS NS SSS NS NS RELIANCE NS NS NS NS NS TELCO NS S NS NS NS TISCO NS NS NS NS NS ii:UARI NS NS NS NS NS i ET Ind. S Sensex NS Natex 9 • Legend: NS : Not significant - i.e., at neither 5% nor 10% S :Significant at 5% . SSS : Significant at 10% .111,1/4o-1 ji 14 Ina/ of 1 ilititic -C anti Rt :Wein 11
When the r-statistic is 'not significant' it means that it is not significantly different from its mean p.(r), implying that the price changes are random. From the above table it can be seen that except for the series CENTURY (1980), TELCO (1985) and G.E.S. (1989) none of the null hypotheses can be rejected at 5% significance level. At 10% significance level the hypothesis can be rejected in two additional cases, namely BOMBAY DYEING (1980) and L&T (1989). Out of a total of 40 cases thenull hypothesis can be rejected only in 1 ive cases at a significance level of 10%. The results suggest that the market was weakly efficient throughout the period under study. We have also done the test for the extended period from April 1989 to November 1990 for the ten scrips and also for three market indices. We found for three series the number of runs is significantly different from the expected number of runs. Out of these three, two are market indices, namely BSE National Index and the ET All India index. Perhaps, wecan interpret thisas theseriesbeing random only for very actively tradcd scrips. Tests of Serial Correlation The return series were calculated for the individual scrips and for the three indices in the following manner. R, = (P, —P ,)/P, where R, = Return over the previous trading day Price at period t P, 1 = Price a t period t — 1. The autocorrela tion of the return series wasexamined for the period April 1989 to November 1990. The autocorrelation coefficients were computed using the SPSS package. The returns have been adjusted for stock splits and bonus issues where data was available. For the other series, we observed the price series and could not find any drastic changescharacteristic of bonus or rights issues, and no adjustments have been made for these series. No adjustment has been made for dividends. Serial Correlation Test Results and Interpretation The a utocorrelation coefficients were computed from the return series using SPSS, and the results are given in Table 2.
Efficiency of The Indian Capital Market 35
Table 2: Serial Correlation Coefficients Lag ACC BDYE Lk T REL TELCO TISCO CENT 1 -.111* -.035 -.042 .013 -.077 .028 -.076 2 .061 -.084 -.106 .054 -.086 -.108* -.019 3 .084 .086 .015 -.004 -.037 -.002 -.049 4 -.029 .078 .104 .103 .108* .160* .108* 5 -.024 -.055 -.006 .073 -.013 -.076 -.138* 6 .013 .072 .102 -.003 -.068 -.047 .040 7 .043 .030 .076 -.043 .040 .000 -.018 8 .103 -.006 -.206* -.011 -.031 -.032 -.069 9 .084 -.060 .033 -.075 .042 -.082 -.036 10 .029 .162* .065 .016 -.043 -.017 .046 11 .093 .043 -.052 .012 .057 .089 .072 12 -.100 -.075 -.073 .085 -.133* -.026 -.017 13 .097 .033 .014 .073 .098 .057 .026 14 .001 .065 -.056 .039 -.011 .004 -.037 15 -.004 -.109* -.051 -.009 -.046 .037 -.019 16 .061 -.002 .071 .077 .034 .053 .011 BL 27.166** 30.268** 38475** 16.777 25.172 24.668 20.066
Table 2 (Continued) ET Lag CES HLL ZUA RI SENSEX NATEX INDEX 1 .081 .030 -.119* .042 .056 .291* 2 -.109* .059 -.123* -.191 .005 .011 3 -.159* -.036 .095 -.013 -.086 -.025 4 .037 .001 -.039 .169* .171* -.023 5 -.054 -.045 -.046 -.110* -.054 .088 6 .048 .055 .079 -.029 .056 .051 7 -.018 .018 -.032 .028 .012 .010 8 -.060 -.063 -.067 .016 -.044 .062 9 -.029 -.010 .090 -.014 .008 .046 10 .055 -.100 .036 -.023 .040 -.040 11 , .086 .033 .026 .083 .086 -.007 12 .014 -.041 -.099 .063 .029 .037 13 -.007 .094 -.012 .085 .062 .044 14 -.010 -.091 -.082 -.078 -.026 .095 15 -.016 .002 -.063 -.015 -.020 .124* 16 .021 -.037 .007 .073 .046 .065 BL 23.282 16.478 29.663** 30.097** 22.838 53393** Legend; * Autocorrelation coefficient is outside the two standard deviation limits. L: Box-Ljung statistic for 16 lags tt ** : Box-Ljung statistic is significant at 5% ihi Indian journal ( I Fwanee and 1:t m41 t
Out of the 208 autocorrelation coefficients computed, only 19 are outside their two-standard-deviation limits. Thus this test gives supportive evidence for the weak form of efficiency. However, the Box-Ljung statistic is significant at 5% level for 6 series. Thatmeans that in the caseof these 6 series, the joint hypothesis, that the autocorrelation coefficients for all the 16 lags are zero, is rejected . That is, at least the coefficient is significant for at least one out of the 16 coefficients. Looking at the magnitude of the coefficients. we can see that the maximum absolute value of the coefficients is 0.206. There may not be profitable opportunities because of these low magnitudes, even in cases where the coefficients are statistically significant. We get further confirmation on this from the tests on the filter rule trading strategy. Filter Rule Tests Fitter rule tests have a direct economic interpretation. We can see the return earned by using a certain trading rule and comparei it with the buy-and-hold strategy in the same stock. We can easily make inferences about whether the trading rule is profitable by adjusting the excess returns for transaction costs. In the case of runs test and serial correlation test, we cannot easily determine whether the statistically significant results provide any profitable opportunities. The filter rule has been defined with the assumption that short-sales are not allowed. The rule we have used can be stated as follows: If the price of a security rises at least x percent, buy and hold the security until its price drops at least x percent from a subsequent high. Then, liquidate the long position and retain cash until the price reaches its next trough and then rises x percent. A filter rule test basically tests whether the stock price series exhibits any momentum and if so whether it is profitable. The price series has been adjusted for stock splits and bonus issues where data was available, but no adjustments have been made for dividends. Initially, the trader was assumed to have a cash position. He will keep monitoring the price level for troughs. When the price rises by x% from the trough (least price from April 1989 to date), he will purchase the securities for a notional amount of Rs.1,000. Then, he will monitor the peaks and compare with the current price. When the price falls by x% from the high (the peak price from the date of purchase), he will sell his holdings and retain cash. Then he will monitor the price and compare with the troughs. When the price rises by x% from the trough (lowest price since the previous sale date), he will convert his cash position to a longposition in the security. It may be noted that the operator can also go short in the scrip, while retaini ng his holding. When the rule gives a buy signal, he covers his short position and
Efficiency of the Indian Capital Market 37
reinvests the gain (or disinvests to cover the loss) in the scrip. In terms of return computation, his procedure is the same as the procedure outlined earlier. We have assumed, however, that unlimited short-sale is not allowed. It has been assumed that the trading strategy will be self-sufficient. We have not considered separately the transactions of each settlement period falling within our study period. It may mentioned that if carry-forward charges are incorporated then the excess returns will be lower. The return from the trading rule was computed for the overall period based on the value of the final investment on 30 November 1990 and the initial investment on 1 April 1989 (which was assumed to be Rs.1,000). This was compared to the strategy of buying the securities on the starting date and liquidating the position on the ending date. For each series, seven filter rules were examined with fil ters of 0.5%, 1%, 2%, 3%, 5%, 10% and 20%. The excess of returns from the trading strategy were computed with two different assumptions about transaction costs, namely 0% and 1%. The actual brokerage cost will be different for different scrips. According to the official brokerage schedule of the Madras Stock Exchange, the brokerage as a percentage of the scrip price declines as the scrip price increases. The brokerage approaches 1% for high priced scrips like Century. For our study, we have assumed a brokerage of 1% taking this as the minimum brokerage that is charged to investors. If the filter rule is not profitable at this cost, it will not be profitable at higher brokerage costs either. These returns were compa red with the returns from the buy- and-hold strategy.
Filter rule test results and interpretation: The res ults of the test are given in Tables 3 and 4. Table 3 gives the excess of returns obtained using the filter rule over the Table 3: Excess Returns of the filter rule over the buy Sc hold strategy Filters Coeff. of Company 0.005 0.01 0.02 0.03 0.05 0.1 0.2 Variation ACC -3.9837 -3.6171 -3.1613 -2.8759 -3.5647 -0.9364 -0.9191 0.9581 B.DYE. -0.8444 -0.8260 4)5278 -0.5354 -0.6247 -0.3375 -0.2799 0.4128 L & T 1.5143 0.8210 03287 0.4496 0.6986 0.7975 0.2629 02519 RELIANCE 0.0089 0.0288 0.6910 0.2667 0.1168 0.3169 0.1738 0,4021 TELCO -1.4883 -1.1467 -0.6928 -1.3940 -1.5475 -1.0473 -0.4409 0.3619 TISCO -0.1205 0.0024 0.0738 0.0650 0,1485 -0.1992 -0.0687 0,1958 CENTURY -03539 -0.6480 -0.7182 -116408 -0.0537 -0.6743 -0.4362 02994 0.5836 0.3839 0.2407 0.0701 0.0237 -0.1072 0.2361 0.0992 H.L.L. -0.1091 -0.0126 -0.0803 0.0837 -0.1782 -0.2760 -0.2574 0.1832 ZUAR1 -0.0446 -0.0760 -0.0710 -0.0780 0.0370 -05002 -0.0924 0.1163 SENSEX 0.0380 00838 -0.0684 -0.1087 -0.0847 -0.0954 -0.1344 0.2410 NATEX 0.2078 0.2062 -0.1174 -0.0610 -0.1755 -0.4241 -0.1887 0.2151 ET IND. 0.4986 0.3238 -0.0318 0.1460 -0.0307 0.0227 -0.1271 0.1997 AVERAGE -0.3303 41.3443 -0.3027 -0.3548 -0.4027 -0.2662 -0.1748
L 38 Indian Journal of Finance and Research return obtained from a simple buy-and-hold strategy, assuming that there are no transaction costs. Table 4 gives the figures for the case when tra nsaction costs are 1%.
From Table 3 we can see that in 34 out of 91 cases the excess return is positive, though at higher filter levels, the number of positive return cases is lesser. We could not observe any consistent pattern in the relationship between excess return and filter level, or between the excess return and the number of transactions. We also examined the coefficients of variation (standard deviation/mean) of the various series. However, there does not seem to be any relationship either between the coefficient of variation and the excess return, or between the coefficient of variation and the absolute magnitude of the excess return. Interestingly, in the ca se of Reliance, L & T and G. E. Shipping (GES) the excess return is positive for almost ail the cases. For GES, we obtain similar results with the runs test and serial correl a ti on test for the 1989-90 period. The runs test is significant and the au tocorrelation coefficients for lags 2 and 3 are significant. For the other two series, the results are not supported by the other two tests. The runs test does not show significance for either of the two scrips. For Reliance, none of the autocorrelation coefficients is significant. For L & T, the autocorrelation coefficient with lag 8 is significant at 5% (falls outside the two standard deviation band). This shows that for operators with no transaction costs, the filter rule is profitable forsome scrips. However, the operator can only makea profit if he knows, in advance, which scrips and which filter is profitable. When we introduced transaction costs, the number of positive excess return cases has reduced dramatically. With transaction costs at 1%, Table 4 shows that
Table 4: Net Excess Returns of the Filter Rule Over the Buy & Hold Strategy with Brokerage at 1% Filters Company 0.005 0.01 0.02 0.03 0.05 0.1 0.2 ACC -5.9896 -5.6671 -5.0102 -4.5311 -4.4499 -1.5825 -1.1438 B.DYE. -2.0684 -1.9769 -1.5749 -1.3394 -1.1281 -0.6154 -0.3656 L &T -0.4620 -0.5139 -0.3981 -0.3329 0.0839 0.4607 0.1331 RELIANCE -0.9546 -0.9181 -0.5257 -0.5439 -0.4234 0.0314 0.0638 TELCO -2.5336 -2.2786 -1.7768 -2.0322 -1.9393 -12185 -0.4649 TISCO -1.0639 -0.9126 -0.6528 -0.5112 -0.2061 -0.3767 -0.1209 CENTURY -1.7491 -1.6402 -L3696 -1.1458 -0.3396 -0.8232 -0.4541 G.E.S. -0.3293 -0.3320 -0.2662 -0.2738 -0.1777 -0.1861 0.2173 I-LL.L -1.0400 -0.7769 -0.5867 -0.2586 -0.3956 -0.3559 -0.2850 ZUARI -0.6590 -0.6448 -0.5474 -0.5071 -0.2666 -0.5994 -0.1351 SENSEX -1.0929 -0.9355 -0.7319 -0.5988 -0.3957 -0.2157 -01646 NATEX -0.8559 -0.6659 -0.6496 -0.4719 -0.4038 -415115 -0.2159 ET. IND. -0.6016 -0.5039 -0.5049 -0.1728 -0.1932 -0.0358 -0.1537 AVERAGE -1.4924 -1.3666 -14227 -0.9784 -0.7873 -0.4637 -0.2377 Efficiency of the Indian Capital Market 39 only 6 out of 91 cases have positive excess returns. These six cases are in the scrips Reliance, L T and G.E. Shipping. As the filter level increases from 0.5% to 20%, the number of transactions comes down. (The number of transaction costs would be higher with the lower filter levels. These transaction costs have a substantial effect on the returns. For example, consider the case of ACC which has given a return of 562% over the period under consideration with a simple buy-and-hold trategy. Using a filter of 05%, the strategy generates a total return of only 164%, However, the filter rule strategy also results in 142 transactions. Assuming a brokerage cost of 1%, the return from the strategy is -37%. The loss due to transactions is not limited to the 142 cases of brokerage paid out at 1% each time- it also includes the opportunity cost of not investing the amount paid out as brokerage in the stock. Thus, though opera tors wi th zero transaction costs may be able to make profi ts from using the filter rule trading strategy, general investors cannot hope to make profits from such a strategy. However, the filters for which the rule is profitable are different for different scrips. For the operators to profit from the rule, they should know in advance which filter level is profitable. Thus, unless the profitable rules are stable over time, even these operators may not be able to make profits. On the average, as we can see from the bottom row of Table 3 no rule is profitable. The average excess return for all the filters is substantially negative even for the case where there are no transaction costs. We have also computed excess returns assuming a brokerage of 2% though we have not shown the full results here. In this case, we found that in two of the above six cases of excess return (with 1% brokerage) became negative. Thus only 4 cases out of 91 were positive. Conclusion We have tested the weak form of efficiency using three tests, namely the runs test, seriai correlation test and the filter rule test using daily data. For the runs test, we have covered four different time periods. For all these periods, the runs test provides supportive evidence for the weak form of the efficient market hypothesis (EMH). The serial correlation and filter nile tests a Iso were performed for the period from April 1989 to November 1990 in addition to the runs test. The evidence from all the three tests support the weak form of EM H. With an unrealistic assumption like zero transaction cost, it may be possible to identify profitable opportunities for using filter rules provided the patterns are stable over time. 40 Indian Journal of Finance and Research
REFERENCES Ba rua, 5.K. (1981). 'The Short-run Price Beha viour of Securities- Some Evidence of Efficiency on Indian Capital Market", Vikalpa Vol. 6, No.2. Barua, Samir K., V. Raghunathan and Jayanth R. Varma (1994), "Research on the Indian Capital Market: A Review", Vikalpa, Vol. 19, No. 1 (Jan-Mar.), pp. 15-31. Chaudhuri S.K. (1991). "Short-run Price Behaviour: New Evidence on Weak Form of Market Efficiency", Vikalpa, Vol. 16, No. 4 (Oct-Nov), pp. 17-21. Gupta, 0.1'. (1989), "An Empirical Testing of Random Walk Hypothesis in India", in Gupta, 0.1'. (1989) (ed.) Stock Market Efficiency and Price Behaviour : The Indian Experience, New Delhi Anmol Publications, pp. 133-160. Madras Stock Exchange (1991), The Madras Stock Exchange Official Year Book. Obaidullah, M. (1990), "Stock Market Efficiency: A Statistical Inquiry", Chartered Financial Analyst, July-August. Obaidullah, M (1994) Indian Stock Market : Theories and Evidence, Hyderabad : ICFAI. Ramachandran, J. (1988), Behaviour of Stock Market Prices, Information Assimilation and Market Efficiency, unpublished FPM thesis, [IM Ahmedabad. Rao, N.K. and Mukheriee, K. (1971). "Random Walk Hypothesis : An Empirical Study", Arthaniti, vol. 14, No. 1 & 2, pp 53-49. Rpt_ in Gupta 0.1'. (1989) (ed.), Stock Market Efficiency and Price Behaviour: The Indian Experience, New Delhi : Anrnol Publications. • Rao, Krishna N. (1988). "Stock Market Efficiency : The Indian Experience", Proceedings of National Seminar on Indian Securities Market : Thrust and Challenges, March 24-26. University of Delhi. Rpt. in Gupta. 0.1' (1989) (ed.). Stock Market Efficiency and Price Behaviour : The Indian Experience, New Delhi : Anmol Publications. Ray. D. (1976). "Analysis of Securi ty Prices in India", Sankhya, vol. 38, series C, part 4, pp.149- 164.
Sharma, J. L. and Kennedy, E. (1977). "A Comparative Analysis of Stock Price Behaviour on the Bombay, London and New Stock Exchanges", journal of Financial and Quantitative Analysis, September. Sharma, J.L. (1983). "Efficient Capital Ma rkets and Random Character of Stock Price Behaviour in a Developing Economy', Indian Economic Journal, vol. 31, no. 2 (Oct-Dec), pp. 53- 70, Rpt, in Gupta, 0.1'. (1989) (ed) Stock Market Efficiency and Price Behaviour: The Indian Experience, New Delhi : Anmol Publications. Yalawar, Y.13. (1986), Rates of Return & Efficiency on Bombay Stock Exchange, Research Monograph, I IM, Bangalore
1, Exhibit 16 Integration and Efficiency of Stock and Foreign Exchange Markets in India
Dr. Alok Kumar Mishra* & Dr. M. Thomas Paul**
Abstract This article attempts to examine the integration and efficiency of Indian stock and foreign exchange markets. The study employed Time series ordinary least square regression, Unit Root test, Grangers causality test, Vector Auto Regression techniques on monthly data of stock return and exchange rate return for the period spanning from February 1995 to March 2005. The major finding of this study are as follows. Both the stock indices return (Rsensex and Rnifty) are near normal whereas exchange rate return is not normal and more peak. The stock return and exchange rate return are positively related. The policy implication of this above result of the positive relation between stock return and exchange rate return for the foreign investors in India should be further studied. From the Granger’s causality test, it is found that there is no causality for the return series of stock indices and exchange rate except return Nifty and return exchange rate. Weak form of market efficiency hypothesis is also corroborated for stock and foreign exchange markets.
JEL: G15, C32 Keywords: Weak form of market efficiency, stock return, exchange rate return, Buy-Hold strategy, Convex trading strategy, Granger’s causality test, Vector Auto Regression
.* is Manager, at the Evaluesrve.Com Pvt. Ltd, 2nd Floor, Unitch World-Cyber Park, Jharsa, Sector-39, Gurgaon-122002, Haryana and ** is Professor , at the National Institute Of Bank Management , NIBM P. O , Kondhwe Khurd, Pune- 411048, India., and ** was also formerly Professor of Financial Economics and Macroeconomics, Department of Economics, University Of Botswana, Botswana, and was also formerly Reserve Bank Of India Chair Professor, Monetary Economics, at the Institute For social and Economic Change Bangalore., India. Email: of (1) * [email protected] of (2) ** [email protected]
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Electronic copy available at: http://ssrn.com/abstract=1088255 1.0 Introduction Global investors choose to diversify their funds across the financial markets to reduce the portfolio risk on the assumption that the returns in various financial markets may not be highly correlated. Another related issue is how far the return in one market will enable to predict the return in the other financial market. From the informational efficiency criteria, any past information even if that information may be pertaining to the return in one financial market, it should not enable to predict the future changes in the return in the other financial market. But at the same time, from the rational expectation point of view, all the informations including the returns from any other financial markets should be factored into the return of the financial markets. For example, how far the return in the stock market influences the return in the foreign exchange market and vice versa. In order to study the aforementioned research problems, we have used the time series techniques viz, unit root test, OLS regression, Granger’s causality and Vector Auto Regression techniques. Our data points are based on the monthly data of stock price and exchange rate, where the sample period spanning from February 1995 to March 2005, forming around 121 observations. Against this background, the present study empirically examined the integration and efficiency of stock and foreign exchange markets in India. One basic issue which has been confronting the practitioners in financial industry is about the probability distribution of the returns in financial markets because it has investing and trading implications .In this context, we have investigated the normality of the return distribution of the respective financial markets. In section 2.0, we discuss the theoretical interlink ages between stock and foreign exchange markets in India. Section 3.0 and 4.0 presents the empirical literature and empirical methodology respectively. Section 5.0 presents the variables description and nature of the data points. Section 6.0 reports the empirical results followed by the conclusion in Section 7.0.
2.0 Interlink ages between stock and Foreign Exchange Markets in India: Theoretical Underpinnings The linkages between stock market performance and exchange rate behavior has long been debated in the economic literature. The arguments for the linkage have been made at both micro and macro economic levels. At the macroeconomic level, the discussion has
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Electronic copy available at: http://ssrn.com/abstract=1088255 been centered around the relationship between aggregate stock price and floating value of exchange rates. This link is seen by models that focus on the current account (Flow Oriented Models, e.g. Dornbusch & Fisher, 1980) as well as those that focus on the asset market (Stock Oriented Models, e.g. Branson & Frankel, 1983), though in different ways. “Flow Oriented” models [Dornbusch & Fisher (1980)] of exchange rate determination focus on the current account or the trade balance. This model posits that currency movements affect international competitiveness and balance of trade positions, and, consequently, the real output of the country, which in turn affects the current and future expected cash flows of firms and their stock prices. The detailed logical deduction of this relationship is like this. Changes in exchange rates affect the competitiveness of a firm as fluctuations in exchange rates affect the value of the earnings and cost of its funds because many companies borrow in foreign currencies to fund their operations and hence its stock prices. But this will affect in either way depending upon whether that firm is an exporting unit or a heavy user of imported inputs. In the case of an exporting firm, a depreciation of the local currency makes exporting goods more attractive and this leads to an increase in foreign demand for export of goods and services. As a result, the revenue of the firm and its value will increase which will in turn increase stock prices. On the other hand, an appreciation of local currency decreases profits of an exporting firm because of decrease in foreign demand of its products. Hence the stock price will decrease. This is exactly opposite to the case of an importing firm as exchange rate changes.
“Stock Oriented” models [Branson & Frankel (1983)] of exchange rates or portfolio balance approach gives emphasis on capital account as the major determinant of exchange rate dynamics. The essence of the portfolio balance model is based on the notion that agents should allocate their entire wealth among domestic and foreign assets including currencies in their portfolio. Hence, exchange rate plays the role of balancing the demand for and supply of assets. Now the logical deduction of negative effects of stock prices on exchange rates is as follows: An increase in domestic stock prices leads individuals to demand more domestic assets. To buy more domestic assets, they need to
2 sell foreign assets as these are now relatively less attractive. As a result of which, there is an appreciation of local currency due to more demand for domestic assets.
Studies like Aggarwala (1981), Sonnen and Hennigar (1988) establish the relation between exchange rates and stock prices. They have pointed out that a change in exchange rates could change the stock prices of multinational firms directly and those of domestic firms indirectly. In the case of multinational firms, a change in the exchange rate will change the value of that firm’s foreign operation, which will be reflected in its balance sheet as profit or loss. Consequently, it contributes current account imbalance. Once the profit or loss is announced, the firm’s stock price will change. Further, a general downward movement of the stock market will motivate investors to seek better returns elsewhere. This decreases the demand for money and pushes interest rate down, thus causing huge outflows of funds, and hence depreciating the currency.
However, in the case of domestic firms, devaluation could either raise or lower a firm’s stock price depending upon whether that particular firm is an exporting firm or it is a heavy user of imported input. If it is involved in both the activities, then the stock price could move in either direction. Consider the case of an exporting domestic firm. This firm will directly benefit from devaluation due to increased demand for its output. Since higher sales usually result in higher profit, its stock price will increase, whereas in the case of a user of imported inputs of domestic firm, devaluation will raise its costs and lower its profits. The news of decline in profits may depress the firm’s stock price.
Bahmani , Oskooe and Sohrabian (1992) offered an alternative explanation for the effect of stock price on exchange rate. The argument is as follows: Consider the resulting increase in the real balance which will result in an increase in interest rate. Thus domestic assets are more attractive, and, as a result, individual investors or firms will adjust their domestic and foreign portfolio by demanding more domestic assets. The portfolio adjustments of firms and individuals will lead to an appreciation of the domestic currency because they require domestic currency for transaction.
3 Further, integration of the US stock market with the Pacific basin country’s markets and world markets, which led to the requirement of establishing the relationship between stock prices and exchange rates. Thus, an increase in international stock market causes the local stock market to rise, which in turn increases wealth as well as raises interest rates. Higher interest rate will attract foreign capital and lead to an increase in the real exchange rate.
3.0 Empirical Literature:
Some of the early studies like Aggawal (1981), Soenen and Hennigar (1988) simply consider the correlation between the two variables. Aggarwal, using monthly U.S. stock price data and the effective exchange rate for the period 1974 to 1978, explored the relationship between the changes in the dollar exchange rates and changes in indices of stock prices. He found a significant positive correlation, and finds that the relationship is stronger in the short run than in the long run. However Soenen and Hennigar, employing monthly data on the same variables, for the period 1980 to 1986, found a strong negative relationship.
Solnik (1987) employing OLS regression analysis on monthly and quarterly data from 1973 to 1983 for eight industrialized countries found a negative relationship between real domestic stock returns and real exchange rate movements. However, for monthly data over 1979-83, he observed a weak but positive relation between the two variables.
Soenen and Aggarwal (1989) found mixed results among industrial countries. Ma and Kao (1990) tried to attribute these differences to the nature of the countries. They used the asset pricing model on the monthly data from January 1993 to December 1983 on six major industrialized countries and found that domestic currency appreciation negatively affects the domestic stock price movements for an export dominant economy and positively affects an import dominant economy.
Jorion (1998) attempted to analyze and compare the empirical distribution of returns in the U.S. stock market and in the foreign exchange market by using the maximum
4 likelihood estimation procedure and ARCH model in daily data of exchange rates and stock returns spanning from June 1973 to December 1985. The study found that exchange rates display significant jump components, which are more manifest than in the stock market. The statistical analysis of the study for the foreign exchange market and stock market suggests that there are important differences in the structure of these markets.
Jorion (1990) examined the exposure of U.S. multinationals to foreign currency risk, by employing the time series regression on the rate of return in the U.S. multinational firms’ common stocks and the rate of change in a trade weighted value of the U.S. dollar over the period 1971 to 1987. The study found significant cross sectional differences in the relationship between the value of U.S. multinationals and the exchange rate. Given these results, the study focused on the determinants of exchange rate exposure. The co movement between stock returns and the value of the dollar is found to be positively related to the percentage of foreign operations of U.S. multinationals.
Smith, C.E. (1992a) attempted to derive an estimable exchange rate equation by considering the portfolio balance model. The model considered values of equities, stocks of bonds and money as important determinants of exchange rates, which were then applied to the German Mark vis-à-vis the US dollar and the Japanese Yen vis-à-vis the US dollar exchange rate by using a general model of optimal choice over risky assets. He has considered the study period spanning from January 1974 to March 1988. The study found that equity value has a significant influence on exchange rates but the stock of money and bond has little impact on exchange rates. These results imply not only that equities are an important additional factor to be included in the portfolio balance models of the exchange rate, but also suggest that the impact of equities is more important than the impact of government bonds and money.
Bodnar and Gentry (1993) employed the market model of Capital Asset Pricing (CAPM) model and categorized the industries into traded and non traded goods industries covering the USA, Canada and Japan. to examined the relation between changes in exchange rate and industry values. The study had considered the data period from January 1979 to
5 December 1988 for the USA and Canada and from September 1983 to December 1988 for Japan. The model was estimated using the SURE method for the US, Canada and OLS for Japan. The results of the study indicated that for the three countries, 20-35 percent of industries had significant foreign exchange exposure and particularly with more exposure in the case of Canada and Japan. Except for the US, non-traded goods industries indicated a gain with appreciation of local currency. Industry export and import ratios were associated with negative and positive exposures respectively. For the US and Japan, foreign dominated assets showed a significant negative exposure to exchange rate changes. Overall, the study found insignificant contemporaneous effect.
There have also been several studies that have used cointegration and Granger causality to study the direction of movement between stock prices and exchange rates. Taylor, M. P. et al. (1988) was one of the early studies using this. They studied the impact of the abolition of the UK exchange control on the degree of integration of the UK and overseas stock markets such as West Germany, Netherlands, Japan and US employing the Granger causality and Engel Granger Cointegration test over the two sub-periods spanning from April 1973 to September 1979 and October 1979 to June 1986 respectively. The study concluded that, there was no significant increase in the correlation of stock market returns as a result of the abolition of exchange control. Cointegration test confirmed that the UK and foreign (non-US) stock market indices were cointegrated in post-1979 period but not before that.
Oskooe, B.M. and Sohrabian, A. (1992) tried to test the causality as well as cointegration between stock price and effective exchange rate using monthly observations over the period July 1973 to December 1988 for a total of 186 observations from the U.S. economy. They found that there was a bi-directional causality between stock prices and the effective exchange rate of the dollar at least in the short run. The co-integration analysis revealed that there was no long run relationship between two variables.
Libly Rittenberg (1993) employed the Granger causality test to examine the relationship between exchange rate changes and stock price level changes in Turkey. Since causality tests are sensitive to lag selection, he employed three different specific methods for
6 optimal lag selection, i.e. an arbitrarily selected, Hsiao method (1979), and the SMART or subset model auto regression method of Kunst and Martin (1989). In all cases, he found that causality runs from price level change to exchange rate changes but there is no feedback causality from exchange rate to price level changes.
Ajayi, A. and Mougoue (1996) examined the intertemporal relation between stock indices and exchange rates for a sample of eight advanced countries during the period 1985:4 to 1991:6. By employing the co-integration and causality tests on daily closing stock market indices and exchange rates, the study found that (i) an increase in aggregate domestic stock price has a negative short-run effect on domestic currency values, (ii) sustained increase in domestic stock prices will induce domestic currency appreciation in the long run and (iii) currency depreciation has negative short-run and long-run effects on the stock market.
Qiao, Yu (1997) employed daily stock price indices and spot exchange rates obtained from the financial markets of Hong Kong, Tokyo and Singapore over the period from January 3 1983 to June 15 1994 to examine the possible interaction between these financial variables. Based on Granger causality test, he found that the changes in stock prices are caused by changes in exchange rates in Tokyo and Hong Kong markets. However, no such causation was found for the Singapore market. On the reverse causality from stock prices to exchange rates, his results show such causation for only Tokyo market. Therefore for Tokyo market there is a bi-directional causal relationship between stock returns and changes in exchange rates. The study also uses Vector Autoregression model to analyse a long run stable relationship between stock prices and exchange rates in the above Asian financial markets. His results found a strong long run stable relationship between stock prices and exchange rates on levels for all three markets.
Johnson and Soenen (1998) analysed the stock price reactions of 11 Pacific Basin stock markets to exchange rate changes with respect to the US dollar and Japanese Yen for the period January 1985 to June 1995. The study found that a significantly strong positive
7 relationship is indicated with the Yen while weak and mixed results are reported with regard to the US dollar.
Ong, L.L. and Izan H.Y (1999) employed Nonlinear Least Square method to examine the association between stock prices and exchange rates. They found that the US share price returns fully reflect information conveyed by movements in both Japanese Yen and the French Franc after four weeks. However, this result suggests a very weak relationship between the US equity market and exchange rates. They concluded that depreciation in a country’s currency would cause its share market returns to rise, while an appreciation would have the opposite effect.
Studying the long-run and short-run dynamics between stock prices and exchange rates on six Pacific Basin countries such as Hong Kong, Indonesia, Malaysia, Singapore, Thailand and the Philippines over the period 1980 to 1998 through employing co- integration and multivariate Granger causality tests, Katephylaktis and Fahiala Ravazzolo (2000) concluded: (i) there is no long run relationship between the real exchange rate and the local stock market in each of the Pacific Basin countries during the decade of the 1980’s or 1990’s except Hong Kong; (ii) for all the countries the real exchange rate and the US stock prices are positively related to domestic stock prices for the period of the 1990s; (iii) foreign exchange restrictions have not been found to be an important determinant of the link between the domestic stock and foreign exchange markets on the one hand and between the domestic capital and world capital markets on the other.
Morley, et al (2000) investigated the empirical nature of the relationship between stock prices and exchange rates for G-7 countries since the relaxation and abolition of exchange controls in the early 1980s from the period 1982:1 to 1994:1. By employing the co-integration and co-dependence method [developed by Engel and Kozicki (1993), Engel and Vahid (1993))] the study found that stock markets and exchange rates are linked through a common cyclical pattern rather than a common trend.
8 Ibrahim (2000) investigated the interactions between stock prices and exchange rates in Malaysia, using bi-variate and multivariate co-integration and the Granger causality test. The study took multiple variables such as stock prices, three exchange rate measures, viz, the real effective exchange rate, the nominal effective exchange rate and RM/US$, money supply, and reserves during the period 1979:1 to 1996:6. The results from bi- variate models indicated that there was no long-run relationship between the stock market and any of the exchange rates; however, there was some evidence of co-integration when the models were extended to include money supply and reserves. This finding indicates that in the short run, a concerted stance on monetary policy, exchange rate and reserve policy is vital for stock market stability, and, also indicates there is informational inefficiency in the Malaysian stock market. Multivariate test showed: (i) there was unidirectional causality from stock market to exchange rate; (ii) both the exchange rates and the stock indices were Granger caused by the money supply and reserves; (iii) there was bi directional causality between variables only in the case of nominal effective exchange rate.
Amare and Mohsin (2000) examined the long-run association between stock prices and exchange rates for Japan, Hong Kong, Taiwan, Singapore, Thailand, Malaysia, Korea, Indonesia and Philippines. The study considered monthly data spanning from January 1980 to June 1998 and employed cointegration technique. The long-run relationship between stock prices and exchange rates was found only for Singapore and Philippines. They attributed this lack of cointegration between the said variables to the bias created by the “omission of important variables”. When interest rate variable was included in their cointegrating equation, they found cointegration between stock prices, exchange rates and interest rate for six of the nine countries.
Granger, C.W.J. et al (2000) applying co-integration and Granger causality test and structural break test on daily data of exchange rate and stock prices in Hong Kong, Indonesia, Japan, South Korea, Malaysia, the Philippines, Singapore, Thailand and Taiwan for the period 1986 to 1998 suggested: (i) there exists very little interaction between currency and stock markets except for Singapore for the period January 3, 1986 to November 30, 1987; (ii) there is no definitive pattern of interaction between the two
9 markets, however, changes in exchange rates lead to stock prices in the case of Singapore and vice versa in the case of Taiwan and Hong Kong during the period December1, 1987 to May 31, 1997; (iii) In the case of South Korea, changes in the exchange rate Granger causes stock prices where as the reverse direction such as changes in stock prices Granger causes exchange rates is found in Hong Kong and the Philippines. The rest of the countries such as Malaysia, Singapore, Thailand and Taiwan are characterized by feedback interactions in which change in exchange rate can take the lead and vice versa from the period June 1, 1997 to June 16, 1998.
Bruce Morley and Eric Pentecost (2000) investigated the nature of the relationship between stock prices and spot exchange rates on G-7 countries by employing the cointegration test and codependence technique. The study considered the monthly observations spanning from January 1982 to January 1994, and broadly concluded that stock prices and exchange rates do not exhibit common trends, but do exhibit common cycles.
Bala Ramasamy and Matthew Yeung (2001) studied the hit and run behaviour in the interaction between stock prices and exchange rates of nine countries, namely Hong Kong, Indonesia, Japan, South Korea, Malaysia, the Philippines Singapore, Thailand and Taiwan affected by the Asian flu. The study considered the quarterly data spanning from January 1, 1997 to December 31, 2000, forming around 1,040 samples for each country. By employing the Granger causality test, the study concluded that stock prices Granger caused movements in the exchange rate in the case of all the countries except Hong Kong, where bidirectional-causality was seen. However, different results were obtained when they (Bala Ramasamy and Matthew C.H.Yeung, 2002) followed with an examination of the links between the foreign exchange and stock markets on six countries in the East Asia region, namely Indonesia, South Korea, Malaysia, Thailand, the Philippines and Singapore. The study considered the period from January 2, 1995 to August 6, 2001, forming around 1,720 observations. By employing the cointegration test and Granger causality test, the study concluded that there are inconsistent results in tests
10 for bivariate causality between stock prices and exchange rates. This finding suggested that the stock and foreign exchange markets in the region may still be unstable.
Hatemi, J. A. and Irandoust, M. (2002) examined a new Granger non-causality testing procedure developed by Toda and Yamamoto (1995) to contribute to the debate on exchange rates and stock prices in Sweden. The study also examined the possible causal relation between these variables in a Vector Auto Regression model. The results of the study found that Granger causality is unidirectional running from stock prices to effective exchange rates. The results also revealed that an increase in Swedish stock prices is associated with an appreciation of the Swedish Krona.
Lean, H.H, Halim, M and Wong, W.K. (2003) employed the cointegration and bivariate causality tests to explore the relationship between exchange rates and stock prices prevalent in the pre-Asian crisis, during Asian crisis and during 9/11-terrorist attack in the US periods on the seven Asian countries such as Hong Kong, Indonesia, Singapore, Malaysia, Korea, Philippines and Thailand badly hit by the Asian financial crisis. The study also included Japan for the control purpose. The empirical results of the study found that during the period before 1997 Asian financial crisis, all the countries except the Philippines and Malaysia experienced no evidence of Granger causality and no specific cointegration relationship between the exchange rates and stock prices. Causality, but not cointegration, between the capital and financial markets appears to become strong during the Asian financial crisis period and all the countries showed evidence of causality between the two markets. The study also found a surprising result that after the 9/11-terrorist attack, the causality relationship between the two markets turns back to normal as in the pre Asian crisis period, when in all the countries except Korea are found no linkages between exchange rates and stock prices. In addition, the study found that after the 9/11-terrorist attack, there is less cointegration relationship between exchange rates and stock prices. Based on these findings, the study broadly concluded: (i) Asian financial crisis has bigger and more direct impact on the causality relationships between stock prices and currency exchanges in Asian markets and the 9/11-terrorist attack in the USA basically has no impact on the causality relationship
11 between the two markets; and (ii) the financial and capital markets become more mature and more efficient after the crisis.
Kasman Saadet (2003) examined the relationship between stock prices and exchange rates by using the daily data from 1990 to 2002 of exchange rates and aggregate stock indices of Turkey. By employing Johansen’s cointegration test and Granger causality test, the study found a long-run stable relationship between stock indices and exchange rates. The study also concluded that causality relationship exists only from exchange rate to industry sector index.
Stavarek Daniel (2004) investigated the nature of the causal relationship between stock prices and effective exchange rates in the four old EU member countries (Asia, France, Germany and the UK), four new EU member countries (Czech Republic, Hungary, Poland and Slovakia) and in the USA. Both the short term and long term causalities between these variables were explored using the monthly data. The study employed cointegration analysis, vector error correction modeling and standard Granger causality test to examine whether stock prices and exchange rates were related to each other or not and what kind of causality direction exists between them. The results of the study found much stronger causality in countries with developed capital and foreign exchange markets (old EU member countries and the USA) than in the new comers. The evidence also suggested more powerful long-run as well as short-run causal relations during the period 1993-2003 than during 1970-1992. Causalities seem to be predominantly unidirectional with the direction running from stock prices to exchange rates.
Victor Murinde and Sunil Poshakwale (2004) investigated the price interactions between the two main components of European emerging financial markets, viz. the foreign exchange market and the stock market before and after the adoption of the Euro by most European Union (EU) economies. The study employed Granger (1969) causality test to analyse daily observations on the stock price index and nominal exchange rate for Hungary, Czech Republic and Poland from January 2, 1995 to December 31, 1998, for the pre-Euro period and January 1, 1999 to December 31, 2003 for the Euro period. The study found that for the pre-Euro period, mutually reinforcing interactions existed
12 between exchange rates and stock prices in the Czech Republic and Poland but no interaction seem to exist for Hungary. During the Euro period, exchange rates unidirectionally Granger cause stock prices in all the three sample economies. The study also concluded that a higher positive correlation existed among the stock and the foreign exchange markets in Hungary, Czech and Poland during the Euro period and pre Euro period respectively.
There have also been a few studies of the interaction between stock prices and exchange rates in the Indian context. Perhaps the earliest is Abdalla et al (1997). They studied the interactions between exchange rates and stock prices in the case of India, Korea, Pakistan and the Philippines by applying bi-variate vector autoregressive models on monthly observations of stock price index and the real effective exchange rate over 1985:1 to 1994:7. The study found unidirectional causality from exchange rate to stock prices in all the countries except the Philippines. This finding suggests policy implication that the respective governments should be cautious in their implementation of exchange rate policies since these policies have ramifications in their stock markets.
Pethe and Karnik (2000) investigated the interrelationships between stock prices and macro economic variables such as exchange rate of rupee vis-à-vis dollar, prime lending rate, narrow money supply, broad money supply and index of industrial production on the monthly data spanning from April 1992 to December 1997. By employing unit root test, cointegration and error correction models, the study found there was no long run stable relationship between stock prices, exchange rates, prime lending rate, narrow money supply, broad money supply and index of industrial production.
Karmarkar et al (2001) by employing the coefficient determination and regression analysis on weekly closing values of exchange rate (RM/US$) and five composite as well as five sectoral indices of stock market over the period 2000 concluded that the depreciation of the rupee with respect to dollar leads to an appreciation of stock prices and vice versa.
13 However, when Bhattacharya et al (2002) studied the nature of causal relation between stock market, exchange rate, foreign exchange reserves and value of trade balance in India from 1990:4 to 2001:3 by applying co-integration and long run Granger non causality test, they found that there was no causal linkage between stock prices and the three variables under consideration.
Muhammad, N. (2002) examined the long-run and short-run association between stock prices and exchange rates for four south Asian countries, namely Pakistan, India, Bangladesh and Srilanka for the period January 1994 to December 2000. The study employed monthly data and applied cointegration, error correction modeling approach and standard Granger causality tests. The major findings of the study are as follows. There is no long run equilibrium relationship between stock prices and exchange rates for Pakistan and India. In the case of Bangladesh, there is a long-run relationship between the variables considered for the study. The results for Srilanka showed a long-run relationship for lag one and two but for higher lag order; the study did not find any cointegration between stock price and exchange rate. However, the Engel and Granger test found a cointegrating relationship to stock prices and exchange rates for Srilanka. Granger causality test confirmed that there seemed to be no short run association between stock prices and exchange rates either in the case of Pakistan and India. The error correction model confirmed that there is bi-directional long-run causality in the case of Srilanka; however, there is no short-run causation in either direction for Bangladesh and Srilanka.
In order to examine the dynamic linkages between the foreign exchange and stock markets for India, Nath and Samanta (2003) employed the Granger causality test on daily data during the period March 1993 to December 2002. The empirical finding of the study suggests that these two markets did not have any causal relationship. When the study extended its analysis to see if liberalization in both the markets has brought them together or not then also the study did not find any significant causal relationship between exchange rate and stock price movements except for the years 1993, 2001 and 2002.
14 Mishra, A. K (2004) examined whether stock market and foreign exchange markets are related to each other or not in the context of India. The study employed Granger’s causality test and Vector Auto Regression technique on monthly stock return, exchange rate, interest rate and demand for money for the period April 1992 to March 2002. The major findings of the study are (a) there exists a unidirectional causality between the exchange rate and interest rate and between the exchange rate return and demand for money; (b) there is no Granger’s causality between the exchange rate return and stock return. Through Vector Auto Regression modeling, the study confirmed that though stock return, exchange rate return, the demand for money, and interest rate are related to each other but it lacks any consistent relationship. The forecast error variance decomposition further evidences that (a) the exchange rate return affects the demand for money, (b) the interest rate causes exchange rate return change (c) the exchange rate return affects the stock return, (d) the demand for money affects stock return, (e) the interest rate affects the stock return, and (f) the demand for money affects the interest rate.
4.0 Methodology:
The discussion in the preceding section reveals that there is neither theoretical nor empirical consensus on any definite pattern or consistent relationship between the stock and foreign exchange markets. Similarly, no conclusive generalization can be made about the causal nexus between these two markets. However, this is a question of vital importance to policy makers as well as investors, in so far as information from one market can be used to predict the behavior of the other market. If stock and foreign exchange markets are related and causation runs from stock market to foreign exchange market, then authorities can focus on domestic economic policies to stabilize the stock market. On the other hand, if causation runs from foreign exchange market to stock market, then the crises in the stock market can be prevented by controlling exchange rates.
In the very first step the study employed the ordinary least square time series regression analysis to examine the behavior of stock return and exchange rate return. The linear regression analysis is defined as the following two regression equations.
15 + + St = a REt Et (1)
= + + Et a1 R1S t E1t (2)
Where both a and a1 in equation 1 and 2 represents the intercept, R and R1 represents the coefficients for exchange rate return and stock price return respectively where, S t and Et are stock price return and exchange rate return at time period t and Et and E1t are the white noise error terms in both the equations.
In order to examine the dynamic interactions of stock and foreign exchange markets in India, various sophisticated time series econometric techniques are employed. Although there are many approaches to modeling causality or short-term interactions in temporal systems, we first apply the prototype model developed by Granger (1969) not only because it is the simplest and most straight forward but also the existence of causal ordering in Granger’s sense points to a law of causation and implies predictability and erogeneity (Abdalla, et al (1997)). However, the non-stationary nature of most times series data and the need for avoiding the problem of spurious or nonsense regression calls for the examination of their stationarity property. The study employed Augment Dickey Fuller Test and Phillips Perron test to remove the unit root problems among the variables both at without trend and intercept and with trend and intercept level respectively.
Granger’s causality [proposed by Granger (1969) and popularized by Sims (1972)] may be defined as the forecasting relationship between two variables. In short, Granger causality test states that if S & E are two time series variables and, if past values of a variable S significantly contribute to forecast the value of the other variable E, then S is said to be Granger causing E and vice versa. The test involves the following two regression equations:
n n S Y aiEt S + u t = 0 + E + E R; t- ; 1 t (3) i= 1 ;= 1
E = Y λ E S + t 1 + EMM i t-i + E S; t-; U2 (4) =1 ;= 1
16 where St and Et are the stock price and exchange rate to be tested, and u1t and u2t are mutually uncorrelated white noise errors, and t denotes the time period. Equation 3 postulates that current S is related to past values of S as well as of past E. Similarly, Equation 4 postulates that E is related to past values of E as well as related to past values of S. Three possible conclusions can be adduced from such analysis, viz, unidirectional causality, bi-directional causality and that they are independent of each other.
1. Unidirectional causality from E to S is indicated if the estimated coefficients on the lagged E in Equation 3 are statistically different from zero as a group (i.e.,
n ai # 0) and the set of estimated coefficients on the lagged S in Equation 4 is i 1
M not statistically different from zero (i.e., E 8j = 0). =1 2. Unidirectional causality from S to E exists if the set of lagged E coefficients in
n Equation 3 is not statistically different from zero (i.e., = 0 ) and the set of Eai i=1 the lagged S coefficients in Equation 4 is statistically different from zero (i.e.,
M # 0). E8j =1
3. Feedback or bilateral causality is suggested when the sets of E and S coefficients are statistically and significantly different from zero in both regressions.
4. Finally, independence is suggested when the sets of E and S coefficients are not statistically significant in both the regressions.
There are two important steps involved with the Granger’s causality test. First, stationary data is required for Equations 3 and 4. Second, in addition to the need for testing the stationary property of the data, the Granger methodology is somewhat sensitive to the lag length used in Equations 3 and 4. It is better to use more rather than fewer lag length since the theory is couched in terms of the relevant past information. The chosen lag
17 length must be matched with the actual lag length. If it is lesser than actual lag length, the omission of relevant lags can cause bias and if it is more than the relevant lag length causes the equation to be insufficient. To deal with this problem, Hsiao (1981) has developed a systematic autoregressive method for choosing appropriate lag length. Therefore, the appropriate lag length is one where Akaike’s Final Prediction Error (FPE) is lowest. Akaike’s information criteria (AIC), or Schwarz Criterion (SC) or Likelihood Ratio (LR) criterion or Hannan-Quinn information criterion (HQ) is also useful for choosing the lag length.
To further confirm the impulse response between stock price and exchange rate and to predict the behavior among them in coming future, the study extends the analysis towards Vector Auto Regression modeling (VAR). VAR system consists a set of regression equation in which all the variables are considered to be endogenous. In VAR methodology, each endogenous variable is explained by its lagged or past values and the lagged values of all other endogenous variables included in the model. In general, there are no exogenous variables in the model. Thus, by avoiding the imposition of a priori restriction on the model the VAR adds significantly to the flexibility of the model. A VAR in the standard form represented as: = St a10 + a11St-1 + a12Et-1 + e1t (5) = + Et a20 a21S t-1 + a22Et-1 + e2t (6)
Where, S t is the stock price at the time period t, Et is the exchange rate at the time period t, aio is element i of the vector Ao, aij is the element in row i and column j of the matrix A 1 and eit as the element i of the vector e t and it represents in the above equation as e1t and e2t respectively are white noise error term and both have zero mean and constant variances and are individually serially uncorrelated.
Now we discuss about various steps, which are involved in VAR estimation. To start with VAR estimation procedure requires the selection of variables to be included in the system. The variables included in the VAR are selected according to the relevant economic model. The next step is to verify the stationarity of the variables. Regarding the
18 issue of whether the variables in VAR need to be stationary Sims (1980) and Doan (1992) recommend against differencing even if the variables containing a unit root 1. Here in this paper, Augmented Dickey- Fuller (ADF) and Phillips Peron (PP) tests are used to carry out unit root test.
The next step is to select the appropriate lag length. The lag length of each of the variables in the system is to be fixed. For this we use Likelihood Ratio (LR) test. After setting the lag length, now we are in a position to estimate the model. But it may be noted that the coefficients obtained from the estimation of VAR model can’t be interpreted directly. To overcome this problem, Litterman (1979) had suggested the use of Innovation Accounting Techniques, which consists of both Impulse response functions (IRFS) and Variance Decompositions (VDS). Impulse response function is being used to trace out the dynamic interaction among variables. It shows how the dynamic response of all the variables in the system to a shock or innovation in each variable. For computing the IRFS, it is essential that the variables in the system are ordered and that a moving average process represents the system. Variance decomposition is used to detect the causal relations among the variables. It explains the extent at which a variable is explained by the shocks in all the variables in the system. The forecast error variance decomposition explains the proportion of the movements in a sequence due to its own shocks verses shocks to the other variables.
5.0 Variable Description and Data Points: To examine the dynamic interrelationship between stock and forex markets in India, the study considered two variables such as stock price return and exchange rate(INR/USD) return. To represent the Indian stock market, the present study considered two liquidity indices here such as Sensex and S & P CNX Nifty and to represent the Foreign exchange market, we have taken into consideration the nominal bilateral exchange rate of Indian Rupee versus US $. The stock return and exchange return is defined as flowingly.
1 They argue that the goal of a VAR analysis is to determine the inter-relationship among the variables, not to determine the parameter estimates. The main argument against differentiating is that it ‘throws away’ information concerning the co movements in the data such as the possibility of co integrating relationships.
19 RS t = ln (St) – ln (St_1)
REt = ln (Et) – ln (Et_1)
Where, RS t and REt represents the stock price return and exchange rate return and S t and
St_1 are the stock prices of time period t and t_1 and E t and Et_1 are the exchange rate of time period t and t_1 respectively.
The present study considered the monthly data of stock price and exchange rate, where the sample period spanning from February 1995 to March 2005, forming around 121 observations. The data for stock prices are collected from the respective web pages of BSE and NSE and the data on nominal bilateral exchange rate (INR/USD) are collected from the Handbook of Statistics on Indian Economy (2004_05).
6.0 Estimated Equation and Result Interpretation:
At the outset, before undertaking any time series econometric analysis of the data, it would be useful to see the broad trends and behavior of the variables, which may help in interpreting the model results latter. For this purpose, time series plots are drawn for all the variables. Figures 3 to 8 plot the monthly movement of stock indices and the exchange rates and the rates of return on their respective indices and exchange rate over the sample period. As can be expected, the monthly data on most of the variables exhibit trends (both stochastic and deterministic) and considerable volatility, which varied over time. It is also quite clear from these figures that the returns exhibit pronounced clustering, a fact consistent with the observed empirical regularities regarding the asset returns as well as the exchange rate returns.
In the next step, we have computed the descriptive statistics of the stock return and exchange rate return. The summary statistics are presented in the Table 1. It can be seen from the table that both stock indices return (Rsensex and Rnifty) are near normal. However, exchange rate return is not normal and more peak than in normal distributions. This supports the general observation that foreign exchange markets return is not normal distribution, but the stock market returns are near normal. The practical implication for the trading and investing community in the financial markets is that the return is near
20 normal distribution as we have observed in the case of both stock indices (Rsensex, Rnifty), the investing and trading strategy can be to buy and hold for a long span of time and there will be some certain profit out of the foregoing strategy. But if the return distribution is not normal as we have observed in the case of foreign exchange market in India, this strategy of ‘buy and hold’ for a long time may not necessarily yield any clear profit. Therefore, in foreign exchange market ‘convex trading strategies’ where the trader may buy in a market which is already appreciating and sell in a market which is depreciating. However, we are not at this stage able to go into the details of advising a profitable trading and investing strategy from the forgoing results, and in any case our results are relevant for further investigation and research.
To examine the stationarity property of all the variables used in our study, we have carried out the ADF and PP unit root test. All the tests have been conducted both with intercept alone and with intercept and time trend 2 . The null hypothesis is that there exists a unit root or the underlying process is non stationary. The results of unit root tests are given in Table 2. The optimum lag length in the case of ADF and PP tests is chosen on the basis of AIC and FPE criterion. From the table, we can see that the null hypothesis is rejected i.e. all the variables are stationary at their return (Rsensex, Rerate, Rnifty) level. However, the null hypothesis can not be rejected i.e. all the variables are non stationary at their level (Sensex, Erate, Nifty). Therefore, the OLS regression can be run with the data and variables at the return level without the fear of yielding spurious parameters.
In order to see the degree of association between the stock return and exchange rate return the correlation matrix is constructed. The results are reported in Tables 5 and 6 respectively. From the Table 5, it can be concluded return on Sensex and return on exchange rate are negatively correlated (r = -0.219) where as from Table 6 the same conclusion can be derived that both return Nifty and return exchange rate are also negatively correlated ( r = -0.211).
To examine the dependence (both at degree and direction) between the stock return and exchange rate return, the regression equations are estimated by the method of ordinary least squares (OLS), which method is justified earlier as they are found to be stationary
2 Eviews 4.0 package was used for the unit root tests.
21 variables. The adequacy of the equations in explaining stock return and exchange return behavior are judged by the appropriateness of the signs and magnitudes of the regression coefficients, statistical criteria such as the coefficient of multiple determination (R2), DW statistic, for auto correlation among residuals, ‘T’ values of the regression coefficients and the standard error of estimate (SEE), which are presented in Table 3 and 4 respectively. From the table, it is inferred that the coefficient of all the explanatory variables preserve expected sign. In Table 3, a one percent depreciation of return erate (INR/US$) will lead to 1.09 percent decrease in stock return (Rsensex). Like wise a one percent increase in stock return (Rsensex) will lead to the appreciation in exchange rate return by 0.04 percent. In Table 4, one percent depreciation in exchange rate leads to a 1.03 percent decrease in stock return (Rnifty). Similarly a one percent increase in stock return (Rnifty) leads to appreciate the exchange rate return (INR/USD) by 0.04 percent. This shows that both stock return and exchange rate return are positively related to each other.
The stock return and exchange rate return are positively related. The policy implication of this aforementioned results of the positive relation between stock return and exchange rate return appears to be not to a very good news for the foreign investors in India because ideally, for the portfolio diversification, the stock return and local currency return should be negatively correlated because when they convert to the base currency, if the local currency is depreciated together with the reduced stock return, it adds to the loss rather than reducing the loss to their portfolio. However, this aspect has to be further studied because the return of the stock market in India may be negatively correlated to the stock market return abroad which would be relevant to the foreign institutional investors. We have not examined that issue in the context of the correlation between stock and forex markets in India. Needless to mention, for international diversification of the portfolios, the correlations with the stock markets elsewhere have also to be further reexamined. Moreover, when the return in the stock market goes down, and the stock prices go down, there will be an obvious substitution effect from domestic currency denominated assets to foreign assets, and therefore, the domestic currency value goes down, and the return in the foreign exchange markets from that perspective also goes
22 down. Thus our results of the positive correlation between stock markets and foreign exchange markets can easily be explained in terms of a positive demand for domestic currency when the domestic stock prices increase, and the opposite action when domestic stock prices decrease and the demand for domestic currency falls. In the aforesaid perspective, the causality is from domestic stock prices to domestic currency. The export firms may not be that dominant to influence the causality from a depreciated domestic currency to a strong stock price movement in the Indian context.
As we mentioned in the last section, between any pair of variables there is possibility of unidirectional causality or bidirectional causality or none. This can also be the case between two pairs of variables used in our empirical analysis. These are stock return (both Rsensex and Rnifty) and exchange rate return (Rerate). There are arguments in the literature to support more than one type of relationship. We therefore would like to examine examine the direction of causality between these two pairs of variables before formulating models to analyze the interrelationship between them. As our variables in return form are already found in stationary, we can directly proceed with Granger causality. In this case, we can explain the causality through changes in one variable causing the changes in another variable which would be find out through Granger causality. The first step for the Granger causality test is to found out the appropriate lag length for each pair of variables. For this purpose, we used the vector auto regression (VAR) lag order selection method available in Eviews 4.0 package. This technique uses six criteria, namely log likelihood value (LogL), sequential modified likelihood ratio (LR) test statistic, Akaike final prediction error (FPE), Akaike information criterion (AIC), Schwarz information criterion (SC) and Hannan-Quinn information criterion (HQ), for choosing the optimal lag length. These lag specification criteria results are reported in Tables 7 and 8 respectively. In practice, it may not be possible that all the criteria will suggest one lag length as optimal. One may have to be content with a lag length supported by 2-3 criteria only. In this study, the optimum lag length has been found out to be 2 and 1 for return Sensex and return erate and return Nifty and return erate respectively, based on two criteria, AIC and FPE.
23 Finally, the result of Granger causality test is reported in Tables 9 and 10. From both the table it may be concluded that the null hypothesis that there is no Granger causality between the pairs can not be rejected only in the case of return Nifty and return exchange rate at 5 percent level of confidence. However, in case of other variables the null hypothesis is strongly rejected. From table 9, it is clear that the past values of return Sensex do not Granger cause the current values of return on exchange rate. Similarly the past values of return on exchange rate do not Granger cause the present values of return on Sensex. From aforementioned results, it is clear that all past values about the respective markets (both stock and forex) do not influence the current values of the return in both stock (BSE Sensex) and foreign exchange markets. As the past values of the different markets are already factored and incorporated in the returns of Sensex and exchange rates. This shows that there is informational efficiency in the markets of Sensex and foreign exchange rates. These results should be contrasted with the regression results reported in Table 3. In Table 3, the current values of return on Sensex and return on exchange rate are influenced the current rates of return on Sensex and exchange rates. These further shows that return Sensex and return exchange rate market are perfectly integrated with each other.
From Table 2, we can see that the variables are non stationary either at their level and log level form, and in difference form, they are stationary. This supports the random walk models of weak form of efficiency for respective markets. This is consistent with our results reported earlier that the return Sensex and return foreign exchange markets are information ally efficient and integrated with each other.
In Table 10, the past values of the changes in exchange rate return do not Granger cause the changes on return on Nifty. However, the past values of return Nifty do Granger cause the current values of return in foreign exchange market at 3 percent significance level. From this, it is surmised that the stock market (Nifty) is more efficient from information criteria than the foreign exchange (INR/USD) market. But from weak form of market efficiency point of view, both Nifty and foreign exchange markets follow the random walk pattern. Both at their level and log level forms, they are non stationary and at their differenced form they are stationary.
24 The result of dynamic interaction between stock return and exchange rate return is extracted by employing Vector Auto Regression technique. The result of forecast error variance at 24 step ahead horizon is reported in Table 11 and 12 respectively. The impulse response between stock return and exchange rate return is plotted in Graph 1and 2 respectively.
Returns on Stock prices (BSE Sensex, NSE Nifty) and Return on Exchange rate (INR/US$)
In Table 11, a shock in return on erate explains only 3.41 percent of forecast error variance in return on Sensex, whereas return on Sensex explains a substantial portion i.e. 9.01 percent of forecast error variance in return in exchange rate from 6th step ahead horizon onwards. From this finding, it can be surmised that the causality runs from return on Foreign exchange rates to return on Sensex as, at least, 9 percent of the Return on Sensex is explained by the Return on Foreign exchange rates. However, in Table 12, return on Nifty explains 3.82 percent of forecast error variance in return on exchange rate whereas marginally higher i.e. 4.10 percent of variance in return on Nifty is explained by return on exchange rate from 5-step ahead horizon. Thus we fail to conclude if the causality runs from Return on Nifty to return on exchange rate or vice versa.
From Graph 1, a one standard deviation shock in return on Sensex exchange rate initially appreciates up to second month and again it appreciates and converges after fifth month. Whereas, a one standard deviation shock in return on foreign exchange rate return on Sensex initially increase up to second month and decreases up to fourth month and after that it converges to the initial value. In Graph 2 a one standard deviation shock in return on foreign exchange rate increases the return on Nifty up to fifth month and then converges.
7.0 Conclusions:
Both the stock indices returns are near normal, whereas exchange rate return is non normal and more peak. The practical implication for the trading and investing community in the financial markets is that the return is near normal distribution as we have observed
25 in the case of both stock indices (Rsensex, Rnifty), the investing and trading strategy can be to buy and hold for a long span of time and there will be some certain profit out of the foregoing strategy. But if the return distribution is not normal as we have observed in the case of foreign exchange market in India, this strategy of ‘buy and hold’ for a long time may not necessarily yield any clear profit. Therefore, in foreign exchange market ‘convex trading strategies’ where the trader may buy in a market which is already appreciating and sell in a market which is depreciating. However, we are not at this stage able to go into the details of advising a profitable trading and investing strategy from the forgoing results, and in any case our results are relevant for further investigation and research.
The stock return and exchange rate return are positively related. The policy implication of this aforementioned results of the positive relation between stock return and exchange rate return appears to be not to a very good news for the foreign investors in India because ideally, for the portfolio diversification, the stock return and local currency return should be negatively correlated because when they convert to the base currency, if the local currency is depreciated together with the reduced stock return, it adds to the loss rather than reducing the loss to their portfolio. However, this aspect has to be further studied because the return of the stock market in India may be negatively correlated to the stock market return abroad which would be relevant to the foreign institutional investors. We have not examined that issue in the context of the correlation between stock and forex markets in India. Needless to mention, for international diversification of the portfolios, the correlations with the stock markets elsewhere have also to be further reexamined. Moreover, when the return in the stock market goes down, and the stock prices go down , there will be an obvious substitution effect from domestic currency denominated assets to foreign assets, and therefore, the domestic currency value goes down, and the return in the foreign exchange markets from that perspective also goes down . Thus our results of the positive correlation between stock markets and foreign exchange markets can easily be explained. explained in terms of a positive demand for domestic currency when the domestic stock prices increase, and the opposite action when domestic stock prices decrease and the demand for domestic currency falls.. In the aforesaid perspective, the causality is from domestic stock prices to domestic currency.
26 The export firms may not be that dominant to influence the causality from a depreciated domestic currency to a strong stock price movement in the Indian context
From the Granger’s causality test for return data, it is found that there is no causality for all the return series of stock and exchange rate except return Nifty and return exchange rate. There is a unidirectional causality between return Nifty and return exchange rate and the causality is running from return Nifty to return exchange rate. We would like to interpret the causality results as a test of weak form of efficiency from an informational criteria as all past informations from the other market are incorporated through the rational expectations by the investors in the respective current markets. Therefore, the past informations from the other market will not be able to predict the return in the current market. We may note that that the simple OLS regressions result show that the stock market influences the forex market and vice versa. But all informations from the other markets are factored into the returns of the respective current markets. From impulse response functions, it can be seen that a one standard deviation shock in the return of any market produces the effect on the other market for a few months and then converges. Therefore, the impulse response function also corroborates our conclusion that both the markets are efficient from the stand point of the weak form of market efficiency.
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33
Table: 1
Descriptive Statistics
Variables Sample Mean SD SK KURTOSIS JB Rsensex 1995:02- 0.0049 0.0645 -0.1754 2.7482 0.9477 2005:03 (0.622) Rerate 1995:02- 0.0027 0.0130 0.2503 10.8169 311.8904 2005:03 (0.000) Rnifty 1995:02- 0.0053 0.0639 -0.1298 2.5925 1.1865 2005:03 (0.552) Note: SD is the standard deviation SK is skew ness JB is Jarqua-Bera statistics Figures in parentheses represent the significance level
Table: 2 Unit Root Test Variables ADF PP None Intercept Trend & None Intercept Trend & Intercept Intercept Sensex 0.85(4) -0.76(4) -1.40(4) 0.72(4) -0.69(4) -1.49(4) Erate 1.26(4) -2.44(4) -0.21(4) 1.49(4) -2.29(4) 0.00(4) (INR/US$) Nifty 0.91(4) -0.62(4) -1.61(4) 0.83(4) -0.48(4) -1.64(4) Rsensex -4.66(4) -4.73(4) -4.80(4) -9.34(4) -9.35(4) -9.38(4) Rerate -4.10(4) -4.48(4) -5.54(4) -8.37(4) -8.58(4) -9.03(4) Rnifty -4.74(4) -4.82(4) -4.90(4) -9.28(4) -9.30(4) -9.33(4) Lsensex 0.87(4) -1.22(4) -1.75(4) 0.69(4) -1.16(4) -1.84(4) Lnifty 0.93(4) -1.06(4) -2.00(4) 0.76(4) 0.98(4) -2.08(4) Lerate 1.76(2) -2.53(2) -0.26(2) 1.81(2) -2.51(2) -0.30(2)
Note: The critical values for ADF test at 1%, 5% and 10% are -2.5833,-1.9427 and - 1.6171 respectively. The critical values for PP test at 1%, 5% and 10% are -4.0361,- 3.4472 and -3.1484 respectively. ‘L’ stands for logarithmic transformation. Figures in parentheses represent the optimum lag length.
34
Table-3 Regression Result: Rerate and Rsensex Dependent Independent coefficient Std.error t-stat R2 DW Variable variable Rsensex Rerate -1.090008 0.441454 -2.469133 0.0483 1.788 (0.01) Constant 0.007908 0.005847 1.352524 (0.17) Rerate Rsensex -0.044356 0.017964 -2.469133 0.0483 1.641 (0.01) Constant 0.002934 0.001158 2.533895 (0.01)
Table-4 Regression Result: Rerate and Rnifty Dependent Independent coefficient Std.error t-stat R2 DW Variable variable Rnifty Rerate -1.037698 0.438157 -2.368325 0.044 1.769 (0.01) Constant 0.008175 0.005803 1.408598 (0.16) Rerate Rnifty -0.043032 0.018170 -2.368 0.044 1.63 (0.01) Constant 0.002945 0.001161 2.537 (0.01)
Table-5 Correlation Matrix: Rerate and Rsensex Rsensex Rerate Rsensex 1 Rerate -0.219884 1
Table-6 Correlation Matrix: Rerate and Rnifty Rnifty Rerate Rnifty 1 Rerate -0.211315 1
35 Table-7 Lag length Criterion-Rsensex and Rerate
Lag LogL LR FPE AIC SC HQ 0 488.4959 NA 6.74E-07 -8.535015 -8.487012* -8.515533 1 495.3135 13.27646* 6.41 E-07 -8.584448 -8.440437 -8.526002* 2 499.3941 7.803217 6.40E-07* -8.585861 * -8.345844 -8.488452 3 502.8137 6.419324 6.47E-07 -8.575680 -8.239655 -8.439306 4 503.9859 2.159257 6.80E-07 -8.526068 -8.094037 -8.350731 5 504.3209 0.605338 7.26E-07 -8.461770 -7.933732 -8.247469 6 505.2952 1.726325 7.66E-07 -8.408687 -7.784642 -8.155422 7 507.4211 3.692468 7.92E-07 -8.375809 -7.655757 -8.083580 8 507.9501 0.900223 8.43E-07 -8.314914 -7.498855 -7.983722 * indicates lag order selected by the criterion LR: sequential modified LR test statistic (each test at 5% level) FPE: Final prediction error AIC: Akaike information criterion SC: Schwarz information criterion HQ: Hannan-Quinn information criterion
Table-8 Lag length Criterion-Rnifty and Rerate
Lag LogL LR FPE AIC SC HQ 0 489.5143 NA 6.62E-07 -8.552883 -8.504879* -8.533401 1 496.6011 13.80049* 6.27E-07* -8.607036* -8.463026 -8.548590* 2 499.9866 6.474153 6.34E-07 -8.596257 -8.356239 -8.498847 3 503.4231 6.450972 6.40E-07 -8.586371 -8.250346 -8.449997 4 504.4638 1.917097 6.74E-07 -8.534453 -8.102422 -8.359116 5 504.6430 0.323829 7.21 E-07 -8.467422 -7.939384 -8.253121 6 505.4334 1.400378 7.64E-07 -8.411112 -7.787066 -8.157847 7 507.7238 3.978168 7.88E-07 -8.381120 -7.661067 -8.088891 8 508.5430 1.394086 8.34E-07 -8.325316 -7.509257 -7.994124 * indicates lag order selected by the criterion LR: sequential modified LR test statistic (each test at 5% level) FPE: Final prediction error AIC: Akaike information criterion SC: Schwarz information criterion HQ: Hannan-Quinn information criterion
36
Table-9 Granger’s Causality Test: Rsensex and Rerate
Null Hypothesis: Obs F-Statistic Probability Rsensex does not Granger Cause Rerate 120 2.12748 0.12380 Rerate does not Granger Cause Rsensex 2.08794 0.12862
Table-10 Granger’s Causality Test: Rnifty and Rerate
Null Hypothesis: Obs F-Statistic Probability Rerate does not Granger Cause Rnifty 121 0.58640 0.44534 Rnifty does not Granger Cause Rerate 4.84728 0.02963
Table-11 Variance Decomposition: Rerate and Rsensex
Variance Decomposition of Rerate:
Period Rerate Rsensex
1 100.0000 0.000000 2 96.86167 3.138328 3 96.60386 3.396139 4 96.58852 3.411484 5 96.58452 3.415482 6 96.58229 3.417710 7 96.58180 3.418200 8 96.58172 3.418280 9 96.58170 3.418297 10 96.58170 3.418302 11 96.58170 3.418303 12 96.58170 3.418303 13 96.58170 3.418303 14 96.58170 3.418303 15 96.58170 3.418303 16 96.58170 3.418303 17 96.58170 3.418303 18 96.58170 3.418303 19 96.58170 3.418303 20 96.58170 3.418303 21 96.58170 3.418303 22 96.58170 3.418303 23 96.58170 3.418303 24 96.58170 3.418303
37 Variance Decomposition of Rsensex:
Period Rerate Rsensex
1 4.444223 95.55578 2 4.538094 95.46191 3 8.497276 91.50272 4 8.961667 91.03833 5 8.998258 91.00174 6 9.007553 90.99245 7 9.011356 90.98864 8 9.012205 90.98779 9 9.012356 90.98764 10 9.012389 90.98761 11 9.012398 90.98760 12 9.012400 90.98760 13 9.012400 90.98760 14 9.012400 90.98760 15 9.012400 90.98760 16 9.012400 90.98760 17 9.012400 90.98760 18 9.012400 90.98760 19 9.012400 90.98760 20 9.012400 90.98760 21 9.012400 90.98760 22 9.012400 90.98760 23 9.012400 90.98760 24 9.012400 90.98760 Cholesky Ordering: Rerate, Rsensex
38 Table-12 Variance Decomposition: Rerate and Rnifty
Variance Decomposition of Rerate:
Period Rerate Rnifty
1 100.0000 0.000000 2 96.34074 3.659259 3 95.93667 4.063326 4 95.90033 4.099671 5 95.89718 4.102815 6 95.89691 4.103085 7 95.89689 4.103108 8 95.89689 4.103110 9 95.89689 4.103111 10 95.89689 4.103111 11 95.89689 4.103111 12 95.89689 4.103111 13 95.89689 4.103111 14 95.89689 4.103111 15 95.89689 4.103111 16 95.89689 4.103111 17 95.89689 4.103111 18 95.89689 4.103111 19 95.89689 4.103111 20 95.89689 4.103111 21 95.89689 4.103111 22 95.89689 4.103111 23 95.89689 4.103111 24 95.89689 4.103111
39 Variance Decomposition of Rnifty:
Period Rerate Rnifty
1 2.960023 97.03998 2 3.740657 96.25934 3 3.820138 96.17986 4 3.827168 96.17283 5 3.827775 96.17223 6 3.827827 96.17217 7 3.827831 96.17217 8 3.827831 96.17217 9 3.827831 96.17217 10 3.827831 96.17217 11 3.827831 96.17217 12 3.827831 96.17217 13 3.827831 96.17217 14 3.827831 96.17217 15 3.827831 96.17217 16 3.827831 96.17217 17 3.827831 96.17217 18 3.827831 96.17217 19 3.827831 96.17217 20 3.827831 96.17217 21 3.827831 96.17217 22 3.827831 96.17217 23 3.827831 96.17217 24 3.827831 96.17217 Cholesky Ordering: Rerate, Rnifty
40 Graph: 1 Impulse Response Function: Rerate and Rsensex
Response to Cholesky One S.D. Innovations
Response of RERATE to RERATE Response of RERATE to RSENSEX .016 .016
.012 .012
.008 .008
.004 .004
.000 .000
-.004 , , , , , , , , , ,-.004 \ /, 5 10 15 20 5 10 15 20
Response of RSENSEX to RERATE Response of RSENSEX to RSENSEX
.06 .06
.04 .04
.02 .02
.00 .00
-.02 , , -.02 5 10 15 20 5 10 15 20
41 Graph: 2 Impulse Response Function: Rerate and Rnifty
Response to Cholesky One S.D. Innovations
Response of RERATE to RERATE Response of RERATE to RNIFTY .016 .016
.012 .012
.008 .008
.004 .004
.000 .000 \ V -.004 , , , , , , , , , , -.004 5 10 15 20 5 10 15 20
Response of RNIFTY to RERATE Response of RNIFTY to RNIFTY
.06 .06
.04 .04
.02 .02
.00 ^ .00
-.02 , , -.02 5 10 15 20 5 10 15 20
42 Graph: 3
SENSEX:Jan 1993-Mar 2005
8000.00 - 7000.00 - 6000.00 5000.00 - •^ 4000.00 — SENSEX a- 3000.00 - 2000.00 1000.00 0.00 W) 110 r- 00 ON O -- N M 't W) O^ O^ O^ O^ O^ O O O O O O
ti ti ti ti ti ti ti ti ti ti ti Month
Graph-4
Rsensex:Jan 1993-Mar 2005
0.2
0.15 - I
0.1 -
0.05 I L ^ V 0 I ] Rsensex i -0.05 1 1A I^ ,^ f -0.1 - I -0.15
-0.2 Month
43
Graph-5
NIFTY:Jan 1993-Mar 2005
2500.00 2000.00 1500.00 NIFTY a 1000.00 500.00 0.00 kn \^O [— 00 OIN O .--^ N M t/ O^ O^ O^ O^ O^ O O O O O O
cz cz cz cz cz cz cz cz cz cz cz ti ti ti ti ti ti ti ti ti ti ti
Month
Graph -6
Rnifty:Jan 1993-Mar 2005
0.2 0.15 0.1 I I 1 0.05 - , i I v I 1 0 I i Rnifty r c^ as x -0.05 oC"4 0 0 0 -0.1 1 ti ti ti ti ti Iti ti ff d -0.15 - -0.2 Month
44
Graph-7
ERATE:Jan 1993-Mar 2005
60.0000 50.0000 40.0000 30.0000 EBATE 20.0000 10.0000 0.0000 in r- 00 GN O M ^ in G^ G^ G^ G^ G^ O O O O O O
ti ti ti ti ti ti ti ti ti ti ti
Month
Graph-8
Rerate:Jan 1993-Mar 2005
0.06
0.04 0.02
x., 0 - m"W o, o c14 1 Berate -0.02 -, x 0 0 0 0 Cd -0.04 - ti ti ti ti ti ti ti ti it -0.06
-0.08
Month
45 Exhibit 17
Fannie Mae Hearing Transcript - 2.13.09 1 92cegenc 1 UNITED STATES DISTRICT COURT 1 SOUTHERN DISTRICT OF NEW YORK 2 x 2 3 IN RE FANNIE MAE MATTERS, 3 4 4 08 CV 7831(GEL) 5 and related cases 5 x 6 6 February 13, 2009 7 11:34 a.m. 7 8 8 Before: 9 9 HON. GERARD E. LYNCH, 10 10 District Judge 11 11 APPEARANCES 12 12 GOLD BENNETT CERA & SIDENER, LLP 13 Attorneys for Plaintiff Movant Horizon Asset Management 13 BY: SOLOMON B. CERA 14 14 FEDERMAN & SHERWOOD 15 Attorneys for Plaintiff Williams 15 BY: WILLIAM B. FEDERMAN 16 16 KAPLAN FOX 17 Attorneys for Plaintiff TCRS 17 BY: FREDERIC S. FOX 18 DONALD R. HALL 18 19 STULL, STULL & BRODY 19 Attorneys for Plaintiff 20 BY: JULES BRODY 20 21 LABATON SUCHAROW 21 Attorneys for Plaintiff Massachusetts 22 BY: CHRISTOPHER J. KELLER 22 23 LATHAM & WATKINS 23 Attorneys for Fannie Mae 24 BY: JAMES BRANDT 24 25 SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 0 2 2 92cegenc 1 A P P E A R A N C E S (continued) 2 2 3 BERNSTEIN LITOWITZ BERGER & GROSSMANN, LLP 3 Attorneys for Alameda County 4 BY: NOAM MANDEL 4 5 SIMPSON THACHER & BARTLETT, LLP 5 Attorneys for Underwriter Defendants 6 BY: GEORGE S. WANG 6 7
Fannie Mae Hearing Transcript - 2.13.09 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 0 33 92cegenc 1 (In open court) 2 THE DEPUTY CLERK: In Re Fannie Mae Matters. 3 THE COURT: Good morning, everyone. 4 We're here for an initial conference in this matter, 5 which I gather is now officially a multidistrict litigation 6 case, thanks to the filing of some additional actions outside 7 this district. I don't know if people are aware of this, 8 there's an annual conference in Palm Beach for judges who have 9 multidistrict litigation. So I'm always grateful when I've got 10 a case anyway and it's got dozens of related cases and gets no 11 more complicated if somebody files one in Chicago or 12 Los Angeles or New Jersey, but once somebody does, there are 13 perks for the judge involved. So thanks to those folks. 14 The principal order of business here today is to 15 appoint lead plaintiffs in the case. Now, normally this is not 16 a terribly complicated matter. I'm a great believer in two 17 principles that I think underlie the PSLRA that usually 18 simplify the choice of lead plaintiffs. One is that we 19 generally want to appoint the plaintiff with the largest 20 losses, which tends to make it a somewhat mechanical process; 21 and two is that other things being equal, we want to appoint 22 lead plaintiffs who are institutional investors, or at least 23 people who have some significant resources and time and legal 24 expertise to devote to the case. I also incline to prefer to 25 appoint, if possible, a single lead plaintiff, rather than a SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 0 44 92cegenc 1 group. But that's not inflexible, and I'm prepared to appoint 2 a group if a group otherwise appears most suitable. I'm even 3 prepared under appropriate circumstances to put movants 4 together, if they're willing to work together and sort of 5 cobble a group, if I think that is otherwise appropriate. 6 Now, in this case, perhaps because of the magnitude of 7 the losses and of the number of claimants, there are a number 8 of competing applicants who are plausible candidates, even 9 within this apparently objective framework. And as is often 10 the case, the question of how you calculate the losses or if in 11 what way different individuals or groups have suffered the 12 losses make it less simple than it might appear, and the 13 consequence here is I'm not sure it's possible to resolve the 14 appointment issues simply by doing some arithmetic and then 15 appointing whoever comes up with the highest number. 16 Now I've reviewed all the applications here and the
Fannie Mae Hearing Transcript - 2.13.09 17 various oppositions and contending statements that folks have 18 made, and I'm grateful for the answer and for the quality of 19 many of those presentations, and I'm prepared to make an 20 appointment. In a way I'm going to address this by kind of 21 process of elimination, which is sort of how I thought about 22 it. 23 First, there is an argument advanced by the Milberg 24 firm on behalf of I guess it's the strong group of contenders 25 for lead plaintiff that in effect argues that I ought to split SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 0 55 92cegenc 1 up the claims here and allow separate actions to proceed 2 against separate underwriters based on different types of 3 claims, some of which sound in strict liability and others in 4 fraud, and some of which would be divided according to the 5 specific securities that were purchased. 6 There are two principal ideas that I take it underlie 7 this argument or this application. One is that some strict 8 liability claims could hypothetically proceed relatively 9 rapidly. The second is that a lead plaintiff, which does not 10 itself have claims against particular underwriters or claims 11 regarding particular securities, will not be as sufficiently 12 vigorous in proceeding against those underwriters. 13 Neither argument is persuasive to me. I'm certainly 14 intrigued by what seems to me to be an innovative approach, and 15 I've given careful consideration to the possibility that this 16 recommendation, which I think is somewhat unconventional, might 17 be as successful in moving certain parts of the case along 18 faster. Nevertheless, the practice or tradition in these 19 matters appears to be to the contrary. In every case I have 20 handled, and in virtually all of the cases of which I'm aware, 21 there has been a single lead plaintiff or group which pursues 22 the claims against all possible defendants who have wronged the 23 class based on all possible theories. 24 Now, tradition or precedent alone is not a reason to 25 presume that that's the best way to proceed, but there is some SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 0 66 92cegenc 1 force to following a road that's been laid out in prior cases, 2 especially when that road has proven successful. And the 3 principal reason why I reject the approach suggested by the 4 strong group is that the traditional road has proven successful 5 in handling major securities fraud cases. It has certainly not 6 been my experience, quite the contrary, that lead plaintiffs 7 have failed to pursue vigorously claims against all possible 8 defendants, regardless of whether the individual lead plaintiff 9 has those particular classes of securities or has a claim 10 against a particular underwriter or a particular defendant. 11 In all of the cases I've handled or reviewed in 12 researching this issue, it appears that the lead plaintiffs 13 have had no trouble tracking down everybody against whom 14 plausible claims have to be made, and many other defendants 15 besides, and pursuing those claims very vigorously, nor do I 16 see a reason to separate out those cases or complaints in which 17 at least some plaintiffs want to proceed primarily on strict 18 liability grounds. I don't think there's any conflict of 19 interest among parties who all want to establish liability 20 where there are multiple different grounds of liability that 21 might apply to different defendants. I don't see any reason 22 why suitable lead plaintiff would not want to proceed 23 vigorously on any strict liability claims that can be made and 24 can nail down those claims quickly while proceeding on whatever 25 other theories can be brought against other parties.
Fannie Mae Hearing Transcript - 2.13.09 SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 0 7 7 92cegenc 1 In terms of the actual administration of doing those 2 multiple agendas, I recognize that if money is gathered in in 3 various settlements against particular defendants, it may take 4 longer for parties -- for class members to get distributions if 5 there is one big class and one big pot than if some plaintiffs 6 were allowed to proceed separately. 7 But first of all, I don't think this is inevitable. 8 If there are specific claims against specific defendants that 9 inure to the benefit of only some members of certain 10 subclasses, there's no reason why a distribution of such 11 amounts cannot proceed whenever it's appropriate. On the other 12 hand, to the extent that some claims could result in recoveries 13 against parties who may be liable to different subclasses on 14 different theories, first, those defendants are unlikely in the 15 first place to settle a claim against only some plaintiffs and 16 leave themselves exposed to other claims; and second, if they 17 did do that and then were not solvent enough to pay off other 18 claims, it seems to me that the cause of justice due all 19 injured parties would not be served by allowing some people to 20 make a quick strike and get whatever money there is to be 21 gotten and leaving those with more complicated claims out in 22 the cold. So I don't think that's a good solution, and I 23 believe we should appoint a lead plaintiff or plaintiffs who 24 have the most comprehensive possible representation. 25 On the other hand, I am persuaded that in this case it SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 0 8 8 92cegenc 1 may not be desirable to have a single lead plaintiff because 2 there may be substantive conflicts of interest among those 3 comprising the largest hypothetical class. The biggest source 4 of conflict seems to me to be between the holders of common and 5 preferred shares. I do not think it's possible for a lead 6 plaintiff that has primarily suffered losses on preferred stock 7 to fairly represent the interest of common shareholders largely 8 for the reasons thoughtfully laid out in Professor Green's 9 declaration. 10 Now, the reverse may not be true. It may be possible 11 to have a single lead plaintiff with primarily losses in common 12 stock, but I'm inclined to think that it would be helpful in 13 the circumstances of this case to have separate lead plaintiffs 14 to represent the interests of common and preferred 15 shareholders. 16 The next issue I want to address is the position of 17 Horizon, one of the movants, which strikes me as somewhat 18 peculiar. I agree with the overwhelming weight of authority in 19 this and other districts holding that an investment adviser 20 ordinarily does not have standing to bring claims on behalf of 21 its clients. Now, I recognize that Horizon has some losses 22 that it does have standing to raise, either because it has 23 received assignments or because it has its own independent 24 losses personal to it, but nevertheless, I don't think it's 25 appropriate simply to say that because Horizon can bring some SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 0 9 9 92cegenc 1 claims in its own right, that it should get credit for its 2 being a party to the largest losses by aggregating claims it 3 does not have standing to bring with those that it does have 4 standing to bring. And if only the latter are taken into 5 account, Horizon becomes not the largest stake holder, as it
Fannie Mae Hearing Transcript - 2.13.09 6 claims to be, if it were given credit for all of its clients' 7 losses; it would be by a large measure the largest stake 8 holder. 9 But if it only is credited with those losses that have 10 standing to represent, then it becomes simply one of a number 11 of contenders with losses in the 10 to 20 million dollar range. 12 I don't think it has established that it is a suitable lead 13 plaintiff in view of the doubts about its right to bring all of 14 the claims that it has presented to the Court. 15 I was next going to address the application of the 16 so-called institutional investor group, the one that includes 17 the North Carolina plaintiffs, but I understand that that 18 application has been withdrawn. 19 So this, a process of elimination, seems to leave me 20 with only a few significant contenders. The Tennessee 21 retirement system has extremely large losses which dwarf those 22 of any other movant who represents the interest of preferred 23 shareholders. Although TCRS has losses in both common and 24 preferred shares, the vast preponderance of its losses are in 25 preferred shares. And since as I've already indicated I think SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 010 92cegenc 1 the interest of preferred and common shareholders need to be 2 separated, I will appoint TCRS as the lead plaintiff 3 representing preferred shareholders. 4 With respect to common shareholders, although there 5 are several contenders in the same ballpark, the largest losses 6 were suffered by the Massachusetts public fund. I've carefully 7 considered the argument this litigant is too overburdened by 8 serving as the lead plaintiff in other actions, but on balance 9 I think this is a sword that cuts both ways. It does tend to 10 show that this institutional investor has developed some 11 expertise in this area and has been trusted by other courts as 12 the lead plaintiff. And that weighs against the notion of 13 excessive burden. 14 I also don't think the burden is so excessive. After 15 all, it is the counsel hired by lead plaintiff, rather than the 16 lead plaintiff itself, that will do the principal litigation 17 leg work. What the client has to do is to evaluate the various 18 options presented by the lawyers and come to understand the 19 litigation. I don't think it's impossible to do this for a 20 number of different cases. Accordingly, the Court will grant 21 the motion to consolidate the various cases pending before me, 22 appoint the Tennessee consolidated retirement system as the 23 lead plaintiff representing preferred shareholders and the 24 Massachusetts public pension funds as the lead plaintiff 25 representing the common shareholders. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 011 92cegenc 1 A couple of other issues first. I'm generally 2 inclined to approve the selection of lead counsel by these two 3 plaintiffs, with a couple of caveats. And I'm certainly 4 familiar with the law of both Kaplan Fox and the Labaton firm, 5 and I think these are suitably experienced and substantial 6 firms and are appropriately retained. I have a hesitation 7 always about appointing colead counsel. I think it's good to 8 have one lead captain of a ship as much as possible. But I 9 think that is ultimately a choice for the lead plaintiff. 10 And while I would suggest that it might be desirable 11 to have one lead law firm, of course I assume that that law 12 firm in each case is likely to enlist others to assist it, and 13 I'm not completely wedded to the idea of just having one law 14 firm as lead counsel. I think lead plaintiff should just
Fannie Mae Hearing Transcript - 2.13.09 15 consider that and let me know what its decision is. 16 But there is one other issue. I don't think that any 17 of the applicants -- and I'm pretty sure that neither of the 18 successful applicants said anything in its papers about any fee 19 arrangements or negotiations that had taken place. Now, of 20 course, I realize that if there is going to be any recovery in 21 this litigation, it will be up to me to make an award of 22 attorneys fees. On the other hand, in doing so, I have often 23 been favorably influenced by agreements that have been made by 24 lead plaintiffs up front that the lead plaintiffs regard as 25 appropriate negotiated fees. And certainly if there have been SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 012 92cegenc 1 any such negotiations, it seems to me that it is more than 2 desirable that any such agreements be disclosed to the Court. 3 So while I will appoint the Kaplan Fox and Labaton 4 firms as lead counsel, that is at least to some extent 5 provisional. And in the two respects I've mentioned, number 6 one, TCRS will tell me if they really think it's a good idea to 7 have colead counsel. I'm prepared to defer to it, but I've 8 stated my preference for a single lead law firm. 9 And then secondly, I would like to receive within a 10 couple of weeks first a disclosure of any negotiated agreements 11 that exist between the lead plaintiffs and these firms that are 12 representing them. And if none have been made, I'd like the 13 parties to at least consider whether it's appropriate to reach 14 some tentative agreement as between the plaintiffs and counsel 15 on what they think up front might be an appropriate way of 16 approaching fees, if there are recoveries. 17 Okay. The next thing on my agenda is to set up a 18 schedule. 19 MR. BRODY: Jules Brody, Stull, Stull & Brody. I have 20 with me in the courtroom Mr. Kraut, who's cocounsel in the 21 case, and also I have Mr. Marx, who's chairman of the board of 22 the Berkshire bank corporation, is one of the movants together 23 with two other directors of the bank. So they are truly 24 institutional clients. The bank itself, it's a matter of 25 public record, suffered substantial losses. And I know your SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 013 92cegenc 1 Honor has rejected this point, but the fact that the 2 institution that your Honor selected for the preferred has a 3 type of shares, and in our view and Mr. Marx's view -- and if 4 your Honor would like him to address the point, it's -- it 5 can't in this situation where there's $7 billion on the issue 6 that they were involved with, to have counsel -- they have -- 7 represent an institution has common shares also, is an inherent 8 conflict. And let me further elaborate. 9 THE COURT: No. Look, I've read all the papers. I've 10 thought about it. In the case of Tennessee, we're talking 11 about some 60-odd million dollars of losses in preferred 12 shares. That's an enormous amount of money, far more than any 13 other preferred shareholders. The common shares losses are 14 $3 million, which is something like that. 15 MR. FOX: Yes, on a LIFO basis. 16 THE COURT: It just seems to me that it's not 17 realistic to think that this is going to make that plaintiff be 18 in a position of conflict or be disloyal to getting the largest 19 possible recovery for the preferred shareholders. And it's a 20 hypothetical position. To say there is some kind of conflict 21 but to say that that's a real conflict would in effect say that 22 this organization, this institution is incapable of 23 representing its own interests because it has some little tail,
Fannie Mae Hearing Transcript - 2.13.09 24 you know, wagging in some other direction. 25 MR. BRODY: Can I just address this in 60 seconds or SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 014 92cegenc 1 less? 2 THE COURT: No, it's done. I've been there. I've 3 read it. I've understood it. I may be wrong. There are folks 4 upstairs who deal with me when I'm wrong. I don't need to hear 5 more about it at this point, especially because I guess what I 6 should have said to the people that are appointed is the good 7 news is you're lead plaintiffs. The bad news is you may be 8 lead plaintiffs in a securities action where the securities are 9 exempt from regulation under the securities laws. 10 So I think we want to get to the substance quickly. 11 And certainly anybody who's got any information at all in the 12 matter is free to submit amicus briefs or otherwise play some 13 role in addressing this issue. But I want to get to moving the 14 case along promptly, and here's what I'm thinking in that 15 regard. 16 MR. CERA: Your Honor, may I be heard briefly on one 17 point the Court has already addressed. 18 THE COURT: Who are you, so that the court reporter 19 knows? 20 MR. CERA: Solomon Cera, your Honor, on behalf of 21 Horizon Asset Management. 22 Your Honor, with respect to the lead plaintiff matter 23 and the common stock purchases, the PSLRA statute has clear -- 24 the language appears to be mandatory about the largest 25 financial interests. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 015 92cegenc 1 With respect to the common, your Honor, as the Court 2 is aware, a new decision came down from the Second Circuit 3 after we filed our pleadings in this matter. And I've 4 represented investment advisers in other security fraud class 5 actions that have been appointed, but new law was established 6 by the Second Circuit after our briefs were submitted, and we 7 went out and obtained assignments immediately from those who 8 were affiliated directly with Horizon. And, your Honor, those 9 assignments reflect a loss of $10.4 million in the common 10 stock. 11 THE COURT: Right. I'm aware of that. But the other 12 folks had -- tell me who is here from the Labaton firm. 13 MR. CERA: Your Honor, their losses are 3.8 million. 14 The Massachusetts private investment pension management board 15 loss is significantly less than Horizon's, as is the Boston 16 retirement plan's loss on the common stock. And, therefore, 17 your Honor, under the mandatory language of the PSLRA, my 18 client, Horizon, should be appointed as lead plaintiff for the 19 common stock, because they have clearly the largest financial 20 interest in the common stock losses. 21 THE COURT: Who's here on behalf of Massachusetts? 22 MR. KELLER: Your Honor, Chris Keller on behalf of 23 Massachusetts. Boston and Massachusetts together suffered a 24 $12 million loss on the common stock. 25 THE COURT: That's what I thought. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 016 92cegenc 1 MR. CERA: Your Honor, that's not what I drew from the 2 submissions. And of course, this does come down to the issue 3 of LIFO, FIFO and the detail that's been presented.
Fannie Mae Hearing Transcript - 2.13.09 4 I would like an opportunity, your Honor, to 5 demonstrate to the Court that, in fact, under the statute, 6 under the largest financial interest, the assignments that 7 Horizon has are the largest. 8 THE COURT: No, you've had your opportunity. You've 9 had your opportunity. I've ruled. We're done. 10 Now let's get on to the business of whether there's 11 any lawsuit here at all. There was what to me was a very 12 persuasive brief filed and a motion to dismiss filed very early 13 on in this matter by various defendants to the effect that 14 these securities are simply exempt from any of the regulations 15 that are the basis of the claims that have been brought by the 16 various plaintiffs. And there was a response filed I guess by 17 the strong group, by the Milberg firm, to that. And I read 18 those briefs. 19 And I think it seemed to me that it was appropriate to 20 defer ruling on any such application until we decided who the 21 lead plaintiffs were and until we gave everybody an opportunity 22 to respond who wanted to respond, not just the people who were 23 plaintiffs in the particular cases that the moving defendants 24 addressed. 25 On the other hand, it is not clear to me how we ought SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 017 92cegenc 1 to structure this. The conventional thing to do in most cases 2 at this point would be to say the lead plaintiffs. And I'm 3 guessing that the lead common and preferred plaintiffs are 4 likely at this stage to have a common front and want to file a 5 single consolidated amended complaint, should be given time to 6 do what they're going to do and then have the defendants 7 respond to that complaint. 8 Now, in this situation, I think there is an elephant 9 in the room. There's a very large obstacle to recovery that 10 defendants have already raised that, as far as I can see, but 11 I'm not all that creative, would apply to all of the claims, 12 federal claims that I can imagine plaintiffs bringing. 13 So what I'd like to know from the lead plaintiffs, and 14 I'll certainly hear from anybody else who's on the plaintiff's 15 side of the table who has ideas, is I could think of a variety 16 of ways of doing this. One is to go down the conventional 17 route, give the plaintiffs time to come up with a consolidated 18 amended complaint and then have the defendants respond to that. 19 But I guess I'd want to hear -- I don't want the defendants to 20 be expending resources, coming up with 30 different grounds for 21 motions to dismiss and spending a huge amount of money on giant 22 briefs. If they think they have got one rifle shot winner, I'd 23 like to have that issue addressed first. 24 The second way to do it would be just to address that 25 issue and give the -- it's already been made, as far as I can SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 018 92cegenc 1 see by the defendants, and have the plaintiffs, lead plaintiffs 2 now see if they have anything additional to say that isn't in 3 the briefs that the Milberg firm already filed, including to 4 give me some preview, and if a consolidated amended complaint 5 they anticipate would say something that's different or would 6 have other causes of action to which those objections aren't 7 addressed. 8 So there are a lot of ways of thinking about this, but 9 I do want to put the plaintiffs on notice that I did find that 10 argument at least prima facie persuasive, and that if it is 11 ultimately persuasive, it seems to me that it would have a very 12 substantial impact on this litigation, whether or not it
Fannie Mae Hearing Transcript - 2.13.09 13 totally wipes out claims, all claims that the plaintiffs want 14 to make. 15 So who's going to speak to that? 16 MR. FOX: Good morning, your honor. Frederic Fox, 17 Kaplan Fox, on behalf of the Tennessee Consolidator Retirement 18 System. I'd like to introduce to the court, with me is Mr. Joe 19 Shirley from the Attorney General of Tennessee's office. 20 MR. SHIRLEY: Good morning, your honor. 21 THE COURT: Mr. Shirley. 22 MR. FOX: I would say that I suppose speaking a little 23 bit for Mr. Keller here, I think we would like the opportunity 24 to file a consolidated amended complaint, because I think that 25 things that we say and how that complaint is pleaded would make SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 019 92cegenc 1 a difference. 2 Another matter is that the motion to dismiss that was 3 filed by defendants only sought to dismiss Section -- I believe 4 Section 12.2 claims. I don't believe it dealt at all with 5 Section 10(b) and Rule 10b-5 claims and other claims that have 6 been advanced. So I think it would be a better procedure and 7 would not cause too much undue delay or undue burden on 8 defendants if we followed what is normally the procedure in 9 these types of cases of allowing us to file a consolidated 10 amended complaint and then taking it from there. I mean, 11 that's what I would propose. 12 THE COURT: Mr. Keller? 13 MR. KELLER: I have nothing to add. I agree with what 14 Mr. Fox has. 15 MR. BRODY: Judge, can I have 30 seconds? This is the 16 very point. The consolidated amended complaint 33 act, 34 act, 17 there's prejudice to the preferred, because that should be 18 determined quickly and early. It's already briefed, and that 19 should be done separately so our clients, particularly the 20 people at the Berkshire bank and Berkshire movants and other 21 banks that have been in touch with the Berkshire people, that 22 should be -- it's going to take too long, and then they'll come 23 up with the argument of, well, the claims sound in fraud. Your 24 Honor's well familiar with that. They shouldn't be mixed up. 25 I'm not going to the point now of separate SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 020 92cegenc 1 representation, but the issue of whether there's a 33 act claim 2 should be decided pronto, immediately. If there's additional 3 briefing, the Milberg firm has done terrific work. And if 4 there are any other arguments, let these eminent lead counsel 5 you've appointed buttress the arguments and let's move on. 6 Otherwise, it's a year, year and a half until we get this 7 amended complaint. There will be a motion to dismiss, reply 8 brief, etc., etc. Your Honor knows that from experience. 9 It's not fair to our clients, whoever simply preferred 10 shares in an issue that came out in late -- very late, and 11 there was no proper disclosure. It's not fair to the Berkshire 12 bank. It's a major bank in the City of New York. These people 13 Mr. Marx -- 14 THE COURT: Let me hear from the defendants for a 15 minute. Who's got this -- who's going to take the lead on 16 this? 17 MR. BRANDT: James Brandt, your Honor, of Latham & 18 Watkins on behalf of Fannie Mae. 19 Your Honor, we made the motion to dismiss coming out 20 of the blocks because a number of the cases were 33 act cases 21 only. And the argument that we made is, you know, we think
Fannie Mae Hearing Transcript - 2.13.09 22 prohibitive. You know, frankly, there were a number of 23 defendants named only in 33 act cases. And our hope was that 24 some of the cases would just go away and some of the 25 defendants, you know, would never appear; really a primary goal SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 021 92cegenc 1 being of streamlining the cases here. 2 I would note I think, and my colleague, Jeff Hammil, 3 just pointed out to me that we move to dismiss the Berkshire 4 case. 5 THE COURT: Well, that's what I'm puzzled about. 6 MR. BRANDT: Which I don't think they responded. 7 THE COURT: Mr. Brody is making the argument I should 8 get his clients dismissed out of the case really fast, it's 9 going to be unfair to his clients to delay their losing until 10 the other people come up with their arguments for why they 11 still have good claims, which, you know, may be right enough, I 12 guess. 13 MR. BRANDT: So our effort, your Honor, was really 14 only to try and assist in cleaning up a little bit so that we 15 could focus, if there were any remaining issues, on what the 16 remaining issues were. 17 And I want to restate, I think, on behalf of the 18 Berkshire bank case, there was no reply at all to our motion to 19 dismiss. So I think they're already in default position. 20 MR. BRODY: That's not correct, okay. Period. End of 21 story. Our case will never -- there's no default. I went 22 through this with you, counsel. I was ready to sign the 23 stipulation when the case in New Jersey was filed. No one told 24 me -- I said either get the Jersey case to New York or go MDL, 25 and that's -- we went back and forth on telephone calls and SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 022 92cegenc 1 etc. And you never moved. You should have done an MDL right 2 away. I said I'll give you the MDL papers. Just get the 3 Jersey -- 4 THE COURT: I'm generally more comfortable with less 5 excitable -- 6 MR. BRODY: I'm sorry, your Honor, but that's an 7 incorrect statement. We did not reply to the brief, and I had 8 to explain why. 9 THE COURT: It doesn't matter. I'm not defaulting 10 anybody. I'm trying to get an orderly process for addressing 11 these various issues. 12 Now, Mr. Brandt? 13 MR. BRANDT: What I was going to say is either way we 14 go, whether we do it by leaving the current motion in place and 15 just provoking answers, which I think would be a perfectly 16 efficient way to go, since our argument really doesn't turn on 17 anything anybody can say about the Fannie securities or 18 pleading facts or what other defendants they lay in, it's sort 19 of a status thing about the actual stock itself, whether it's 20 preferred or common stock. It would make the consolidated 21 amended complaint that much cleaner and make the motion that 22 much cleaner. So either way -- 23 THE COURT: That's sort of what -- I find that fairly 24 persuasive. It may be that there's something that counsel can 25 come up with for the plaintiffs that would change the way in SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 023 92cegenc 1 which this issue appears. I don't mean -- I mean, by both --
Fannie Mae Hearing Transcript - 2.13.09 2 you know, maybe you'll have better arguments or good things to 3 say. I want to give the plaintiffs the fullest opportunity to 4 respond to these motions. I haven't predetermined it. I've 5 said only that I think it's got some persuasive force. 6 But I also mean it is possible, hypothetically, I 7 don't know, that you would be able to frame the complaint or 8 come up with facts that would, despite what Mr. Brandt says, 9 change the way this issue appears. On the other hand, I think 10 there is some force to the idea that we've got this argument 11 presented and we can proceed on two tracks. I don't want to 12 delay the case or slow it down. I want to speed it up. 13 It seems to me that it might well make sense for lead 14 plaintiffs to have a say in response to the arguments that have 15 been presented by defendants with respect to the exemption of 16 these securities, make clear what it applies to and what it 17 doesn't apply to in your view, make clear if there are any 18 facts that you anticipate you'll be pleading that could change 19 the way in which that issue looks or make it not what 20 Mr. Brandt says it is, which is just a categorical abstract 21 claim, and explain to me why they're wrong on the face of it. 22 And if they're not necessarily wrong on the face of it, why 23 they might turn out to look broader after you've had a chance 24 to elaborate the claims. 25 But I think that if we proceeded to deal with that SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 024 92cegenc 1 issue promptly, it would lead to the possibility of expending 2 less time on the consolidated amended complaint front on claims 3 that might not survive. And then we'll -- you know, if you 4 continue to work on that complaint. But we can get that issue 5 teed up and find out whether we're going ahead on those fronts 6 or not. 7 Mr. Fox? 8 MR. FOX: Your Honor, and we don't have any issue or 9 problem with moving promptly, but I do think that it is a 10 matter of how the complaint is pleaded; because one thing that 11 we've noticed in these offering circulars is that they're all 12 not the same. And in certain of them -- for example, Fannie 13 says it is acting as an instrumentality of the government. In 14 certain other ones, particularly ones that are at issue in this 15 litigation, it appears to us that those offering circulars 16 expressly say that Fannie is not acting as an instrumentality 17 of the government. 18 So I think it does matter what the complaint says 19 about the offering circulars. And I'm concerned that if 20 we're -- if we just are in the position of responding to a 21 brief that we haven't adequately preserved what I think would 22 be our best argument or facts in a proper pleading that's 23 before the Court, should there be appeals or things of that 24 nature. 25 THE COURT: I thought -- of course, this is a little SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 025 92cegenc 1 premature. This isn't the place where anyone's expecting to 2 argue the merits of this, but I'm just trying to get a handle 3 on it. I rather thought that the defendants' best argument was 4 not about any representation that was made or even about 5 whether in a particular offering Fannie Mae was acting as an 6 instrumentality but was the simple argument that Fannie Mae 7 securities are expressly declared to be exempt. And I would 8 have thought that whatever the merits of that argument, it's an 9 argument that's independent of what they say; that if they said 10 these are not exempt securities right there on the face of
Fannie Mae Hearing Transcript - 2.13.09 11 the -- don't worry about that, that might raise a fraud claim. 12 But that doesn't change whether they are or aren't 13 exempt. They can't make themselves unexempt if Congress has 14 made them exempt, I would have thought. 15 MR. FOX: Except if they're not acting within the 16 scope of what the exemption calls for. If the exemption is 17 only if they're acting as an instrumentality of the government 18 or there's a government guarantee of the securities, then the 19 argument is the exemption simply doesn't apply. 20 THE COURT: All right. Well, here's what I think, 21 with all respect to Mr. Brody's desire to get this wrapped up 22 fast. Defendants usually don't have a big interest. They 23 usually don't mind a little delay in this. And if the 24 plaintiffs have -- the lead plaintiffs have theories or 25 arguments that they think are better presented in the context SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 026 92cegenc 1 of a slower, more thoughtful presentation, then I'm happy to 2 give them that opportunity, I guess, if that's the position 3 that the plaintiffs want to take. And once the complaint is 4 out there, then I think that various defendants might choose to 5 have different kinds of responses and move with different 6 issues on different tracks. And we can address things a little 7 bit separately. 8 I would be inclined to want to address this issue very 9 early on. And to the extent that it obviates other issues for 10 at least some defendants or with respect to at least some 11 claims, I think it's a strong enough argument with a likely 12 enough chance of success that I would want to spare any 13 defendant who's going to be relying on that argument the burden 14 of making a dozen alternative arguments. 15 I think I want to make clear that those defendants who 16 are relying exclusively -- primarily on that, or to whom that 17 argument applies that would take them out of the case or make 18 it unnecessary to respond to anything else, I don't think I 19 need to hear their 12 backup arguments until I've decided 20 whether this one works. If it does, so much the better for 21 those defendants. If it doesn't, well, then we've lost some 22 time, and that's unfortunate. And they'll have another round 23 of briefing to raise whatever other arguments they've got. 24 Meanwhile, those defendants who are not in a position 25 to rely on those arguments with respect to other claims that SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 027 92cegenc 1 are made by the plaintiffs can make whatever they've -- 2 objections they've got to the consolidated amended complaint. 3 Now, Mr. Fox, what are you roughly proposing? I think 4 what I'm going to do ultimately is send the parties home to 5 negotiate with each other as to coming up with a concrete 6 schedule. But I'd like to know what we're in for, because I'd 7 like it not to be what Mr. Brody is afraid of. I don't see why 8 this is going to be a ten-year plan. Let's see how fast we can 9 get these things done. 10 So what are you thinking ballpark? 11 MR. FOX: Ballpark, I'd want to confer with 12 Mr. Keller, but approximately 30 to 45 days. 13 MR. KELLER: On the amended complaint. 14 THE COURT: That seems not at all unreasonable. Then, 15 Mr. Brandt, again, I'm happy to save you guys money. I think 16 in the interest of not having myself appear to be terribly 17 dilatory by sitting on your existing motions, I'm going to deem 18 the existing motions withdrawn, and you'll then respond to the 19 consolidated amended complaint. But you're certainly free to
Fannie Mae Hearing Transcript - 2.13.09 20 do so by simply reinstating your previous papers with whatever 21 supplementation you think is appropriate, in light of anything 22 that's said in the consolidated amended complaint. 23 So if that's done, then at least the exemption issue 24 could presumably be teed up rather quickly. I don't know what 25 "rather quickly" means, but rather quickly. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 028 92cegenc 1 MR. BRANDT: And, your Honor, can I just ask, my 2 suggestion would be, of course, we haven't seen any 3 consolidated amended complaint, but we've seen a lot of 4 complaints in the matter. And my suggestion would be that what 5 we do is agree on some form of schedule, obviously 6 consensually, to the motion to dismiss at two levels. And 7 first we could move with respect to the Section 12 claims, and 8 then if we need to after, move with respect to the entire 9 matter, because -- or else, you know, we're going to end up in 10 a situation, if we do it all simultaneously, if everybody has 11 to move at the same time, we are going to end up spending, you 12 know, a lot of effort developing additional claims like on 13 scienter grounds with respect to defendants I think that may 14 really be excluded altogether if the Section 12 cases go away. 15 THE COURT: Well, again, I don't want to do -- to the 16 extent that there are defendants who will get out of the case 17 altogether, if the exemption claim is successful, I don't want 18 those people to be briefing anything else. There are other 19 folks, though, to whom apparently those arguments are not going 20 to apply. And I don't know why they should hold up in making 21 whatever response they want to make to the consolidated amended 22 complaint. 23 And, of course, you'll have the opportunity to weigh 24 in -- I guess -- are you thinking that you'll do a better job 25 and you'll want to weigh in at the very beginning and not let SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 029 92cegenc 1 somebody else take the laboring war on that? See what I'm 2 saying? 3 MR. BRANDT: We'll it's self-centered, but maybe. But 4 why don't we go according to the plan that your Honor 5 expressed, and we'll just do it all at the same time, except 6 carve out for some -- I think on a practical level, it's going 7 to end up on account of that schedule we're really just going 8 to do it all at the same time, because there's a lot of 9 crossover as to representation. So I think we're going to end 10 up doing most of it at the same time on a practical matter -- 11 THE COURT: I guess -- what I'm concerned about is if 12 there are arguments that function only as backups to the 13 exemption argument, I'll give you another opportunity to raise 14 those later. You don't need to raise those. If, for example, 15 there's a scienter argument that has to be made in response to 16 claims to which the exemption argument does not apply, well, 17 they're going to have to be made anyway. And they're not just 18 backups. They're because these are claims that are going to 19 proceed regardless of whether you succeed on the exemption. 20 So maybe it doesn't lead to saving any time, I don't 21 know. And if it doesn't, that's all the more reason why I 22 shouldn't do the exemption thing today; because if you're going 23 to have to address these arguments anyway with response to the 24 10b-5 claims or something else, you know, so you're going to 25 still have to do it. So let's just -- SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 030
Fannie Mae Hearing Transcript - 2.13.09 92cegenc 1 MR. BRANDT: We'll go ahead. 2 MR. WANG: Your Honor, George Wang of Simpson Thacher 3 for the underwriter defendants. 4 One possibility that might reconcile and harmonize 5 competing interests is perhaps to have the motions dismissed; 6 deemed withdrawn, as you suggested, your Honor, but to have 7 those deemed remade, say, 14 days prior to whenever the 8 consolidated amended complaint is due, such that 9 contemporaneous with filing the consolidated amended complaint 10 we would get an opposition to the motion to dismiss that has 11 already been filed on the 12a-2 issue. That would allow for 12 more expedited treatment of the motion to dismiss on that 13 narrow issue and would alleviate plaintiffs' concern that they 14 won't know until they file the consolidated amended complaint 15 the details of their opposition. 16 THE COURT: I hear that, but it sounds a little too 17 fancy in at least the following regard. Mr. Fox thinks 18 apparently that he's going to be able to position this in a way 19 such that you guys are going to want to say something more, 20 that he's going to put something into his complaint and then 21 presumably, if we followed your suggestion into his response to 22 the motions, that would go beyond whatever you've already said. 23 So I think we can move this pretty quickly, because I 24 think I want this to proceed in such a way that -- not 25 necessarily simultaneously with the filing of the complaint, SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 031 92cegenc 1 but soon thereafter these issues can be rejoined. I think the 2 way to do that best is just to say that the defendants will 3 have the option immediately, if they choose to reassert their 4 previous motions. And if they can in two days or two weeks put 5 in a supplemental brief on those issues, we can get that 6 charging right ahead and let the other issues take the stately 7 course that such issues tend to take. 8 MR. CERA: Your Honor, Solomon Cera again for Horizon. 9 If I may just be heard for one moment to correct the 10 record, because I've been mining the record on this lead 11 plaintiff issue. And a statement was made to the Court with 12 respect to the size of the loss of the common stock for the 13 Massachusetts pension reserves investment management board. 14 And I've been looking at the declaration of Alan Ellman, 15 document 24 on the docket filed November 7, 2008, and my 16 reading of that document is quite clear, your Honor, that the 17 aggregate common and preferred losses of Massachusetts were 18 $12.7 million, of which amount 3.8 million was the common. So 19 when they stand up and they say, we've had a $12 million loss, 20 they're aggregating their common and preferred losses. 21 The way I m reading this, your Honor, it's page 7 of 8 22 of Exhibit B. And if that be the case, and I believe the 23 documents show that, Horizon unquestionably has the larger 24 common stock loss and is required to be appointed under the 25 PSLRA because it has the largest financial interest. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 032 92cegenc 1 MR. KELLER: Your Honor, if I may. What he's not 2 recognizing is that Massachusetts, the PRIM fund moved together 3 with Boston, their combined stock loss is $12 million. 4 THE COURT: This is what my understanding was. 5 MR. KELLER: Recognizing only the PRIM board, which 6 the PRIM board has itself a stock loss of $6.7 million, the 7 Boston common retirement system has a loss of $5.4 million, for 8 a combined loss of $12 million worth of stock. So he's
Fannie Mae Hearing Transcript - 2.13.09 9 incorrect. 10 MR. CERA: Your Honor -- 11 THE COURT: Do I also have the Alameda County folks 12 here. Mr. Mandel. 13 MR. MANDEL: Yes, your Honor. 14 THE COURT: Now, you had 11-something million. Is 15 that aggregating common and preferred, or is that all common or 16 what -- 17 MR. MANDEL: That was aggregate, the common and two 18 classes of preferred, the absentee. 19 THE COURT: So you would have less than $10 million in 20 common losses? 21 MR. MANDEL: I believe that's correct, your Honor. 22 MR. CERA: Your Honor, I'm looking at Mr. Ellman's 23 declaration, and I guess there were multiple submissions on 24 this. But this is the moving declaration, page eight of eight, 25 for the State Boston Retirement Board. It indicates that the SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 033 92cegenc 1 loss is 5.3 million on the common. And it doesn't 2 differentiate between FIFO and LIFO in this district. LIFO 3 generally is the measure, but, your Honor -- so I don't know 4 where these sort of higher numbers are coming from. 5 But I think under any measure there's some question 6 about this at a minimum, your Honor. It is a statutory 7 requirement that the largest financial loss take the position, 8 and we believe we have it. And I think these numbers in this 9 declaration show that. 10 MR. KELLER: Your Honor, the declaration submitted, 11 all the filings we've submitted have -- he's looking at one 12 certification. There are two certifications, one on behalf of 13 each movant. Combined they have a $12 million FIFO loss, which 14 is reflected in our opening papers, our opposition papers and 15 reply papers. 16 THE COURT: Can you point me to the particular pages? 17 Do you have that -- the declarations here? 18 MR. KELLER: Yes, your Honor. Your Honor, on 19 Exhibit C, which is Exhibit C to the declaration of Alan 20 Ellman, in support of the motion of the Massachusetts public 21 pension funds -- 22 THE COURT: If I'm looking at the right -- I must be 23 looking at the wrong thing, because what I'm looking at has an 24 Exhibit C that's a press release. 25 MR. KELLER: Okay. Is this in connection with the -- SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 034 92cegenc 1 THE COURT: The declaration in support of the motion 2 for -- of Massachusetts public pension funds for appointment as 3 lead plaintiff. 4 MR. KELLER: I'm sorry, your Honor. Exhibit B. 5 THE COURT: Exhibit B, okay. 6 MR. KELLER: Which is the loss chart. And what you'll 7 see is that with respect to common stock, okay, that is going 8 to be on page -- although they're not numbered, your Honor, I'm 9 sorry. On page three at the top, you'll see FIFO gain/loss, 10 and that says FIFO loss of 8.764 million. And this is only for 11 PRIM, okay. 12 The next movant, Boston, which moved together, would 13 be reflected on the last page of that document and that 14 exhibit. And that reflects their purchase of a common stock 15 only. And you'll see there's a FIFO loss of 5.38 million. You 16 add those two together and you have their aggregate loss on the 17 common stock alone.
Fannie Mae Hearing Transcript - 2.13.09 18 MR. CERA: Sorry. Which page is the 8 million on? 19 THE COURT: The $8 million on the third page of 20 Exhibit B. 21 MR. KELLER: I'm sorry. The FIFO loss reflecting 22 their stock trading only is the first line on page two, your 23 Honor, which is 6.74, which is a number I read earlier. 24 THE COURT: Now I'm totally lost. I'm sorry. 25 MR. KELLER: The PRIM board shows their losses as SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 035 92cegenc 1 stock first, and then its trading and losses in the preferred 2 stock. So there's stock losses only on page two of that 3 exhibit. 4 THE COURT: Oh, right at the very top. 5 MR. KELLER: You'll see 6.7. And when you add that to 6 the 5.4 of Boston, it's clearly a $12 million common stock 7 loss. 8 THE COURT: Okay. So that's 6.7 plus 5.3 is roughly 9 12? 10 MR. KELLER: Correct. 11 THE COURT: Which is what I thought in the first place 12 was around 12. 13 MR. CERA: Your Honor, the point is with respect to 14 that, that they are aggregating the losses of two distinct 15 entities which come into court represented by the same counsel 16 with no showing of any prior relationship to these -- between 17 these entities under Judge Cedarbaum's decision in Donnkenney 18 is inappropriate to present an otherwise unrelated group and 19 aggregate their losses to take the position of -- 20 THE COURT: I don't think they're otherwise unrelated. 21 One's Boston, one's Massachusetts. They both root for the Red 22 Sox. Same guys, no problem. I've heard your point. Go 23 mandamus me. Go do something about it. Here I've made my 24 ruling. This is my choice. This is my decision, end of story. 25 All right. So I think we have a plan, yes? I have SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 036 92cegenc 1 standard orders in a couple of these cases from Global 2 Crossing, for example, and Revco. You can use those as models 3 for something to submit once you work out a schedule. 4 One quirk -- I don't know if it's a quirk. I'm a 5 little anal about the idea of having lots of complaints lying 6 around for years while these things get resolved. And so 7 there's a standard provision in my orders that says that X days 8 after the consolidated amended complaint is filed, all the 9 other complaints are going to be dismissed, unless the 10 proponents of those complaints make some kind of showing. 11 Doesn't have to be a showing; just say they want for some 12 reason for the complaint to stay alive, and that's fine with 13 me. 14 But generally it's my experience that most people 15 don't care and those additional complaints just remain 16 outstanding forever. And I've inherited, you know, class 17 action cases where there are like 15 related cases, all of 18 which have been dormant for years. I don't see why we need to 19 have that. But otherwise it's fairly standard. 20 MR. BRODY: Can we keep our case alive? 21 THE COURT: Sure, you want to, you have the case 22 alive, that's fine. But the order will say that it's going to 23 be dismissed unless you make a showing. Just write a letter 24 saying at the appropriate time you want your case alive. That 25 will be fine. SOUTHERN DISTRICT REPORTERS, P.C.
Fannie Mae Hearing Transcript - 2.13.09 (212) 805-0300 0 37 92cegenc 1 MR. BRODY: Can I just do it now? 2 THE COURT: You can spend the stamp, it's not a big 3 deal. I don't want to lose track of things. I want it done in 4 an orderly way so I know what's being dismissed and what's not 5 being dismissed, and I don't have to hang something up today -- 6 MR. BRODY: Can we be on the service list? 7 THE COURT: Sure. Put them on the service list. 8 MR. FEDERMAN: Bill Federman, Federman & Sherwood for 9 Plaintiff Williams. We'd like the order simply to say it's 10 dismissed without prejudice. 11 THE COURT: Sure, that's fair. 12 MR. FEDERMAN: We don't need to continue on the 13 service list. 14 MR. FOX: One final point, your Honor. On the issue 15 of disclosure of any fee agreements, I assume that would be 16 disclosure to the Court only be disclosed in camera? 17 THE COURT: Sure. Something somebody wants to see? 18 MR. BRODY: I want to see it, your Honor. 19 THE COURT: I don't know if you get to see it. Do the 20 defendants need to see it? 21 MR. BRANDT: We don't need to see it, your Honor. 22 THE COURT: I think it can be in camera. At least -- 23 I'll give you notice if I choose to un-in-camera it. But, you 24 know, I'm not sure I understand why it will matter, because in 25 the long run, if there is anything ever to be recovered, SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 0 38 92cegenc 1 there's going to be full disclosure of all of this stuff, and 2 it's a factor that may be influential. 3 At this point I'm just interested in whether there is 4 such an agreement and, you know, it's at least hypothetically 5 something that could cause me to reconsider the appropriateness 6 of any particular lead plaintiff, if they're giving the store 7 away, or of any particular law firm, if they seem to me to be 8 gouging. I don't anticipate that's going to be the case, but 9 it seems to me it's my responsibility to at least look at that 10 prospect. 11 Okay. Are we done? Have we got everything? 12 MR. BRODY: Your Honor, I apologize about the dialogue 13 before with opposing counsel, but -- 14 THE COURT: It's all right. No offense taken. I just 15 generally respond when folks are flaccid but -- 16 MR. BRODY: We tried to move the process, then the 17 Jersey case came up. 18 THE COURT: You know, it rolled off my back because I 19 don't even know what you're talking about. Doesn't matter. 20 Fair enough. Thank you all very much. 21 (Adjourned) 22 23 24 25 SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 0 Exhibit 18
757nzirn 1 757nzirn Argument 1 UNITED STATES DISTRICT COURT 1 SOUTHERN DISTRICT OF NEW YORK 2 x 2 3 HAROLD ZIRKIN, 3 4 Plaintiff, New York, N.Y. 4 5 v. 07 Civ. 851 (RPP) 5 6 QUANTA CAPITAL HOLDINGS, LTD. 6 et al., 7 7 Defendant. 8 8 x 9 May 7, 2007 9 10:10 a.m. 10 Before: 10 HON. ROBERT P. PATTERSON, JR., 11 11 District Judge 12 12 APPEARANCES 13 13 BERNSTEIN LIEBHARD & LIFSHITZ 14 Attorneys for Plaintiff 14 BY: STANLEY BERNSTEIN 15 JOSEPH SEIDMAN 15 16 COVINGTON & BURLING 16 Attorneys for Defendants 17 BY: MICHAEL SCHLANGER 17 18 WILLIAMS & CONNOLLY 18 Attorneys for Defendant Friedman Billings & Ramsey, Ltd. 19 BY: JENNIFER LEE 19 20 LABATON SUCHAROW & RUDOFF LLP 20 Attorneys for Movant Washington State Plumbing and 21 Pipefitting Pension Trust 21 BY: JOHN KEHOE 22 ANDREI RADO 22 23 THE BRUALDI LAW FIRM 23 Attorneys for Jorge Coronel 24 BY: GAITRI BOODHOO 24 25 SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 0 2 2 757nzirn Argument 1 (Case called) 2 THE COURT: I am trying to think who I should hear 3 from first, whether it should be Washington State or Mr. 4 Zirkin's firm. I guess it's Mr. Zirkin s firm. 5 Mr. Bernstein. 6 MR. BERNSTEIN: Good morning, your Honor. 7 I think everyone in the courtroom at least agrees to 8 one ministerial act. There is no opposition to the 9 consolidation of the two securities class actions relating to 10 Quanta Capital. 11 THE COURT: I may. I am not sure that they should be 12 consolidated, except for discovery purposes.
757nzirn 13 MR. BERNSTEIN: OK. 14 THE COURT: So you may want to address the issue. 15 In other words, for discovery purposes it makes sense 16 because you will be engaging in virtually the same discovery in 17 both actions. But one action is brought on solely on behalf of 18 a preferred shareholders, at least as I read the complaint, and 19 the other action is based on the common shareholders. 20 MR. BERNSTEIN: That may tie into the whole argument, 21 so let me explain. Traditionally, no matter what would happen 22 today, whoever is appointed lead plaintiff and lead counsel 23 would file a consolidated complaint to merge whatever 24 differences there might be in the complaint. So I don't think 25 that the scenario your Honor anticipates would actually happen. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 0 33 757nzirn Argument 1 In fact, both complaints, the Zirkin complaint is on behalf of 2 all securities purchasers, preferred and common, not just 3 preferred or common. It combines both. The proposed lead 4 plaintiffs bought both preferred and common shares, paragraph 1 5 of the complaint. 6 THE COURT: The other complaint is solely on behalf of 7 common? 8 MR. BERNSTEIN: Common because they didn't have any 9 preferred shareholder, but the Zirkin covers all the 10 securities. 11 MR. SCHLANGER: Excuse me, your Honor. The only 12 reason I came forward was to say there hasn't been a motion to 13 consolidate to my knowledge. We'll address whatever is 14 directed to the defendants at such time as it is, but I think 15 it's premature. 16 THE COURT: So you would oppose the motion to 17 consolidate? 18 MR. SCHLANGER: I would agree with your Honor that for 19 purposes of efficiency there should be consolidated discovery. 20 MR. RADO: Just one point of clarification? 21 THE COURT: They will be handled as related actions in 22 this court in any event. 23 MR. SCHLANGER: Yes, your Honor. Certainly. 24 MR. RADO: Good morning, your Honor. Andrei Rado from 25 Labaton. One point of clarification. I'm looking at the SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 0 44 757nzirn Argument 1 Zirkin complaint, 07 Civ. 851, in paragraph 21, which defines 2 the class. It says, The class consists of all those who 3 purchased or otherwise acquired the preferred, it says 4 preferred or common shares of Quanta stock pursuant to or 5 traceable to one of the prospectuses. So it purports to be on 6 behalf of only '33 Act claims that are traceable to a 7 prospectus as opposed to open market purchasers of the common 8 stock. 9 THE COURT: There is that difference in the 10 complaints. 11 MR. RADO: Yes, sir. 12 THE COURT: You are perfectly correct. The Coronel 13 action would cover earlier purchases, and it covers earlier 14 events than the Zirkin complaint. 15 MR. BERNSTEIN: To move to the lead plaintiff motion, 16 the Zirkin Cutler and Zirkin individual lead plaintiff movant 17 has moved in both actions, has the largest financial interest 18 under any measure of class period, whether it goes back to the 19 IPO or goes forward. This happens quite frequently in 20 securities class actions, where different firms, different 21 plaintiffs file different class periods, have different
757nzirn 22 theories, but the PSLRA says that the Court should appoint the 23 movant with the largest financial interest in the totality of 24 the circumstances, which by one measure -- I know your Honor 25 read the papers over the weekend -- the Zirkin Cutler funds has SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 0 55 757nzirn Argument 1 over $1 million of losses, which have not been attacked or 2 challenged under any argument. The Washington Pipefitters have 3 about $50,000 in claimed losses. So if we just stopped right 4 there, we are the presumptive lead plaintiff, and we have the 5 largest financial interest. 6 THE COURT: Let me ask you the question that was 7 raised by the other parties' papers. That is, why isn't there 8 a conflict with respect to Mr. Zirkin? 9 MR. BERNSTEIN: The issue, your Honor, in securities 10 class actions since the PSLRA, while the language is very 11 clear, appoints the party with the largest financial interest, 12 since then very creative counsel have tried to carve out niches 13 for themselves in virtually every class action because they 14 know that if they don't have the largest financial interest, 15 let me see if I can attack this way or attack that way. 16 The attacks come very frequently with respect to what 17 we call a niche. I want to represent the people that bought 18 options. I want to represent the people that bought the 19 preferred. I want to represent this and that. 20 Your Honor, I don't stand here and say there can never 21 be a conflict. What I say is under the PSLRA and the body of 22 cases in this district and throughout the country, the courts 23 say we appoint the lead plaintiff that has the largest 24 financial interest, even if he or she does not have the right 25 to even bring a particular claim, let alone when there is a SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 0 66 757nzirn Argument 1 conflict, even if they never even bought a particular niche of 2 security. Then, if there is a conflict or if there's any need, 3 at the class certification stage additional class 4 representatives are added to the case. For that in the 5 Southern District we have the WorldCom case, we cite DVCI, 6 KPMG, and the IPO case. 7 THE COURT: What were the terms of the preferred stock 8 in the WorldCom case? What were the terms of the preferred 9 stock? Was it just a preferred dividend, or was it a situation 10 where they had a right to a liquidation value? 11 MR. BERNSTEIN: As I stand here, I don't know the 12 answer to that. But I do know this answer. At that time 13 WorldCom was already bankrupt. So the conflict was -- 14 THE COURT: You are almost taking on the situation of 15 being a bondholder in a sense if this company is going to be 16 liquidated. 17 MR. BERNSTEIN: We have no indication that this 18 company is being liquidated. 19 THE COURT: If you didn't think it was going to be 20 liquidated and you were going to get less than $25 a share, why 21 did you bring the action? 22 MR. BERNSTEIN: The stock value went down. The stock 23 value, both the common and the stock went down. 24 THE COURT: But you haven't sold yet as far as I can 25 tell. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 0 77 757nzirn Argument 1 MR. BERNSTEIN: Not during the class period. I don't
757nzirn 2 believe even after the class period. 3 THE COURT: Have they sold? 4 MR. BERNSTEIN: Post-class period. Post-class period, 5 but not during the class period. 6 THE COURT: They have sold? 7 MR. SEIDMAN: Post-class period I believe everything 8 was sold. You only have to list your class period transactions 9 for certification. 10 THE COURT: I know. But it makes a difference on how 11 I view the action. 12 MR. BERNSTEIN: If you have a separate lead plaintiff 13 for common and preferred, then we are throwing out PSLRA 14 jurisprudence which says let's not have niche plaintiffs. 15 Let's have one lead plaintiff and address this later at the 16 class certification stage if there is a conflict. 17 If there is a conflict, your Honor, may I just say one 18 thing, the Washington plaintiff is not the right class 19 representative to represent common or preferred because of 20 something we learned, what we suspected early but we now 21 learned in Friday's papers, we were apparently wrong, that they 22 were a short seller. What we now discover is they may not have 23 been a short seller. They may have purchased their stock even 24 before the initial public offering in a private placement. 25 This is what we are gleaning from their papers that were served SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 0 88 757nzirn Argument 1 Friday. We don't have discovery yet. But it seems to us 2 either they are a short seller, so they are atypical, and 3 shouldn't be appointed for common or preferred or either as a 4 short seller, or as having purchased stock before the IPO and 5 having access to nonpublic information. 6 THE COURT: What do the cases say about a private 7 offering? 8 MR. BERNSTEIN: The cases are pretty clear that if you 9 have access to information that wasn't publicly available, you 10 are not a typical class representative. 11 THE COURT: They were talking about a period that's 12 quite a bit before the period when the alleged disclosures were 13 made. 14 MR. BERNSTEIN: We don't know when they got the stock. 15 We don't know what information they had. If they bought in a 16 private placement, you have access to information and to people 17 that's not typical in the marketplace. 18 If you need a separate common shareholder strictly, 19 you can get a separate common; if you need a separate 20 preferred, maybe you can. I don't believe you do for lead 21 plaintiff, maybe for class representative. But it's not the 22 Washington funds. I cite the Network Associates case, which 23 says if you made an off-market purchase, you are just not 24 typical for lead plaintiff purchases. 25 THE COURT: That is often the case, but they have had SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 0 99 757nzirn Argument 1 other purchases and sales within the class period of the 2 Coronel complaint. I mean, they have purchases and sales made 3 on October 28th, 29th, 31st, November 1, 2, 3, after there were 4 disclosures by Quanta that things were not as they previously 5 expected. 6 MR. BERNSTEIN: We would argue those sales reduce the 7 damages. When it is a million to 50,000 or a million to 6,000, 8 those losses probably aren't recoverable under Dura because 9 there's no allegation that the artificial inflation had, or 10 that there had been any disclosure of the fraud during the
757nzirn 11 class period, that the stock had dropped during the class 12 period as a result of any of the fraud. The fraud was revealed 13 at the end of the class period. That's the Dura Comverse 14 argument that we have in our papers, Comverse Technology, that 15 you can't include in your losses for PSLRA purposes. 16 THE COURT: I actually had the Comverse case and 17 transferred it over to Brooklyn. But I had preliminarily in my 18 own mind decided the case just as Judge Garaufis did, so 19 several months later I was pleased to read his decision. 20 MR. BERNSTEIN: The PSLRA says appoint the lead 21 plaintiff that can monitor counsel, can supervise the theories 22 of the case, does not have to have standing on every claim. In 23 WorldCom Alan Hevesi and New York State did not purchase every 24 security that was at issue. There are always tensions between 25 the securities, and then they get addressed in the class SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 010 757nzirn Argument 1 certification stage. 2 THE COURT: Let me go back to their point on 3 liquidation value. 4 Doesn't your complaint clearly indicate that you all 5 had determined that you weren't going to get full value for 6 your shares by holding on until the liquidation? 7 MR. BERNSTEIN: We clearly thought that the shares 8 were artificially inflated and the stock dropped as a result of 9 the disclosures. 10 THE COURT: Right. 11 As a result doesn't that mean that the common stock 12 and the preferred stock were going to be at loggerheads in 13 terms of any value that may be received? 14 MR. BERNSTEIN: I don't think it's any different than 15 in any other cases where common and preferred had one lead 16 plaintiff. I just don't see any difference. If you accept 17 that theory, your Honor, we will always have a separate lead 18 plaintiff for common and preferred. Then you may land up with 19 a separate lead plaintiff. 20 THE COURT: No. Because oftentimes the preferred 21 stock is just a preferred dividend, not necessarily a preferred 22 value at the time of liquidation. 23 MR. BERNSTEIN: I think it is a treacherous path that 24 can be addressed at the class certification stage. The Bruce 25 Green affidavit would lead to separate lead plaintiffs in SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 011 757nzirn Argument 1 virtually every case. The option holders would say we need 2 separate counsel, and that's been rejected by the courts. 3 THE COURT: Yes. 4 MR. BERNSTEIN: Generally rejected by the courts, 5 certainly in this district. In Enron it was rejected. In the 6 largest cases around the country, Dynergy, Waste Management, 7 Cendant, WorldCom -- WorldCom was the only one in the southern 8 District. You appoint the lead plaintiff with the largest 9 financial interest. It is not close here. 50,000 or 6,000, a 10 million dollars. Zirkin Cutler is an investment manager. It 11 is the ideal lead plaintiff under the PSLRA and shouldn't be 12 penalized because it covers both the common and preferred 13 universe. 14 THE COURT: What did Judge Kaplan do in Parmalat? 15 MR. SEIDMAN: In Parmalat, which was really an 16 anomalous case, he did, in view of the bankruptcy of Parmalat, 17 carve out a niche there. But Parmalat is really sort of a 18 one-in-a-million case. Also, in Parmalat the company was 19 actually bankrupt.
757nzirn 20 Here there's a runoff going on. That could go on for 21 years. It really does not warrant undermining the PSLRA making 22 this a situation for separate representation. It's really not 23 warranted. 24 MR. BERNSTEIN: You caught me off guard. Parmalat was 25 one that goes against WorldCom. In Parmalat you already had a SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 012 757nzirn Argument 1 bankrupt companies. This is a company that is in runoff. It 2 is not in bankruptcy. There is no indication that it is going 3 to be bankrupt. If it were, WorldCom and Enron give models for 4 major cases. 5 THE COURT: What's the insurance here? 6 MR. BERNSTEIN: That we don't know. 7 THE COURT: You don't know the insurance? 8 MR. BERNSTEIN: You mean the D & O insurance? 9 THE COURT: You know there is D & O insurance? 10 MR. BERNSTEIN: We would suspect there is. 11 THE COURT: Isn't that what you are looking at? 12 MR. BERNSTEIN: They are individuals, there are 13 investment banks, and there was a company. Often there is D & 14 O insurance. Your Honor, I don't want to sit down before 15 saying it's been 15 years since I have been before you. It was 16 Popp & Nikolow (phonetic) v. Chase Manhattan bank. I can say 17 you haven't changed much. I am afraid I might have. But it's 18 nice to see you. 19 THE COURT: You haven't changed much. Popp & Nikolow, 20 I hope I don't get into that issue again. 21 MR. BERNSTEIN: I'm still in touch with him. I see 22 him every year or two when he comes to visit. 23 THE COURT: All right. 24 MR. BERNSTEIN: It is very important, no matter what 25 your Honor thinks about common versus preferred, to focus on SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 013 757nzirn Argument 1 the cases that point -- 2 THE COURT: I thought Judge Kaplan made a pretty good 3 point. Maybe Mr. Seidman is right, that it only applies in the 4 case of bankruptcy, but it seems to me that that's just about 5 what, at least that your cocounsel, or not cocounsel -- 6 MR. BERNSTEIN: Everybody's creative. 7 THE COURT: -- are arguing for. 8 MR. BERNSTEIN: There are several cases that say if 9 you purchase stock prior to an IPO or you are a short seller, I 10 think either way these people are not the right people. If we 11 need an additional class representative, we have been contacted 12 by many people recently since the press releases went out who 13 don't have the losses of the size of a Zirkin who would fit the 14 bill and don't have the atypical issues of either being a short 15 seller, selling more stock during the class period than they 16 bought, profiting from the fraud by selling stock during the 17 fraudulent class period. 18 THE COURT: Are you suggesting that their position is 19 they've got a large block of stock here that was bought in 20 private placement and are holding on to it and are only showing 21 the sales and purchases that are occurred during the alleged 22 class period? Is that what you are saying? 23 MR. BERNSTEIN: We don't know yet. I'm sure Mr. Rado 24 would be happy to answer the question. We know that they sold 25 more stock during the class period than they bought. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 014
757nzirn 757nzirn Argument 1 MR. RADO: That's incorrect. 2 THE COURT: Well, if you keep out the purchase of 3 stock in December, the last purchase, if you disregard that, 4 then Mr. Bernstein is right. 5 MR. RADO: No. If you look at the class period as a 6 whole, even if you exclude all the pre-class period purchases, 7 they are still net purchasers. I believe at one point during 8 the class period, at one point they had sold more than they 9 bought. However, after that they continued to make purchases. 10 If you look at the class period as a whole, they continued to 11 hold the stock. 12 THE COURT: I have your papers in front of me. I 13 think that you are mistaken. If you disregard the purchase on 14 the 14th of December, 2005 of 24,200 shares, you only have 15 something over 6,000 shares bought on here listed, and you 16 have, well, some 28,000 shares sold. 17 MR. RADO: Your Honor, if I may, the December 14, 18 2005, purchase of 24,000 shares, that was during the class 19 period. I believe what Mr. Bernstein is referring to -- 20 THE COURT: It is. But it's after all the other 21 purchases and sales that Mr. Bernstein is talking about. 22 MR. RADO: Right. But it's still within the class 23 period. My point was it's within the class period. I guess if 24 what he's trying to say is, well, at one point during the class 25 period you sold more than you had up to that point, then, yes. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 015 757nzirn Argument 1 But I think as far as the jurisprudence on the in and out, as 2 far as adequacy, what the courts look at is are they in and out 3 completely during the class period, and they are not. 4 They purchased more shares during the class period 5 than they sold. As for the argument that pre-class period 6 purchases in private offering somehow make a movant inadequate 7 is simply untrue because we are not seeking to recover on those 8 shares. 9 The problem with private placement sometimes is that 10 it would be difficult to show reliance on the market. One 11 wouldn't be able to avail one's self on the fraud on the market 12 reliance because this were purchased not on an open market. We 13 are not trying to get money back on the -- 14 THE COURT: When were your shares purchased off the 15 market in the private placement? 16 When did you acquire the shares in the private 17 placement? 18 MR. RADO: I don't have the exact date. I think it 19 was within this six months preceding the class period. I don't 20 have the -- 21 MR. KEHOE: Your Honor, I don't have the exact date. 22 THE COURT: But it was a private placement? 23 MR. RADO: It was. Those shares are not included in 24 this loss calculation. 25 THE COURT: I understand. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 016 757nzirn Argument 1 MR. RADO: We excluded those. 2 THE COURT: Do you have a holding for those shares to 3 date? In other words, are you going to come in with -- 4 MR. RADO: We will not be seeking a recovery on those 5 shares in the private placement in this action. I think that 6 resolves any potential issue. 7 If I may speak to some of the things that we've 8 discussed here?
757nzirn 9 MR. KEHOE: May I just make one point about those 10 shares. Mr. Bernstein had noted that it was only revealed, I 11 believe, in the reply brief. I think it was Exhibit C to our 12 initial papers there's a footnote that reveals quite clearly 13 that Washington State Plumbers and Pipefitters had purchased in 14 the private placement. So I don't think that was exactly 15 correct. I just want to make sure the record is clear on that, 16 your Honor. 17 MR. RADO: When it comes to the common versus the 18 preferred issue that we have been talking about, I think 19 Mr. Bernstein is right, that in the ordinary case the court 20 doesn't want to appoint five, ten lead plaintiffs for each 21 class of securities. There's been an exception made when 22 there's a limited fund. The PSLRA doesn't say anything about 23 the situation. It doesn't say anything about classes of 24 securities. The law on this point is all judge-made. The 25 Second Circuit has not ruled on the point. It is essentially a SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 017 757nzirn Argument 1 fact-based analysis. 2 Judge Kaplan applied it in bankruptcy, and we saw that 3 in WorldCom it didn't apply. I would argue those cases are 4 different. 5 First of all, in those cases the defendant was 6 essentially judgment proof. Everybody knew that. They didn't 7 get a dime out of WorldCom. They got everything out of the 8 investment banks, out of the brokers, and out of the individual 9 defendants. The same happened in Enron, where you literally 10 had hundreds of securities. I don't think Judge Harmon wanted 11 to appoint hundreds of lead plaintiffs. 12 That is not what we are asking for here. This is not 13 a WorldCom. This is not an Enron. I think the Court's point 14 that Judge Kaplan had right it is correct. One important 15 fact -- 16 THE COURT: I haven't made up my mind yet. Don't rely 17 on me. 18 MR. RADO: One point that Judge Kaplan made is that 19 something in the neighborhood of 85 percent of the losses were 20 suffered with respect to the bonds. So he's looking at the 21 overall losses, and he's saying, well, most of the losses 22 happened in the bonds. Why would I appoint someone who didn't 23 purchase the bonds as the plaintiff? 24 That is one of the points that we have argued here, 25 your Honor. There are 73 million shares total of Quanta stack SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 018 757nzirn Argument 1 outstanding. Of those 73 million shares, 70 million are common 2 and 3 million are preferred. So less than 5 percent of the 3 overall shares are preferred shares. They account for a very, 4 very small portion of the overall losses. 5 THE COURT: When were the preferred shares issued? 6 MR. RADO: They were issued, I believe, in December of 7 '05. 8 THE COURT: All of them? 9 MR. RADO: Yes. There were 3 million shares offered 10 at $25 a share with a liquidation preference. 11 THE COURT: All the purchases and sales would have to 12 be between December 15, '05, and March 2 or 3, '06. 13 MR. RADO: Yes. So we have this very small part of 14 the overall case that wants to take control. I think that's 15 problematic where you have a limited fund, because the 16 preferred stockholders essentially have two roads to recovery 17 for any loss that they sustain. One of them is the litigation,
757nzirn 18 and the other one is the liquidation preference. 19 If there is a recovery at the end of this case -- 20 THE COURT: Won't they have to be coordinated for the 21 recovery? Won't the recovery depend on, as far as the 22 preferred shares, aren't they concerned with what they get on 23 liquidation and whatever they get in this action? 24 MR. RADO: I think that is another point. What 25 happens if the company does liquidate and Zirkin gets back SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 019 757nzirn Argument 1 their $25 per share? They will be made whole. What is going 2 to happen to the litigation if that happens a year from now? 3 MR. BERNSTEIN: Zirkin individually bought common 4 shares only, I believe, and Zirkin Cutler bought both common 5 and preferred. So the case wouldn't disappear by any measure, 6 nor would counsel disappear by any measure. Under no scenario, 7 if the common needs to be represented separately, should it be 8 Washington, who bought in a private placement, which if it was 9 clear before, I must have missed that footnote. It makes them 10 an atypical class representative. To be a lead plaintiff you 11 have to meet the typicality requirements. There are three 12 cases I picked up over the weekend. 13 THE COURT: I don't see why it matters if they're not 14 seeking to recover on the private placement shares. 15 MR. BERNSTEIN: Because it shows they had information 16 that was not available to the market generally even if when 17 they bought their public shares -- 18 THE COURT: That's outside the class period. The 19 information that they got was six months prior thereto. 20 MR. BERNSTEIN: Six months is not a long time for an 21 insurance company. They had access. They presumably got into 22 the private placement because they had meetings with people, 23 with board members. In Network Associates, and Dec v. Status 24 (phonetic) in the Southern District, Network Associates said an 25 off-market purchase makes you atypical for a lead plaintiff. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 020 757nzirn Argument 1 Dec v. Status says -- 2 THE COURT: Weren't all the purchases within the class 3 period? 4 MR. BERNSTEIN: I will double check. 5 And Independent Energy in the Southern District, 6 communications between defendant and the plaintiff make the 7 plaintiff atypical. 8 So if it is a couple of months before or during the 9 class period, that is, before the company went public, the 10 private placement is all part of the process to take the 11 company public. That's why people -- 12 THE COURT: The company was public before that, wasn't 13 it? 14 MR. BERNSTEIN: No. This was before the IPO, the 15 private placement right before the IPO. 16 THE COURT: Not right before it, because the class 17 period goes back -- the IPO is in December '05, and they got 18 purchases and sales going back to '04. 19 MR. BERNSTEIN: The IPO was in May/June of '04, May of 20 '04. So the private placement would have been a couple of 21 months before that. 22 THE COURT: All right. 23 MR. BERNSTEIN: We are not sure exactly when it was, 24 but we know it's not a typical investor who gets to buy in a 25 private placement prior to an IPO. If your Honor wants to have SOUTHERN DISTRICT REPORTERS, P.C.
757nzirn (212) 805-0300 021 757nzirn Argument 1 an investor there who strictly bought the common, then Zirkin 2 Cutler will be charged with that responsibility as the lead 3 plaintiff to get a class representative who would represent 4 singularly those interests, even though Mr. Zirkin singularly 5 represents common, they only bought common, Zirkin Cutler 6 bought both -- Zirkin bought preferred, Zirkin Cutler, both. I 7 misspoke. If your Honor thinks you need the third, just the 8 common, it should be someone who's typical, and that would be 9 at the class representative stage. 10 THE COURT: That would also mean that he wouldn't be 11 particularly interested in what happened prior to December 12 12 or 14, '05, and that these sales that were made by Washington 13 state on October 27, October 28, October 31, November 1 and 14 November 2 and November 3 wouldn't be of much interest. 15 MR. BERNSTEIN: I don't know about that, your Honor. 16 Once you assume a fiduciary duty -- we drafted the first 17 complaint. Mr. Zirkin came to us. We investigated it. 18 THE COURT: It doesn't even include the common shares. 19 MR. BERNSTEIN: Yes, we did. 20 THE COURT: In the original complaint? 21 MR. BERNSTEIN: The original complaint, your Honor, 22 the first paragraph, second paragraph, and even Mr. Rado read 23 it. 24 THE COURT: He says in his affidavit, I recently 25 discovered that I own common shares also. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 022 757nzirn Argument 1 MR. BERNSTEIN: No. That's something different. 2 THE COURT: All right. 3 MR. BERNSTEIN: Let's break it down. 4 The complaint was drafted for preferred and common 5 shares. That's what it says in paragraph 1. This is a federal 6 securities class action on behalf of purchasers of the 7 preferred and common shares. 8 THE COURT: That is what it says. I understand that. 9 But you understood that there were common shares 10 outstanding. After all, they were issued at the same time as 11 the preferred shares. I thought I read in his affidavit that 12 recently, on going back over the papers, he recognized that he 13 had purchased common shares also. 14 MR. BERNSTEIN: There was a ministerial error in their 15 office with respect to this. They are running a $2 billion 16 fund. It wasn't for lack of interest in representing all 17 shareholders and maximizing the recovery. Certainly now, 18 common, preferred, and if we need a common class rep, you know, 19 we could take that and find a class representative at the 20 appropriate time or even a lead plaintiff, if your Honor felt, 21 singularly without the warts of having bought prior to the 22 class period in a private placement, having access to nonpublic 23 information, having sold many shares during the class period 24 that may not be recoverable under Dura. There are just lots 25 and lots of warts here. But, again, I believe that the SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 023 757nzirn Argument 1 overwhelming weight of the authority would not require any 2 separate representation at this time under the PSLRA. You find 3 the lead plaintiff that has the largest financial interest in 4 the totality of the circumstances, and the rest evolves at the 5 appropriate time. 6 THE COURT: Let me hear from Mr. Rado. You have been
757nzirn 7 very patient. Go ahead. 8 MR. RADO: Thank you, your Honor. 9 First of all, I don't think that we can, if there is 10 an issue, I don't think it's wise to simply say, well, we will 11 deal with it later for a number of reasons. 12 First of all, the PSLRA says there has to be a finding 13 of adequacy and typicality. While it's not the same type of 14 searching, deep analysis of the issue, you can't just gloss 15 over it and say, well, gee, there is a problem, but we will 16 deal with it at class certification. 17 That's not what the statute says. I don't think it's 18 wise from simply a case management point of view, when you know 19 that there are issues to simply say, well, we'll deal with them 20 later. I think the earlier we deal with them, the bitter it 21 would be for all the class members and efficiency in general. 22 If I could simply go back to, I guess, the crux of the 23 conflict here, it's that there's one pot of money. The 24 liquidation preference is going to draw from that same pot of 25 money. The litigation is going to draw from that same pot of SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 024 757nzirn Argument 1 money. 2 Yet, whatever they recover in the litigation, Zirkin 3 is going to have to split 73 million different ways. It's 4 going to have to satisfy damaged shares in the amount of 73 5 million. It's going to be much more diluted than simply if he 6 were to receive his money back on the liquidation preference, 7 because there are only 3 million shares that are entitled to 8 the liquidation preference. 9 It doesn't even make sense to me as to why a preferred 10 stockholder would want a big recovery in the litigation, 11 because the bigger the recovery the less there's going to be 12 for the liquidation preference. It's the liquidation 13 preference where the preferred stockholders really have a good 14 chance of getting their money back, because it's guaranteed 15 contractually. 16 If the contract has the money, it will pay it. If 17 they don't pay it, they have a simple contract action versus a 18 securities fraud class action, which is much more complex. So 19 I think that's really the crux of it. 20 I think that is what makes this case different than 21 all the others which were cited, which I agree with. I think 22 in the ordinary case, I wouldn't be standing up here if Quanta 23 was not in runoff mode and was not going to liquidate. It is 24 clear that it is in runoff mode. They are not taking in new 25 business except for an immaterial Lloyd's' London part. I just SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 025 757nzirn Argument 1 looked at the financials on Yahoo. Their last quarter they 2 lost $43 million. They are in negative cash flow. This is a 3 company that's basically paying off its insurance claims, and 4 when it's done it is going to close shop and probably divvy up 5 whatever is left. 6 THE COURT: What's the stock selling for these days? 7 MR. RADO: It is at $2.00, which is precisely what the 8 cash position is, so it is trading for cash. 9 THE COURT: What do you mean cash position? 10 MR. RADO: The company's cash, the cash per share is 11 $2.00. That's what the stock is trading at. So, in other 12 words, investors in the common stock are not expecting it to 13 grow. The only reason they are in it I guess -- 14 THE COURT: What's the preferred share selling at. 15 MR. RADO: The preferred shares are selling at $19 per
757nzirn 16 share, which to me indicates that if the company were to 17 liquidate today they think they are going to get $19 back. 18 Clearly, the more the company spends of their money, the less 19 that's going to be. 20 THE COURT: What's the date of the financial that you 21 are referring to? 22 MR. RADO: I got it off of Yahoo. I think it was the 23 current snapshot of the assets of the company, so I would say 24 it was the last reporting statement, which I think would have 25 been the 10-K for the year. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 026 757nzirn Argument 1 So I just think in the ordinary case, the lead 2 plaintiff, the bigger the loss, the more the incentive to 3 recover the large pot of money. That's not true here because 4 the bigger the loss for the preferred stockholders the better 5 off they are simply conserving the company's assets and hoping 6 that they are going to get the liquidation preference, which is 7 going to be, it is going to have to satisfy 3 million shares, 8 not 73 million shares. 9 So I think there is a conflict here. There is no law 10 that says someone who purchased in a private offering is not 11 adequate unless those are the shares that they're trying to 12 recover for in the class action. 13 I mean, if they purchased everything in a private 14 offering and I was here standing up and saying they have a 15 financial interest, all of which was traceable to a private 16 offering, we might have an issue with respect to showing 17 reliance. But there is no problem with the private offering 18 that happened before the class period. 19 Mr. Bernstein mentioned nonpublic information. That's 20 nonsense. There was no nonpublic information. This was a 21 massive private offering. If you would like, I can supplement 22 the record and put it in. It wasn't a phase of this 23 transaction where shares were handed out to friends of the CEO. 24 This was a massive private offering worth -- literally 25 thousands of institutions and individuals bought shares. I SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 027 757nzirn Argument 1 think that's markedly different from what happened in Network 2 Associates and other cases. 3 This is not an issue that Mr. Bernstein sought to 4 brief, even though we noted clearly in our initial papers that 5 Washington "has a pre-class balance of 21,900 shares that were 6 purchased through a private placement." 7 He was implying that we didn't tell the Court this. 8 We told the Court, we told Mr. Bernstein in our initial papers 9 that we did this. He didn't say anything about it. 10 As for the common shares that Zirkin purchased, I just 11 want to point out that he purchased, he spent $111,000 12 purchasing the common stock versus billions of dollars 13 purchasing 179,000 shares of preferred stock. 14 THE COURT: He purchased them on December 14. 15 MR. RADO: Yes. So it's completely lopsided. I don't 16 think he has any interest in seeing a large recovery in this 17 litigation, most of which, 90 percent, 95 percent of which will 18 go to the common stockholders and will deprive the preferred 19 stockholders of the liquidation preference. 20 The Court has in its discretion to appoint co-lead 21 plaintiffs and co-lead counsel. It happens all over the 22 country. It happened in the cable and wireless case which 23 involves an English company. 24 THE COURT: If I appoint co-lead counsel, I'm not
757nzirn 25 going to allow more than one attorney. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 028 757nzirn Argument 1 MR. RADO: OK. I understand that. 2 THE COURT: Plaintiffs will have to select one firm 3 over the other. 4 MR. RADO: We can talk to the client about that. I 5 think there needs to be separate representation. The Court has 6 authority to do that. It is an issue that should be dealt with 7 now as opposed to let's wait 12 months and see what happens at 8 class cert. and then deal with it then. I don't see a reason 9 why this litigation should be under a cloud from the get-go 10 when we can take care of it now as the statute requires. 11 MR. BERNSTEIN: I just want to point out one thing. 12 You have been very patient, your Honor, but Zirkin Cutler's 13 losses on its common shares are about $47,000, just on its 14 common shares. The Washington fund's losses, adjusted for the 15 Dura issue and the Comverse issue, would be about $6,000. 16 So, when you examine just the common or the totality 17 as the PSLRA, we believe, requires, the Zirkin Cutler movant 18 dwarfs the Washington movant. If there is a need for strictly 19 a common representation, I don't believe Washington should be 20 it either now or at the class representation. 21 THE COURT: There is no one else. 22 MR. BERNSTEIN: Oh, there are other plaintiffs that 23 have contacted us, but they didn't make a motion because they 24 felt that they were well represented by a movant that had over 25 a million dollars in losses. Traditionally, the class SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 029 757nzirn Argument 1 representative steps up at the later stage if necessary. 2 THE COURT: No one else has applied. 3 MR. BERNSTEIN: The class representative would not 4 make a motion for lead plaintiff. He would join the action 5 later. That's how it traditionally happens. It happens very, 6 very frequently. I think it was done in WorldCom. It's done 7 in almost every class action where you need to cover a 8 particular security or issue, a class representative is added 9 then. 10 MR. RADO: If I may, just one more minute. 11 Mr. Bernstein is right that Zirkin's loss is 47,000. 12 We don't believe the Dura issue is an issue. It is not a 13 unique defense to us. Numerous class members sold during the 14 class period. It is not a unique defense. It is not something 15 that's commonly dealt with at this point. Really the point of 16 the conflict that I raised doesn't go to the financial 17 interest. It goes to the adequacy. The PSLRA and the cases 18 are clear that you have twin requirements: You have the 19 largest financial interest and you've got adequacy. If you are 20 not adequate, it doesn't matter how big your financial interest 21 is. It could be a billion dollars to two dollars. You are not 22 adequate. That's the point. Zirkin's relative interest lies 23 in the preferred. He has over a $1 million interest in that 24 stock versus a $47,000 interest with respect to the common 25 stock. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 030 757nzirn Argument 1 So I don't think the fact that he purchased some 2 common shares does anything as far as the conflict presented by 3 his much larger preferred stock. 4 THE COURT: Let me ask Mr. Bernstein one question,
757nzirn 5 that is, I haven't seen any case where preferred shareholders 6 have been appointed to represent common shareholders. It's 7 always the other way around; that the class representative of 8 the common shareholders is appointed to represent the 9 preferred. Do you have any cases that show it the other way? 10 MR. BERNSTEIN: None come to mind. I think it's just 11 traditionally that the investor with the largest financial 12 interest is appointed, and if that has happened to be common 13 over time -- I would be happy to go and study that question, 14 but it just happens in this particular case the common losses 15 are about the same as their common losses accepted at a face 16 value, and then you have 20 times more in preferred losses, and 17 the PSLRA says the investor with the largest financial interest 18 in the subject matter of the litigation. Obviously, I mean, we 19 haven't addressed that. The issues are overlapping 100 20 percent, the same types of disclosures and the same fraudulent 21 statements. So there is complete overlap in that regard. 22 So I don't think it makes any difference under the 23 PSLRA which type of investor has the largest financial interest 24 as long as there is the large financial interest in the subject 25 matter. SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 031 757nzirn Argument 1 THE COURT: I agree with the Zirkin position that they 2 have the largest financial interest in the action; however, I 3 also agree with Mr. Rado that they are not a typical common 4 shareholder. They purchased all their shares December 14, 5 2005. And the Coronel complaint alleges that prior to that 6 there were a number of actions by the defendants that were 7 misleading as far as they were concerned, and the funds that 8 they were after, they took action to sell when the proper 9 disclosure was made, particularly in October, November, 2005, 10 before the final denouement which Zirkin seems to rely on. 11 So I am going to appoint the Washington State Plumbing 12 and Pipefitting Trust to represent the common shareholders. 13 They will have to select one counsel, not two, and I am going 14 to appoint Zirkin Cutler as the representative of the preferred 15 shareholders. 16 I am not going to consolidate the actions. I am going 17 to permit joint discovery, consolidated discovery without 18 prejudice to your moving to consolidate if both counsel feel 19 that -- there will be an opportunity by the defense to oppose 20 the consolidation if they wish to. It seems to me that the two 21 cases shouldn't be consolidated at this point. 22 Is there anything I left out? 23 MR. RADO: Your Honor, we will send a letter to the 24 Court with the client's decision on the counsel. Is that the 25 way the Court would like us to proceed? SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 032 757nzirn Argument 1 THE COURT: All right. 2 MR. RADO: Thank you. 3 THE COURT: Is there anything else? 4 MS. LEE: Your Honor, this is Jennifer Lee from 5 Williams & Connolly on behalf of Friedman Billings & Ramsey. 6 We just want to state for the record that we do not waive any 7 arguments with respect to any plaintiffs' arguments expressed 8 today to the extent that they bear on the adequacy of the 9 pleadings or any class certification issues. 10 THE COURT: Of course. 11 MS. LEE: Thank you. 12 THE COURT: I may be difficult, but I am not that 13 difficult. Thank you very much. 757nzirn 14 (Adjourned) 15 16 17 18 19 20 21 22 23 24 25 SOUTHERN DISTRICT REPORTERS, P.C. (212) 805-0300 0 Exhibit C UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
AEKTA BEN PATEL, On Behalf of Herself Electronically Filed And All Others Similarly Situated, Plaintiff, Civil Action No. 1:09-cv-00093-BSJ-DFE vs. Hon. Barbara S. Jones SATYAM COMPUTER SERVICES LTD., Mag. Judge Douglas F. Eaton B. RAMALINGA RAJU, and B. RAMA RAJU, (ECF Case) Defendants.
(Additional Captions on the Following Pages)
DECLARATION OF KENNETH N. KOTZ HOSSEIN MOMENZADEH, On Behalf Of Himself Electronically Filed And All Others Similarly Situated, Plaintiff, Civil Action No. 1:09-cv-00161-CM vs. Hon. Colleen McMahon SATYAM COMPUTER SERVICES LTD., B. RAMALINGA RAJU, and B. RAMA RAJU, (ECF Case) Defendants.
CYNTHIA FREEMAN, Electronically Filed Plaintiff, vs. Civil Action No. 1:09-cv-00330-BSJ SATYAM COMPUTER SERVICES LTD., Hon. Barbara S. Jones B. RAMALINGA RAJU, B. RAMA RAJU, SRINIVAS VADLAMANI, and JOHN DOES 1-5, (ECF Case) Defendants.
NAVEEN CHANDER JEPU, On Behalf Of Himself Electronically Filed And All Others Similarly Situated, Plaintiff, Civil Action No. 1:09-cv-00337-BSJ vs. Hon. Barbara S. Jones SATYAM COMPUTER SERVICES LTD., B. RAMALINGA RAJU, B. RAMA RAJU, and (ECF Case) SRINIVAS VADLAMANI, Defendants.
BERT H. STURGIS, II, On Behalf Of Himself And Electronically Filed All Others Similarly Situated, Plaintiff, Civil Action No. 1:09-cv-00361-BSJ vs. Hon. Barbara S. Jones SATYAM COMPUTER SERVICES LTD., B. RAMALINGA RAJU, and B. RAMA RAJU, (ECF Case) Defendants. LARRY R. PENNINGTON, Individually and On Behalf of All Others Similarly Situated, Electronically Filed Plaintiff, Civil Action No. 1:09-cv-00386-BSJ vs. Hon. Barbara S. Jones SATYAM COMPUTER SERVICES LTD., B. RAMALINGA RAJU, B. RAMA RAJU, and (ECF Case) VADLAMANI SRINIVAS, Defendants. JAMES HAMBLIN, On Behalf Of Himself And All Others Similarly Situated, Electronically Filed Plaintiff, Civil Action No. 1:09-cv-00489-VM vs. Hon. Victor Marrero SATYAM COMPUTER SERVICES LTD., B. RAMALINGA RAJU, B. RAMA RAJU, (ECF Case) SRINIVAS VADLAMANI, PRICEWATERHOUSE COOPERS INTERNATIONAL LIMITED, PRICEWATERHOUSE COOPERS PVT LTD., and PRICE WATERHOUSE, Defendants. HILLEL RAYMON, Individually and On Behalf of All Others Similarly Situated, Electronically Filed Plaintiff, Civil Action No. 1:09-cv-00512-BSJ vs. Hon. Barbara S. Jones SATYAM COMPUTER SERVICES LTD., B. RAMALINGA RAJU, and B. RAMA RAJU JR., (ECF Case) and VADLAMANI SRINIVAS, Defendants. BRIAN FABER, Individually and On Behalf of All Others Similarly Situated, Electronically Filed Plaintiff, Civil Action No. 1:09-cv-00569-BSJ vs. Hon. Barbara S. Jones SATYAM COMPUTER SERVICES LTD., B. RAMALINGA RAJU, B. RAMA RAJU, and (ECF Case) SRINIVAS VADLAMANI, Defendants. WILLIAM M. HEBERT, JANET K. HEBERT and THE WILLIAM M. HEBERT IRA, On Behalf of Electronically Filed Themselves and All Others Similarly Situated, Civil Action No. 1:09-cv-01124-BSJ Plaintiff, vs. Hon. Barbara S. Jones
SATYAM COMPUTER SERVICES LTD., (ECF Case) B. RAMALINGA RAJU, B. RAMA RAJU, PRICEWATERHOUSE COOPERS INTERNATIONAL LIMITED, PRICEWATERHOUSE COOPERS PVT LTD., and PRICE WATERHOUSE, Defendants.
ASHIT M. MEHTA, On Behalf of Himself And All Others Similarly Situated, Electronically Filed Plaintiff, Civil Action No. 1:09-cv-01789-BSJ vs. Hon. Barbara S. Jones SATYAM COMPUTER SERVICES LTD., B. RAMALINGA RAJU, and B. RAMA RAJU, (ECF Case) Defendants. I, Kenneth N. Kotz, declare as follows:
1. I have been retained by Labaton Sucharow LLP (“Counsel”), on behalf of
Mineworkers’ Pension Scheme (“Mineworkers”), to assist in calculating the financial interest of lead plaintiff Movants relating to their transactions in Satyam Computer Services Ltd.
(“Satyam”) American Depository Receipts (“ADRs”) from January 1, 2004 through January 6,
2009, inclusive (the “Class Period”). 1
2. In addition to analyzing the financial interest of Mineworkers, I have also been asked to analyze the financial interest of Movant Global Institutional Investors Group (“GII”), which consists of Public Employees’ Retirement System of Mississippi (“Mississippi PERS”),
Sampension KP Livsforsikring A/S (“Sampension KP”) and SKAGEN Kon-Tiki (“SKAGEN”).
It is my understanding from Counsel that the Class consists of investors in Satyam ADRs, and therefore Counsel has requested that I analyze financial interest based solely on transactions made in ADRs. Mississippi PERS’ transactions were solely in Satyam Common Shares, which trade on Indian stock exchanges. Thus, I have not performed a financial interest analysis for
Mississippi PERS, but I reserve the right to amend this analysis if the Court considers investors in Satyam Common Shares to be included in the Class. I therefore present the analysis for the
GII Group as “Sampension/SKAGEN.”
1 Counsel has requested that I use the Class Period specified in the Class Action First Amended Complaint for Violation of Federal Securities Laws filed January 16, 2009 by Plaintiff Saji Vettiyil in the U.S. District Court for the Northern District of California (Case No. C-09- 00117 RS, the “Vettiyil Complaint”). Counsel has also supplied me with a complaint filed January 20, 2009 by Plaintiff Hillel Raymon in the U.S. District Court, Southern District of New York (the “Raymon Complaint”). The Class Period in the Raymon Complaint begins on January 22, 2004. None of the Movants had transactions in Satyam ADRs between January 1 and January 22, 2004. - 1 - 3. I have calculated financial interest using the four “Olsten-Lax” factors commonly
used in these types of actions.2 The fourth factor of approximate losses was calculated based on
the assumption that, in accordance with the Comverse Decision, pre-disclosure losses should not be included in the financial interest analysis. 3 The Vettiyil Complaint alleges multiple corrective
disclosures beginning on December 15, 2008, which appear to have affected Satyam’s ADR prices beginning on December 16, 2008. 4 If the Court deems the first partial corrective
disclosure alleged in the Vettiyil Complaint as relevant for determining losses, I have provided
such an analysis. 5 Consequently, I assume, for the purposes of calculating financial interest, that
ADRs bought and subsequently sold in the Class Period prior to December 16, 2008 would not be deemed potential damaged shares. For the reasons explained in the Comverse Decision,
ADRs not meeting these requirements are considered pre-disclosure shares, and would not be
deemed damaged by the alleged fraud. Thus, these ADRs would not be included in the losses
2 The four Olsten-Lax factors include: number of shares purchased during the Class Period; net number of shares purchased during the Class Period; net funds expended during the Class Period; and approximate losses. See Memorandum and Order by Judge Nicholas G. Garaufis, March 2, 2007, In re Comverse Technology, Inc. Securities Litigation, United States District Court, Eastern District of New York, March 2, 2007 (the “ Comverse Decision”), pp. 4-5. 3 In the Comverse Decision, the Court stated that: “In short, it is clear that under Dura and its progeny, any losses that P&P may have incurred before Comverse’s misconduct was ever disclosed to the public are not recoverable, because those losses cannot be proximately linked to the misconduct at issue in this litigation.” ( Comverse Decision at p. 8, citing to Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005)). 4 Vettiyil Complaint, starting at ¶48. The Raymon Complaint alleges the first partial disclosure on December 16, 2008 (at ¶43). At this early stage of the litigation, I have not been asked to, nor have I undertaken, an independent analysis of potential corrective disclosures. 5 I have also, for completeness, calculated the losses without requiring Class Period purchases to be held past the first potential corrective disclosure. - 2 - factored into the financial interest analysis.6 In addition, GII has alleged additional partial
corrective disclosures prior to December 2008.7 I have also, for completeness, analyzed the
fourth factor based on these additional disclosures. 8
4. Because calculating the fourth factor in this manner requires the matching of purchases and sales of the Movants, I have used the “Last-In-First-Out” (“LIFO”) and “First-In-
First-Out” (“FIFO”) methodologies.9 Although the choice of matching methodology is a legal
determination, FIFO will generally exclude a greater number of Class Period sales transactions
(which occurred at allegedly inflated prices) from the loss analysis for investors with pre-Class
Period holdings.10 Therefore, LIFO will generally yield a calculation that includes more Class
Period sales transactions that have occurred at allegedly inflated prices. 11
6 I therefore assume that potential damaged shares are ADRs purchased during the Class Period prior to December 16, 2008 that were sold on or after December 16, 2008, or any share purchased on or after December 16, 2008 through the end of the Class Period regardless of the date of sale. This assumption is due to the potential for multiple corrective disclosures between December 16, 2008 and the end of the Class Period on January 6, 2009.
7 Memorandum of Law in Support of the Global Institutional Investors’ Motion for Appointment as Lead Plaintiff, Approval of Their Selection of Counsel and Consolidation of All Related Actions, March 9, 2009 (the “GII Memorandum”), pp. 4-6. 8 At this early stage of the litigation, I have not been asked to, nor have I undertaken, an independent analysis of potential corrective disclosures. I do not offer any opinion on when the first partial corrective disclosure occurred. 9 Damages calculations generally require the matching of purchases and sales of the damaged shares, while the first three Olsten-Lax factors do not require any share matching. In other words, unlike the fourth factor, the first three Olsten-Lax factors deal only with totals during the Class Period. 10 Sales matched to pre-Class Period holdings are generally excluded from the calculations because pre-Class Period holdings are not eligible to recover damages. If pre-Class Period matches are excluded from the analysis, FIFO will always exclude at least as many Class Period sales as the LIFO methodology given the existence of pre-Class Period holdings. Under both methods, though, sales made during the Class Period that occur before any Class Period purchases will necessarily match to pre-Class Period holdings. 11 I note that none of the Movants listed any pre-Class Period holdings of Satyam ADRs. - 3 - 5. The following table summarizes the results of the four Olsten-Lax factors. 12 The
fourth factor of approximate losses is based on LIFO matching, and ADRs purchased prior to
December 16, 2008 must be held past December 15, 2008. It therefore excludes any losses or
gains from Class Period purchases prior to December 16, 2008 matched to sales made prior to
December 16, 2008. In the table, all ADR amounts are adjusted for stock splits. 13
Factor 1 Factor 2 Factor 3 Factor 4 Net Class Net Class Class Period Period Funds Approximate Period Purchases/ Expended/ Losses/ Movant(s) Purchases (Sales) (Gained) (Gains) Mineworkers 394,100 355,200 $8,829,518 $8,365,099
Sampension 237,800 0 $2,444,421 $0 SKAGEN 2,916,098 0 $16,806,144 $(1,115,392) Sampension/SKAGEN 3,153,898 0 $19,250,565 $(1,115,392)
6. Mineworkers had greater net Class Period purchases and greater approximate losses
than Sampension/SKAGEN.
QUALIFICATIONS, COMPENSATION, AND MATERIALS REVIEWED
7. I am a Vice President of Forensic Economics, Inc., located in Rochester, New York.
I have been employed by Forensic Economics since 1999. I have consulted on issues pertaining
to financial valuations, financial-economic analysis, and the analysis of stock price reactions to public information in securities fraud lawsuits during this time period. Forensic Economics has been retained by both plaintiffs and defendants in such securities cases.
12 Results for individual Movant accounts are presented in the Exhibits. 13 See Exhibits 3, 4 and 5. See Exhibit 7 for FIFO results. Also, see Exhibits 5 and 7 for LIFO and FIFO results if all Class Period purchases are included in the calculation of approximate losses, and for the results if the Court deems GII’s alleged partial disclosures as relevant for calculating approximate losses. - 4 - 8. I hold an M.S. in Applied Economics (1999) from the University of Rochester’s
William E. Simon Graduate School of Business Administration. I hold an M.B.A. in Finance
(1996) from the Loyola University Chicago Graduate School of Business, where I also received an Outstanding Student award. I have co-taught a corporate finance class and served as a research and teaching assistant at the University of Rochester. I have served as a research assistant to the finance faculty of the Loyola University Chicago Graduate School of Business. I was awarded the CFA@ Charter and the right to use the Chartered Financial Analyst (CFA) @ designation as authorized by the CFA Institute in 2006. My resume is attached to this
Declaration as Exhibit 1.
9. My compensation is based on the number of hours worked plus out-of-pocket expenses. My hourly rate is $270. I was assisted by employees of Forensic Economics, who worked under my supervision and direction in connection with this assignment. Forensic
Economics, Inc.’s hourly rates for employees range from $145 to $475.
10. In the course of this assignment, I reviewed, among other things, Satyam ADR stock price data and dividend history obtained from Bloomberg and various case documents. I have attempted to cite in the text of this Declaration or Exhibits specific documents and information on which I relied in my analysis.
- 5 - ANALYSIS
Data
11. I first detail the source of the transaction data I used and assumptions that I made in
order to perform the analysis. 14 In general, the main source of data was each Movant’s
“Transaction Chart,” supplied by Counsel. Supplemental data was obtained from each Movant’s
“Loss Chart,” also supplied by Counsel. I rounded all per-share prices to four decimal places,
which may create slight rounding differences with results presented by others. Because none of
the Movants held any ADRs as of March 9, 2009, it was unnecessary to determine a holding price for ADRs held as of this date.
12. Exhibit 2 contains the transaction data that I used for my calculations in this
Declaration. Specific adjustments/assumptions regarding the data for each Movant are listed in
the Notes to Exhibit 2. I have attached the underlying source documents for the Movants as
Exhibits 9A-9D. I also checked whether the transaction prices listed (or implied) were within
the low and high prices for Satyam ADRs on the trading day. All of the transaction prices were
within the ranges.
Analysis of the First Three Olsten-Lax Factors
13. The first three Olsten-Lax factors concern only Class Period purchases and sales.
Exhibit 3 details each Movant’s purchases and sales during various time periods and the ADR
14 I reserve the right to amend my analysis pending revisions in either the data or assumptions underlying the analysis. - 6 - balance at the end of these time periods. 15 The first two Olsten-Lax factors are presented in
Exhibit 3 and in the following tables.
14. The first factor is the number of ADRs purchased in the Class Period, and is equal
to the sum of the Purchases columns during the Class Period in Panel A of Exhibit 3. The
results, shown in Panel B of Exhibit 3, are presented in the following table:
Movant(s) Class Period Purchases Mineworkers 394,100
Sampension 237,800 SKAGEN 2,916,098 Sampension/SKAGEN 3,153, 898
15. Sampension/SKAGEN had the most Class Period ADR purchases. This factor does
not account for any sales of ADRs during the Class Period.
16. The second factor accounts for ADRs sold during the Class Period, and is the net
number of ADRs purchased during the Class Period. The results are presented in Panel B of
Exhibit 3 and in the table below:
Net Class Period Movant(s) Purchases/(Sales) Mineworkers 355,200
Sampension 0 SKAGEN 0 Sampension/SKAGEN 0
17. Mineworkers had the most net Class Period ADR purchases.
18. The third factor is net funds expended during the Class Period, which equal the total
costs from Class Period purchases less the total proceeds from sales during the Class Period.
Panel A of Exhibit 4 details the costs of purchases and proceeds from sales that took place within
15 I have presented the following time periods, based on the Class Period, the first alleged corrective disclosure in the Vettiyil Complaint and the alleged partial disclosures in the GII Memorandum: 1/1/04-9/14/08; 9/15/08-10/2/08; 10/3/08-12/15/08; 12/16/08-1/6/09; and 1/7/09- 3/9/09. - 7 - each time period during the Class Period. The net funds expended during the Class Period are presented in Panel B of Exhibit 4 and in the table below:
Net Funds Movant(s) Expended/(Gained) Mineworkers $8,829,518
Sampension $2,444,421 SKAGEN $16,806,144 Sampension/SKAGEN $19,250,565
19. Sampension/SKAGEN had the greatest net funds expended during the Class Period.
However, as shown in the second factor, neither Sampension nor SKAGEN held any ADRs beyond the end of the Class Period. In fact, as shown in Exhibit 2, both Sampension and
SKAGEN had sold all of their purchases made prior to December 16, 2008 by October 2008 (the
ADR balance for both goes to zero in October 2008). 16 This factor does not exclude these
ADRs, which may be considered pre-disclosure shares if the first corrective disclosure is
assumed to have occurred in December 2008.
Analysis of the Fourth Olsten-Lax Factor
20. The fourth Olsten-Lax factor is the approximate loss suffered. In this analysis, as
described above, ADRs bought during the Class Period prior to December 16, 2008 must be held beyond December 15, 2008. 17
21. Calculating these losses requires the matching of purchases (and pre-Class Period
holdings) to subsequent sales. The two most commonly applied matching methodologies are the
LIFO and FIFO methods.
16 SKAGEN subsequently purchased 403,000 ADRs on December 16, 2008 and sold them at higher prices on December 17 and 29, 2008 (see Exhibit 2). 17 For completeness, I also present in the Exhibits the results if this requirement is not implemented, and the results if the Court deems GII’s alleged partial disclosures as relevant for calculating approximate losses. - 8 - LIFO Losses/(Gains) Analysis
22. Under the LIFO method, a sale is matched to the most recent purchase of shares
(occurring prior to the sale). For example, if an investor purchased 100 shares at time 1 and
again at time 2 (for a total of 200 shares purchased), and subsequently sold 100 shares at time 3,
the shares sold at time 3 would be matched to the most recent purchase of shares at time 2. The
remaining time 1 purchased shares would be matched to the next sale if no intervening purchase
occurs, but if another purchase occurs at time 4, any subsequent sales after time 4 will first be
matched to this purchase at time 4, because this new purchase at time 4 will now become the
most recent purchase. 18 Purchases unmatched to sales are considered held. Sales are only
matched to purchases occurring prior to the sale, i.e., a purchase can only be matched to a
subsequent sale – you cannot sell what you have not already bought. 19
23. A summary of the LIFO results is presented in Exhibit 5, which details the net gain
or loss for matched transactions, as well as the number of matched ADRs, based on the time periods the ADRs were purchased and subsequently sold. The transaction-by-transaction LIFO
matching results for the Movants are contained in Exhibit 6. 20
18 As more purchases are made, they will, in turn, become the most recent purchase to be matched against the next sale. 19 See the Comverse Decision, p. 15: “It appears that P&P’s new [LIFO] calculation inexplicably matches sales of shares from 2001 with purchases of shares that occurred years later in 2006.” Economically, sales should only be matched to purchases occurring later in time if the sale is a “short sale.” A short sale is one in which an investor borrows a share from a current share owner, sells that share on the open market, and promises to return the share to the current owner. The short seller therefore first sells a share and then later purchases the share (called “covering the short”). 20 Because a single sale transaction will not necessarily equal a single purchase transaction, the individual purchase and sale transactions are divided according to the LIFO methodology. Therefore, a single row in Exhibit 6 will not necessarily match an exact transaction listed in Exhibit 2. This holds for all share-matching results. - 9 - 24. The following table summarizes the approximate losses (or gains) for ADRs that
were either: (i) purchased during the Class Period through December 15, 2008 and held through
December 15, 2008; or (ii) purchased during the Class Period after December 15, 2008.
Approximate Movant(s) Losses/(Gains) Mineworkers $8,365,099
Sampension $0 SKAGEN $(1,115,392) Sampension/SKAGEN $(1,115,392)
25. Under LIFO, Mineworkers had the greatest losses on potentially damaged ADRs.
In addition, for completeness, in Exhibit 5, I also calculate losses under LIFO without the
requirement that Class Period purchases prior to December 16, 2008 be held past December 15,
2008, as well as losses with requirements based on GII’s alleged corrective disclosure dates. 21
FIFO Losses/(Gains) Analysis
26. FIFO is an inventory method wherein a sale is matched to the earliest purchase of
shares (occurring prior to the sale). For example, if an investor purchased 100 shares at time 1
and again at time 2 (for a total of 200 shares purchased), and subsequently sold 100 shares at
time 3, the shares sold at time 3 would be matched to the earliest purchase of shares at time 1.
The remaining time 2 purchased shares would be matched to the next sale, because it will now become the earliest purchase, even if more purchases are subsequently made. Purchases
unmatched to sales are considered held. As with LIFO, sales are only matched to purchases
occurring prior to the sale, i.e., a purchase can only be matched to a subsequent sale.
21 If no Class Period purchases are excluded, Sampension/SKAGEN has the greatest loss. If ADRs purchased and sold prior to September 15, 2008 are excluded, Sampension/SKAGEN has the greatest loss. If ADRs purchased and sold prior to October 3, 2008 are excluded, Mineworkers has the greatest loss. See Exhibit 5. - 10 - 27. Because FIFO first matches sales to pre-Class Period holdings regardless of
whether any purchase has previously occurred during the Class Period, FIFO will generally
remove more, but never less, Class Period sales from an analysis that excludes sales matched to pre-Class Period holdings. When a party has pre-Class Period holdings, the effect of utilizing
the FIFO method, as opposed to LIFO, will be to possibly exclude from the calculation more
shares sold during the Class Period at allegedly inflated prices, and the therefore inflated proceeds from these sales.
28. A summary of the FIFO results is presented in Exhibit 7, which details the net gain
or loss for matched transactions, as well as the number of matched ADRs, based on the time periods the ADRs were purchased and subsequently sold. The transaction-by-transaction FIFO
matching results for the Movants are contained in Exhibit 8. Similar to the LIFO results, under
FIFO, Mineworkers had the greatest losses on potentially damaged ADRs for ADRs that were
either: (i) purchased during the Class Period through December 15, 2008 and held through
December 15, 2008; or (ii) purchased during the Class Period after December 15, 2008.
29. In addition, for completeness, in Exhibit 7, I also calculate losses under FIFO
without the requirement that Class Period purchases prior to December 16, 2008 be held past
December 15, 2008, as well as losses with requirements based on GII’s alleged corrective
disclosure dates . 22
22 If no Class Period purchases are excluded, Sampension/SKAGEN has the greatest loss. If ADRs purchased and sold prior to September 15, 2008 are excluded, Sampension/SKAGEN has the greatest loss. If ADRs purchased and sold prior to October 3, 2008 are excluded, Mineworkers has the greatest loss. See Exhibit 7. - 11 - I declare under penalty of perjury that the foregoing is true and correct to the best of my knowledge.
Executed til l s„ -"' - th day of March, 2009 s at Rochester, New York 6/_44.,! f 1, 7i Kenneth N. Kotz
- 12 -
Exhibit 1 March 2009
KENNETH N. KOTZ, CFA
Business Address: Home Address: Forensic Economics, Inc. 85 Coral Way 95 Allens Creek Road Rochester, New York 14618 Building 2, Suite 303 (585) 241-3230 Rochester, New York 14618 (585) 385-7440 (585) 385-7441 FAX [email protected]
Employment and Education
8/99-present Forensic Economics, Inc., Rochester, NY. Vice President. Consulting in financial-economic analysis in securities litigation and business disputes.
6/96-12/99 M.S. in Applied Economics, Finance and Accounting, William E. Simon Graduate School of Business Administration, University of Rochester, Rochester, NY.
9/97-12/99 William E. Simon Graduate School of Business Administration, University of Rochester, Rochester, NY. Instructor and Teaching Assistant.
1994-1996 M.B.A., Finance, Loyola University Chicago, Chicago, IL.
1994-1996 Loyola University Chicago, Chicago, IL. Research Assistant, Finance Department.
1995-1996 Financial and Economics Strategies Corporation, Chicago IL. Research Assistant.
1991-1994 Midwest European Publications, Inc., Evanston, IL. Assistant Manager.
1986-1989 B.A., History, University of Pennsylvania, Philadelphia, PA.
p. 1 of 3 Exhibit 1 March 2009
Publications
Automation versus intermediation: Evidence from treasuries going off the run (with M. Barclay and T. Hendershott), The Journal of Finance, vol. 61 no. 5, October 2006, 2395-2414.
Working papers
Stock price effects of changes in the accounting procedure set, October 1999.
IPO underpricing, information asymmetry, and dividend policy, June 1999.
The stock price reaction to shareholder proposals, June 1998.
The investment opportunity set and the stock price reaction to dividend changes, January 1998.
Awards
Awarded the CFA® Charter and the right to use the Chartered Financial Analyst (CFA)® designation as authorized by the CFA Institute (2006).
Fellowship, William E. Simon Graduate School of Business Administration, University of Rochester (1996-1999).
Outstanding Student Award, Loyola University Chicago (1996).
Phi Beta Kappa, Loyola University Chicago (1996).
Graduate Scholarship, Loyola University Chicago (1994-1996).
Testimonial Experience
Declaration of Kenneth N. Kotz in Jacksonville Police and Fire Pension Fund et al. v. American International Group, Inc. et al., James Connolly v. American International Group, Inc. et al., Maine Public Employees Retirement System et al. v. American International Group, Inc. et al., and Ontario Teachers’ Pension Plan Board et al. v. American International Group, Inc. et al. in the United States District Court Southern District of New York, Civil Action Nos. 08 Civ. 4772 (RJS), 08 Civ. 5072 (RJS), 08 Civ. 5464 (RJS), and 08 Civ. 5560 (RJS) (August 18, 2008).
p. 2 of 3 Exhibit 1 March 2009
Supplemental Declaration of Kenneth N. Kotz in Plumbers and Pipefitters Local 51 Pension Fund et al. vs. Darden Restaurants, Inc. et al. and Robert Kalkstein et al. vs. Darden Restaurants, Inc. et al. in the United States District Court Middle District of Florida, Orlando Division, Case Nos. 6:08-CV-00388-PCF-DAB and 6:08-CV-00507-GAP-DAB (June 27, 2008).
Declaration of Kenneth N. Kotz in Plumbers and Pipefitters Local 51 Pension Fund et al. vs. Darden Restaurants, Inc. et al. and Robert Kalkstein et al. vs. Darden Restaurants, Inc. et al. in the United States District Court Middle District of Florida, Orlando Division, Case Nos. 6:08-CV-00388-PCF-DAB and 6:08-CV-00507-GAP-DAB (June 19, 2008).
Declaration of Kenneth N. Kotz in Life Enrichment Foundation et al. against Merrill Lynch & Co., Inc. et al., Michael J. Savena et al. against Merrill Lynch & Co., Inc. et al., Gary Kosseff et al. against Merrill Lynch & Co., Inc. et al., Robert R. Garber et al. against Merrill Lynch & Co., Inc. et al., and James Conn et al. against Merrill Lynch & Co., Inc. et al. in the United States District Court Southern District of New York, Civil Action Nos. 07 Civ. 09633 (LBS), 07 Civ. 09837 (LBS), 07 Civ. 10984 (LBS), 07 Civ. 11080 (LBS), and 07 Civ. 11626 (LBS) (January 17, 2008).
Supplemental Declaration of Kenneth N. Kotz in Eugene Kratz vs. Beazer Homes USA, Inc. et al., New Jersey Building Laborers Pension Fund vs. Beazer Homes USA, Inc. et al., and IBEW Local 1579 Pension Plan vs. Beazer Homes USA, Inc. et al. in the United States District Court Southern District of Georgia, Civil Action Nos. 1:07-CV-00725, 1:07-CV- 1139 and 1:07-CV-1151 (July 2, 2007).
Declaration of Kenneth N. Kotz in Eugene Kratz vs. Beazer Homes USA, Inc., et al., New Jersey Building Laborers Pension Fund vs. Beazer Homes USA, Inc. et al., and IBEW Local 1579 Pension Plan vs. Beazer Homes USA, Inc., et al. in the United States District Court Southern District of Georgia, Civil Action Nos. 1:07-CV-00725, 1:07-CV-1139 and 1:07-CV-1151 (June 15, 2007).
Declaration of Kenneth N. Kotz in Tully Nadel et al. against Comverse Technology, Inc. et al., David Thomas et al. against Comverse Technology, Inc. et al., and Lance Moore et al. against Comverse Technology, Inc. et al. in the United States District Court Southern District of New York, Civil Action Nos. 06 Civ. 3190 (LAK), 06 Civ. 3445 (LAK) and 06 Civ. 4418 (LAK) (July 6, 2006).
Declaration of Kenneth N. Kotz in Anthony Caiafa et al. against Comverse Technology, Inc. et al. and James M. Gorman et al. against Comverse Technology, Inc. et al. in the United States District Court Eastern District of New York, Civil Action Nos. 06 CV 1825 (NGG) and 06 CV2738 (NGG) (July 6, 2006).
p. 3 of 3
Exhibit 2 - ADR Transaction Data for Movants
ADR Split ADRs Low High Price Price Multi- Balance Cost/ Movant Transaction Date ADRs Adj. (Split-Adj.) Price Price Price ok? (Split-Adj.) plier (Split-Adj.) (Proceeds) Mineworkers Purchase 10/22/2007 10,400 1 10,400 $26.32 $25.28 $27.35 --- $26.3154 1 10,400 $ 273,680.00 Mineworkers Purchase 12/13/2007 70,400 1 70,400 $26.25 $25.92 $26.66 --- $26.2540 1 80,800 $ 1,848,282.00 Mineworkers Purchase 12/14/2007 38,400 1 38,400 $26.58 $26.00 $26.97 --- $26.5756 1 119,200 $ 1,020,503.00 Mineworkers Purchase 12/17/2007 115,100 1 115,100 $25.43 $24.85 $26.40 --- $25.4279 1 234,300 $ 2,926,751.00 Mineworkers Sale 2/29/2008 17,000 1 17,000 $26.34 $24.93 $26.69 --- $26.3404 -1 217,300 $ (447,787.00) Mineworkers Purchase 3/26/2008 800 1 800 $23.64 $23.45 $24.20 --- $23.6363 1 218,100 $ 18,909.00 Mineworkers Purchase 3/26/2008 10,700 1 10,700 $23.64 $23.45 $24.20 --- $23.6353 1 228,800 $ 252,898.00 Mineworkers Purchase 3/26/2008 22,100 1 22,100 $23.53 $23.45 $24.20 --- $23.5300 1 250,900 $ 520,013.00 Mineworkers Purchase 3/27/2008 32,800 1 32,800 $23.52 $22.79 $23.79 --- $23.5191 1 283,700 $ 771,426.00 Mineworkers Purchase 3/27/2008 93,400 1 93,400 $23.55 $22.79 $23.79 --- $23.5455 1 377,100 $ 2,199,150.00 Mineworkers Sale 7/2/2008 21,900 1 21,900 $25.31 $24.52 $25.50 --- $25.3108 -1 355,200 $ (554,307.00) Mineworkers Sale 1/12/2009 355,200 1 355,200 $1.46 $0.78 $1.77 --- $1.4600 -1 0 $ (518,592.00)
MINEWORKERS ADR PURCHASES/(SALES) SUMMARY Purchases 1/1/04-9/14/08 394,100 9/15/08-10/2/08 - 10/3/08- 12/15/08 - 12/16/08-1/6/09 - 1/7/09-3/9/09 - TOTAL 394,100
MINEWORKERS COST/(PROCEEDS) SUMMARY Purchase Costs 1/1/04-9/14/08 $ 9,831,612 9/15/08-10/2/08 $ - 10/3/08- 12/15/08 $ - 12/16/08-1/6/09 $ - 1/7/09-3/9/09 $ - TOTAL $ 9,831,612
Sampension KP Purchase 8/23/2007 4,600 1 4,600 $23.6961 $23.52 $24.49 --- $23.6961 1 4,600 $ 109,002.06 Sampension KP Purchase 8/23/2007 32,800 1 32,800 $23.7563 $23.52 $24.49 --- $23.7563 1 37,400 $ 779,206.64 Sampension KP Purchase 8/23/2007 54,518 1 54,518 $23.7770 $23.52 $24.49 --- $23.7770 1 91,918 $ 1,296,274.49 Sampension KP Purchase 8/23/2007 9,400 1 9,400 $23.7989 $23.52 $24.49 --- $23.7989 1 101,318 $ 223,709.66 Sampension KP Purchase 8/23/2007 621 1 621 $23.8712 $23.52 $24.49 --- $23.8712 1 101,939 $ 14,824.02 Sampension KP Purchase 8/24/2007 14,079 1 14,079 $24.3748 $24.27 $24.54 --- $24.3748 1 116,018 $ 343,172.81 Sampension KP Purchase 8/24/2007 3,900 1 3,900 $24.4000 $24.27 $24.54 --- $24.4000 1 119,918 $ 95,160.00 Sampension KP Purchase 8/24/2007 200 1 200 $24.4260 $24.27 $24.54 --- $24.4260 1 120,118 $ 4,885.20 Sampension KP Purchase 8/24/2007 36,482 1 36,482 $24.4272 $24.27 $24.54 --- $24.4272 1 156,600 $ 891,153.11 Sampension KP Purchase 9/12/2007 40,100 1 40,100 $24.2409 $23.70 $24.48 --- $24.2409 1 196,700 $ 972,060.09 Sampension KP Purchase 3/5/2008 11,100 1 11,100 $25.6320 $24.72 $26.11 --- $25.6320 1 207,800 $ 284,515.20 Sampension KP Purchase 7/14/2008 30,000 1 30,000 $22.4742 $22.32 $23.61 --- $22.4742 1 237,800 $ 674,226.00 Sampension KP Sale 10/16/2008 106,800 1 106,800 $13.1698 $12.34 $13.61 --- $13.1698 -1 131,000 $ (1,406,534.64)
FORENSIC ECONOMICS, INC.
Exhibit 2 - ADR Transaction Data for Movants
ADR Split ADRs Low High Price Price Multi- Balance Cost/ Movant Transaction Date ADRs Adj. (Split-Adj.) Price Price Price ok? (Split-Adj.) plier (Split-Adj.) (Proceeds) Sampension KP Sale 10/16/2008 44,800 1 44,800 $13.2144 $12.34 $13.61 --- $13.2144 -1 86,200 $ (592,005.12) Sampension KP Sale 10/17/2008 75,700 1 75,700 $14.4283 $13.12 $15.47 --- $14.4283 -1 10,500 $ (1,092,222.31) Sampension KP Sale 10/17/2008 10,500 1 10,500 $14.5720 $13.12 $15.47 --- $14.5720 -1 0 $ (153,006.00)
SAMPENSION KP ADR PURCHASES/(SALES) SUMMARY Purchases 1/1/04-9/14/08 237,800 9/15/08-10/2/08 - 10/3/08- 12/15/08 - 12/16/08-1/6/09 - 1/7/09-3/9/09 - TOTAL 237,800
SAMPENSION KP COST/(PROCEEDS) SUMMARY Purchase Costs 1/1/04-9/14/08 $ 5,688,189 9/15/08-10/2/08 $ - 10/3/08- 12/15/08 $ - 12/16/08-1/6/09 $ - 1/7/09-3/9/09 $ - TOTAL $ 5,688,189
SKAGEN Purchase 3/16/2004 60,000 2 120,000 $18.9424 $18.89 $19.45 --- $9.4712 1 120,000 $ 1,136,544.00 SKAGEN Sale 4/1/2004 60,000 2 120,000 $21.1696 $20.70 $21.51 --- $10.5848 -1 0 $ (1,270,176.00) SKAGEN Purchase 1/8/2008 534,100 1 534,100 $24.8830 $24.50 $25.48 --- $24.8830 1 534,100 $ 13,290,010.30 SKAGEN Purchase 1/8/2008 5,100 1 5,100 $24.6624 $24.50 $25.48 --- $24.6624 1 539,200 $ 125,778.24 SKAGEN Purchase 1/8/2008 3,300 1 3,300 $24.6461 $24.50 $25.48 --- $24.6461 1 542,500 $ 81,332.13 SKAGEN Purchase 1/9/2008 202,600 1 202,600 $24.4071 $24.21 $24.96 --- $24.4071 1 745,100 $ 4,944,878.46 SKAGEN Purchase 1/10/2008 115,500 1 115,500 $24.5021 $24.37 $25.16 --- $24.5021 1 860,600 $ 2,829,992.55 SKAGEN Purchase 1/11/2008 291,500 1 291,500 $23.7330 $23.43 $24.51 --- $23.7330 1 1,152,100 $ 6,918,169.50 SKAGEN Purchase 1/14/2008 62,000 1 62,000 $23.7761 $23.51 $24.32 --- $23.7761 1 1,214,100 $ 1,474,118.20 SKAGEN Purchase 1/15/2008 361,900 1 361,900 $22.9935 $22.58 $23.76 --- $22.9935 1 1,576,000 $ 8,321,347.65 SKAGEN Purchase 3/7/2008 34,000 1 34,000 $23.7793 $23.17 $24.65 --- $23.7793 1 1,610,000 $ 808,496.20 SKAGEN Purchase 3/10/2008 40,000 1 40,000 $23.1593 $22.58 $23.87 --- $23.1593 1 1,650,000 $ 926,372.00 SKAGEN Sale 4/1/2008 50,000 1 50,000 $24.0000 $22.61 $24.19 --- $24.0000 -1 1,600,000 $ (1,200,000.00) SKAGEN Sale 4/2/2008 26,500 1 26,500 $24.0007 $22.67 $24.15 --- $24.0007 -1 1,573,500 $ (636,018.55) SKAGEN Purchase 4/22/2008 72,108 1 72,108 $23.2430 $23.12 $24.53 --- $23.2430 1 1,645,608 $ 1,676,006.24 SKAGEN Purchase 4/25/2008 600 1 600 $24.1000 $24.05 $24.76 --- $24.1000 1 1,646,208 $ 14,460.00 SKAGEN Purchase 4/28/2008 24,000 1 24,000 $24.3455 $24.14 $24.74 --- $24.3455 1 1,670,208 $ 584,292.00 SKAGEN Purchase 5/8/2008 47,790 1 47,790 $25.3999 $25.29 $25.90 --- $25.3999 1 1,717,998 $ 1,213,861.22 SKAGEN Purchase 6/11/2008 59,000 1 59,000 $25.2499 $25.23 $26.36 --- $25.2499 1 1,776,998 $ 1,489,744.10 SKAGEN Purchase 7/1/2008 47,000 1 47,000 $23.9789 $23.42 $24.64 --- $23.9789 1 1,823,998 $ 1,127,008.30 SKAGEN Purchase 7/11/2008 276,000 1 276,000 $23.2435 $22.86 $24.40 --- $23.2435 1 2,099,998 $ 6,415,206.00 SKAGEN Purchase 7/18/2008 99,700 1 99,700 $22.3231 $21.91 $22.75 --- $22.3231 1 2,199,698 $ 2,225,613.07 SKAGEN Purchase 9/15/2008 116,900 1 116,900 $18.5335 $17.90 $20.00 --- $18.5335 1 2,316,598 $ 2,166,566.15
FORENSIC ECONOMICS, INC.
Exhibit 2 - ADR Transaction Data for Movants
ADR Split ADRs Low High Price Price Multi- Balance Cost/ Movant Transaction Date ADRs Adj. (Split-Adj.) Price Price Price ok? (Split-Adj.) plier (Split-Adj.) (Proceeds) SKAGEN Sale 9/25/2008 266,300 1 266,300 $17.9112 $17.57 $18.29 --- $17.9112 -1 2,050,298 $ (4,769,752.56) SKAGEN Sale 9/26/2008 352,585 1 352,585 $17.7807 $17.30 $17.98 --- $17.7807 -1 1,697,713 $ (6,269,208.11) SKAGEN Sale 9/29/2008 380,500 1 380,500 $15.1852 $14.56 $16.89 --- $15.1852 -1 1,317,213 $ (5,777,968.60) SKAGEN Sale 9/30/2008 700,112 1 700,112 $15.7024 $15.12 $16.15 --- $15.7024 -1 617,101 $ (10,993,438.67) SKAGEN Sale 10/1/2008 63,700 1 63,700 $16.2475 $15.73 $16.33 --- $16.2475 -1 553,401 $ (1,034,965.75) SKAGEN Sale 10/2/2008 53,401 1 53,401 $15.7064 $15.42 $16.25 --- $15.7064 -1 500,000 $ (838,737.47) SKAGEN Sale 10/3/2008 26,000 1 26,000 $16.2500 $15.01 $16.94 --- $16.2500 -1 474,000 $ (422,500.00) SKAGEN Sale 10/6/2008 36,500 1 36,500 $13.9901 $13.53 $14.43 --- $13.9901 -1 437,500 $ (510,638.65) SKAGEN Sale 10/6/2008 321,900 1 321,900 $13.8953 $13.53 $14.43 --- $13.8953 -1 115,600 $ (4,472,897.07) SKAGEN Sale 10/13/2008 115,600 1 115,600 $14.2903 $13.49 $15.10 --- $14.2903 -1 0 $ (1,651,958.68) SKAGEN Purchase 12/16/2008 403,000 1 403,000 $5.4752 $5.05 $6.81 --- $5.4752 1 403,000 $ 2,206,505.60 SKAGEN Sale 12/17/2008 353,000 1 353,000 $8.2059 $7.24 $8.75 --- $8.2059 -1 50,000 $ (2,896,682.70) SKAGEN Sale 12/29/2008 50,000 1 50,000 $8.5043 $8.27 $8.55 --- $8.5043 -1 0 $ (425,215.00)
SKAGEN ADR PURCHASES/(SALES) SUMMARY Purchases 1/1/04-9/14/08 2,396,198 9/15/08-10/2/08 116,900 10/3/08-12/15/08 - 12/16/08-1/6/09 403,000 1/7/09-3/9/09 - TOTAL 2,916,098
SKAGEN COST/(PROCEEDS) SUMMARY Purchase Costs 1/1/04-9/14/08 $ 55,603,230 9/15/08-10/2/08 $ 2,166,566 10/3/08-12/15/08 $ - 12/16/08-1/6/09 $ 2,206,506 1/7/09-3/9/09 $ - TOTAL $ 59,976,302
FORENSIC ECONOMICS, INC. Notes to Exhibit 2
Column Definitions Movant – as defined in the text of the Declaration. Transaction – labeled as a purchase or sale. Date – date of trade. ADRs – number of ADRs traded. Split Adj. – Adjustment used to account for Satyam 2-for-1 stock split in October 2006. ADRs (Split-Adj.) – equals ADRs multiplied by Split Adj. Price– price per ADR listed in source data. Low Price –low ADR price on the trading date, source: Bloomberg. High Price –high ADR price on the trading date, source: Bloomberg. Price ok? – equal to “N” if Price not within bounds of Low Price or High Price. Price (Split-Adj.) – price adjusted for stock split. Calculation depends on data provided by each Movant, as noted below. Multiplier – equals -1 for Sales and +1 for Purchases. ADR Balance (Split-Adj.) – equals, by movant, previous ADR Balance plus the product of Multiplier and ADRs (Split-Adj.). Cost/(Proceeds) – equals the total cost (of purchases) and proceeds (from sales). Calculation depends on data provided b Purchase Range – denotes period of time when a purchase transaction occurred. Sales Range – denotes period of time when a sale transaction occurred.
Notes on Individual Movants
Mineworkers Transaction data during the Class Period from Mineworkers’ transaction chart, sales after the Class Period from Minewor Cost/(Proceeds) is entered, Price (Split-Adj.) is calculated (absolute value of, and rounded to 4 decimal places) by dividing ADRs (Split-Adj.).
Sampension KP Transaction data from Sampension KP’s transaction chart. Cost/(Proceeds) is calculated by multiplying Price (Split-Adj.) b
SKAGEN Transaction data from SKAGEN’s transaction chart. Cost/(Proceeds) is calculated by multiplying Price (Split-Adj.) by ADRs
FORENSIC ECONOMICS, INC. Exhibit 3 - ADR Purchase and Sale Analysis
1/1/04-9/14/08 9/14/2008 9/15/08-10/2/08 10/2/2008 10/3/ Movant Purchases Sales Balance Purchases Sales Balance Purchase [1] [2] [3] [4]=[2]+[3] [5] [6] [7]=[4]+[5]+[6] [8] PANEL A: ADR PURCHASES, SALES and BALANCE by TIME PERIOD Mineworkers 394,100 (38,900) 355,200 - - 355,200
Sampension KP 237,800 - 237,800 - - 237,800 SKAGEN 2,396,198 (196,500) 2,199,698 116,900 (1,816,598) 500,000 Sampension/SKAGEN Total 2,633,998 (196,500) 2,437,498 116,900 (1,816,598) 737,800
12/16/08-1/6/09 1/6/2009 1/7/09-3/9/09 3/9/2009 Movant Purchases Sales Balance Purchases Sales Balance [1] [11] [12] [13]=[10]+[11]+[12] [14] [15] [16]=[13]+[14]+[15] PANEL A, cont'd: ADR PURCHASES, SALES and BALANCE by TIME PERIOD Mineworkers - - 355,200 - (355,200) -
Sampension KP ------SKAGEN 403,000 (403,000) - - - - Sampension/SKAGEN Total 403,000 (403,000) - - - -
FACTOR 1 FACTOR 2 Movant CP PURCH. CP SALES NET CP PURCH. [1] [17]=[2]+[5]+[8]+[11] [18]=[3]+[6]+[9]+[12] [19]=[17]+[18] PANEL B: OLSTEN-LAX FACTORS 1 & 2 RESULTS Mineworkers 394,100 (38,900) 355,200
Sampension KP 237,800 (237,800) - SKAGEN 2,916,098 (2,916,098) - Sampension/SKAGEN Total 3,153,898 (3,153,898) -
See Exhibit 2 for transaction data.
FORENSIC ECONOMICS, INC. Exhibit 4 - Class Period Cost/(Proceeds) Analysis
1/1/04-9/14/08 9/15/08-10/2/08 Movant Purchases Sales Purchases S [1] [2] [3] [4] PANEL A: PURCHASE COSTS and SALES (PROCEEDS) by TIME PERIOD Mineworkers $ 9,831,612 $ (1,002,094) $ - $
Sampension KP $ 5,688,189 $ - $ - $ SKAGEN $ 55,603,230 $ (3,106,195) $ 2,166,566 $ (2 Sampension/SKAGEN Total $ 61,291,419 $ (3,106,195) $ 2,166,566 $ (2
10/3/08-12/15/08 12/16/08-1/6/09 Movant Purchases Sales Purchases S [1] [6] [7] [8] PANEL A, cont'd: PURCHASE COSTS and SALES (PROCEEDS) by TIME PERIOD Mineworkers $ - $ - $ - $
Sampension KP $ - $ (3,243,768) $ - $ SKAGEN $ - $ (7,057,994) $ 2,206,506 $ Sampension/SKAGEN Total $ - $ (10,301,762) $ 2,206,506 $
CP CP FACTOR 3 Movant COSTS (PROCEEDS) NET CP EXPEND. [1] [10]=[2]+[4]+[6]+[8] [11]=[3]+[5]+[7]+[9] [12]=[10]+[11] PANEL B: OLSTEN-LAX FACTORS 3 RESULTS Mineworkers $ 9,831,612 $ (1,002,094) $ 8,829,518
Sampension KP $ 5,688,189 $ (3,243,768) $ 2,444,421 SKAGEN $ 59,976,302 $ (43,170,158) $ 16,806,144 Sampension/SKAGEN Total $ 65,664,491 $ (46,413,926) $ 19,250,565
See Exhibit 2 for transaction data.
FORENSIC ECONOMICS, INC.
Exhibit 5 - LIFO Matching Summary
Purchase Range: 1/1/04-9/14/08 9/15/08-10/2/08 12/16/08-1/6/09 Class Period Class P 1/1/04- 10/3/08- Post 9/15/08- 10/3/08- Post Post Po Sales Range: Movant 9/14/04 9/15/08-10/2/08 12/15/08 12/15/08 10/2/08 12/15/08 12/15/08 12/15/08 ALL 9/14 [1] [2] [3] [4] [5] [6] [7] [8] [9] sum [2]-[9] sum [ PANEL A: ADR SUMMARY Mineworkers 38,900 0 0 355,200 0 0 0 0 394,100
Sampension KP 0 0 237,800 0 0 0 0 0 237,800 SKAGEN 196,500 1,699,698 500,000 0 116,900 0 0 403,000 2,916,098 2 Sampension/SKAGENTotal 196,500 1,699,698 737,800 0 116,900 0 0 403,000 3,153,898 2,
PANEL B: LOSS/(GAIN) SUMMARY Mineworkers $ (54,173) $ - $ - $ 8,365,099 $ - $ - $ - $ - $ 8,310,927 $ 8,
Sampension KP $ $ $ 2,444,421 $ $ $ $ $ $ 2,444,421 $ 2, SKAGEN $ (177,299) $ 12,642,582 $ 5,383,506 $ $ 72,747 $ $ $ (1,115,392) $ 16,806,144 $ 16, Sampension/SKAGENTotal $ (177,299) $ 12,642,582 $ 7,827,927 $ - $ 72,747 $ - $ - $ (1,115,392) $ 19,250,565 $ 19,
See Exhibit 6 for transaction-by-transaction matching results, 10/3/08-12/15/08 purchase range results excluded due to lack of purchases during this time period. Class Period purchase range results give total ADRs and loss/(gain) for ADRs purchased during the Class Period and held over the respective date. (9/14/08 and 10/2/08 are GII alleged corrective disclosures, 12/15/08 is Vettiyil Complaint first alleged corrective disclosure).
FORENSIC ECONOMICS, INC.
Exhibit 6- LIFO Transaction-by-Transaction Results ADR Matching Res Purchase Range: 1/1/04-9/14/08 9 Purchase Purchase Sale Sale Loss/ Purchase Sales 9/15/08- 10/3/08- Post 9/15/08- Sales Range: 1/1/04- Movant/Account Date Price Date Price ADRs (Gain) Range Range 9/14/08 10/2/08 12/15/08 12/15/08 10/2/08 Mineworkers 10/22/2007 26.3154 1/12/2009 1.4600 10,400 $ 258,496 1/1/04-9/14/08 1/7/09-3/9/09 ------10,400 -- Mineworkers 12/13/2007 26.2540 1/12/2009 1.4600 70,400 $ 1,745,498 1/1/04-9/14/08 1/7/09-3/9/09 ------70,400 -- Mineworkers 12/14/2007 26.5756 1/12/2009 1.4600 38,400 $ 964,439 1/1/04-9/14/08 1/7/09-3/9/09 ------38,400 -- Mineworkers 12/17/2007 25.4279 2/29/2008 26.3404 17,000 $ (15,513) 1/1/04-9/14/08 1/1/04-9/14/08 17,000 ------Mineworkers 12/17/2007 25.4279 1/12/2009 1.4600 98,100 $ 2,351,251 1/1/04-9/14/08 1/7/09-3/9/09 ------98,100 -- Mineworkers 3/26/2008 23.5300 1/12/2009 1.4600 22,100 $ 487,747 1/1/04-9/14/08 1/7/09-3/9/09 ------22,100 -- Mineworkers 3/26/2008 23.6353 1/12/2009 1.4600 10,700 $ 237,276 1/1/04-9/14/08 1/7/09-3/9/09 ------10,700 -- Mineworkers 3/26/2008 23.6363 1/12/2009 1.4600 800 $ 17,741 1/1/04-9/14/08 1/7/09-3/9/09 ------800 -- Mineworkers 3/27/2008 23.5455 7/2/2008 25.3108 21,900 $ (38,660) 1/1/04-9/14/08 1/1/04-9/14/08 21,900 ------Mineworkers 3/27/2008 23.5455 1/12/2009 1.4600 71,500 $ 1,579,113 1/1/04-9/14/08 1/7/09-3/9/09 ------71,500 -- Mineworkers 3/27/2008 23.5191 1/12/2009 1.4600 32,800 $ 723,538 1/1/04-9/14/08 1/7/09-3/9/09 ------32,800 -- Sampension KP 8/23/2007 23.7989 10/16/2008 13.2144 9,400 $ 99,494 1/1/04-9/14/08 10/3/08-12/15/08 ------9,400 --- -- Sampension KP 8/23/2007 23.7770 10/16/2008 13.2144 5,718 $ 60,397 1/1/04-9/14/08 10/3/08-12/15/08 ------5,718 --- -- Sampension KP 8/23/2007 23.8712 10/16/2008 13.2144 621 $ 6,618 1/1/04-9/14/08 10/3/08-12/15/08 ------621 --- -- Sampension KP 8/23/2007 23.7770 10/17/2008 14.4283 48,800 $ 456,217 1/1/04-9/14/08 10/3/08-12/15/08 ------48,800 --- -- Sampension KP 8/23/2007 23.7563 10/17/2008 14.4283 26,900 $ 250,923 1/1/04-9/14/08 10/3/08-12/15/08 ------26,900 --- -- Sampension KP 8/23/2007 23.7563 10/17/2008 14.5720 5,900 $ 54,187 1/1/04-9/14/08 10/3/08-12/15/08 ------5,900 --- -- Sampension KP 8/23/2007 23.6961 10/17/2008 14.5720 4,600 $ 41,971 1/1/04-9/14/08 10/3/08-12/15/08 ------4,600 --- -- Sampension KP 8/24/2007 24.4272 10/16/2008 13.1698 25,600 $ 288,189 1/1/04-9/14/08 10/3/08-12/15/08 ------25,600 --- -- Sampension KP 8/24/2007 24.3748 10/16/2008 13.2144 14,079 $ 157,127 1/1/04-9/14/08 10/3/08-12/15/08 ------14,079 --- -- Sampension KP 8/24/2007 24.4272 10/16/2008 13.2144 10,882 $ 122,018 1/1/04-9/14/08 10/3/08-12/15/08 ------10,882 --- -- Sampension KP 8/24/2007 24.4000 10/16/2008 13.2144 3,900 $ 43,624 1/1/04-9/14/08 10/3/08-12/15/08 ------3,900 --- -- Sampension KP 8/24/2007 24.4260 10/16/2008 13.2144 200 $ 2,242 1/1/04-9/14/08 10/3/08-12/15/08 ------200 --- -- Sampension KP 9/12/2007 24.2409 10/16/2008 13.1698 40,100 $ 443,951 1/1/04-9/14/08 10/3/08-12/15/08 ------40,100 --- -- Sampension KP 3/5/2008 25.6320 10/16/2008 13.1698 11,100 $ 138,330 1/1/04-9/14/08 10/3/08-12/15/08 ------11,100 --- -- Sampension KP 7/14/2008 22.4742 10/16/2008 13.1698 30,000 $ 279,132 1/1/04-9/14/08 10/3/08-12/15/08 ------30,000 --- -- SKAGEN 3/16/2004 9.4712 4/1/2004 10.5848 120,000 $ (133,632) 1/1/04-9/14/08 1/1/04-9/14/08 120,000 ------SKAGEN 1/8/2008 24.8830 10/2/2008 15.7064 34,100 $ 312,922 1/1/04-9/14/08 9/15/08-10/2/08 --- 34,100 ------SKAGEN 1/8/2008 24.6624 10/2/2008 15.7064 5,100 $ 45,676 1/1/04-9/14/08 9/15/08-10/2/08 --- 5,100 ------SKAGEN 1/8/2008 24.6461 10/2/2008 15.7064 3,300 $ 29,501 1/1/04-9/14/08 9/15/08-10/2/08 --- 3,300 ------SKAGEN 1/8/2008 24.8830 10/3/2008 16.2500 26,000 $ 224,458 1/1/04-9/14/08 10/3/08-12/15/08 ------26,000 --- -- SKAGEN 1/8/2008 24.8830 10/6/2008 13.8953 321,900 $ 3,536,941 1/1/04-9/14/08 10/3/08-12/15/08 ------321,900 --- -- SKAGEN 1/8/2008 24.8830 10/6/2008 13.9901 36,500 $ 397,591 1/1/04-9/14/08 10/3/08-12/15/08 ------36,500 --- -- SKAGEN 1/8/2008 24.8830 10/13/2008 14.2903 115,600 $ 1,224,516 1/1/04-9/14/08 10/3/08-12/15/08 ------115,600 --- -- SKAGEN 1/9/2008 24.4071 9/30/2008 15.7024 127,999 $ 1,114,193 1/1/04-9/14/08 9/15/08-10/2/08 --- 127,999 ------SKAGEN 1/9/2008 24.4071 10/1/2008 16.2475 63,700 $ 519,767 1/1/04-9/14/08 9/15/08-10/2/08 --- 63,700 ------SKAGEN 1/9/2008 24.4071 10/2/2008 15.7064 10,901 $ 94,846 1/1/04-9/14/08 9/15/08-10/2/08 --- 10,901 ------SKAGEN 1/10/2008 24.5021 9/30/2008 15.7024 115,500 $ 1,016,365 1/1/04-9/14/08 9/15/08-10/2/08 --- 115,500 ------SKAGEN 1/11/2008 23.7330 9/30/2008 15.7024 291,500 $ 2,340,920 1/1/04-9/14/08 9/15/08-10/2/08 --- 291,500 ------SKAGEN 1/14/2008 23.7761 9/30/2008 15.7024 62,000 $ 500,569 1/1/04-9/14/08 9/15/08-10/2/08 --- 62,000 ------SKAGEN 1/15/2008 22.9935 4/2/2008 24.0007 2,500 $ (2,518) 1/1/04-9/14/08 1/1/04-9/14/08 2,500 ------SKAGEN 1/15/2008 22.9935 9/29/2008 15.1852 256,287 $ 2,001,166 1/1/04-9/14/08 9/15/08-10/2/08 --- 256,287 ------SKAGEN 1/15/2008 22.9935 9/30/2008 15.7024 103,113 $ 751,807 1/1/04-9/14/08 9/15/08-10/2/08 --- 103,113 ------SKAGEN 3/7/2008 23.7793 4/1/2008 24.0000 10,000 $ (2,207) 1/1/04-9/14/08 1/1/04-9/14/08 10,000 ------SKAGEN 3/7/2008 23.7793 4/2/2008 24.0007 24,000 $ (5,314) 1/1/04-9/14/08 1/1/04-9/14/08 24,000 ------SKAGEN 3/10/2008 23.1593 4/1/2008 24.0000 40,000 $ (33,628) 1/1/04-9/14/08 1/1/04-9/14/08 40,000 ------SKAGEN 4/22/2008 23.2430 9/29/2008 15.1852 72,108 $ 581,032 1/1/04-9/14/08 9/15/08-10/2/08 --- 72,108 ------SKAGEN 4/25/2008 24.1000 9/29/2008 15.1852 600 $ 5,349 1/1/04-9/14/08 9/15/08-10/2/08 --- 600 ------SKAGEN 4/28/2008 24.3455 9/29/2008 15.1852 24,000 $ 219,847 1/1/04-9/14/08 9/15/08-10/2/08 --- 24,000 ------SKAGEN 5/8/2008 25.3999 9/26/2008 17.7807 20,285 $ 154,555 1/1/04-9/14/08 9/15/08-10/2/08 --- 20,285 ------SKAGEN 5/8/2008 25.3999 9/29/2008 15.1852 27,505 $ 280,955 1/1/04-9/14/08 9/15/08-10/2/08 --- 27,505 ------SKAGEN 6/11/2008 25.2499 9/26/2008 17.7807 59,000 $ 440,683 1/1/04-9/14/08 9/15/08-10/2/08 --- 59,000 ------SKAGEN 7/1/2008 23.9789 9/26/2008 17.7807 47,000 $ 291,315 1/1/04-9/14/08 9/15/08-10/2/08 --- 47,000 ------SKAGEN 7/11/2008 23.2435 9/25/2008 17.9112 49,700 $ 265,015 1/1/04-9/14/08 9/15/08-10/2/08 --- 49,700 ------SKAGEN 7/11/2008 23.2435 9/26/2008 17.7807 226,300 $ 1,236,232 1/1/04-9/14/08 9/15/08-10/2/08 --- 226,300 ------SKAGEN 7/18/2008 22.3231 9/25/2008 17.9112 99,700 $ 439,866 1/1/04-9/14/08 9/15/08-10/2/08 --- 99,700 ------SKAGEN 9/15/2008 18.5335 9/25/2008 17.9112 116,900 $ 72,747 9/15/08-10/2/08 9/15/08-10/2/08 ------116,90 SKAGEN 12/16/2008 5.4752 12/17/2008 8.2059 353,000 $ (963,937) 12/16/08-1/6/09 12/16/08-1/6/09 ------SKAGEN 12/16/2008 5.4752 12/29/2008 8.5043 50,000 $ (151,455) 12/16/08-1/6/09 12/16/08-1/6/09 ------
Notes: TOTALS Movant ADRs are matched for each Movant/Account based on the Last-In-First-Out ("LIFO") Mineworkers 38,900 0 0 355,200 methodology described in the text of the Declaration. Sampension KP 0 0 237,800 0 Loss/(Gain) equals ADRs multiplied by the quantity of Purchase Price less Sale Price. SKAGEN 196,500 1,699,698 500,000 0 116,90 10/3/08-12/15/08 purchase range results are excluded due to lack of purchases during this time period.
FORENSIC ECONOMICS, INC.
Exhibit 6- LIFO Transaction-by-Transaction Results Loss/(Gain) Resu Purchase Range: 1/1/04-9/14/08 Purchase Purchase Sale Sale Loss/ Purchase Sales 1/1/04- 9/15/08- 10/3/08- 9/1 Sales Range: Movant/Account Date Price Date Price ADRs (Gain) Range Range 9/14/08 10/2/08 12/15/08 Post 12/15/08 10/ Mineworkers 10/22/2007 26.3154 1/12/2009 1.4600 10,400 $ 258,496 1/1/04-9/14/08 1/7/09-3/9/09 $ - $ - $ - $ 258,496 $ Mineworkers 12/13/2007 26.2540 1/12/2009 1.4600 70,400 $ 1,745,498 1/1/04-9/14/08 1/7/09-3/9/09 $ - $ - $ - $ 1,745,498 $ Mineworkers 12/14/2007 26.5756 1/12/2009 1.4600 38,400 $ 964,439 1/1/04-9/14/08 1/7/09-3/9/09 $ - $ - $ - $ 964,439 $ Mineworkers 12/17/2007 25.4279 2/29/2008 26.3404 17,000 $ (15,513) 1/1/04-9/14/08 1/1/04-9/14/08 $ (15,513) $ - $ - $ - $ Mineworkers 12/17/2007 25.4279 1/12/2009 1.4600 98,100 $ 2,351,251 1/1/04-9/14/08 1/7/09-3/9/09 $ - $ - $ - $ 2,351,251 $ Mineworkers 3/26/2008 23.5300 1/12/2009 1.4600 22,100 $ 487,747 1/1/04-9/14/08 1/7/09-3/9/09 $ - $ - $ - $ 487,747 $ Mineworkers 3/26/2008 23.6353 1/12/2009 1.4600 10,700 $ 237,276 1/1/04-9/14/08 1/7/09-3/9/09 $ - $ - $ - $ 237,276 $ Mineworkers 3/26/2008 23.6363 1/12/2009 1.4600 800 $ 17,741 1/1/04-9/14/08 1/7/09-3/9/09 $ - $ - $ - $ 17,741 $ Mineworkers 3/27/2008 23.5455 7/2/2008 25.3108 21,900 $ (38,660) 1/1/04-9/14/08 1/1/04-9/14/08 $ (38,660) $ - $ - $ - $ Mineworkers 3/27/2008 23.5455 1/12/2009 1.4600 71,500 $ 1,579,113 1/1/04-9/14/08 1/7/09-3/9/09 $ - $ - $ - $ 1,579,113 $ Mineworkers 3/27/2008 23.5191 1/12/2009 1.4600 32,800 $ 723,538 1/1/04-9/14/08 1/7/09-3/9/09 $ - $ - $ - $ 723,538 $ Sampension KP 8/23/2007 23.7989 10/16/2008 13.2144 9,400 $ 99,494 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 99,494 $ - $ Sampension KP 8/23/2007 23.7770 10/16/2008 13.2144 5,718 $ 60,397 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 60,397 $ - $ Sampension KP 8/23/2007 23.8712 10/16/2008 13.2144 621 $ 6,618 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 6,618 $ - $ Sampension KP 8/23/2007 23.7770 10/17/2008 14.4283 48,800 $ 456,217 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 456,217 $ - $ Sampension KP 8/23/2007 23.7563 10/17/2008 14.4283 26,900 $ 250,923 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 250,923 $ - $ Sampension KP 8/23/2007 23.7563 10/17/2008 14.5720 5,900 $ 54,187 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 54,187 $ - $ Sampension KP 8/23/2007 23.6961 10/17/2008 14.5720 4,600 $ 41,971 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 41,971 $ - $ Sampension KP 8/24/2007 24.4272 10/16/2008 13.1698 25,600 $ 288,189 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 288,189 $ - $ Sampension KP 8/24/2007 24.3748 10/16/2008 13.2144 14,079 $ 157,127 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 157,127 $ - $ Sampension KP 8/24/2007 24.4272 10/16/2008 13.2144 10,882 $ 122,018 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 122,018 $ - $ Sampension KP 8/24/2007 24.4000 10/16/2008 13.2144 3,900 $ 43,624 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 43,624 $ - $ Sampension KP 8/24/2007 24.4260 10/16/2008 13.2144 200 $ 2,242 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 2,242 $ - $ Sampension KP 9/12/2007 24.2409 10/16/2008 13.1698 40,100 $ 443,951 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 443,951 $ - $ Sampension KP 3/5/2008 25.6320 10/16/2008 13.1698 11,100 $ 138,330 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 138,330 $ - $ Sampension KP 7/14/2008 22.4742 10/16/2008 13.1698 30,000 $ 279,132 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 279,132 $ - $ SKAGEN 3/16/2004 9.4712 4/1/2004 10.5848 120,000 $ (133,632) 1/1/04-9/14/08 1/1/04-9/14/08 $ (133,632) $ - $ - $ - $ SKAGEN 1/8/2008 24.8830 10/2/2008 15.7064 34,100 $ 312,922 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 312,922 $ - $ - $ SKAGEN 1/8/2008 24.6624 10/2/2008 15.7064 5,100 $ 45,676 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 45,676 $ - $ - $ SKAGEN 1/8/2008 24.6461 10/2/2008 15.7064 3,300 $ 29,501 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 29,501 $ - $ - $ SKAGEN 1/8/2008 24.8830 10/3/2008 16.2500 26,000 $ 224,458 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 224,458 $ - $ SKAGEN 1/8/2008 24.8830 10/6/2008 13.8953 321,900 $ 3,536,941 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 3,536,941 $ - $ SKAGEN 1/8/2008 24.8830 10/6/2008 13.9901 36,500 $ 397,591 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 397,591 $ - $ SKAGEN 1/8/2008 24.8830 10/13/2008 14.2903 115,600 $ 1,224,516 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 1,224,516 $ - $ SKAGEN 1/9/2008 24.4071 9/30/2008 15.7024 127,999 $ 1,114,193 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 1,114,193 $ - $ - $ SKAGEN 1/9/2008 24.4071 10/1/2008 16.2475 63,700 $ 519,767 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 519,767 $ - $ - $ SKAGEN 1/9/2008 24.4071 10/2/2008 15.7064 10,901 $ 94,846 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 94,846 $ - $ - $ SKAGEN 1/10/2008 24.5021 9/30/2008 15.7024 115,500 $ 1,016,365 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 1,016,365 $ - $ - $ SKAGEN 1/11/2008 23.7330 9/30/2008 15.7024 291,500 $ 2,340,920 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 2,340,920 $ - $ - $ SKAGEN 1/14/2008 23.7761 9/30/2008 15.7024 62,000 $ 500,569 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 500,569 $ - $ - $ SKAGEN 1/15/2008 22.9935 4/2/2008 24.0007 2,500 $ (2,518) 1/1/04-9/14/08 1/1/04-9/14/08 $ (2,518) $ - $ - $ - $ SKAGEN 1/15/2008 22.9935 9/29/2008 15.1852 256,287 $ 2,001,166 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 2,001,166 $ - $ - $ SKAGEN 1/15/2008 22.9935 9/30/2008 15.7024 103,113 $ 751,807 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 751,807 $ - $ - $ SKAGEN 3/7/2008 23.7793 4/1/2008 24.0000 10,000 $ (2,207) 1/1/04-9/14/08 1/1/04-9/14/08 $ (2,207) $ - $ - $ - $ SKAGEN 3/7/2008 23.7793 4/2/2008 24.0007 24,000 $ (5,314) 1/1/04-9/14/08 1/1/04-9/14/08 $ (5,314) $ - $ - $ - $ SKAGEN 3/10/2008 23.1593 4/1/2008 24.0000 40,000 $ (33,628) 1/1/04-9/14/08 1/1/04-9/14/08 $ (33,628) $ - $ - $ - $ SKAGEN 4/22/2008 23.2430 9/29/2008 15.1852 72,108 $ 581,032 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 581,032 $ - $ - $ SKAGEN 4/25/2008 24.1000 9/29/2008 15.1852 600 $ 5,349 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 5,349 $ - $ - $ SKAGEN 4/28/2008 24.3455 9/29/2008 15.1852 24,000 $ 219,847 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 219,847 $ - $ - $ SKAGEN 5/8/2008 25.3999 9/26/2008 17.7807 20,285 $ 154,555 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 154,555 $ - $ - $ SKAGEN 5/8/2008 25.3999 9/29/2008 15.1852 27,505 $ 280,955 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 280,955 $ - $ - $ SKAGEN 6/11/2008 25.2499 9/26/2008 17.7807 59,000 $ 440,683 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 440,683 $ - $ - $ SKAGEN 7/1/2008 23.9789 9/26/2008 17.7807 47,000 $ 291,315 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 291,315 $ - $ - $ SKAGEN 7/11/2008 23.2435 9/25/2008 17.9112 49,700 $ 265,015 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 265,015 $ - $ - $ SKAGEN 7/11/2008 23.2435 9/26/2008 17.7807 226,300 $ 1,236,232 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 1,236,232 $ - $ - $ SKAGEN 7/18/2008 22.3231 9/25/2008 17.9112 99,700 $ 439,866 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 439,866 $ - $ - $ SKAGEN 9/15/2008 18.5335 9/25/2008 17.9112 116,900 $ 72,747 9/15/08-10/2/08 9/15/08-10/2/08 $ - $ - $ - $ - $ 7 SKAGEN 12/16/2008 5.4752 12/17/2008 8.2059 353,000 $ (963,937) 12/16/08-1/6/09 12/16/08-1/6/09 $ - $ - $ - $ - $ SKAGEN 12/16/2008 5.4752 12/29/2008 8.5043 50,000 $ (151,455) 12/16/08-1/6/09 12/16/08-1/6/09 $ - $ - $ - $ - $
Notes: TOTALS Movant ADRs are matched for each Movant/Account based on the Last-In-First-Out ("LIFO") Mineworkers $ (54,173) $ - $ - $ 8,365,099 $ methodology described in the text of the Declaration. Sampension KP $ - $ - $ 2,444,421 $ - $ Loss/(Gain) equals ADRs multiplied by the quantity of Purchase Price less Sale Price. SKAGEN $ (177,299) $ 12,642,582 $ 5,383,506 $ - $ 7 10/3/08-12/15/08 purchase range results are excluded due to lack of purchases during this time period.
FORENSIC ECONOMICS, INC. Exhibit 7 - FIFO Matching Summary
Purchase Range: 1/1/04-9/14/08 9/15/08-10/2/08 12/16/08-1/6/09 Class Period Class P 1/1/04- 10/3/08- Post 9/15/08- 10/3/08- Post Post Po Sales Range: Movant 9/14/04 9/15/08-10/2/08 12/15/08 12/15/08 10/2/08 12/15/08 12/15/08 12/15/08 ALL 9/14 [1] [2] [3] [4] [5] [6] [7] [8] [9] sum [2]-[9] sum [ PANEL A: ADR SUMMARY Mineworkers 38,900 0 0 355,200 0 0 0 0 394,100
Sampension KP 0 0 237,800 0 0 0 0 0 237,800 SKAGEN 196,500 1,816,598 383,100 0 0 116,900 0 403,000 2,916,098 2, Sampension/SKAGENTotal 196,500 1,816,598 620,900 0 0 116,900 0 403,000 3,153,898 2,
PANEL B: LOSS/(GAIN) SUMMARY Mineworkers $ 19,826 $ - $ - $ 8,291,101 $ - $ - $ - $ - $ 8,310,927 $ 8,2
Sampension KP $ $ $ 2,444,421 $ $ $ $ $ $ 2,444,421 $ 2,4 SKAGEN $ (66,101) $ 14,060,803 $ 3,430,291 $ $ $ 496,544 $ $ (1,115,392) $ 16,806,144 $ 16,8 Sampension/SKAGENTotal $ (66,101) $ 14,060,803 $ 5,874,712 $ - $ - $ 496,544 $ - $ (1,115,392) $ 19,250,565 $ 19,3
See Exhibit 8 for transaction-by-transaction matching results, 10/3/08-12/15/08 purchase range results excluded due to lack of purchases during this time period. Class Period purchase range results give total ADRs and loss/(gain) for ADRs purchased during the Class Period and held over the respective date. (9/14/08 and 10/2/08 are GII alleged corrective disclosures, 12/15/08 is Vettiyil Complaint first alleged corrective disclosure).
FORENSIC ECONOMICS, INC.
Exhibit 8 - FIFO Transaction-by-Transaction Results ADR Matching Res Purchase Range: 1/1/04-9/14/08 9 Purchase Purchase Sale Sale Loss/ Purchase Sales 9/15/08- 10/3/08- Post 9/15/08- Sales Range: 1/1/04- Movant/Account Date Price Date Price ADRs (Gain) Range Range 9/14/08 10/2/08 12/15/08 12/15/08 10/2/08
Mineworkers 10/22/2007 26.3154 2/29/2008 26.3404 10,400 $ (260) 1/1/04‐9/14/08 1/1/04‐9/14/08 10,400 ‐‐‐ ‐‐‐ ‐‐‐ ‐‐ Mineworkers 12/13/2007 26.2540 2/29/2008 26.3404 6,600 $ (570) 1/1/04‐9/14/08 1/1/04‐9/14/08 6,600 ‐‐‐ ‐‐‐ ‐‐‐ ‐‐ Mineworkers 12/13/2007 26.2540 7/2/2008 25.3108 21,900 $ 20,656 1/1/04‐9/14/08 1/1/04‐9/14/08 21,900 ‐‐‐ ‐‐‐ ‐‐‐ ‐‐ Mineworkers 12/13/2007 26.2540 1/12/2009 1.4600 41,900 $ 1,038,869 1/1/04‐9/14/08 1/7/09 ‐3/9/09 ‐‐‐ ‐‐‐ ‐‐‐ 41,900 ‐‐ Mineworkers 12/14/2007 26.5756 1/12/2009 1.4600 38,400 $ 964,439 1/1/04‐9/14/08 1/7/09 ‐3/9/09 ‐‐‐ ‐‐‐ ‐‐‐ 38,400 ‐‐ Mineworkers 12/17/2007 25.4279 1/12/2009 1.4600 115,100 $ 2,758,705 1/1/04‐9/14/08 1/7/09 ‐3/9/09 ‐‐‐ ‐‐‐ ‐‐‐ 115,100 ‐‐ Mineworkers 3/26/2008 23.5300 1/12/2009 1.4600 22,100 $ 487,747 1/1/04‐9/14/08 1/7/09 ‐3/9/09 ‐‐‐ ‐‐‐ ‐‐‐ 22,100 ‐‐ Mineworkers 3/26/2008 23.6353 1/12/2009 1.4600 10,700 $ 237,276 1/1/04‐9/14/08 1/7/09‐3/9/09 ‐‐‐ ‐‐‐ ‐‐‐ 10,700 ‐‐ Mineworkers 3/26/2008 23.6363 1/12/2009 1.4600 800 $ 17,741 1/1/04‐9/14/08 1/7/09 ‐3/9/09 ‐‐‐ ‐‐‐ ‐‐‐ 800 ‐‐ Mineworkers 3/27/2008 23.5455 1/12/2009 1.4600 93,400 $ 2,062,786 1/1/04‐9/14/08 1/7/09‐3/9/09 ‐‐‐ ‐‐‐ ‐‐‐ 93,400 ‐‐ Mineworkers 3/27/2008 23.5191 1/12/2009 1.4600 32,800 $ 723,538 1/1/04‐9/14/08 1/7/09 ‐3/9/09 ‐‐‐ ‐‐‐ ‐‐‐ 32,800 ‐‐ Sampension KP 8/23/2007 23.7770 10/16/2008 13.1698 54,518 $ 578,283 1/1/04‐9/14/08 10/3/08 ‐12/15/08 ‐‐‐ ‐‐‐ 54,518 ‐‐‐ ‐‐ Sampension KP 8/23/2007 23.7563 10/16/2008 13.1698 32,800 $ 347,237 1/1/04‐9/14/08 10/3/08 ‐12/15/08 ‐‐‐ ‐‐‐ 32,800 ‐‐‐ ‐‐ Sampension KP 8/23/2007 23.7989 10/16/2008 13.1698 9,400 $ 99,914 1/1/04‐9/14/08 10/3/08 ‐12/15/08 ‐‐‐ ‐‐‐ 9,400 ‐‐‐ ‐‐ Sampension KP 8/23/2007 23.6961 10/16/2008 13.1698 4,600 $ 48,421 1/1/04‐9/14/08 10/3/08 ‐12/15/08 ‐‐‐ ‐‐‐ 4,600 ‐‐‐ ‐‐ Sampension KP 8/23/2007 23.8712 10/16/2008 13.1698 621 $ 6,646 1/1/04‐9/14/08 10/3/08 ‐12/15/08 ‐‐‐ ‐‐‐ 621 ‐‐‐ ‐‐ Sampension KP 8/24/2007 24.4272 10/16/2008 13.2144 31,482 $ 353,001 1/1/04‐9/14/08 10/3/08 ‐12/15/08 ‐‐‐ ‐‐‐ 31,482 ‐‐‐ ‐‐ Sampension KP 8/24/2007 24.3748 10/16/2008 13.2144 9,218 $ 102,877 1/1/04‐9/14/08 10/3/08 ‐12/15/08 ‐‐‐ ‐‐‐ 9,218 ‐‐‐ ‐‐ Sampension KP 8/24/2007 24.3748 10/16/2008 13.1698 4,861 $ 54,468 1/1/04‐9/14/08 10/3/08 ‐12/15/08 ‐‐‐ ‐‐‐ 4,861 ‐‐‐ ‐‐ Sampension KP 8/24/2007 24.4000 10/16/2008 13.2144 3,900 $ 43,624 1/1/04‐9/14/08 10/3/08 ‐12/15/08 ‐‐‐ ‐‐‐ 3,900 ‐‐‐ ‐‐ Sampension KP 8/24/2007 24.4260 10/16/2008 13.2144 200 $ 2,242 1/1/04‐9/14/08 10/3/08 ‐12/15/08 ‐‐‐ ‐‐‐ 200 ‐‐‐ ‐‐ Sampension KP 8/24/2007 24.4272 10/17/2008 14.4283 5,000 $ 49,995 1/1/04‐9/14/08 10/3/08 ‐12/15/08 ‐‐‐ ‐‐‐ 5,000 ‐‐‐ ‐‐ Sampension KP 9/12/2007 24.2409 10/17/2008 14.4283 40,100 $ 393,485 1/1/04‐9/14/08 10/3/08 ‐12/15/08 ‐‐‐ ‐‐‐ 40,100 ‐‐‐ ‐‐ Sampension KP 3/5/2008 25.6320 10/17/2008 14.4283 11,100 $ 124,361 1/1/04‐9/14/08 10/3/08 ‐12/15/08 ‐‐‐ ‐‐‐ 11,100 ‐‐‐ ‐‐ Sampension KP 7/14/2008 22.4742 10/17/2008 14.4283 19,500 $ 156,895 1/1/04‐9/14/08 10/3/08 ‐12/15/08 ‐‐‐ ‐‐‐ 19,500 ‐‐‐ ‐‐ Sampension KP 7/14/2008 22.4742 10/17/2008 14.5720 10,500 $ 82,973 1/1/04‐9/14/08 10/3/08 ‐12/15/08 ‐‐‐ ‐‐‐ 10,500 ‐‐‐ ‐‐ SKAGEN 3/16/2004 9.4712 4/1/2004 10.5848 120,000 $ (133,632) 1/1/04 ‐9/14/08 1/1/04‐9/14/08 120,000 ‐‐‐ ‐‐‐ ‐‐‐ ‐‐ SKAGEN 1/8/2008 24.8830 4/1/2008 24.0000 50,000 $ 44,150 1/1/04‐9/14/08 1/1/04‐9/14/08 50,000 ‐‐‐ ‐‐‐ ‐‐‐ ‐‐ SKAGEN 1/8/2008 24.8830 4/2/2008 24.0007 26,500 $ 23,381 1/1/04‐9/14/08 1/1/04‐9/14/08 26,500 ‐‐‐ ‐‐‐ ‐‐‐ ‐‐ SKAGEN 1/8/2008 24.8830 9/25/2008 17.9112 266,300 $ 1,856,590 1/1/04‐9/14/08 9/15/08 ‐10/2/08 ‐‐‐ 266,300 ‐‐‐ ‐‐‐ ‐‐ SKAGEN 1/8/2008 24.8830 9/26/2008 17.7807 191,300 $ 1,358,670 1/1/04‐9/14/08 9/15/08 ‐10/2/08 ‐‐‐ 191,300 ‐‐‐ ‐‐‐ ‐‐ SKAGEN 1/8/2008 24.6624 9/26/2008 17.7807 5,100 $ 35,097 1/1/04‐9/14/08 9/15/08 ‐10/2/08 ‐‐‐ 5,100 ‐‐‐ ‐‐‐ ‐‐ SKAGEN 1/8/2008 24.6461 9/26/2008 17.7807 3,300 $ 22,656 1/1/04‐9/14/08 9/15/08 ‐10/2/08 ‐‐‐ 3,300 ‐‐‐ ‐‐‐ ‐‐ SKAGEN 1/9/2008 24.4071 9/26/2008 17.7807 152,885 $ 1,013,077 1/1/04‐9/14/08 9/15/08 ‐10/2/08 ‐‐‐ 152,885 ‐‐‐ ‐‐‐ ‐‐ SKAGEN 1/9/2008 24.4071 9/29/2008 15.1852 49,715 $ 458,467 1/1/04‐9/14/08 9/15/08 ‐10/2/08 ‐‐‐ 49,715 ‐‐‐ ‐‐‐ ‐‐ SKAGEN 1/10/2008 24.5021 9/29/2008 15.1852 115,500 $ 1,076,102 1/1/04‐9/14/08 9/15/08 ‐10/2/08 ‐‐‐ 115,500 ‐‐‐ ‐‐‐ ‐‐ SKAGEN 1/11/2008 23.7330 9/29/2008 15.1852 215,285 $ 1,840,213 1/1/04‐9/14/08 9/15/08 ‐10/2/08 ‐‐‐ 215,285 ‐‐‐ ‐‐‐ ‐‐ SKAGEN 1/11/2008 23.7330 9/30/2008 15.7024 76,215 $ 612,052 1/1/04‐9/14/08 9/15/08 ‐10/2/08 ‐‐‐ 76,215 ‐‐‐ ‐‐‐ ‐‐ SKAGEN 1/14/2008 23.7761 9/30/2008 15.7024 62,000 $ 500,569 1/1/04‐9/14/08 9/15/08 ‐10/2/08 ‐‐‐ 62,000 ‐‐‐ ‐‐‐ ‐‐ SKAGEN 1/15/2008 22.9935 9/30/2008 15.7024 361,900 $ 2,638,649 1/1/04‐9/14/08 9/15/08 ‐10/2/08 ‐‐‐ 361,900 ‐‐‐ ‐‐‐ ‐‐ SKAGEN 3/7/2008 23.7793 9/30/2008 15.7024 34,000 $ 274,615 1/1/04‐9/14/08 9/15/08 ‐10/2/08 ‐‐‐ 34,000 ‐‐‐ ‐‐‐ ‐‐ SKAGEN 3/10/2008 23.1593 9/30/2008 15.7024 40,000 $ 298,276 1/1/04‐9/14/08 9/15/08 ‐10/2/08 ‐‐‐ 40,000 ‐‐‐ ‐‐‐ ‐‐ SKAGEN 4/22/2008 23.2430 9/30/2008 15.7024 72,108 $ 543,738 1/1/04‐9/14/08 9/15/08 ‐10/2/08 ‐‐‐ 72,108 ‐‐‐ ‐‐‐ ‐‐ SKAGEN 4/25/2008 24.1000 9/30/2008 15.7024 600 $ 5,039 1/1/04‐9/14/08 9/15/08 ‐10/2/08 ‐‐‐ 600 ‐‐‐ ‐‐‐ ‐‐ SKAGEN 4/28/2008 24.3455 9/30/2008 15.7024 24,000 $ 207,434 1/1/04‐9/14/08 9/15/08 ‐10/2/08 ‐‐‐ 24,000 ‐‐‐ ‐‐‐ ‐‐ SKAGEN 5/8/2008 25.3999 9/30/2008 15.7024 29,289 $ 284,030 1/1/04‐9/14/08 9/15/08 ‐10/2/08 ‐‐‐ 29,289 ‐‐‐ ‐‐‐ ‐‐ SKAGEN 5/8/2008 25.3999 10/1/2008 16.2475 18,501 $ 169,329 1/1/04‐9/14/08 9/15/08 ‐10/2/08 ‐‐‐ 18,501 ‐‐‐ ‐‐‐ ‐‐ SKAGEN 6/11/2008 25.2499 10/1/2008 16.2475 45,199 $ 406,899 1/1/04‐9/14/08 9/15/08 ‐10/2/08 ‐‐‐ 45,199 ‐‐‐ ‐‐‐ ‐‐ SKAGEN 6/11/2008 25.2499 10/2/2008 15.7064 13,801 $ 131,710 1/1/04‐9/14/08 9/15/08 ‐10/2/08 ‐‐‐ 13,801 ‐‐‐ ‐‐‐ ‐‐ SKAGEN 7/1/2008 23.9789 10/2/2008 15.7064 39,600 $ 327,591 1/1/04‐9/14/08 9/15/08 ‐10/2/08 ‐‐‐ 39,600 ‐‐‐ ‐‐‐ ‐‐ SKAGEN 7/1/2008 23.9789 10/3/2008 16.2500 7,400 $ 57,194 1/1/04‐9/14/08 10/3/08 ‐12/15/08 ‐‐‐ ‐‐‐ 7,400 ‐‐‐ ‐‐ SKAGEN 7/11/2008 23.2435 10/3/2008 16.2500 18,600 $ 130,079 1/1/04‐9/14/08 10/3/08 ‐12/15/08 ‐‐‐ ‐‐‐ 18,600 ‐‐‐ ‐‐ SKAGEN 7/11/2008 23.2435 10/6/2008 13.8953 220,900 $ 2,065,017 1/1/04‐9/14/08 10/3/08 ‐12/15/08 ‐‐‐ ‐‐‐ 220,900 ‐‐‐ ‐‐ SKAGEN 7/11/2008 23.2435 10/6/2008 13.9901 36,500 $ 337,749 1/1/04‐9/14/08 10/3/08 ‐12/15/08 ‐‐‐ ‐‐‐ 36,500 ‐‐‐ ‐‐ SKAGEN 7/18/2008 22.3231 10/6/2008 13.8953 99,700 $ 840,252 1/1/04‐9/14/08 10/3/08 ‐12/15/08 ‐‐‐ ‐‐‐ 99,700 ‐‐‐ ‐‐ SKAGEN 9/15/2008 18.5335 10/6/2008 13.8953 1,300 $ 6,030 9/15/08‐10/2/08 10/3/08 ‐12/15/08 ‐‐‐ ‐‐‐ ‐‐‐ ‐‐‐ ‐‐ SKAGEN 9/15/2008 18.5335 10/13/2008 14.2903 115,600 $ 490,514 9/15/08 ‐10/2/08 10/3/08 ‐12/15/08 ‐‐‐ ‐‐‐ ‐‐‐ ‐‐‐ ‐‐ SKAGEN 12/16/2008 5.4752 12/17/2008 8.2059 353,000 $ (963,937) 12/16/08 ‐1/6/09 12/16/08 ‐1/6/09 ‐‐‐ ‐‐‐ ‐‐‐ ‐‐‐ ‐‐ SKAGEN 12/16/2008 5.4752 12/29/2008 8.5043 50,000 $ (151,455) 12/16/08 ‐1/6/09 12/16/08 ‐1/6/09 ‐‐‐ ‐‐‐ ‐‐‐ ‐‐‐ ‐‐
Notes: TOTALS Movant
ADRs are matched for each Movant/Account based on the First ‐ In ‐ First‐Out ("FIFO") Mineworkers 38,900 0 0 355,200 methodology described in the text of the Declaration. Sampension KP 0 0 237,800 0 Loss/(Gain) equals ADRs multiplied by the quantity of Purchase Price less Sale Price. SKAGEN 196,500 1,816,598 383,100 0
10/3/08 ‐12/15/08 purchase range results are excluded due to lack of purchases during this time period.
FORENSIC ECONOMICS, INC.
Exhibit 8 - FIFO Transaction-by-Transaction Results Loss/(Gain) Resu Purchase Range: 1/1/04-9/14/08 Purchase Purchase Sale Sale Loss/ Purchase Sales 1/1/04- 9/15/08- 10/3/08- 9/1 Sales Range: Movant/Account Date Price Date Price ADRs (Gain) Range Range 9/14/08 10/2/08 12/15/08 Post 12/15/08 10/ Mineworkers 10/22/2007 26.3154 2/29/2008 26.3404 10,400 $ (260) 1/1/04-9/14/08 1/1/04-9/14/08 $ (260) $ - $ - $ - $ Mineworkers 12/13/2007 26.2540 2/29/2008 26.3404 6,600 $ (570) 1/1/04-9/14/08 1/1/04-9/14/08 $ (570) $ - $ - $ - $ Mineworkers 12/13/2007 26.2540 7/2/2008 25.3108 21,900 $ 20,656 1/1/04-9/14/08 1/1/04-9/14/08 $ 20,656 $ - $ - $ - $ Mineworkers 12/13/2007 26.2540 1/12/2009 1.4600 41,900 $ 1,038,869 1/1/04-9/14/08 1/7/09-3/9/09 $ - $ - $ - $ 1,038,869 $ Mineworkers 12/14/2007 26.5756 1/12/2009 1.4600 38,400 $ 964,439 1/1/04-9/14/08 1/7/09-3/9/09 $ - $ - $ - $ 964,439 $ Mineworkers 12/17/2007 25.4279 1/12/2009 1.4600 115,100 $ 2,758,705 1/1/04-9/14/08 1/7/09-3/9/09 $ - $ - $ - $ 2,758,705 $ Mineworkers 3/26/2008 23.5300 1/12/2009 1.4600 22,100 $ 487,747 1/1/04-9/14/08 1/7/09-3/9/09 $ - $ - $ - $ 487,747 $ Mineworkers 3/26/2008 23.6353 1/12/2009 1.4600 10,700 $ 237,276 1/1/04-9/14/08 1/7/09-3/9/09 $ - $ - $ - $ 237,276 $ Mineworkers 3/26/2008 23.6363 1/12/2009 1.4600 800 $ 17,741 1/1/04-9/14/08 1/7/09-3/9/09 $ - $ - $ - $ 17,741 $ Mineworkers 3/27/2008 23.5455 1/12/2009 1.4600 93,400 $ 2,062,786 1/1/04-9/14/08 1/7/09-3/9/09 $ - $ - $ - $ 2,062,786 $ Mineworkers 3/27/2008 23.5191 1/12/2009 1.4600 32,800 $ 723,538 1/1/04-9/14/08 1/7/09-3/9/09 $ - $ - $ - $ 723,538 $ Sampension KP 8/23/2007 23.7770 10/16/2008 13.1698 54,518 $ 578,283 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 578,283 $ - $ Sampension KP 8/23/2007 23.7563 10/16/2008 13.1698 32,800 $ 347,237 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 347,237 $ - $ Sampension KP 8/23/2007 23.7989 10/16/2008 13.1698 9,400 $ 99,914 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 99,914 $ - $ Sampension KP 8/23/2007 23.6961 10/16/2008 13.1698 4,600 $ 48,421 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 48,421 $ - $ Sampension KP 8/23/2007 23.8712 10/16/2008 13.1698 621 $ 6,646 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 6,646 $ - $ Sampension KP 8/24/2007 24.4272 10/16/2008 13.2144 31,482 $ 353,001 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 353,001 $ - $ Sampension KP 8/24/2007 24.3748 10/16/2008 13.2144 9,218 $ 102,877 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 102,877 $ - $ Sampension KP 8/24/2007 24.3748 10/16/2008 13.1698 4,861 $ 54,468 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 54,468 $ - $ Sampension KP 8/24/2007 24.4000 10/16/2008 13.2144 3,900 $ 43,624 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 43,624 $ - $ Sampension KP 8/24/2007 24.4260 10/16/2008 13.2144 200 $ 2,242 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 2,242 $ - $ Sampension KP 8/24/2007 24.4272 10/17/2008 14.4283 5,000 $ 49,995 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 49,995 $ - $ Sampension KP 9/12/2007 24.2409 10/17/2008 14.4283 40,100 $ 393,485 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 393,485 $ - $ Sampension KP 3/5/2008 25.6320 10/17/2008 14.4283 11,100 $ 124,361 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 124,361 $ - $ Sampension KP 7/14/2008 22.4742 10/17/2008 14.4283 19,500 $ 156,895 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 156,895 $ - $ Sampension KP 7/14/2008 22.4742 10/17/2008 14.5720 10,500 $ 82,973 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 82,973 $ - $ SKAGEN 3/16/2004 9.4712 4/1/2004 10.5848 120,000 $ (133,632) 1/1/04-9/14/08 1/1/04-9/14/08 $ (133,632) $ - $ - $ - $ SKAGEN 1/8/2008 24.8830 4/1/2008 24.0000 50,000 $ 44,150 1/1/04-9/14/08 1/1/04-9/14/08 $ 44,150 $ - $ - $ - $ SKAGEN 1/8/2008 24.8830 4/2/2008 24.0007 26,500 $ 23,381 1/1/04-9/14/08 1/1/04-9/14/08 $ 23,381 $ - $ - $ - $ SKAGEN 1/8/2008 24.8830 9/25/2008 17.9112 266,300 $ 1,856,590 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 1,856,590 $ - $ - $ SKAGEN 1/8/2008 24.8830 9/26/2008 17.7807 191,300 $ 1,358,670 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 1,358,670 $ - $ - $ SKAGEN 1/8/2008 24.6624 9/26/2008 17.7807 5,100 $ 35,097 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 35,097 $ - $ - $ SKAGEN 1/8/2008 24.6461 9/26/2008 17.7807 3,300 $ 22,656 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 22,656 $ - $ - $ SKAGEN 1/9/2008 24.4071 9/26/2008 17.7807 152,885 $ 1,013,077 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 1,013,077 $ - $ - $ SKAGEN 1/9/2008 24.4071 9/29/2008 15.1852 49,715 $ 458,467 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 458,467 $ - $ - $ SKAGEN 1/10/2008 24.5021 9/29/2008 15.1852 115,500 $ 1,076,102 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 1,076,102 $ - $ - $ SKAGEN 1/11/2008 23.7330 9/29/2008 15.1852 215,285 $ 1,840,213 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 1,840,213 $ - $ - $ SKAGEN 1/11/2008 23.7330 9/30/2008 15.7024 76,215 $ 612,052 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 612,052 $ - $ - $ SKAGEN 1/14/2008 23.7761 9/30/2008 15.7024 62,000 $ 500,569 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 500,569 $ - $ - $ SKAGEN 1/15/2008 22.9935 9/30/2008 15.7024 361,900 $ 2,638,649 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 2,638,649 $ - $ - $ SKAGEN 3/7/2008 23.7793 9/30/2008 15.7024 34,000 $ 274,615 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 274,615 $ - $ - $ SKAGEN 3/10/2008 23.1593 9/30/2008 15.7024 40,000 $ 298,276 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 298,276 $ - $ - $ SKAGEN 4/22/2008 23.2430 9/30/2008 15.7024 72,108 $ 543,738 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 543,738 $ - $ - $ SKAGEN 4/25/2008 24.1000 9/30/2008 15.7024 600 $ 5,039 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 5,039 $ - $ - $ SKAGEN 4/28/2008 24.3455 9/30/2008 15.7024 24,000 $ 207,434 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 207,434 $ - $ - $ SKAGEN 5/8/2008 25.3999 9/30/2008 15.7024 29,289 $ 284,030 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 284,030 $ - $ - $ SKAGEN 5/8/2008 25.3999 10/1/2008 16.2475 18,501 $ 169,329 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 169,329 $ - $ - $ SKAGEN 6/11/2008 25.2499 10/1/2008 16.2475 45,199 $ 406,899 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 406,899 $ - $ - $ SKAGEN 6/11/2008 25.2499 10/2/2008 15.7064 13,801 $ 131,710 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 131,710 $ - $ - $ SKAGEN 7/1/2008 23.9789 10/2/2008 15.7064 39,600 $ 327,591 1/1/04-9/14/08 9/15/08-10/2/08 $ - $ 327,591 $ - $ - $ SKAGEN 7/1/2008 23.9789 10/3/2008 16.2500 7,400 $ 57,194 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 57,194 $ - $ SKAGEN 7/11/2008 23.2435 10/3/2008 16.2500 18,600 $ 130,079 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 130,079 $ - $ SKAGEN 7/11/2008 23.2435 10/6/2008 13.8953 220,900 $ 2,065,017 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 2,065,017 $ - $ SKAGEN 7/11/2008 23.2435 10/6/2008 13.9901 36,500 $ 337,749 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 337,749 $ - $ SKAGEN 7/18/2008 22.3231 10/6/2008 13.8953 99,700 $ 840,252 1/1/04-9/14/08 10/3/08-12/15/08 $ - $ - $ 840,252 $ - $ SKAGEN 9/15/2008 18.5335 10/6/2008 13.8953 1,300 $ 6,030 9/15/08-10/2/08 10/3/08-12/15/08 $ - $ - $ - $ - $ SKAGEN 9/15/2008 18.5335 10/13/2008 14.2903 115,600 $ 490,514 9/15/08-10/2/08 10/3/08-12/15/08 $ - $ - $ - $ - $ SKAGEN 12/16/2008 5.4752 12/17/2008 8.2059 353,000 $ (963,937) 12/16/08-1/6/09 12/16/08-1/6/09 $ - $ - $ - $ - $ SKAGEN 12/16/2008 5.4752 12/29/2008 8.5043 50,000 $ (151,455) 12/16/08-1/6/09 12/16/08-1/6/09 $ - $ - $ - $ - $
Notes: TOTALS Movant ADRs are matched for each Movant/Account based on the First-In-First-Out ("FIFO") Mineworkers $ 19,826 $ - $ - $ 8,291,101 $ methodology described in the text of the Declaration. Sampension KP $ - $ - $ 2,444,421 $ - $ Loss/(Gain) equals ADRs multiplied by the quantity of Purchase Price less Sale Price. SKAGEN $ (66,101) $ 14,060,803 $ 3,430,291 $ - $ 10/3/08-12/15/08 purchase range results are excluded due to lack of purchases during this time period.
FORENSIC ECONOMICS, INC. Exhibits 9A – 9D Source Documents for Movant Transactions
Exhibit 9A Mineworkers’ Transaction Chart
Exhibit 9B Mineworkers’ Loss Chart
Exhibit 9C GII Group Transaction Charts
Exhibit 9D GII Group Loss Charts Exhibit 9A - Mineworkers' Transaction Chart Mineworkers' Pension Scheme
EXHIBIT A
TRANSACTIONS IN SATYAM COMPUTER SERVICES LTD.
SATYAM COMPUTER SERVICES LTD ADR
Transaction Typ e Trade Date Shares Price Per Share Cost/ Proceeds Purchase 10/22/07 10,400.00 $ 26.32 ($273,680.OQ) Purchase 12/13/07 70,400.00 $ 26.25 (51,848,282.00) Purchase 12/14/07 35,400.00 S 26.58 (a1,020,503.00) Purchase 12/17/07 115,100.00 $ 25.43 x$2,926,751.00) Purchase 03/26/08 800.00 $ 23.64 ($18,909.00) Purchase 03/26/08 10,700.00 $ 23.64 (5252,898,00) Purchase 03/26/08 22,100.00 S 23.53 ($520,013.00) Purchase 03/27/OS 32,800.00 $ 23.52 (57X,426.00') Purchase 03/27/08 93,400.00 $ 23.55 ($2,199,150,00) Sale 02/29/08 -17,000.00 $ 26.34 $447,787.00 Sale 07/02/08 -21,900.00 S 25.31 $554,307.00
Exhibit 9B - Mineworkers' Loss Chart
Mineworkers' Pension Scheme
Class Period: 1/1/2004 to 1/6/2009
SATYAM COMPUTER SVCS LTD ADR Ticker CUSIP SEDOL ISIN WKN Lookback Price SAY 804098101 2756743 US8040981016 $1.65
Split Information: Date Split 10/16/06 2.0 : 1.0
Trans Type Trade Date Settle Date Shares Shares Split Price Per Share Cost/ Proceeds Currency
Open 01/01/04 0.00 0.00
Purchase 10/22/07 10/25/07 10,400.00 10,400.00 $ 26.32 ($273,680.00) USD Purchase 12/13/07 12/18/07 70,400.00 70,400.00 $ 26.25 ($1,848,282.00) USD Purchase 12/14/07 12/19/07 38,400.00 38,400.00 $ 26.58 ($1,020,503.00) USD Purchase 12/17/07 12/20/07 115,100.00 115,100.00 $ 25.43 ($2,926,751.00) USD Purchase 03/26/08 03/31/08 800.00 800.00 $ 23.64 ($18,909.00) USD Purchase 03/26/08 03/31/08 10,700.00 10,700.00 $ 23.64 ($252,898.00) USD Purchase 03/26/08 03/31/08 22,100.00 22,100.00 $ 23.53 ($520,013.00) USD Purchase 03/27/08 04/01/08 32,800.00 32,800.00 $ 23.52 ($771,426.00) USD Purchase 03/27/08 04/01/08 93,400.00 93,400.00 $ 23.55 ($2,199,150.00) USD Class period purchases: 394,100.00 ($9,831,612.00)
Sale 02/29/08 03/04/08 -17,000.00 -17,000.00 $ 26.34 $447,787.00 USD Sale 07/02/08 07/08/08 -21,900.00 -21,900.00 $ 25.31 $554,307.00 USD Class period sales (matched to class -38,900.00 $1,002,094.00 period purchases):
Sale 01/12/09 01/15/09 -355,200.00 -355,200.00 $ 1.46 $518,592.00 USD Post-Class period sales (matched to class -355,200.00 $518,592.00 period purchases):
Retained purchases: 0.00 $0.00
FIFO/LIFO Gain/(Loss): ($8,310,926.00) USD
**Pursuant to the PSLRA, the value for sales occurring during the 90-day lookback period is either the sale price or the average price up to the date of sale, whichever is higher. Exhibit 9C - GII Group Transaction Charts
Mississippi PERS Transactions in Satyam Computer Services (SCS IN) Price Exchange Rate Transaction Date Shares Price (USD) (Indian Rupee) (Rupee:USD) PURCHASE 5/2/2006 450,000 767.5000 44.8200 $ 17.1241 SALE 6/15/2006 (21,400) 600.9105 45.9500 $ 13.0775 SALE 2/5/2007 (26,900) 489.1683 44,1050 $ 11.0910 PURCHASE 8/24/2007 23,900 431.2100 41.0920 $ 10.4938 PURCHASE 8/24/2007 5,000 430.6400 41.0920 $ 10.4799 PURCHASE 8/27/2007 15,400 438.6000 41.0200 $ 10.6923 PURCHASE 8/28/2007 14,700 441.2600 41.1650 $ 10.7193 PURCHASE 8/29/2007 17,700 442.8900 41.1050 $ 10.7746 PURCHASE 8/29/2007 700 443.1400 41.1050 $ 10.7807 PURCHASE 8/30/2007 6,000 443.9330 41.1600 $ 10.7855 PURCHASE 8/30/2007 600 443.9800 41.1600 $ 10.7867 PURCHASE 9/10/2007 2,300 443.8900 40.6400 $ 10.9225 PURCHASE 9/10/2007 90,500 441.8200 40.6400 $ 10.8716 PURCHASE 9/10/2007 5,200 443.8953 40.6400 $ 10.9226 PURCHASE 9/11/2007 77,241 441.5943 40.5600 $ 10.8874 PURCHASE 11/12/2007 98,700 418.9631 39.3600 $ 10.6444 PURCHASE 11/12/2007 26,000 416.4100 39.3600 $ 10.5795 PURCHASE 11/13/2007 31,800 411.1505 39.4200 $ 10.4300 PURCHASE 11/13/2007 7,800 411.0800 39.4200 $ 10.4282 PURCHASE 11/14/2007 35,900 423.0626 39.3100 $ 10.7622 PURCHASE 11/14/2007 13,700 424.5600 39.3100 $ 10.8003 PURCHASE 11/15/2007 14,692 423.9794 39.3000 $ 10.7883 PURCHASE 6/26/2008 18,600 455.4864 42.6800 $ 10.6721 PURCHASE 6/27/2008 13,900 445.5139 42.8750 $ 10.3910 PURCHASE 6130/2008 2,210 447,3300 43.0200 $ 10.3982 PURCHASE 6/30/2008 8,400 446.9776 43.0200 $ 10.3900 SALE 7/9/2008 (24,800) 470.1129 411200 $ 10.9024 PURCHASE 11/6/2048 62,400 271.2559 47,7400 $ 5.6819 PURCHASE 11/7/2008 7,200 271.5900 47.6500 $ 5.6997 PURCHASE 11/7/2008 30,900 271.3784 47.6500 $ 5.6952 PURCHASE 11/10/2008 33,850 290.4233 47.3800 $ 6.1297
Exhibit 9C - GII Group Transaction Charts Sampension KP Livsforsikring A/S
SCHEDULE A
Type of Purchase Number of Price of Securities or Sale Date Securities Securities ADS Purchase 812312007 4,600 $23.6961 ADS Purchase 8/23/2007 32,800 $23.7563 ADS Purchase 8/23/2007 54,518 $23.7770 ADS Purchase 8/23/2007 9,404 $23.7989 ADS Purchase 8/23/2007 621 $23.8712 ADS Purchase 8/24/2007 14,079 $24.3748 ADS Purchase 8/24/2007 3,900 $24.4000 ADS Purchase 8/24/2007 200 $24.4260 ADS Purchase 8/24/2007 36,482 $24.4272 ADS Purchase 9/12/2007 40,100 $24.2409 ADS Purchase 3/5/2008 11,100 $25.6320 ADS Purchase 7/14/2008 30,000 $22.4742 ADS Sale 10/16/2008 106,800 $13.1698 ADS Sale 10/16/2008 44,800 $13.2144 ADS Sale 10/17/2008 75,700 $14.4283 ADS Sale 10/17/2008 10,500 $14.5720
Exhibit 9C - GII Group Transaction Charts
SCHEDULE A
Type of Purchase Number of Price of Fund Securities or Sale Date Securities Securities SKAGEN Kon-Tiki ADS Purchase* 3/16/2004 120,000 $9.4712 ADS Purchase 1/8/2008 534,100 $24.8830 ADS Purchase 1/8/2008 5,100 $24.6624 ADS Purchase 1/8/2008 3,300 $24.6461 ADS Purchase 1/9/2008 202,600 $24.4071 ADS Purchase 1/10/2008 115,500 $24.5021 ADS Purchase 1/11/2008 291,500 $23.7330 ADS Purchase 1/14/2008 62,000 $23.7761 ADS Purchase 1/15/2008 361,900 $22.9935 ADS Purchase 3/7/2008 34,000 $23.7793 ADS Purchase 3/10/2008 40,000 $23.1593 ADS Purchase 4/22/2008 72,108 $23.2430 ADS Purchase 4/25/2008 600 $24.1000 ADS Purchase 4/28/2008 24,000 $24.3455 ADS Purchase 5/8/2008 47,790 $25.3999 ADS Purchase 6/11/2008 59,000 $25.2499 .ADS Purchase 7/1/2008 47,000 $23.9789 ADS Purchase 7/11/2008 276,000 $23.2435 ADS Purchase 7/18/2008 99,700 $22.3231 ADS Purchase 9/15/2008 116,900 $18.5335 ADS Purchase 12/16/2008 403,000 $5.4752 ADS Sale* 41112004 120,000 $10.5848 ADS Sale 4/1/2008 50,000 $24.0000 ADS Sale 4/2/2008 26,500 $24.0007 .ADS Sale 9/25/2008 266,300 $17.9112 ADS Sale 9/26/2008 352,585 $17.7807 ADS Sale 9/29/2008 380,500 $15.1852 ADS Sale 9/30/2008 700,112 $15.7024 ADS Sale 10/1/2008 63,700 $16.2475 ADS Sale 10/2/2008 53,401 $15.7064 ADS Sale 10/3/2008 26,000 $16.2500 ADS Sale 10/6/2008 36,500 $13.9901 ADS Sale 10/6/2008 321,900 $13.8953 ADS Sale 10/13/2008 115,600 $14.2903 ADS Sale 12/17/2008 353,000 $8.2059 ADS Sale 12/29/2008 50,000 $8.5043
*Adjusted for two far one stock split on October 18, 2006
Exhibit 9D - GII Group Loss Charts Public Employees’ Retirement System of Mississippi Losses in Satyam Computer Services (SCS IN) Class Period: 1/6/04-1/6/09
Transaction Date Shares Price (USD) Cost Transaction Date Shares P
Purchase* 5/2/2006 900,000 8.5621 $7,705,845.00 Purchase 8/24/2007 23,900 10.4938 $250,801.82 Purchase 8/24/2007 5,000 10.4799 $52,399.50 Purchase 8/27/2007 15,400 10.6923 $164,661.42 Purchase 8/28/2007 14,700 10.7193 $157,573.71 Purchase 8/29/2007 17,700 10.7746 $190,710.42 Purchase 8/29/2007 700 10.7807 $7,546.49 Purchase 8/30/2007 6,000 10.7855 $64,713.00 Purchase 8/30/2007 600 10.7867 $6,472.02 Purchase 9/10/2007 2,300 10.9225 $25,121.75 Purchase 9/10/2007 90,500 10.8716 $983,879.80 Purchase 9/10/2007 5,200 10.9226 $56,797.52 Purchase 9/11/2007 77,241 10.8874 $840,953.66 Purchase 11/12/2007 98,700 10.6444 $1,050,602.28 Purchase 11/12/2007 26,000 10.5795 $275,067.00 Purchase 11/13/2007 31,800 10.4300 $331,674.00 Purchase 11/13/2007 7,800 10.4282 $81,339.96 Purchase 11/14/2007 35,900 10.7622 $386,362.98 Purchase 11/14/2007 13,700 10.8003 $147,964.11 Purchase 11/15/2007 14,692 10.7883 $158,501.70 Purchase 6/26/2008 18,600 10.6721 $198,501.06 Purchase 6/27/2008 13,900 10.3910 $144,434.90 Purchase 6/30/2008 2,210 10.3982 $22,980.02 Purchase 6/30/2008 8,400 10.3900 $87,276.00 Sale* 6/15/2006 (42,800) Purchase 11/6/2008 62,400 5.6819 $354,550.56 Sale 2/5/2007 (26,900) Purchase 11/7/2008 7,200 5.6997 $41,037.84 Sale 7/9/2008 (24,800) Purchase 11/7/2008 30,900 5.6952 $175,981.68 Sale** 1/15/2009 (1,004,079) Purchase 11/10/2008 33,850 6.1297 $207,490.35 Sale** 1/15/2009 (466,714) 1,565,293 $14,171,240.55 (1,565,293)
TO
*Adjusted for two for one stock split on October 18, 2006 **Shares sold within 90 days after the end of the class period have been valued at the higher price between the actual sales price and the average closing price from the end of the class period to the date of the sale.
Exhibit 9D - GII Group Loss Charts SKAGEN A/S Losses in Satyam Computer Services (SAY) Class Period: 1/6/04-1/6/09
Transaction Date Shares Price Cost Transaction Date Shares
Purchase* 3/16/2004 120,000 9.4712 $ 1,136,538.00 Purchase 1/8/2008 534,100 24.8830 $ 13,290,010.30 Purchase 1/8/2008 5,100 24.6624 $ 125,778.24 Purchase 1/8/2008 3,300 24.6461 $ 81,332.13 Purchase 1/9/2008 202,600 24.4071 $ 4,944,878.46 Purchase 1/10/2008 115,500 24.5021 $ 2,829,992.55 Purchase 1/11/2008 291,500 23.7330 $ 6,918,169.50 Sale* 4/1/2004 (120,000) Purchase 1/14/2008 62,000 23.7761 $ 1,474,118.20 Sale 4/1/2008 (50,000) Purchase 1/15/2008 361,900 22.9935 $ 8,321,347.65 Sale 4/2/2008 (26,500) Purchase 3/7/2008 34,000 23.7793 $ 808,496.20 Sale 9/25/2008 (266,300) Purchase 3/10/2008 40,000 23.1593 $ 926,372.00 Sale 9/26/2008 (352,585) Purchase 4/22/2008 72,108 23.2430 $ 1,676,006.24 Sale 9/29/2008 (380,500) Purchase 4/25/2008 600 24.1000 $ 14,460.00 Sale 9/30/2008 (700,112) Purchase 4/28/2008 24,000 24.3455 $ 584,292.00 Sale 10/1/2008 (63,700) Purchase 5/8/2008 47,790 25.3999 $ 1,213,861.22 Sale 10/2/2008 (53,401) Purchase 6/11/2008 59,000 25.2499 $ 1,489,744.10 Sale 10/3/2008 (26,000) Purchase 7/1/2008 47,000 23.9789 $ 1,127,008.30 Sale 10/6/2008 (36,500) Purchase 7/11/2008 276,000 23.2435 $ 6,415,206.00 Sale 10/6/2008 (321,900) Purchase 7/18/2008 99,700 22.3231 $ 2,225,613.07 Sale 10/13/2008 (115,600) Purchase 9/15/2008 116,900 18.5335 $ 2,166,566.15 Sale 12/17/2008 (353,000) Purchase 12/16/2008 403,000 5.4752 $ 2,206,505.60 Sale 12/29/2008 (50,000) 2,916,098 $ 59,976,295.92 (2,916,098)
TO
*Adjusted for two for one stock split on October 18, 2006
Exhibit 9D - GII Group Loss Charts Sampension KP Livsforsikring A/S Losses in Satyam Computer Services (SAY) Class Period: 1/6/04-1/6/09
Transaction Date Shares Price Cost Transaction Date Shares
Purchase 8/23/2007 4,600 23.6961 $ 109,002.06 Purchase 8/23/2007 32,800 23.7563 $ 779,206.64 Purchase 8/23/2007 54,518 23.7770 $ 1,296,274.49 Purchase 8/23/2007 9,400 23.7989 $ 223,709.66 Purchase 8/23/2007 621 23.8712 $ 14,824.02 Purchase 8/24/2007 14,079 24.3748 $ 343,172.81 Purchase 8/24/2007 3,900 24.4000 $ 95,160.00 Purchase 8/24/2007 200 24.4260 $ 4,885.20 Purchase 8/24/2007 36,482 24.4272 $ 891,153.11 Sale 10/16/2008 (106,800) Purchase 9/12/2007 40,100 24.2409 $ 972,060.09 Sale 10/16/2008 (44,800) Purchase 3/5/2008 11,100 25.6320 $ 284,515.20 Sale 10/17/2008 (75,700) Purchase 7/14/2008 30,000 22.4742 $ 674,226.00 Sale 10/17/2008 (10,500) 237,800 $ 5,688,189.27 (237,800)
TO
