3:05-cv-02394-CRB Document 138 Filed 11/09/2007 Page 1 of 2 1 2 3 4 5 6 7 8 9 10 UNITED STATES DISTRICT COURT 11 NORTHERN DISTRICT OF CALIFORNIA 12 SAN FRANCISCO DIVISION 13 IN RE: MAGMA DESIGN AUTOMATION, ) Case No.: C-05-2394 CRB INC. SECURITIES LITIGATION ) 14 ) CLASS ACTION 15 DECLARATION OF BLAINE F. NYE, This Document Relates to: ) PH.D. 16 ) 17 ALL ACTIONS ) DATE: November 30, 2007 18 ) TIME: 10:00 a.m. CTRM: 8, 19th 19 ) JUDGE: Hon Charles R. Breyer 20 21 22 23 24 25 26 27 28 II DECLARATION OF BLAINE F. NYE, PH.D. Case No. C-05-2394 CRB DOCS\418640v 1 3:05-cv-02394-CRB Document 138 Filed 11/09/2007 Page 2 of 2 1 I, BLAINE F. NYE, declares: 2 1. I have been retained by Counsel for Lead Plaintiff to provide expert 3 opinions in this action. I submit this declaration, in support of Lead Plaintiffs Memorandum in 4 Opposition to Defendants' Motion for Summary Judgment. 5 2. Attached hereto as Exhibit A is a true and correct copy of the Report of Blaine F. Nye, Ph.D dated October I I, 2007. 3. Attached. hereto as Exhibit B is a true and correct copy of the Declaration and Rebuttal Report of Blaine F. Nye, Ph.D dated November 9, 2007. 1 declare under penalty of perjury under the laws of the United States of America that the 10 foregoing is true and correct. Executed this 9th. day of November, 2007 at Redwood City, 11 California. 12 13 14 BLAINE"F. NVK 15 1d 17 18 19 20 21 22 23 24 25 26 27 28 OF BLAINE F. NYE, PH.D. - 1 - ase No. C-05-2394 CRB OCS\418640v1 Case 3:05-cv-02394-CRB Document 138-2 Filed 11/09/2007 Page 1 of 100 Exhibit A Case 3:05-cv-02394-CRB Document 138-2 Filed 11/09/2007 Page 2 of 100 UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN FRANCISCO DIVISION IN RE MAGMA DESIGN AUTOMATION, Case No.: C-05-2394 CRB INC. SECURITIES LITIGATION CLASS ACTION This Document Relates to: ALL ACTIONS THE CORNELIA I. CROWELL GST TRUST, On Behalf Of Itself and All Others Similarly Situated, Plaintiff, vs. MAGMA DESIGN AUTOMATION, INC., RAJEEV MADHAVAN, GREGORY C. WALKER, ROY E. JEWELL, Defendants. REPORT OF BLAINE F. NYE, PH.D. October 11, 2007 Case 3:05-cv-02394-CRB Document 138-2 Filed 11/09/2007 Page 3 of 100 Table of Contents I. Background and Qualifications ........................................................................................... 1 II. Scope of Engagement ......................................................................................................... 1 III. Bases for Opinions .............................................................................................................. 2 IV. Summary of Opinions ......................................................................................................... 3 V. Market Efficiency: Securities prices in efficient markets reflect the market ' s consensus as to fair value given all publicly available information at the time of purchase or sale.... 5 VI. Application of the Cammer Factors and Additional Factors as Indicia of the Efficiency of the Market for Magma's Stock ........................................................................................... 9 A. Cammer Factor 1: Weekly Trading Volume ...................................................................... 9 B. Cammer Factor 2: The Number of Securities Analysts Following and Reporting on Magma .............................................................................................................................. 11 C. Cammer Factor 3: The Number of Market Makers in Magma's Stock ............................ 12 D. Cammer Factor 4: Whether Magma was Eligible to File SEC Form S-3 ......................... 15 E. Cammer Factor 5: Empirical Facts Showing a Cause-and-Effect Relationship between Unexpected Corporate Events or Financial Releases and an Immediate Response in the Stock Price ........................................................................................................................ 17 F. Summary Regarding the Market Efficiency of Magma's Stock ....................................... 22 VII. Evidence on the Efficiency of the Market for Call and Put Options on Magma Stock.... 23 VIII. Evidence on the Efficiency of the Market for the Magma Notes ..................................... 24 A. Description of the Magma Notes ...................................................................................... 24 B. Changes in the Prices of the Magma Notes Corresponded to Changes in the Prices of Magma Stock .................................................................................................................... 25 C. Registration and Trading Venue ....................................................................................... 27 D. There was an Underwriter and Market Maker for the Magma Notes ............................... 30 E. Additional Factors Supporting My Conclusion the Market for the Magma Notes was Efficient during the Class Period ...................................................................................... 30 F. Summary of the Efficiency of the Market for the Magma Notes ..................................... 31 IX. Materiality ......................................................................................................................... 31 X. Loss Causation .................................................................................................................. 35 XI. Analysis of Per-Security Damages under Section 10(b) ................................................... 49 A. Loss Causation and the Percentage versus Dollar Measure of Inflation .......................... 49 B. Per-Security Damages: Magma Stock .............................................................................. 55 C. Per-Security Damages: Call and Put Options on Magma Stock ....................................... 57 Case 3:05-cv-02394-CRB Document 138-2 Filed 11/09/2007 Page 4 of 100 D. Per-Security Damages: Magma Notes .............................................................................. 60 XII. Aggregate Damages under Section 10(b) ......................................................................... 61 A. Aggregate Damages on Magma Stock under Section 10(b) ............................................. 61 B. Aggregate Damages on Options on Magma Stock under Section 10(b) .......................... 63 C. Aggregate Damages on the Magma Notes under Section 10(b) ....................................... 64 Appendix: Regression Analysis and Event Study .......................................................................... 1 Case 3:05-cv-02394-CRB Document 138-2 Filed 11/09/2007 Page 5 of 100 I, BLAINE F. NYE, PH.D., declare: 1. Background and Qualifications 1. I am a financial economist and the President of Stanford Consulting Group, Inc., which provides research and consulting services in financial economics and related areas to clients including government agencies, corporations, and law firms. I have a B.A. degree in physics from Stanford University, an M.S. degree in physics from the University of Washington, an M.B.A. degree from Stanford, and a Ph.D. in finance from Stanford. I have served as a consultant and/or expert witness in the areas of market efficiency, materiality, causation, and damages in a number of securities actions . My curriculum vitae is attached as Exhibit 1. During the past four years I have provided expert testimony in trial or by deposition in the matters listed in Exhibit 2. My publications during the past ten years are listed in my curriculum vitae (Exhibit 1). 2. The fees charged Lead Plaintiff for this project are the standard hourly rates of employees of Stanford Consulting Group, Inc. At present my hourly rate is $650. II. Scope of Engagement I have been retained by Counsel for Lead Plaintiff in this class action to provide expert opinions on the efficiency of markets for certain publicly traded securities of Magma Design Automation ("Magma or the "Company ) during the period October 23, 2002 through April 12, 2005, inclusive (the "Class Period ). Such securities include Magma common stock,' call and put options on Magma stock, and $150 million zero coupon convertible subordinated 1 During the Class Period, Magma's common stock traded on the NASDAQ National Market ("NASDAQ ) under the ticker "LAVA. Magma's stock was also traded on the Berlin stock exchange . The total reported trading volume during the Class Period on the Berlin stock exchange was 7,256 shares. (Source : FactSet Research Systems, Inc.) Shares traded on the Berlin stock exchange are not considered in this analysis . Herein, "Magma stock refers to the common stock of Magma traded on the NASDAQ. -1- Case 3:05-cv-02394-CRB Document 138-2 Filed 11/09/2007 Page 6 of 100 ).2, 3 notes due May 15, 2008 (the "Magma Notes I have also been asked to provide expert opinions with respect to materiality and loss causation pertaining to the alleged misrepresentations and omissions in this matter, and to provide an estimate of the damages incurred by acquirers of the above listed Magma Securities under Sections 10(b) of the Securities Exchange Act and Rule 10(b)-5 of the Securities and Exchange Commission ("SEC ) 4. The opinions offered in this Report are subject to refinement or revision based on continuing analysis of the documents and materials listed below, as well as new or additional information which may be provided to or obtained by me in the course of this matter. I expect to review additional information and documents, including information and documents that may become available through discovery and