UNITED STATES DISTRICT COURT 

NORTHERN DISTRICT OF ILLINOIS 

EASTERN DIVISION 

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LAWRENCE E. JAFFE PENSION PLAN, ON 

BEHALF OF ITSELF AND ALL OTHERS SIMILARLY 

SITUATED, 

Plaintiffs, 

- against - 

HOUSEHOLD INTERNATIONAL, INC., ET AL., 

Defendants. 

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Lead Case No. 02-C-5893 

(Consolidated) 

CLASS ACTION 

Judge Ronald A. Guzmán 

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DEFENDANTS’ RESPONSE TO PLAINTIFFS’ POST-VERDICT SUBMISSION

CAHILL GORDON & REINDEL LLP

80 Pine Street 

New York, New York 10005 

(212) 701-3000 

 -andEIMER STAHL KLEVORN & SOLBERG LLP

224 South Michigan Ave. 

Suite 1100 

Chicago, Illinois 60604 

(312) 660-7600 

Attorneys for Defendants Household 

International, Inc., William F. Aldinger, 

David A. Schoenholz and Gary Gilmer 

Case 1:02-cv-05893 Document 1630 Filed 06/04/2009 Page 1 of 24
TABLE OF CONTENTS 

Page 

INTRODUCTION .......................................................................................................................... 1 

ARGUMENT 

A. Plaintiffs’ Proposal Ignores Defendants’ Right to Rebut the Presumption of Reliance..... 2 

B. Damages Must Be Calculated Using a Methodology that Does Not Provide 

Windfalls for Sales of Shares at Inflated Prices............................................................ 4 

C. LIFO Is the Appropriate Method for “Matching” All Purchases and Sales ....................... 9 

D. Damages May Not Be Calculated Until After the Conclusion of Phase II....................... 11 

E. Plaintiffs’ Proposed Notice and Claim Form Are Inadequate and Objectionable............ 12 

CONCLUSION............................................................................................................................. 14 

Case 1:02-cv-05893 Document 1630 Filed 06/04/2009 Page 2 of 24
TABLE OF AUTHORITIES 

Page 

-iiCases

Abrahamson v. Fleschner, 568 F.2d 862 (2d Cir. 1977), cert. denied, 436 U.S. 913 

(1978) 8 

Argent Classic Convertible Arbitrage Fund L.P. v. Rite Aid Corp., 315 F. Supp. 2d 

666 (E.D. Pa. 2004) 7n 

In re ASK Securities Litigation, No. C-85-20207(A)-WAI 1992 WL 278386 (N.D. 

Cal. Aug. 18, 1992) 4n 

Associated Randall Bank v. Griffin, Kubik, Stephens & Thompson, Inc., 3 F.3d 208 

(7th Cir. 1993) 9 

Basic Inc. v. Levinson, 485 U.S. 224 (1988) 2 

Blackie v. Barrack, 524 F.2d 891 (9th Cir. 1975) 8n, 11 

Buchanan v. United States, 82 F.3d 706 (7th Cir. 1996) 11n 

In re Cendant Corp. Securities Litigation, 454 F.3d 235 (3d Cir. 2006) 

10 

In re Comdisco Securities Litigation, 150 F. Supp. 2d 943 (N.D. Ill. 2001) 

6, 9 

In re Comdisco Securities Litigation, No. 01 C 2110, 2004 WL 905938 (N.D. Ill. 

Apr. 26, 2004) 6, 10n 

Daubert v. Merrell Dow Pharmaceuticals, 509 U.S. 579 (1993) 5n 

Disher v. Information Resources, Inc., 691 F. Supp. 75 (N.D. Ill. 1988) 

7 

Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005) 4-5, 8-9 

Hill v. Tribune Co., No. 05 C 2602, 2005 WL 3299144 (N.D. Ill. Oct. 13, 2005) 

9 

Kane v. Shearson Loeb Rhoades, Inc., No. 86-551-Civ-Marcus, 1989 U.S. Dist. 

LEXIS 19022 (S.D. Fla. May 3, 1989), aff’d sub. nom., Kane v. Shearson Lehman 

Hutton, Inc., 916 F.2d 643 (11th Cir. 1990) 

7n 

Knapp v. Gomez, No. CV 87-0067 H(M), 1993 U.S. Dist. LEXIS 8581 (S.D. Cal. 

May 5, 1993) 3, 11 

Makor Issue & Rights, Ltd. v. Tellabs, Inc., 256 F.R.D. 586 (N.D. Ill. 2009) 

6, 9 

In re Milwaukee Cheese Wisconsin, Inc., 112 F.3d 845 (7th Cir. 1997) 

11n 

Nielsen v. Greenwood, No. 91 C 6537, 1996 U.S. Dist. LEXIS 14441 (N.D. Ill. 

Sept. 27, 1996) 11n 

Randall v. Loftsgaarden, 478 U.S. 647 (1986) 5, 7-9, 7n 

Richardson v. MacArthur, 451 F.2d 35 (10th Cir. 1971) 8n 

Salgado v. General Motors Corp., 150 F.3d 735 (7th Cir. 1998) 5n 

In re Sepracor Inc. Securities Litigation, 233 F.R.D. 52 (D. Mass. 2005) 

6n-7n 

SEC v. Bear, Stearns & Co., No. 03 Civ.2937(WHP), 2005 WL 217018 (S.D.N.Y. 

Jan. 31, 2005) 

 

10 

Spicer v. Chicago Board Options Exchange, Inc., No. 88 C 2139, 1990 WL 16983 

Case 1:02-cv-05893 Document 1630 Filed 06/04/2009 Page 3 of 24
Page

-iii- 

(N.D. Ill. Jan. 31, 1990) 7 

Wolf v. Frank, 477 F.2d 467 (5th Cir. 1973) ............................................................. 8n 

Internet Resources

Daniel R. Fischel et al., The Use of Trading Models to Estimate Aggregate Damages in Securities Fraud Litigation: An Update, 10 National Legal Center for the 

Public Interest, Briefly (Mar. 2006), available at www.aei.org1docLib/20070809—

Aggregate—Damages-pdf 

12n 

Rules

Fed R. Civ. P. 

26(a) 5n 

26(a)(2) 5n 

26(e) 5n 

37 5n 

37(c)(1) 5n 

Statutes

Securities Act of 1933 

§ 12(2), 15 U.S.C. § 77l(2) (2006) 7n 

Securities Act of 1934 

§ 10(b), 15 U.S.C. § 78j(b) (2006) 2, 7n 

Case 1:02-cv-05893 Document 1630 Filed 06/04/2009 Page 4 of 24
INTRODUCTION 

Plaintiffs argued in favor of bifurcated proceedings in their successful effort to 

postpone discovery regarding individual issues until after the trial on class-wide issues. Based 

on the Court’s prior rulings, the parties thereafter proceeded on the understanding that individual 

issues would be pursued through discovery and resolved in a separate phase after class-wide liability issues had been tried. This is the law of the case and Plaintiffs are judicially estopped 

from now insisting upon a truncated, discovery-free Phase II. Nevertheless, Plaintiffs’ recent 

Post-Verdict Submission urges the Court to collapse the required adjudication of individual damages and reliance issues into a “ministerial” claims procedure with no discovery or trial and to 

enter judgment thereafter as though there were a negotiated settlement with no outstanding issues 

to resolve. For the reasons discussed in Defendants’ Recommendations for Phase Two Proceedings (Dkt. 1623), such an administrative short-cut would violate the Court’s prior rulings and Defendants’ due process rights, including their Seventh Amendment right to have all material factual disputes determined by a jury. 1

 

Plaintiffs’ recommendation ignores the Court’s reservation of potentially dispositive legal issues, and their assertion that there are no outstanding issues of fact ignores the undisputed fact that the class-wide trial did not address or resolve any individual issues of reliance and 

damages. Notwithstanding the entry of a verdict on class-wide issues, no individual class member has established a right to recover (which necessarily depends on proving the element of damages on an individual basis), and Defendants have not been allowed to exercise their right to rebut the presumption of reliance. 

1

 Defendants reiterate that Phase II cannot reasonably proceed until this Court has ruled on the 

post-verdict motions that were filed on May 21, 2009. See Defendants’ Recommendations for 

Phase Two Proceedings (Dkt. 1623). 

Case 1:02-cv-05893 Document 1630 Filed 06/04/2009 Page 5 of 24
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It is also evident from the parties’ submissions, including the opinions of Plaintiffs’ previously undisclosed and unexamined expert, that the issues surrounding the proper calculation of damages and application of Professor Fischel’s “leakage model” (which is itself fundamentally flawed as set forth in Defendants’ challenges sub judice) are anything but straightforward and mechanical. Furthermore, Plaintiffs’ opposition to the required netting of inflationrelated gains and proposed use of FIFO (rather than LIFO) for matching transactions run directly 

contrary to the precedents of this Court. Like Defendants’ right to rebut questions of individualized reliance, the determination of actual net damages is not a “ministerial” issue, but rather is a 

required element for prevailing on a claim under Section 10(b). 

The “limited” post-verdict proceedings that Plaintiffs advocate would result in an 

incomplete and insufficient vetting of the required elements and deny Defendants their Constitutional rights. Defendants’ proposal of a focused request for information from class members, 

efficient discovery in appropriate cases, and trial of any material factual dispute is the appropriate framework for the resolution of these Phase II issues. 

ARGUMENT 

A. Plaintiffs’ Proposal Ignores Defendants’ Right to Rebut the Presumption of 

Reliance 

Plaintiffs cannot dispute that any individual plaintiff who trades without regard to 

market integrity is not entitled to the benefit of any presumption of reliance. See Basic Inc. v.

Levinson, 485 U.S. 224, 249-50 (1988). Their argument that the litigation of class-wide issues in 

Phase I mooted the need for discovery and adjudication of matters Plaintiffs previously asserted 

to be relevant only in Phase II is disingenuous on its face. Defendants were not allowed to propound discovery regarding individual reliance during Phase I discovery, and the class-wide trial 

did not resolve or even address this issue as to any named Plaintiff or any absent class member. 

At Plaintiffs’ own insistence, class-wide and individual issues were explicitly separated and the 

latter deferred to Phase II. Plaintiffs’ speculation and predictions about their likelihood of sucCase 1:02-cv-05893 Document 1630 Filed 06/04/2009 Page 6 of 24
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cess in Phase II provide no basis for simply skipping the process they themselves advocated. 

Moreover, contrary to Plaintiffs’ prediction of “thousands of mini-trials,” Defendants have no 

incentive, intention or need to proceed in an inefficient manner (especially given the high concentration of stock ownership in the hands of a small number of institutional investors), and they 

have represented to the Court that they will isolate and pursue only material contested facts. 

Plaintiffs rely on Knapp v. Gomez, No. CV 87-0067 H(M), 1993 U.S. Dist. 

LEXIS 8581 (S.D. Cal. May 5, 1993), as supposed authority for the notion that individual reliance can be resolved by propounding a single rhetorical question to class members. However, 

the court in Knapp recognized that the defendants had a right to rebut the presumption of reliance, noting that “[m]any of the individual class members may not be entitled to the presumption 

of reliance,” and citing as an example an investor that had conducted independent research into 

the company before investing in its IPO. Id. at *2. The court distinguished between class-wide 

assumptions made for purposes of class certification and the requirements for actual individual 

recovery, observing that “the class was not defrauded nor did it sustain injury. The individuals 

comprising the class did.” Id. at *6-*7. The court refused to enter an order of final judgment 

prior to resolution of individual reliance issues because it was inappropriate to render judgment 

for class members “who ultimately may not recover.” Id. at *7. “Because the action was bifurcated, not a single class member has thus far established a right to recover.” Id. at *1 

(emphasis added). 

The same is true here. To establish the relevant facts on reliance, Defendants are 

entitled to discovery from those claimants whose questionnaire answers and/or trading records 

demonstrate the kinds of investment choices that may be inconsistent with the presumption of 

reliance and/or who may assert substantial claims that warrant further analysis. For example, 

Wells Fargo not only elected to retain but substantially increased its large holdings in Household 

stock in 2002 after reviewing non-public information that supposedly revealed systematic reaging fraud. Similarly, a class member’s involvement in the 2001 and 2002 shareholder initiatives 

Case 1:02-cv-05893 Document 1630 Filed 06/04/2009 Page 7 of 24
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to tie executive compensation to eliminating so-called “predatory” practices may give rise to 

facts rebutting the presumption of reliance. Moreover, the “leakage” theory chosen by the jury 

raises additional highly relevant areas of discovery with respect to individual reliance. Putting 

aside the many problems with “leakage” that are presently before the Court, the leakage model is 

premised upon an (unproven) assumption that various investors in Household stock learned 

about unspecified pieces of fraud-related information which affected the stock price on a day-byday basis. If in fact (as posited by the leakage model) an individual class member became aware 

of the alleged fraud prior to other class members and nevertheless continued to purchase shares, 

any presumption of reliance on market “integrity” by that investor would self-evidently be unwarranted. 

Defendants’ due process rights, jury trial rights and entitlement to discovery on 

contested individual issues were not eliminated by the certification of a class for purposes of trying common issues, and nothing in the jury verdict on class-wide issues estops Defendants from 

attempting to rebut the presumption of reliance that was merely assumed for purposes of trying 

class-wide issues.2

B. Damages Must Be Calculated Using a Methodology that Does Not Provide 

Windfalls for Sales of Shares at Inflated Prices 

As the Supreme Court made clear in Dura, windfall gains have no place in recoveries for claimed losses from securities fraud. Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 

336, 345 (2005) (purpose of the securities laws is “not to provide investors with broad insurance 

against market losses, but to protect them against those economic losses that misrepresentations 

2

 Plaintiffs have provided no authority to refute Defendants’ right under the Seventh Amendment 

to a jury trial. The only case Plaintiffs cite involved a request to bifurcate the issues of liability 

and reliance “on the very eve of trial” and did not raise any Seventh Amendment questions. See 

In re ASK Securities Litigation, No. C-85-20207(A)-WAI, 1992 WL 278386 (N.D. Cal. Aug. 18, 

1992). Those facts are distinguishable from our case where the Court ordered bifurcation in 2005 

(four years before trial), and all preparation for trial was conducted with this understanding. 

Case 1:02-cv-05893 Document 1630 Filed 06/04/2009 Page 8 of 24
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actually cause”). Under relevant authority, any determination of damages must net all inflationrelated gains against losses and use LIFO for the matching of transactions. 

Consistent with Dura’s principles, Plaintiffs previously represented that they intended to use a netting approach for all class members who purchased stock during the Class Period.3

 Now, in an attempt to obtain what they freely admit to be a “windfall” recovery (Pls. 

Submission at 20, citing Randall v. Loftsgaarden, 478 U.S. 647 (1986)), Plaintiffs propose to 

offset only those shares purchased from November 15, 2001 through October 11, 2002. Without 

any supporting legal authority,4 Plaintiffs now assert that November 15, 2001 should be the first 

day that netting should apply, simply because that is the first day Professor Fischel asserted that 

the truth began to “leak” out of the stock price -- even though this period is significantly shorter 

than the Class Period (July 30, 1999 - October 11, 2002) and begins well after the start of what 

Plaintiffs call the “Damages Period.” This new and arbitrary cut-off date flatly contradicts Plaintiffs’ previous representation that they intended to apply an offset for all transactions at inflated 

prices during the Class Period. (See n.2, supra.)

3

 “Lead Plaintiffs intend to use a netting approach for Class members who profited from some 

trades of Household’s common stock acquired during the Class Period [July 30, 1999 - October 

11, 2002] and sold after November 14, 2001, but suffered losses from other trades of Household’s 

common stock during this same period.” Lead Plaintiffs’ Supplemental Statement Regarding 

Damages Pursuant to the Court’s October 17, 2007 Order, at 2 (Oct. 24, 2007) (attached to Declaration of Thomas J. Kavaler dated May 28, 2009, Ex. A (Dkt. 1623)). 

4

 In support of their novel limited netting theory, Plaintiffs offer the declaration of Bjorn I. Steinholt, CFA, a purported expert who was never disclosed to Defendants pursuant to Rule 26(a)(2), 

who did not testify in this case, and whose opinions have never been subject to testing under 

Daubert v. Merrell Dow Pharmaceuticals, 509 U.S. 579 (1993), or discovery by Defendants. 

Under Rule 37, a party that has failed to make a timely disclosure of the identity of an expert witness as required by Rule 26(a) or (e) “is not allowed to use that information or witness to supply 

evidence on a motion, at a hearing, or at a trial.” Fed. R. Civ. P. 37(c)(1) (emphasis added). Because Plaintiffs’ violation is neither justified (and Plaintiffs make no attempt at any justification)

nor harmless, “the sanction of exclusion is automatic and mandatory.” Salgado v. General Motors Corp., 150 F.3d 735, 742 (7th Cir. 1998). The declaration of Mr. Steinholt should thus be 

stricken and should not be considered by this Court. 

Case 1:02-cv-05893 Document 1630 Filed 06/04/2009 Page 9 of 24
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The “transactional approach” that Plaintiffs propose admittedly is intended to produce windfall recoveries for class members by considering only their purchases during the 

“Damages Period” while ignoring sales of artificially inflated shares. As discussed in the accompanying declaration of Dr. Mukesh Bajaj, attached hereto as Exhibit A,5

 class members are 

entitled only to net damages, so that failing to base recoverable damages on each class member’s 

complete experience as a holder of Household stock affected by the claimed fraud will impermissibly calculate damages in a biased manner. See Declaration of Mukesh Bajaj, June 2, 2009 

(“Bajaj Decl.”) at 2-4. 

Besides being economically unsound and inconsistent with their prior representations, Plaintiffs’ self-serving proposal to begin the “netting” period on November 15, 2001 is 

also contrary to applicable law, which mandates an offset for all sales of the subject stock at inflated prices. In this Court, it is well-settled that all inflationary gains from sales during the relevant period must be netted against recoverable losses. See Makor Issues & Rights, Ltd. v.

Tellabs, Inc., 256 F.R.D. 586, 600 (N.D. Ill. 2009) (St. Eve, J.) (holding that where proposed 

lead plaintiff purchased shares before the class period but sold those shares for a gain at inflated 

prices during the class period, thus offsetting any claimed losses, plaintiff was an inadequate 

class representative); In re Comdisco Securities Litigation, 150 F. Supp. 2d 943, 945 (N.D. Ill. 

2001) (Shadur, J.) (proposed lead plaintiff was inadequate class representative because its sales 

of pre-class period shares at inflated prices during the class period demonstrated a net gain rather 

than any net loss); In re Comdisco Securities Litigation, No. 01 C 2110, 2004 WL 905938, at *2-

*3 (N.D. Ill. Apr. 26, 2004) (Shadur, J.) (finding no gain or loss if an investor with a pre-fraud 

stake in a company buys and sells the same number of shares during the class period).6

 

5

 Defendants properly disclosed Dr. Bajaj as their damages expert and he testified at trial. 

6

 In fact, Plaintiffs cite several cases dealing with offsets that are entirely unrelated to the inflationary gains at issue in this case. In Sepracor, the issue was whether profitable transactions in one 

type of security (i.e., stocks) should be offset against unprofitable transactions in another type of 

Footnote continued on next page. 

Case 1:02-cv-05893 Document 1630 Filed 06/04/2009 Page 10 of 24
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Any sale of shares at inflated prices on or after March 23, 2001 delivered inflation-related profits to the sellers who otherwise would have sold shares at substantially lower 

prices in the absence of the claimed fraud. This Court has consistently applied the principle that 

all profits and losses that occurred after the fraud was committed “must be netted against each 

other” in securities fraud cases. See Disher v. Information Resources, Inc., 691 F. Supp. 75, 79 

(N.D. Ill. 1988) (Hart, J) (holding that the plaintiff could not demonstrate damages where the 

profit he realized due to the alleged fraud exceeded his claimed losses); Spicer v. Chicago Board 

Options Exchange, Inc., No. 88 C 2139, 1990 WL 16983, at *10 (N.D. Ill. Jan. 31, 1990) (Will, 

J.) (although the fair price of securities must be established individually during the damages 

stage of trial, “plaintiff class members have a right only to their net losses”). 

Plaintiffs’ reliance on Randall v. Loftsgaarden as justification for a “windfall” to 

class members is misplaced because its narrow holding addressed only whether tax benefits 

could be used to offset damages in a rescission case under the securities laws. 478 U.S. at 649.7

 

The Court held that tax benefits were not a direct product of the securities and, thus, did not need 

to be credited. Id. at 658-659. Randall does not apply here because Defendants do not propose 

Footnote continued from previous page. 

security (i.e., bonds) where both sets of transactions occurred during the class period. In re Sepracor Inc. Securities Litigation, 233 F.R.D. 52 (D. Mass. 2005). In Argent, the issue was 

whether transactions occurring after the damages period on which the plaintiff made money 

should be netted against transactions during the damage period on which it lost money. Argent 

Classic Convertible Arbitrage Fund L.P. v. Rite Aid Corp., 315 F. Supp. 2d 666 (E.D. Pa. 2004). 

Plaintiffs’ inclusion of cases that discuss netting losses against unrelated gains is misguided at 

best, if not affirmatively misleading. 

7

Randall also expressly reserved judgment as to whether § 10(b) provided a rescissionary measure 

of damages. 478 U.S. at 666. Its holding does not apply to this case because Plaintiffs do not 

seek rescission -- and such a measure of damages would be inappropriate because the class in a 

fraud-on-the-market case is comprised of open market purchasers (i.e., there is no privity between 

the purchaser and the issuer of shares justifying rescission, as there was in Randall). Because a 

rescissionary measure of damages is irrelevant, Plaintiffs’ reliance on Kane v. Shearson Loeb 

Rhoades, Inc., No. 86-551-Civ-Marcus, 1989 U.S. Dist. LEXIS 19022 (S.D. Fla. May 3, 1989), 

aff’d sub. nom. Kane v. Shearson Lehman Hutton, Inc., 916 F.2d 643 (11th Cir. 1990), is also inapplicable. The Eleventh Circuit’s decision in Kane hinged on an analogy between Florida law 

and the § 12(2) element of the case. 916 F.2d at 646. 

Case 1:02-cv-05893 Document 1630 Filed 06/04/2009 Page 11 of 24
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any offset for tax benefits unrelated to the alleged fraud, but rather are entitled to the netting of 

inflationary gains against losses where both result from the same disclosure defects causing alleged inflation. Defendants cannot find — nor have Plaintiffs provided — any Seventh Circuit 

authority applying Randall’s tax benefits holding to netting of inflated shares in an out-of-pocket 

damages case. 

In Dura, the Supreme Court cited Randall for the general proposition that private 

actions under the federal securities laws serve the purpose of deterring fraud. 544 U.S. at 345. 

However, the Court noted that “the statutes make these [private] actions available, not to provide 

investors with broad insurance against market losses, but to protect them against those economic losses that misrepresentations actually cause.” Id. at 345 (emphasis added). Offsetting 

inflationary gains against losses is required because both result from the same course of alleged 

fraudulent conduct. It is clear that a plaintiff in a securities fraud case cannot recover for losses

and while ignoring profits where both result from a single wrong. Instead, a plaintiff can recover 

only for net losses occurring after the fraud was committed, as is the case with all shares sold at 

inflated prices during the relevant period. See, e.g., Abrahamson v. Fleschner, 568 F.2d 862, 

878-79 (2d Cir. 1977), cert. denied, 436 U.S. 913 (1978).8

 As the Supreme Court observed in 

Dura, “if . . . the purchaser sells the shares quickly before the relevant truth begins to leak out, 

the misrepresentation will not have led to any loss.” 544 U.S. at 342. It follows that if pre-class 

period shares are sold during a period of inflation, the misrepresentation will have led to a gain 

that must be netted against any subsequent losses. 

Netting of inflation-related gains against losses is required because class members 

are entitled only to “actual damages” -- i.e., their out-of-pocket losses, measured by “the differ8

 The Courts of Appeals for the Fifth, Ninth, and Tenth Circuits have also taken the position that 

gains and losses stemming from different transactions must be offset. See Blackie v. Barrack, 

524 F.2d 891, 908–11 (9th Cir. 1975); Wolf v. Frank, 477 F.2d 467, 478–79 (5th Cir. 1973); 

Richardson v. MacArthur, 451 F.2d 35, 43–44 (10th Cir. 1971). 

Case 1:02-cv-05893 Document 1630 Filed 06/04/2009 Page 12 of 24
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ence between the price of the stock and its value on the date of the transaction if the full truth 

were known.” Associated Randall Bank v. Griffin, Kubik, Stephens & Thompson, Inc., 3 F.3d 

208, 214 (7th Cir. 1993). The concept of “out-of-pocket-losses,” which Plaintiffs acknowledge 

is the proper measure of damages, would be meaningless if some of the gains that accrued to 

Plaintiffs’ benefit as the result of the inflation of the stock price are ignored in quantifying any 

harm suffered by a particular shareholder as a result of that inflation. Plaintiffs’ argument that a 

windfall must be granted to certain plaintiffs in order to avoid an alleged windfall to Defendants 

is unfounded because class members purchased shares from other shareholders in the open market, not as initial purchasers of shares offered by the company (as in Randall, 478 U.S. at 650-

51). The counter-parties are the investors who sold their shares at the inflated price, not Defendants. Plaintiffs’ approach would improperly ensure windfall recoveries to sellers who benefited 

from sales at an inflated price because such investors improperly obtain both a recovery for inflation-related purchases and the benefit of the sale of their shares at an inflated price -- a result that 

contradicts the Supreme Court’s instruction in Dura. 

C. LIFO Is the Appropriate Method for “Matching” All Purchases and Sales 

Plaintiffs’ reliance on a handful of cases from outside this Circuit for their proposed use of the FIFO method for matching ignores prior holdings of this Court, most recently in 

the Tellabs case. This Court follows the majority view: that securities fraud losses are calculated 

using LIFO. See Makor Issues & Rights, Ltd. v. Tellabs, Inc., 256 F.R.D. 586, 599 (N.D. Ill. 

2009) (St. Eve, J.) (rejecting FIFO in favor of LIFO analysis as the appropriate method for determining loss due to securities fraud); Hill v. Tribune Co., No. 05 C 2602, 2005 WL 3299144, at 

*2 (N.D. Ill. Oct. 13, 2005) (Hart, J.) (“The current majority view . . . is that securities fraud 

losses should be calculated using LIFO.”); In re Comdisco Securities Litigation, 150 F. Supp. 2d 

943, 945-46 (N.D. Ill. 2001) (Shadur, J.) (rejecting plaintiff’s “attempted FIFO construct in favor 

of a calculation [LIFO] that properly nets out purchases and sales during the class period and determines gains or losses in those terms”). 

Case 1:02-cv-05893 Document 1630 Filed 06/04/2009 Page 13 of 24
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Plaintiffs’ proposed use of FIFO highlights a critical inconsistency in their position. Plaintiffs propose ignoring pre-November 15, 2001 purchases for purposes of netting gains 

while simultaneously claiming that those same purchases (including pre-Damages Period purchases) should be matched with sales during the Damages Period under FIFO. This arbitrary and 

logically inconsistent construct is cynically engineered to match a greater number of early sales 

at inflated prices with pre-Damages Period purchases and maximize the number of those “ignored” sales for purposes of calculating net losses. See Bajaj Decl. at. 3-5, n.7. 

Plaintiffs’ invocation of the use of FIFO for allocating settlement funds in certain 

plans is irrelevant because this case does not involve the allocation of an agreed, fixed settlement 

fund. (It also bears noting that the Cendant plan of allocation cited by Plaintiffs also included a 

netting provision subtracting all stock sale profits from any claimed losses, In re Cendant Corp. 

Securities Litigation, 454 F.3d 235, 245-47 (3d Cir. 2006)).9

 Many courts have used LIFO instead of FIFO to calculate final damages awards in the context of allocating settlements. See, 

e.g., SEC v. Bear, Stearns & Co., No. 03 Civ.2937(WHP), 2005 WL 217018, at *7 (S.D.N.Y. 

Jan. 31, 2005) (approving a settlement plan expressly calculating eligible losses “on a last-in, 

first-out (‘LIFO’) accounting basis”). That courts have previously approved certain parties’ 

choice to use an alternate method in a settlement context does not trump prevailing precedent in 

this Court holding that LIFO is the preferred approach for matching. 

9

 The IRS’s use of FIFO was rejected as irrelevant to a 10b-5 class action in Comdisco, where 

Judge Shadur explained the distinction: “In light of the long-term trend of increasing values in 

stocks, plus the facts (1) that FIFO rather than LIFO therefore typically increases the measurement of currently recordable gains and (2) that stocks held until death get a stepped-up basis 

while at the same time escaping income taxation entirely, what other approach might be expected 

from taxing authorities who are properly interested in maximizing [tax revenue]?” In re Comdisco Securities Litigation, No. 01 C 2110, 2004 WL 905938, at *2-*3 (N.D. Ill. Apr. 26, 2004). 

Case 1:02-cv-05893 Document 1630 Filed 06/04/2009 Page 14 of 24
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D. Damages May Not Be Calculated Until After the Conclusion of Phase II 

Contrary to Plaintiffs’ assertion, this Court may not determine damages in a “mechanical fashion,” and no such determination would be ripe until after all outstanding legal issues 

and post-verdict motions have been resolved, and (if any part of the class-wide verdict is sustained) until all issues as to individual reliance and actual entitlement to recovery (including netting) have been resolved in the second phase.10 Because a plaintiff is entitled only to “actual 

damages” under the securities laws (15 U.S.C. § 78bb(a)), “[t]he amount of damages is invariably an individual question.” Blackie v. Barrack, 524 F.2d 891, 908 (9th Cir. 1975). In this case,

the identity of hundreds of potential claimants, the amount of net loss (if any) each suffered, and 

the time period(s) in which each is eligible to collect for those losses (not to mention damages’ 

issues such as netting, matching and the 90-day “look-back”) have yet to be determined. In 

Knapp (cited in Plaintiffs’ submission) the court noted that: “[b]ecause the action was bifurcated, 

not a single class member has thus far established a right to recover. The class has proven fraud, 

an inflated share value, and its members each enjoy the presumption of reliance, but no one is 

entitled to recover at this time.” Knapp v. Gomez, 1993 U.S. Dist. LEXIS 8581, at *1.11 

10 The only case Plaintiffs cite in support of their contention that final judgment should be entered 

against Defendants is Buchanan v. United States, 82 F.3d 706 (7th Cir. 1996). In Buchanan the 

Court of Appeals held that the failure to resolve when one plaintiff became eligible to collect 

damages during a two year period precluded entry of final judgment. Id. at 707-8. 

11 Because any discussion of final damages calculations is premature, so too is Plaintiffs’ request for 

pre-judgment interest. Plaintiffs are not entitled to prejudgment interest as a matter of course, and

Plaintiffs concede in their Submission that “[t]his court has discretion to award prejudgment interest to plaintiffs.” (Pls. Submission at 27)(emphasis added). See, e.g., In re Milwaukee Cheese 

Wisconsin, Inc., 112 F.3d 845, 849 (7th Cir. 1997) (Easterbrook, J.) (“Doubtless judges have discretion to exercise when deciding whether to award prejudgment interest . . . .”); Nielsen v. 

Greenwood, No. 91 C 6537, 1996 U.S. Dist. LEXIS 14441, at *29 (N.D. Ill. Sept. 27, 1996) 

(“[A]n award of prejudgment interest is not automatic. Rather, such an award falls within the 

sound discretion of this court.”). For example, prejudgment interest may be inappropriate when 

the plaintiffs themselves have caused delay, as this would unjustly penalize the defendant. See, 

e.g., Milwaukee Cheese, 112 F.3d at 849 (“Gratuitous delay by the party seeking the award . . . 

might be a reason to limit an award of interest.”). At the appropriate time Defendants will brief 

the manner in which Plaintiffs have caused unnecessary and gratuitous delay, and the reasons 

why Plaintiffs’ deliberate and repeated impediments to the progress of this case dictate that prejudgment interest should be denied. 

Case 1:02-cv-05893 Document 1630 Filed 06/04/2009 Page 15 of 24
-12- 

E. Plaintiffs’ Proposed Notice and Claim Form Are Inadequate and 

Objectionable 

For the reasons set forth in this Response and in Defendants’ Proposal, Defendants object to Plaintiffs’ proposed Class Notice, Summary Notice and Proof of Claim (Pls. 

Submission, Exs. 2, 3, 4) because they do not accurately describe the status of this action; they 

impermissibly indicate without qualification that class members will recover damages; they fail 

to request required information relating to outstanding reliance and damages issues; and they 

treat Phase II as if it were a ministerial claims administration procedure following upon a negotiated settlement that resolved all disputed issues. Although Defendants reserve the right to fully 

brief the deficiencies and inaccuracies in Plaintiffs’ proposed notice and claims forms at the appropriate time, some of the more glaring errors are listed below: 

• Plaintiffs’ proposed notice inaccurately states that the verdict results in actual 

entitlement to recover damages; that the jury awarded per share damages for 

each trading day, that the leakage “inflation table” shows the per share damages, 

and that damages are estimated in an amount over $2 billion. In fact, no “damages” have been awarded, established or estimated, nor could they be at this 

stage.12

 

• The proposed notice inappropriately fails to take into account netting and matching using the LIFO method, and thus inaccurately describe a formula for calculating actual damages. 

• The proposed notice does not accurately inform class members that on February 

28, 2006, the Court ruled that class members’ claims based on disclosure defects 

before July 30, 1999 were barred under the applicable statute of repose. Class 

members must be notified about this denial of claims in any new notice lest the 

sins of the past be repeated. 

• The proposed notice fails to justify -- or even explain -- Plaintiffs’ proposal that 

the Arthur Andersen settlement funds (which resolved claims covering the period beginning October 23, 1997) be allocated only to class members who purchased on or after March 23, 2001. 

• The proposed notice prejudicially refers class members to the subtly-named 

website www.householdfraud.com for information concerning the litigation. 

This is not a post-settlement situation as Plaintiffs continue to pretend. The 

12 As Professor Fischel has concluded, formulaic and mechanical attempts to estimate damages using trading models will overstate potential recovery by upwards of 600%. See Daniel R. Fischel 

et al., The Use of Trading Models to Estimate Aggregate Damages in Securities Fraud Litigation: 

An Update, 10 National Legal Center for the Public Interest, Briefly 1, 19-20 (Mar. 2006), available at www.aei.org1docLib/20070809_Aggregate_Damages.pdf.

Case 1:02-cv-05893 Document 1630 Filed 06/04/2009 Page 16 of 24
-13- 

value of seeking Court approval for class-wide notice in this still-pending litigation would be lost if class counsel were permitted to spread misinformation 

through the internet. 

• The proposed notice fails to inform class members that the jury rendered a verdict against the class on 57.5% of the alleged disclosure defects. 

• The proposed notice fails to inform class members that this Court reserved 

judgment on certain legal issues that may have a dispositive impact on Plaintiffs’ claims, and that the Court’s resolution of Defendants’ post-verdict motions 

may result in dismissal of all claims as a matter of law, or in the alternative, require a new trial on class-wide issues. 

• Plaintiffs’ proposed proof of claim form fails to include any inquiry as to 

threshold issues that courts have considered relevant to individual reliance such 

as short selling or unusual trading activities. 

• The proposed proof of claim form does not inform class members that they may 

be subject to discovery based on their responses. 

• Plaintiffs’ proposed notice and claim form do not accurately state that a class 

member’s failure to provide the requested information on or before the Courtordered deadline will disqualify that class member from pursuing a claim for 

damages -- only that it could result in delay or rejection. 

• The proposed claim form inappropriately poses only a single question about reliance which is self-serving and rhetorical and prejudicially suggests the “correct” answer (which they incorrectly assume that Defendants will have no opportunity to test.). 

These critical errors and omissions render Plaintiffs’ proposed notice and claim form unsuitable 

for distribution to the class. 

Case 1:02-cv-05893 Document 1630 Filed 06/04/2009 Page 17 of 24
-14- 

CONCLUSION 

Defendants respectfully request that this Court accept the Defendants’ recommendations as to the timing, scope and administration of any Phase II proceedings. 

Dated: June 4, 2009 

Respectfully submitted, 

Cahill Gordon & Reindel LLP

By: /s/ Thomas J. Kavaler 

 Thomas J. Kavaler 

 Bar No. 1269927 

 Howard G. Sloane 

 Bar No. 1197391 

 Patricia Farren 

 Bar No. 1198498 

 Susan Buckley 

 Bar No. 1198696 

 Landis C. Best 

 David R. Owen 

80 Pine Street 

New York, New York 10005 

(212) 701-3000 

- andEIMER STAHL KLEVORN & SOLBERG LLP 

224 South Michigan Avenue 

Chicago, Illinois 60604 

(312) 660-7600 

Attorneys for Defendants Household 

International, Inc., William F. Aldinger, 

David A. Schoenholz and Gary Gilmer 

Case 1:02-cv-05893 Document 1630 Filed 06/04/2009 Page 18 of 24
EXHIBIT A 

Case 1:02-cv-05893 Document 1630 Filed 06/04/2009 Page 19 of 24
UNITED STATES DISTRICT COURT 

NORTHERN DISTRICT OF ILLINOIS 

_______________________________________ 

In re: Lawrence E. Jaffe Pension Plan ) 

Plaintiff, ) 

)

v. ) Lead Case No. 02-C-5893 

)

Household International, Inc., et al ) 

) 

)

Defendant, ) 

_______________________________________) 

DECLARATION OF MUKESH BAJAJ 

June 2, 2009 

Case 1:02-cv-05893 Document 1630 Filed 06/04/2009 Page 20 of 24
2

I am a financial economist and Senior Managing Director leading the securities practice 

at LECG, LLC. LECG is an international consulting firm specializing in economics and 

financial analysis. I have been retained by counsel for Household International Inc. 

(“Household” or the “Company”) to review and comment on the Plaintiffs’ Post-Verdict 

Submission dated May 28, 2009 (“Plaintiffs’ Submission”) and its Exhibits. 

I. Background 

Plaintiffs’ Submission claims that “the calculation of damages is a mechanical function 

that is appropriately handled by the Claims Administrator” and provides a “formula”1to 

calculate recoverable damages. As I discuss in this Declaration, the Plaintiffs Submission 

is critically flawed from an economics perspective and its proposed formula to calculate 

recoverable damages will result in a vast over-statement of damages. 

II. Recoverable damages should be based on each class member’s 

complete trading history, not simply on the shares purchased 

during the “Damage Period” 

Plaintiffs’ Submission notes that:2

On May 7, 2009, the jury in this case rendered a verdict. The jury found 

that defendants Household International, Inc., William Aldinger, David 

Schoenholz and Gary Gilmer violated §10(b), Rule 10b-5 and §20(a) of 

the Securities and Exchange Act of 1934 (“1934 Act”) with respect to 

statements made from March 23, 2001 to October 11, 2002. The jury 

determined the inflation per share from March 23, 2001 to October 11, 

2002.

Notably, the daily inflation per share was determined to be zero for all dates prior to 

March 23, 2001 including the July 30, 1999 – March 22, 2001 period (the “Remainder of 

the Class Period”), and as calculated by Professor Fischel’s Leakage Model from March 

23, 2001 to October 11, 2002 (“Damage Period”).

1

 Plaintiffs’ Submission, page 16. 

2

 Plaintiffs’ Submission, page 1. 

Case 1:02-cv-05893 Document 1630 Filed 06/04/2009 Page 21 of 24
3

Plaintiffs argue that each class member’s recoverable damages (“recovery per share”) 

should be calculated as “the difference between: (i) the artificial inflation on the date of 

purchase, less (ii) the artificial inflation on the date of sale.”3 Plaintiffs recognize that 

class members are only entitled to net damages, i.e., each class member’s total recovery 

is net of any gains through sale of shares at prices that were more inflated than at the time 

of purchase.

Plaintiffs’ methodology includes two critical assumptions: (1) Plaintiffs argue that such 

net recovery for each class member should be based only on the Household common 

stock that was purchased during the Damage Period;4

and (2) in order to match the class 

member’s sales to purchases, all his pre-Damage Period (and even Pre-Class Period stock 

holdings) should be included in a FIFO matching method. Specifically, Plaintiffs note:

5

The FIFO method offsets sales during the class period with a plaintiff’s 

pre-class period stock holdings by matching, in chronological order, the 

first shares sold during the class period with the shares held at the 

beginning of the Damages Period, if any, and then the first shares 

purchased during the Damages Period. This method of matching is 

consistent with the transactional approach discussed above, and will avoid 

inappropriate reductions to defendants’ liability based on sales of shares 

purchased before the Damages Period. 

Both of these assumptions introduce significant biases into the calculation of each class 

member’s net aggregate damages caused by the fraud as the following hypothetical 

example illustrates. Consider a class member whose trading history is as shown in the 

table below. 

3 Additionally, Plaintiffs assume that recovery on (a) shares sold prior to November 15, 2001 is zero, and 

(b) shares retained at the end of October 10, 2002 is equal to the artificial inflation on the date of purchase. 

Plaintiffs also recognize that this recovery “is properly subject to certain limitations imposed by the “90-

Day Bounce Back Rule” as described in Steinholt Decl. (Exhibit 5 of the Plaintiffs’ Submission). See 

Plaintiffs’ Submission, page 16. 

4

 Plaintiffs’ Submission, pages 23-24. 

5

 Plaintiffs’ Submission, page 24. 

Case 1:02-cv-05893 Document 1630 Filed 06/04/2009 Page 22 of 24
4

Date

No. of shares 

bought (sold) 

[1]

Daily

Inflation

[2]

Damage (gain) 

[3]=[1]x[2]

Pre-Damage Period (date 0) 11 $0.00 $0.00

Damage Period (date 1) 1 $1.00 $1.00

Damage Period (date 2) (10) $0.75 ($7.50)

Post-Damage Period (date 3) (2) $0.00 $0.00

Total damage (gain) ($6.50)

An economic question naturally arises, “What is this class member’s aggregate damages 

that was caused by the alleged fraud?” To properly answer this question one should 

evaluate the aggregate damages caused by the fraud to the class member net of all the 

benefit that the same class member received as a result of the same fraud. 

Thus, in the above example, if we considered the class member’s entire trading history, it 

indicates that he sold 10 shares at an inflation of $0.75 per share (resulting in a benefit of 

$7.50) whereas he bought 1 share at an inflation of $1 per share(resulting in a damage of 

$1). Consequently, this class member’s net aggregate damages accounting for all 

transactions during the Damage period is -$6.50 (i.e., a gain of $6.50). Note that such a 

calculation does not depend on whether or not a FIFO or LIFO method of matching sales 

to purchases is employed. 

In contrast, if we were to consider the Plaintiffs’ method, we would first have to match 

pre-Damage period purchases to subsequent sales using FIFO. This would result in the 

share bought during the Damage Period (on date 1) being matched to one of the 2 shares 

retained after the Damage Period ended, resulting in damage of $1 to the class member. 

Notably, the Plaintiffs’ method, ignores the $7.50 benefit from the sale of 10 shares 

during the Damage Period, even though it recognizes that such shares were bought at 

uninflated prices under its FIFO matching method.6

6 The 10 shares sold during the Damage Period at an inflation of $0.75 per share are matched to a purchase 

at zero inflation, thereby resulting in a benefit of $7.50. 

Case 1:02-cv-05893 Document 1630 Filed 06/04/2009 Page 23 of 24
5

If we were to use the LIFO method, then the “last-in” share bought during the Damage 

Period (at date 1) would be matched to the first-out share (i.e., sales on date 2), resulting 

in damage of $0.25. However, if the LIFO method was implemented using all shares, 

then again the class member’s total damages would be properly calculated at -$6.50. 

In short, to properly determine any class member’s aggregate damages we must consider 

all transaction that this class member undertook in Household’s common stock during the 

Damage Period, not simply some transactions, selected in a particular biased7manner, as 

the Plaintiffs have proposed. 

Respectfully submitted, 

______________________

Mukesh Bajaj, Ph.D. 

7

The proposed method is biased because pre-Damage period stock holding are included in matching 

Damage period sales to prior purchases, but the resultant benefit to the class member from such a 

transaction is ignored. An additional bias arises because the inflation is relatively greater at the start of the 

damage Period. Under FIFO, the class member’s early sales when inflation is relatively high (which 

conveys a benefit to the class member) are matched to pre-Damage period holding and then ignored in 

calculating the class member’s net damages. 

Case 1:02-cv-05893 Document 1630 Filed 06/04/2009 Page 24 of 24