02C5893 Jaffe vs. Household et al. Page 1 of 3

Order Form (01/2005)

United States District Court, Northern District of Illinois

Name of Assigned Judge

or Magistrate Judge

Ronald A. Guzman Sitting Judge if Other

than Assigned Judge

CASE NUMBER 02 C 5893 DATE 3/23/2009

CASE

TITLE

Jaffe vs. Household et al.

DOCKET ENTRY TEXT

Minute entry dated 3/23/09 [1526] is amended as follows to include pages 1-3: For the reasons provided in

this Minute Order, the Court denies defendants’ Daubert motion to exclude the testimony of Daniel Fischel

pursuant to Federal Rule of Evidence (“Rule”) 702 [doc. no. 1361].

O[ For further details see text below.] Docketing to mail notices.

STATEMENT

Under Rule 702 and Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 592-93 (1993), a court

must conduct a three-step inquiry: “[1] the witness must be qualified as an expert by knowledge, skill,

experience, training, or education; [2] the expert’s reasoning or methodology underlying the testimony must

be scientifically reliable; and [3] the testimony must assist the trier of fact to understand the evidence or to

determine a fact in issue.” Ervin v. Johnson & Johnson, Inc., 492 F.3d 901, 904 (7th Cir. 2007) (citations

and quotation omitted). 

Defendants argue that Daniel Fischel’s testimony is inadmissible because his causation analysis is not

useful to the fact finder in that he did not evaluate any causal connection, assumed his conclusion thereby

making his opinion regarding causation useless to the fact finder and merely concluded that there is economic

evidence “consistent with” plaintiffs’ allegations but did not rule out non-fraud explanations. The Court

disagrees.

Fischel’s report, rebuttal report and documents underlying those reports establish that Fischel

analyzed in detail the causal relationship between defendants’ conduct and investors’ losses. Fischel utilizes

a well-established methodology in analyzing loss causation in securities fraud cases: an event study. See

Carpe v. Aquila, Inc., No. 02-0388-CV, 2005 WL 1138833, at *4 (W.D. Mo. Mar. 23, 2005) (“Failure to

conduct an event study comparing the stock’s price to the market as a whole or a selected index of similar

businesses is enough to cause an expert’s opinion to be excluded.”); see also In re Imperial Credit Indus. Sec.

Litig., 252 F. Supp. 2d 1005, 1014-16 (C.D. Cal. 2003) (barring expert report that did not include an event

study and stating that “[a] proper measure of damages in the securities context . . . requires elimination of that

portion of the price decline or price difference which is unrelated to the alleged wrong.”), aff’d sub nom.

Mortensen v. Snavely, 145 Fed. Appx. 218 (9th Cir. 2005); In re Executive Telecard, Ltd. Sec. Litig., 979 F.

Supp. 1021, 1025 (S.D.N.Y. 1997) (excluding expert testimony because “[t]he reliability of the Expert

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STATEMENT

02C5893 Jaffe vs. Household et al. Page 2 of 3

Witness’ proposed testimony is called into question by his failure to indicate . . . whether he conducted an

‘event study’ to determine whether [defendant’s] stock price was affected by company specific factors

exclusive of the challenged fraud”). 

To the extent that defendants take issue with Fischel’s analysis, they are, in essence, questioning the

validity of the use of an event study to establish materiality and causation. However, an event study is “[t]he

gold standard, which is accepted by both courts and economists . . . .” Marge S. Thorsen et al.,

Rediscovering the Economics of Loss Causation, 6 J. Bus. & Sec. L. 93, 99 (2006). 

 An event study is an examination of the association between news about a 

 company (good, bad, or neutral) and stock price movements. The researcher is examining 

 whether the association between news and share price movements is strong enough to 

 support an inference of, among other things, causation. If price movements are found that 

 are unexplained by the “market model” and are statistically significant, either individually 

 or collectively, a causal connection between the event in question and price movements is 

 established. The study will separate out the effects of company-specific news on the stock 

 price from the effects of market or industry forces on the price, thereby identifying the 

 “true” price and the inflationary component thereof. Typically, event studies work backward 

 from what is ultimately determined to be a fair price, after dissipation of inflation, to determine

 how much inflation was contained in the price due to fraud during the relevant time frame all 

 the way back to the beginning.

Id. “Event study analysis is a ubiquitous tool in assessing claims of loss causation as well as the ‘materiality’

of misstatements or fraudulently omitted information.” Allen Farrell & Atanu Saha, The Loss Causation

Requirement for Rule 10b-5 Causes of Action: The Implications of Dura Pharmaceuticals, Inc. v. Broudo, 63

Bus. Law. 163, 166 (2007). “Use of an event study or similar analysis is necessary more accurately to isolate

the influences of information specific to [the issuer] which defendants allegedly have distorted.” In re

Oracle Sec. Litig., 829 F. Supp. 1176, 1181 (N.D. Cal. 1993); see Sanjai Bhagat & Roberta Romano, Event

Studies and the Law: Part II: Empirical Studies of Corporate Law, 4 Am. Law & Econ. Rev. 380, 400 (Fall

2002) (“It is therefore safe to conclude that, with regard to securities litigation, the methodology’s

appropriateness for valuation issues is a settled part of the landscape . . . .”).

Typically, defendants, rather than plaintiffs, in securities fraud litigation rely on the event study

approach because it may underestimate the amount of inflation in certain circumstances, e.g., when there is

leakage of true information. See Sanjai Bhagat & Roberta Romano, Event Studies and the Law: Part II: 

Empirical Studies of Corporate Law, 4 Am. Law & Econ. Rev. 380, 400 (Fall 2002) (“[T]he event study

technique will understate the damages . . . because part of the impact of the information has been

incorporated into the stock price before the announcement date.”). It is interesting to note that in the instant

case, however, plaintiffs rely on the event study approach and defendants rely on the comparable index

approach. See Paul Grier, Establishing Upper and Lower Limits for Settlement Negotiations in Rule 10b-5

Class Action Litigation, in Securities Litigation 1993 at 445 (PLI Corp. Litigation and Administrative

Practice Series No. 479, 1993) (“[T]he event study approach underestimates damages because it assumes that

the event effects the security price only on specific class period days while the comparable index approach

assumes that the event can effect the security price on all of the class period days.”).

Anomalies aside, Fischel offers the jury two ways to determine whether defendants’ conduct caused

investors’ loss, both of which utilize the event study method: quantification using specific disclosures and

quantification using leakage.1

 Fischel’s methodologies involve precisely the kind of analysis that finds

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STATEMENT

02C5893 Jaffe vs. Household et al. Page 3 of 3

1.To the extent that defendants rely on In re Williams Securities Litigation for the proposition

that Fischel’s quantification based on leakage is inadmissible, the Court finds the case

inapposite. 496 F. Supp. 2d 1195, 1272 (N.D. Okla. 2007). In that case, the court barred the loss

causation expert’s testimony because he “performed no regression analysis, or even an analysis

of statistical significance, to differentiate fraud-related effects from forces unrelated to the

fraud.” Id. In the instant case, however, Fischel performed a regression analysis and employed a

statistical significance measure in his event study.

extensive support in economic, legal and financial articles. See, e.g., G.N. Pettengill & J.M. Clark,

Estimating Expected Returns in an Event Study Framework: Evidence from the Dartboard Column, 40

Quarterly Journal of Business & Economics (2001), at 19; A.C. MacKinlay, Event Studies in Economics and

Finance, 35 J. Econ. Literature (March 1997), at 13-39; Mark L. Mitchell & Jeffry M. Netter, The Role of

Financial Economics in Securities Fraud Cases: Applications at the Securities and Exchange Commission,

49 Bus. Law. 545, 545-90 (1994); Bradford Cornell & R. Gregory Morgan, Using Finance Theory to

Measure Damages in Fraud on the Market Cases, 37 UCLA L. Rev. 883, 899 (1990). 

Fischel’s event study (as do all event studies) employs a regression analysis, which measures stock

price movements upon disclosure of new information, rather than the omission of information. See Daniel P.

Lefler & Allan W. Kleidon, Just How Much Damage Did Those Misrepresentations Actually Cause and to

Whom?: Damages Measurement in “Fraud on the Market” Securities Class Actions, in Securities Litigation

& Enforcement Institute 2005, at 285, 289 (PLI Corp. Law & Practice, Course Handbook Series No. 6746,

2005) (“. . . [U]nder Dura, the principle of loss causation limits recovery to the price reaction that actually

occurred at the time of the disclosure (or disclosures) that actually occurred.”). Fischel’s regression analysis

calculates the amount of artificial inflation resulting from an alleged omission on any day during the class

period. It estimates the effect of the specific corrective disclosures and information leakage that caused

dissipation of the artificial inflation that existed from the time of the first actionable nondisclosure and

subtracts from the equation general market movements in order to determine the true effect of the

information disclosed. 

In sum, the Court holds that Fischel’s testimony is admissible because he evaluated the causal

connection between defendants’ conduct and investors’ loss via a reliable methodology that accounts for nonfraud explanations. Accordingly, Fischel’s testimony will assist the trier of fact to understand the evidence

and determine facts in issue. The Court thus denies defendants’ motion to exclude Fischel’s testimony. 

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