EXHIBIT 5 

Case: 1:02-cv-05893 Document #: 2159-5 Filed: 05/06/16 Page 1 of 13 PageID #:84145
1

 UNITED STATES DISTRICT COURT

 FOR THE NORTHERN DISTRICT OF ILLINOIS

 EASTERN DIVISION

LAWRENCE E. JAFFE PENSION )

PLAN, On Behalf of Itself )

and All Others Similarly )

Situated, )

 Plaintiffs, ) Lead Case No.

 vs. ) 1:02-CV-05893

HOUSEHOLD INTERNATIONAL, )

INC., et al., )

 Defendants. )

 VIDEOTAPED DEPOSITION OF DANIEL FISCHEL, Ph.D.

 February 24, 2016

 Chicago, Illinois

 9:00 a.m.

Reported By:

Sheri E. Liss, CRR

Job No. 42823

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450 Seventh Avenue - Ste 500, New York, NY 10123 1.800.642.1099

DAVID FELDMAN WORLDWIDE, INC.

2 (Pages 2 to 5)

2

1 The videotaped deposition of DANIEL

2 FISCHEL, Ph.D., called by the Defendant for

3 examination, taken pursuant to the Code of Civil

4 Procedure and the Rules of the Supreme Court of the

5 State of Illinois pertaining to the taking of

6 depositions for the purposes of evidence, taken

7 before Sheri E. Liss, CSR NO. 084-002600, a

8 Certified Shorthand Reporter within and for the

9 State of Illinois, Registered Professional Reporter,

10 Certified Realtime Reporter, at the offices of

11 Skadden, Arps, Slate, Meagher & Flom, LLP,. 155

12 North Wacker Drive, Chicago, Illinois, on

13 February 24, 2016 at the hour 9:00 o'clock a.m.

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1 APPEARANCES:

2 ON BEHALF OF THE PLAINTIFFS:

3 ROBBINS GELLER RUDMAN & DOWD, LLP 

4 655 West Broadway, Suite 1900

5 San Diego, CA 92101

6 (619) 231-1058

7 BY: SPENCER BURKHOLZ, ESQ. 

8 spenceb@rgrdlaw.com

9 LUKE BROOKS, ESQ.

10 LukeB@rgrdlaw.com

11 MICHAEL DOWD, ESQ.

12 miked@rgrdlaw.com

13 

14

15 ON BEHALF OF HOUSEHOLD INTERNATIONAL, INC.:

16 WILLIAMS & CONNOLLY, LLP

17 725 Twelfth Street, N.W.

18 Washington, D.C. 20005

19 BY: STEVEN M. FARINA, ESQ.

20 sfarina@wc.com

21 LESLIE COOPER MAHAFFEY, ESQ.

22 lmahaffey@wc.com

23 

24 -and25

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1 APPEARANCES (continued):

2 SKADDEN, ARPS, SLATE, MEAGHER & FLOM, LLP

3 155 North Wacker Drive

4 Chicago, IL 60606 

5 BY: PATRICK FITZGERALD, ESQ.

6 patrick.fitzgerald@skadden.com

7 ANDREW J. FUCHS, ESQ.

8 andrew.fuchs@skadden.com

9 RYAN STOLL, ESQ.

10 ryan.stoll@skadden.com

11 

12

13 ON BEHALF OF WILLIAM ALDINGER:

14 KATTEN MUCHIN ROSENMAN, LLP

15 525 West Monroe Street

16 Chicago, IL 60661 

17 BY: GIL M. SOFFER, ESQ.

18 gil.soffer@kattenlaw.com

19 

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1 ON BEHALF OF GARY GILMER;

2 McDERMOTT WILL & EMERY

3 227 West Monroe Street

4 Chicago, IL 60606 

5 BY: DAVID S. ROSENBLOOM, ESQ.

6 drosenbloom@mwe.com

7 C. MAEVE KENDALL, ESQ.

8 makendall@mwe.com

9 

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11 ON BEHALF OF DAVE SCHOENHOLZ;

12 JACKSON WALKER, LLP

13 1401 McKinney Street, Suite 1900

14 Houston, TX 77010

15 BY: TIM S. LEONARD, ESQ.

16 tleonard@jw.com

17 

18

19 ALSO PRESENT:

20 MARK LoSACCO, HSBC

21 KRISTIN FEITZINGER, Cornerstone

22 STUART ALDERTY (Telephonically)

23 NICK YAVORSKY (Telephonically)

24 ALLEN FERRELL (Via LiveDeposition Feed)

25 JEREMY MANGAN, Videographer

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DAVID FELDMAN WORLDWIDE, INC.

3 (Pages 6 to 9)

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1 I N D E X

2 Page

3 By Mr. Farina 8

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6 E X H I B I T S

7 No. Page

8 Exhibit 1 .................................. 9

9 Exhibit 2 .................................. 22

10 Exhibit 3 .................................. 47

11 Exhibit 4 .................................. 59

12 Exhibit 5 .................................. 85

13 Exhibit 6 .................................. 93

14 Exhibit 7 .................................. 108

15 Exhibit 8 .................................. 118

16 Exhibit 9 .................................. 123

17 Exhibit 10 .................................. 142

18 Exhibit 11 .................................. 155

19 Exhibit 12 .................................. 161

20 Exhibit 13 .................................. 161

21 Exhibit 14 .................................. 189

22 Exhibit 15 .................................. 192

23 Exhibit 16 .................................. 195

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7

1 E X H I B I T S (continued)

2 No. Page

3 Exhibit 17 .................................. 205

4 Exhibit 18 .................................. 208

5 Exhibit 19 .................................. 222

6 Exhibit 20 .................................. 224

7 Exhibit 21 .................................. 256

8 Exhibit 22 .................................. 259

9 Exhibit 23 .................................. 268

10 Exhibit 24 .................................. 269

11 Exhibit 25 .................................. 271

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1 THE VIDEOGRAPHER: We are now on the

2 record. This marks the beginning of Media No. 1 in

3 the deposition of Daniel Fischel in the matter of

4 Lawrence E. Jaffe, et al., versus Household

5 International, et al., in the U.S. District Court,

6 Northern District of Illinois, Eastern Division.

7 This deposition is being held at 155 North Wacker

8 Drive, Chicago, Illinois on February 24, 2016 and

9 the time is now 9:10 a.m. All attorneys present

10 will be noted on the stenographic record. Will the

11 court reporter please swear in the witness.

12 (Whereupon, the witness was

13 duly sworn.)

14 DANIEL FISCHEL, Ph.D.,

15 having been first duly sworn, was examined and

16 testified as follows:

17 EXAMINATION

18 BY MR. FARINA:

19 Q. Good morning, Professor Fischel.

20 A. Good morning.

21 Q. Let me start by handing you what we've

22 marked as Exhibit 1, and we're going to start at 1

23 and run consecutively.

24 A. Okay.

25

9

1 (Whereupon, Exhibit 1 marked.)

2 (Whereupon, the document was

3 tendered.)

4 BY MR. FARINA:

5 Q. You're familiar with that document?

6 A. No, I'm not actually. I don't know what

7 this is.

8 Q. I'll tell you this is the verdict form

9 from the first trial. It's the one that the jury

10 actually filled out.

11 Have you looked at this verdict

12 form since the first trial?

13 A. No, I didn't look at it at the time or

14 I -- and I haven't look at it subsequently.

15 Q. So you haven't used this verdict form in

16 any way in creating your damages models?

17 A. I have not. My damages models predated

18 the existence of this form.

19 Q. Now, when you presented your damages

20 models in the first trial, you were making certain

21 assumptions about liability; is that correct?

22 A. That's probably fair to say. That's

23 correct.

24 Q. And the jury in the first trial actually

25 made findings as to liability. And at the time, the

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DAVID FELDMAN WORLDWIDE, INC.

4 (Pages 10 to 13)

10

1 plaintiffs were presenting 40 separate alleged

2 misstatements.

3 Do you recall that?

4 A. No, I don't.

5 Q. Okay.

6 A. I'm not disagreeing, I just don't recall

7 it one way or the other.

8 Q. And you understand that the jury in the

9 first trial agreed with the plaintiffs as to 17 of

10 the alleged misstatements and disagreed with the

11 plaintiffs as to 23 of the alleged misstatements.

12 A. Again, that may be right. I don't know.

13 But I don't have any familiarity with that one way

14 or the other.

15 Q. So that's not something that you've

16 taken into account in presenting your damages model

17 in the retrial?

18 A. I haven't specifically taken that into

19 account, no.

20 Q. Could you take a look at the document

21 that's before you? And if you want to peruse the

22 document, that's fine with me, but I would like to

23 direct you to Page 40 of the document.

24 A. Okay. All right. I have it.

25 Q. So the way this is laid out, there is a

11

1 separate question for each of the 40 alleged

2 misstatements. And the jury decided whether or not

3 Household and the individuals had made misstatements

4 that were actionable or not made misstatements, and

5 this particular page goes to statement No. 40.

6 Do you see that?

7 A. I see it, yes.

8 Q. And do you see that the jury rejected

9 the alleged misstatement No. 40?

10 A. I do.

11 Q. All right. Now, did you make any

12 adjustment to your damages analysis to take into

13 account that the jury had rejected this alleged

14 misstatement?

15 A. As I said, I didn't look at this

16 document. I think I adjusted my -- the dates for

17 the beginning of my damage calculations using the

18 exact same model with one slight adjustment for the

19 first three days. That's all I did.

20 Q. So I'll represent to you that the

21 statements run chronologically, so statement No. 40

22 would be the last alleged misstatement. And if you

23 want to verify that I can walk you through the

24 document.

25 A. You could do whatever you'd like. I've

12

1 never looked at this document. And like I said, it

2 didn't play any role in the damage analysis that I

3 did either at the trial or what I have presented in

4 my reports in connection with the potential retrial.

5 Q. All right. If you would flip to Page

6 39.

7 A. Okay. I have it.

8 Q. So this is statement 39. You'll see the

9 jury rejected that alleged misstatement as well?

10 A. I see that.

11 Q. And I take it your answer is the same,

12 you haven't reduced your damages in any way to take

13 into account that the jury rejected this particular

14 alleged misstatement?

15 A. It's really the same answer. This

16 document played -- this particular document played

17 no role in my analysis of my damage model or

18 calculations. The only adjustments I made are the

19 ones that I've stated.

20 Q. Okay. But it's not just this document.

21 Your model doesn't take into account the fact that

22 the jury rejected this alleged misstatement.

23 A. I can't speak to this alleged

24 misstatement because I don't know what this

25 particular misstatement means in the connection --

13

1 in connection with the case. I did modify my model

2 to have a different starting date because of what I

3 understood the jury found with respect to what the

4 jury considered to be the first false and misleading

5 statement so I did take the -- my understanding of

6 the jury verdict into account in that way.

7 I also made a slight adjustment for

8 the first three days of the class period based on

9 what -- I guess what I call the new class period

10 based on my understanding of the 7th Circuit

11 opinion. But other than that, I kept everything the

12 same.

13 Q. And if you would turn to Page 14 of the

14 document.

15 A. Okay. I have it.

16 Q. That is statement No. 14, and you'll see

17 that there are "yes" boxes checked or "yes" lines

18 checked. I'll represent to you that that's the

19 first alleged misstatement that the jury found.

20 So your testimony is you took this

21 particular misstatement into account by adjusting

22 the starting point for your model; is that fair?

23 A. I don't know if it's fair or not. I

24 don't want to comment on this particular document

25 because, as I said, I've never seen it, I didn't

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DAVID FELDMAN WORLDWIDE, INC.

5 (Pages 14 to 17)

14

1 review it. I've already told you what I did in

2 connection with my damage model in this part of the

3 proceeding as opposed to what I did at the time of

4 the original retrial.

5 And I guess I would also say, my

6 understanding at this point, the existence of the

7 fraud has been established by the jury verdict and

8 subsequent judicial ruling so it's no longer an

9 assumption.

10 Q. I agree with that. What's been

11 established are the 17 specific misstatements that

12 the jury found.

13 Would you agree with that?

14 A. You know, I've already said, I don't

15 have a specific understanding, without checking, of

16 exactly how many misstatements the jury found to be

17 false and misleading.

18 Q. But you understand that the jury

19 accepted certain misstatements and rejected others?

20 A. I guess on some general level I

21 understand that.

22 Q. All right.

23 A. And that -- again, that is really the

24 motivation for the change in the starting date for

25 purposes of my damage model.

15

1 Q. Would you agree that your role as an

2 expert in the retrial is to help the jury determine

3 whether the 17 misstatements caused any injury and

4 to help quantify those damages?

5 A. Well, I don't want to keep repeating

6 myself. I don't know whether 17 is the right

7 number, the wrong number. But I agree, my role in

8 the retrial, subject to the Court's rulings and what

9 the jury determines, is to analyze the artificial

10 inflation resulting from the fraud committed by

11 Household and its executives.

12 Q. Well, to be more precise, it's analyzing

13 the damages that you believe were caused by the --

14 however many number, whatever the number is, I'll

15 represent to you it's 17, it's trying to determine

16 the damages that were caused by those 17

17 misstatements, correct?

18 A. Actually, I prefer my own formulation in

19 my last answer. My analysis was to measure the

20 existence and magnitude of artificial inflation

21 under two different damage models, and that's what I

22 did.

23 Q. But the fraud that you're measuring

24 damages for has been fixed by the jury as being

25 comprised of those misstatements.

16

1 Would you agree with that?

2 A. Well, you keep using the word "damages."

3 I'm using the word "inflation" because I think there

4 is a difference.

5 But apart from that, my role, to

6 the extent that it's permitted by the Court, is to

7 do exactly what I said, to measure the existence of

8 artificial inflation under two different damage

9 models resulting from the fraud committed by

10 Household and its executives.

11 Q. Would you agree that any damages model

12 that you offer to the jury in the second trial has

13 to be based upon and consistent with the jury's

14 findings in the first trial that were not vacated on

15 appeal?

16 A. You keep using the words "damages." I

17 can start my answer every single time by talking

18 about inflation as opposed to damages so I'll do it

19 again.

20 But apart from that, it sounds like

21 you're asking for a legal opinion. I've already

22 described what my understanding of my role is and

23 I've already said it's subject to whatever judicial

24 rulings the Court makes about the relevance of my

25 analysis of inflation under my two different models

17

1 in connection with the fraud that's been established

2 against Household and its executives.

3 Q. I'll ask it this way: Did you attempt

4 to conform your models of inflation to the findings

5 that were found by the jury?

6 A. I would say yes in the way that I've

7 described.

8 Q. And you would agree that for your models

9 to be helpful to the jury in determining damages in

10 this case that was caused by the 17 misstatements,

11 you would have to be offering a model that is

12 predicated on the jury's actual findings?

13 A. You know, you've asked me that question

14 multiple times now in different ways and I will give

15 you the same answer every time. I've told you what

16 I've done, and whether that is consistent with the

17 Court's rulings will be determined by the Court.

18 Whether it's helpful to the jury, assuming it's

19 permitted by the Court, will be determined by the

20 jury. And I really don't have anything to add

21 beyond that.

22 Q. Okay. If you go to -- let's just take

23 one, let's go to statement 38 on Page 38.

24 MR. BURKHOLZ: Can you actually show him

25 the statement you're talking about?

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6 (Pages 18 to 21)

18

1 MR. FARINA: Sure. It's actually in the

2 document.

3 BY MR. FARINA:

4 Q. The way this works is you have the --

5 it's broken out in different sections. The section

6 we're in right now is just a list of the statements.

7 But if you go further in the document, you'll see

8 that the statements are actually laid out. So it's

9 towards the back. So 38 is on Page 26 of the second

10 part of the document.

11 A. Okay. I have it.

12 Q. Actually, it runs on two.

13 MR. BURKHOLZ: Is it 38 you're asking

14 him about?

15 MR. FARINA: Yes.

16 BY MR. FARINA:

17 Q. So you see the statement 38?

18 A. I do.

19 Q. So how did the misrepresentation that is

20 statement 38 cause inflation in Household's stock

21 according to your model?

22 A. I'm not sure how to answer that other

23 than what I've already said. My understanding is

24 that the jury found that Household and its

25 executives executed a massive fraud. The first

19

1 false and misleading statement in connection with

2 that fraud was on March 23, if I remember correctly,

3 2001, with the fraud fully revealed I think October

4 11, 2002.

5 The fraud involved fraudulent

6 statements in three areas and that -- where the

7 first false and misleading statement with pred- --

8 dealt with predatory lending. Other false and

9 misleading statements dealt with some combination of

10 the three areas of the fraud.

11 And based on that understanding,

12 which was originally an assumption, as you stated,

13 but later determined to be a fraud in those three

14 areas in the way that I said, I calculated by two

15 particular models of inflation.

16 Q. Did statement No. 38 cause inflation in

17 Household's stock? And I'm focusing particularly on

18 statement 38.

19 A. Well, as I sit here, I don't have an

20 opinion one way or the other, other than the subject

21 matter of statement 38, to the extent it involved

22 one of the three areas found to be fraudulent by the

23 jury, I would say did cause an inflation in

24 Household's stock, even if the nature of that fraud

25 was a failure to make corrective statements about

20

1 this subject or subjects at earlier points in time

2 in a fraudulent way as determined by the jury.

3 Q. If the jury had rejected statement

4 No. 38 as it did statements No. 39 and 40, that

5 wouldn't have changed the inflation generated by

6 your models, correct?

7 MR. BURKHOLZ: Objection to form.

8 BY THE WITNESS:

9 A. I'm not sure I would be able to give an

10 answer to that question. But in terms of my model,

11 I've already told you what I did and what it was

12 based on.

13 BY MR. FARINA:

14 Q. You didn't make any adjustment to take

15 into account that the jury rejected statements 39

16 and 40, correct?

17 MR. BURKHOLZ: Objection. Asked and

18 answered about five times.

19 BY THE WITNESS:

20 A. As I said, I didn't look at this

21 particular form at any point in time. This is the

22 first time I've seen it, to the best of my knowledge

23 today, and I've told you what I did.

24 BY MR. FARINA:

25 Q. Okay. So with respect to all of the

21

1 statements that were rejected by the jury that come

2 after the first misstatement found by the jury, the

3 fact that the jury rejected those misstatements did

4 not cause you to change in any way your opinion?

5 MR. BURKHOLZ: Objection. Asked and

6 answered.

7 BY THE WITNESS:

8 A. Well, I mentioned that I did make an

9 adjustment for the first three days based on my

10 understanding of the holding of the court of appeals

11 and because the jury found that Household and its

12 executives committed a massive fraud in the three

13 areas that I identified, which was originally

14 assumption and now is established by the jury in

15 subsequent judicial rulings, other than changing the

16 starting date and making the adjustment for the

17 three days, that's what I did.

18 BY MR. FARINA:

19 Q. All right. So the jury's -- if you

20 could take that document, open it up again to Page

21 35.

22 A. Okay.

23 Q. I'll try to run through this quickly,

24 but the jury's finding as to statement No. 35 didn't

25 impact your model in any way?

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7 (Pages 22 to 25)

22

1 A. It's really the same answers to all of

2 these different questions. I haven't looked at this

3 document before. It's the first time I've ever seen

4 it. I've already described what I did, what changes

5 I made and I can't be any more specific than that.

6 Q. That's fine. Same answer for statement

7 No. 34?

8 A. Same answer for any statement that you

9 ask me about.

10 Q. Okay.

11 A. Other than what I've already described.

12 Q. Professor Fischel, you are offering two

13 different damages or inflation models for the jury's

14 consideration in this case; is that fair?

15 A. Correct.

16 Q. And one of which I'll refer to, I think

17 you refer to it also, as a specific disclosure

18 model?

19 A. Correct.

20 Q. And one is a leakage model?

21 A. Correct.

22 Q. All right.

23 (Whereupon, Exhibit 2 marked.)

24 (Whereupon, the document was

25 tendered.)

23

1 BY MR. FARINA:

2 Q. I'll hand what you we've marked as

3 Exhibit No. 2.

4 A. Thank you.

5 Q. Exhibit No. 2 is Exhibit 25 to your

6 second supplemental report. Do you see that?

7 A. I do.

8 Q. And this document sets forth the

9 inflation that's calculated by your two models,

10 correct?

11 A. That's right.

12 Q. And if you go to the first page of the

13 chart, there's a column "Artificial Inflation" under

14 "Quantification Using Specific Disclosures."

15 Do you see that?

16 A. I do.

17 Q. And to the far right there's another

18 column, "Artificial Inflation," and that's under the

19 heading "Quantification Including Leakage," correct?

20 A. Correct.

21 Q. So those two columns set forth the

22 amount of inflation according to your two different

23 models, correct?

24 A. That's right.

25 Q. And there are also columns for true

24

1 value which is what your models tell you the true

2 value of Household's stock was during this period of

3 time?

4 A. Correct.

5 Q. Now, your two models offer very

6 different results as to the amount of inflation that

7 was allegedly present in Household's stock during

8 this period.

9 Would you agree with that?

10 A. I would for reasons that I've testified

11 about at the first trial.

12 Q. So by way of example, on the first page,

13 the inflation according to your leakage model is

14 $23.94 on every day on that first page apart from

15 the first three days; is that correct?

16 A. That's right.

17 Q. And under your other model, the amount

18 of inflation is about a third of that, it's 7.97 on

19 every day, other than the first three days of this

20 period?

21 A. Correct.

22 Q. So if you take a look, for example, at

23 let's pick April 25, 2001. According to one of your

24 models, Household stock had a fair value of $56.78?

25 A. Had a true value, that's right.

25

1 Q. And according to your other model,

2 Household's true value was $40.81 per share?

3 A. Correct.

4 Q. And the disparity between the outputs of

5 your two models continues all the way through up

6 until the last two days of your leakage period,

7 correct?

8 A. Correct.

9 Q. So, for example, if you take a look at

10 January 4, 2002, the artificial inflation under your

11 leakage model is $23.94?

12 A. January 1?

13 Q. January 4.

14 A. I'm sorry. Correct.

15 Q. Okay. And the inflation under your

16 other model is $3.66, correct?

17 A. Correct.

18 Q. So the inflation under your leakage

19 model is about 6-1/2 times greater than what your

20 other model says the inflation is?

21 A. On that date, correct.

22 Q. On that date. So if you take a look at,

23 let's just take another date, August 22, 2002.

24 A. Okay. I see it.

25 Q. What's the artificial inflation

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8 (Pages 26 to 29)

26

1 according to your specific disclosure model?

2 A. 32 cents.

3 Q. What's your artificial inflation

4 according to your leakage model?

5 A. $8.14.

6 Q. So that's more than 25 times greater

7 than what your other model is telling you the

8 inflation is?

9 A. I haven't done the arithmetic but it

10 looks approximately right.

11 Q. And as you walk through this exhibit,

12 you'll see that there are days when the inflation

13 goes up on one model but doesn't go up on the other

14 model.

15 A. That's possible.

16 Q. And there are days when the inflation

17 goes down on one model but not on the other model.

18 A. That's also possible.

19 Q. And there's only it looks like five days

20 out of 389 days where your two models actually

21 generate consistent results.

22 MR. BURKHOLZ: Objection. I don't even

23 know what you mean by "consistent results." It's a

24 vague question.

25 BY MR. FARINA:

27

1 Q. There are only five days out of 398 days

2 where your two models say that the inflation is the

3 same.

4 MR. BURKHOLZ: Same objection.

5 BY THE WITNESS:

6 A. You know, I haven't counted. I guess I

7 can if you ask me to, but the two models are

8 measuring inflation in different ways.

9 You know, again, for reasons that I

10 explained in the first trial and as found and

11 endorsed by the jury and my understanding affirmed

12 by the 7th Circuit and also by the new judge on

13 remand.

14 BY MR. FARINA:

15 Q. Both of your models are attempting to

16 calculate the amount of inflation in Household

17 stock, correct?

18 A. That's right. Under different

19 assumptions, again, as explained by me during the

20 first trial.

21 Q. Take a look, if you would, at 11/5/01.

22 A. Okay.

23 Q. Do you recall the significance of

24 11/5/01? That's the first specific disclosure that

25 you found. Do you recall that?

28

1 MR. BURKHOLZ: Object to the --

2 MR. FARINA: I might have misspoken.

3 11/15.

4 BY THE WITNESS:

5 A. I see. 11/15/01 as I recall is the

6 first corrected disclosure.

7 BY MR. FARINA:

8 Q. Got it. So on 11/15/01 there was

9 information that was disclosed to the markets that,

10 according to you, corrected some of the prior

11 misinformation that the markets had.

12 A. Yes. But I think at this point I think

13 that was also as found by the jury.

14 Q. Is it your understanding that the jury

15 made specific findings about days on which there was

16 a corrective disclosure?

17 A. I think the jury, by accepting my

18 testimony, either explicitly or implicitly made that

19 finding.

20 Q. You understand that the findings as to

21 causation and damages have been vacated and are

22 going to be retried which is why we're here.

23 A. You know, I'll leave the legal

24 characterization to others. I understand there is a

25 retrial on certain issues.

29

1 Q. Okay. So on 11/15/01, because of the

2 corrective disclosure, the inflation under your

3 specific disclosure model goes down by $1.86; is

4 that correct?

5 A. Correct.

6 Q. Now, what happens to the inflation under

7 your other model?

8 A. It stays the same.

9 Q. So there's a corrective disclosure made

10 to the markets and under one of your models the

11 inflation goes down and under your other model it

12 doesn't budge.

13 A. That's right.

14 Q. So your two models are telling you two

15 different things about what's happening to Household

16 on that day.

17 A. They're measuring different things using

18 different methodologies for reasons based on the

19 factual circumstances in the case as now found to be

20 those circumstances constituting a massive fraud by

21 Household and its executives. And I already

22 explained at the first trial the nature of the

23 different methodologies employed in the two models

24 and which one I thought was more reliable.

25 And as I said, I'm aware there's

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1 those indices both declined during your leakage

2 period. Your point is that Household declined more,

3 correct?

4 A. I think that is something I stated in my

5 reports. I think that's correct.

6 Q. All right.

7 A. And possibly at the trial as well.

8 Q. So any time the performance of

9 Household's stock on any day during your leakage

10 period was different than the predicted return, you

11 attributed that difference to the leakage of

12 fraud-related information, correct?

13 A. It is true that the -- in the leakage

14 period, the actual return on every day is replaced

15 by a predicted return produced by a particular

16 regression, and that difference is an input into the

17 calculation of artificial inflation under the

18 leakage model, that's correct.

19 Q. Okay. So any time there is a departure

20 from the predicted return, that is attributed by

21 your model to artificial inflation?

22 A. Well, during a period of leakage --

23 Q. During a period of leakage.

24 A. When there is no leakage, actual returns

25 are used in the calculation. And I don't want to

79

1 keep adding this caveat to what you keep saying in

2 your question, but it is true that I applied a

3 leakage model and I concluded that it was

4 appropriate to apply under the facts and

5 circumstances of this case, but I don't want to

6 claim credit for the existence of the model, which I

7 think was developed in an article by Cornell and

8 Morgan.

9 Q. Professor Fischel, just mechanically,

10 during your 228 trading day leakage period,

11 mechanically the way your model works is that any

12 residual on any day, that residual is attributed to

13 the leakage of fraud-related information. That's

14 just how your model works, correct?

15 MR. BURKHOLZ: Objection. Compound and

16 asked and answered.

17 BY THE WITNESS:

18 A. Well, I'm just going to repeat what I

19 just said, that it is true that during the leakage

20 period, as part of the calculation of the

21 quantification of leakage, actual returns are

22 replaced by predicted returns. And the difference

23 between actual returns and predicted returns

24 residuals are input into the calculation of the

25 quantification of leakage.

80

1 But I also think it's important

2 when you keep referring to my model, it is my

3 quantification of leakage but the model originated

4 with -- in an article by Cornell and Morgan which I

5 concluded was appropriate to use under the facts and

6 circumstances of this case.

7 BY MR. FARINA:

8 Q. Your model, the way it works, rejects

9 the possibility that any departure from the

10 predicted return could have been caused by something

11 other than the leakage of fraud-related information;

12 isn't that true?

13 A. I'm not going to keep repeating the

14 caveat when you keep referring to the term "my

15 model," but that's my quantification of leakage. If

16 you use that language, then we won't have to have

17 this modification of your question every time you

18 ask it.

19 But the way that the leakage model

20 works is exactly as you describe, you know, with the

21 result that positive divergences, as well as

22 negative divergences between actual and predicted

23 returns are all factored into the quantification of

24 leakage.

25 Q. The fraud inflation pursuant to your

81

1 quantification is unrelated in any way to the actual

2 misstatements found by the jury; isn't that correct?

3 MR. BURKHOLZ: Objection. Vague.

4 BY THE WITNESS:

5 A. I'm sorry. I didn't understand that

6 question.

7 BY MR. FARINA:

8 Q. Sure. The model that you're offering to

9 calculate damages, the leakage model, calculates

10 inflation by reference to the residuals during every

11 day in your leakage period, that's what we've just

12 been discussing.

13 So what doesn't factor into that

14 analysis are the jury's findings of particular

15 misstatements on particular days, correct?

16 A. I'm not sure I understood what you mean

17 by it doesn't factor into the analysis because the

18 quantification of leakage is a quantification of the

19 leakage of information following the fraudulent

20 disclosures by Household and its executives. So to

21 say it doesn't relate I think really does not

22 capture the reality of the exercise or why the

23 quantification of leakage is being performed.

24 Q. Well, when we started this deposition,

25 you were not even aware of the 17 misstatements that

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1 were actually found by the jury, and you testified

2 that you didn't take into account the statements

3 that were accepted or rejected in your leakage

4 period; isn't that true?

5 MR. BURKHOLZ: Objection. Misstates the

6 testimony. You asked him about the verdict form,

7 not about the jury verdict.

8 BY THE WITNESS:

9 A. I think you've mischaracterized my

10 testimony. I think I described what I did in

11 response to the jury verdict and my understanding of

12 that verdict and subsequent judicial rulings.

13 My understanding again, as I've

14 stated without any intention to give a legal

15 opinion, is that because the -- there was a

16 fraudulent disclosure which covered all three

17 aspects of the fraud three days after the first

18 fraudulent disclosure by Household, there wasn't any

19 need for any further allocation among the three

20 elements of the fraud and therefore I didn't perform

21 any separate allocation other than for the first

22 three days, as I described. But beyond that, as I

23 testified, I don't have any particular familiarity

24 with the verdict form which I never looked at before

25 today.

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1 BY MR. FARINA:

2 Q. So just to be clear, take a look at

3 Exhibit 2. That includes your artificial inflation

4 pursuant to your quantification including leakage.

5 A. Okay. I see that.

6 Q. All right. Your disclosure period

7 starts on 11/15/01, correct?

8 A. My disclosure period?

9 Q. Your leakage period.

10 A. Well, the disclosure period and the

11 leakage period are not the same thing, so which one

12 are you asking me about?

13 Q. Don't they both start on 11/15/01 and

14 continue through 10/11/02?

15 A. No. No, they don't. The first false

16 and misleading disclosure, my understanding, is

17 found by the jury was in March of -- March 23 of

18 2001. And the first corrective disclosure is on

19 November 15, 2001. Those are not the same thing.

20 Q. I was referring to the corrective

21 disclosure period under your specific disclosure

22 model. Both your --

23 A. Excuse me. You may have been referring

24 to it but you didn't say it.

25 Q. That's fair, fair enough. The different

84

1 experts refer to these periods differently.

2 Your leakage period starts on

3 11/15/01, correct?

4 A. That's correct.

5 Q. That is also your specific disclosure

6 period, correct? It starts on 11/15/01?

7 A. Well, I wouldn't put it exactly that

8 way. I would say all of the corrective disclosures

9 that are used in the specific disclosure model

10 occurred during the leakage period beginning on

11 November 15, 2001, that's correct.

12 Q. The artificial inflation that the model

13 calculates during the leakage period, 11/15/01

14 through 10/11/02 is no different now than it was

15 when you first presented the model to the jury in

16 the first trial, correct?

17 MR. BURKHOLZ: Objection. Asked and

18 answered. He already explained it, the modification

19 he made.

20 MR. FARINA: There is no modification in

21 that period. That's the point.

22 BY THE WITNESS:

23 A. There's no modification to the testimony

24 about what I consider the first corrective

25 disclosure to be, so in that sense I agree with your

85

1 question.

2 BY MR. FARINA:

3 Q. All right.

4 MR. BURKHOLZ: Is this a good time to

5 break? We've been going just over an hour.

6 MR. FARINA: That's fine.

7 THE VIDEOGRAPHER: Off the record. The

8 time is now 11:12 a.m.

9 (There was an intermission

10 from 11:12 a.m. to 11:27 a.m.)

11 THE VIDEOGRAPHER: Going on the record.

12 This marks the beginning of Media No. 3. The time

13 is now 11:27 a.m.

14 BY MR. FARINA:

15 Q. Professor Fischel, let me hand you what

16 we've marked as Exhibit 5.

17 (Whereupon, Exhibit 5 marked.)

18 (Whereupon, the document was

19 tendered.)

20 BY MR. FARINA:

21 Q. Exhibit 5 is your Exhibit 25, and what

22 we've done is we've highlighted the days on which

23 the jury found a misrepresentation. That's the

24 difference between Exhibit 5 and Exhibit 2.

25 A. Okay.

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86

1 Q. Take a look, if you would, at the period

2 February 6, 2002 through March 8, 2002.

3 A. February 6, 2002?

4 Q. Yes. So on February 6, 2002, the

5 inflation according to your leakage model was

6 $12.47?

7 A. Correct.

8 Q. All right. Now, if you look at 3/8/02,

9 your inflation had gone from $12 to almost $24,

10 correct?

11 A. Correct.

12 Q. So your inflation goes up by 11.47,

13 nearly doubling; is that right?

14 A. Correct.

15 Q. Was there any misrepresentation found by

16 the jury during this period when your fraud

17 inflation almost doubles?

18 A. Well, I can't really speak what was

19 found by the jury. Just again, I just accept your

20 representation about this highlighting, but as I

21 said, I can't speak to what was found by the jury

22 other than the jury found the existence of leakage

23 and agreed with my quantification of leakage. So in

24 that sense, my understanding of what the jury

25 concluded is consistent with the methodology that I

87

1 employed and the conclusions that I reached.

2 Q. You understand that that portion of the

3 jury's findings have been vacated by the 7th

4 Circuit?

5 A. Well, you just asked me what I -- about

6 what the jury found. So if you want to ask me

7 something else, obviously feel free to do it. But

8 if you're asking me what the jury found, that's not

9 a function of what the court of appeals subsequently

10 did.

11 Q. Your model pumps nearly $12 of

12 artificial inflation into the price of Household

13 stock during a period when there was no

14 misrepresentation found by the jury; isn't that

15 true?

16 MR. BURKHOLZ: Objection. The question

17 is vague, what you mean by "pumps."

18 BY THE WITNESS:

19 A. Well, again, it's a loaded question with

20 rhetoric which I don't want to adopt by

21 acquiescence. But I am not sure now because you

22 keep asking me what the jury found and what was

23 vacated by the jury. Which are you asking me about?

24 BY MR. FARINA:

25 Q. There are 17 misrepresentations that

88

1 were found by the jury and 23 that were rejected.

2 We've highlighted the 17 -- the days on which there

3 was one of the 17 misrepresentations found by the

4 jury. And there is no misrepresentation found by

5 the jury during the period when your model says that

6 the artificial inflation in Household stock went

7 from $12.47 to $23.94; isn't that correct?

8 A. It's a highly misleading question

9 because first of all, it ignores the fact that the

10 jury also found the existence of leakage, since you

11 keep asking me what the jury found, and because of

12 the jury finding of leakage, its findings are not

13 limited to particular alleged false and misleading

14 statements.

15 And secondly, it is my

16 quantification of leakage but it's based on a model

17 developed by Cornell and Morgan which I concluded

18 was appropriate to use under the facts and

19 circumstances of this case.

20 Q. The output of the model as reflected in

21 this exhibit is that the inflation nearly doubles

22 during a period when there was no misrepresentation

23 found by the jury; isn't that true?

24 A. I think I just answered that question.

25 There's no highlighted yellow date, but the question

89

1 as stated is highly misleading because it does not

2 take into account that the jury also found the

3 existence of leakage during the particular period

4 that you are asking me about in your question.

5 Q. According to the model, the amount of

6 inflation in Household's shares is not going down

7 because of leakage. Somehow it manages to go up by

8 $11.47 during a period where there was no

9 misrepresentation; isn't that true?

10 MR. BURKHOLZ: Objection. Asked and

11 answered.

12 Go ahead.

13 BY THE WITNESS:

14 A. I can't really add to what I said. I

15 used the standard methodology in the way that I've

16 described and have produced the results that are

17 produced. The jury, my understanding is, agreed

18 with my quantification of inflation using the

19 leakage model. And I think it's a fundamental

20 misunderstanding of the leakage model to suggest

21 that changes in the measure of the quantification of

22 inflation can only occur when there are specific

23 false and misleading statements.

24 The whole concept of leakage is

25 premised on the idea that inflation can vary, it can

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182

1 the relationship to the jury's findings about false

2 and misleading disclosures.

3 BY MR. FARINA:

4 Q. If your quantification including leakage

5 was inconsistent with the jury's specific findings

6 as to misrepresentations, would you agree that is a

7 problem?

8 A. You know, again, I'm not sure how to

9 answer that question because I don't understand it.

10 But whether or not there is a problem, to use your

11 phrase, I guess will be determined by the court and

12 the jury when I present my testimony, if I'm asked

13 to give it, about one or both of my quantifications.

14 Q. But if your quantification including

15 leakage is inconsistent with the jury's specific

16 findings as to the misrepresentations in this case,

17 would you personally have -- believe that to be a

18 problem?

19 MR. BURKHOLZ: Objection. Asked and

20 answered.

21 BY THE WITNESS:

22 A. I don't understand that question as to

23 what inconsistency is that you're referring to. I

24 don't know there's any inconsistency. But

25 ultimately, the judge of that will be the court and

183

1 the jury.

2 BY MR. FARINA:

3 Q. So I don't know that we're going to

4 agree as to whether there is an inconsistency so

5 that's not what I'm asking you.

6 But you would agree if there is an

7 inconsistency, that is a problem because a damages

8 and causation model needs to match up with the

9 actual liability findings, correct?

10 MR. BURKHOLZ: Objection. It's vague

11 and it's been asked and answered twice now.

12 BY THE WITNESS:

13 A. I absolutely agree there has to be a

14 relationship between a quantification of inflation

15 and the relevant facts and circumstances in the

16 case. I think that's correct.

17 BY MR. FARINA:

18 Q. That's not what I asked though. I asked

19 whether there has to be a relationship between the

20 quantification including leakage and the jury's

21 specific findings that are reflected in that verdict

22 form that we looked at. That's my question.

23 MR. BURKHOLZ: Same objection. Asked

24 and answered three times now.

25 BY THE WITNESS:

184

1 A. It's the same answer. I don't think

2 there's any inconsistency. I've already described I

3 don't think there's any inconsistency. I've already

4 described the basis of the standard methodology that

5 I used under both my quantification based on leakage

6 and my quantification based on specific disclosures

7 if my conclusion on those issues is ultimately

8 adopted as a function of what the court and the jury

9 ultimately decide, assuming that I'm asked to give

10 that testimony.

11 BY MR. FARINA:

12 Q. Let's change gears.

13 I'm going to give you a

14 hypothetical and I'm going to ask you a couple

15 questions.

16 So a study is published in a

17 medical journal and the study calls into question

18 the safety or efficacy of a class of drugs. Okay?

19 And there are some manufacturers, some

20 pharmaceutical companies that make those class of

21 drugs and some that don't.

22 Is that firm-specific information,

23 the publication of this study questioning the

24 efficacy or safety of a particular class of drugs?

25 A. I want to analyze all the facts and

185

1 circumstances of your hypothetical, but to the

2 extent it's a regulatory action affecting an

3 industry, I would say it's a regulatory action

4 affecting an industry as opposed to affecting a

5 single specific firm.

6 Q. Well, that wasn't exactly my question.

7 Let me try again.

8 So let's say that there is a study

9 published that says that cox-2 drugs give rise to

10 coronary hazards. And there are 12 pharmaceutical

11 companies that are in some pharmaceutical index and

12 only four of them make cox-2 drugs. And the study's

13 bad. So it has an impact on the four pharmaceutical

14 companies that sell cox-2 drugs, but it has an

15 opposite effect on the other companies in that

16 industry that don't sell cox-2 drugs because if

17 patients are not going to be using cox-2 drugs,

18 maybe they'll use alternatives that they

19 manufacture.

20 So it's information that

21 disproportionately impacts a small number of

22 companies within an industry but doesn't impact the

23 entire industry the same way.

24 Is that firm-specific or not?

25 A. The way you described it, if I

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