EXHIBIT 1 

Case: 1:02-cv-05893 Document #: 2186-1 Filed: 05/13/16 Page 1 of 5 PageID #:85627
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· · · · ·IN THE UNITED STATES DISTRICT COURT

· · · · FOR THE NORTHERN DISTRICT OF ILLINOIS

· · · · · · · · · No. 1:02-CV-05893

- - - - - - - - - - - - - - - - - - - - - -

LAWRENCE E. JAFFE PENSION PLAN, on behalf

of itself and all others similarly situated,

· · · · · · · · ·Plaintiffs,

·vs.

HOUSEHOLD INTERNATIONAL, INC., et al.,

· · · · · · · · · Defendants.

- - - - - - - - - - - - - - - - - - - - - -

· · · · · · · VIDEOTAPED DEPOSITION OF

· · · · · · · FRANK ALLEN FERRELL, III

· · · ·Saturday, February 27, 2016 9:02 a.m.

· · · · · · · · · Skadden Arps LLP

· · · ·500 Boylston Street, Boston, MA 02116

Reported by:

Janet Sambataro, RMR, CRR, CLR

Job No. 10022056

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· · · · · · · · · · February 27, 2016

· · · · · · · · · · 9:02 a.m.

· · ·Videotaped deposition of FRANK ALLEN

FERRELL, III, held at the offices of Skadden Arps

LLP, 500 Boylston Street, Boston, Massachusetts,

pursuant to Agreement before Janet Sambataro, a

Registered Merit Reporter, Certified Realtime

Reporter, Certified LiveNote Reporter, and a

Notary Public within and for the Commonwealth of

Massachusetts.

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APPEARANCES:

ROBBINS, GELLER, RUDMAN & DOWD LLP

(By Luke O. Brooks, Esquire)

Post Montgomery Center

One Montgomery Street

San Francisco, California 94104

415.288.4534

lukeb@rgrdlaw.com

Counsel for the Plaintiffs

- and -

ROBBINS, GELLER, RUDMAN & DOWD LLP

(By Michael J. Dowd, Esquire)

655 W. Broadway

San Diego, California 92101

619.231.1058

miked@rgrdlaw.com

Counsel for the Plaintiffs

- Continued -

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APPEARANCES:· (Continued)

SKADDEN ARPS SLATE MEAGHER & FLOM, LLP

(By Patrick Fitzgerald, Esquire, and

Andrew J. Fuchs, Esquire)

155 N. Wacker Drive

Chicago, Illinois 60606

312.407.0700

patrick.fitzgerald@skadden.com

andrew.fuchs@skadden.com

Counsel for the Defendant, Household

International, Inc.

- and -

WILLIAMS & CONNOLLY

(By Steven M. Farina, Esquire, and

Leslie Cooper Mahaffey, Esquire)

725 Twelfth Street, N.W.

Washington, D.C. 20005

202.434.5526

sfarina@wc.com

lmahaffey@wc.com

Counsel for the Defendant, Household International,

Inc.

Case: 1:02-cv-05893 Document #: 2186-1 Filed: 05/13/16 Page 2 of 5 PageID #:85628
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March 17, 1981.· Yeah.· So assuming that's the

class.

· · · · · MR. FITZGERALD:· Objection to form.· Go

ahead.

· · ·A.· ·So assuming that's the class period,

then I agree it's -- it's about four years.

· · · · · MR. FITZGERALD:· I don't want to

interrupt you, but when you get to a natural

break point...

· · · · · MR. BROOKS:· Okay.

· · ·Q.· ·And you agree that this article cites

the WPPSS case as a case where it may be

necessary to use the comparable index approach.

Right?

· · ·A.· ·It does say that.· But you're

leaving -- it's misleading to leave it at that,

because in Footnote 16 on Page 888, Cornell and

Morgan quite rightly, in my view, have a

qualifier where they say -- and I'll read from

the article, "Our primary concern is with

conceptual and legal issues rather than with

financial and statistical ones."

· · ·So I don't read this article to be

advocating that this -- to be addressing the

statistical issues inherent in using an event

Page 214

window so long.

· · ·And I would also note Footnote 41 and 42 and

47, where, you know, they're saying -- and I'm

going to paraphrase -- that this index approach

assumes that the parties agree on the proper

model --

· · · · · · ·(Phone interruption.)

· · ·A.· ·-- that this index approach is

appropriate where the experts agree on the model,

which is clearly not the case here.· Anyway...

· · ·Q.· ·Any other caveats?

· · ·A.· ·Yeah.· So Footnote 47, they also note

that -- and I'll just read from Footnote 47 --

"Over longer periods of time, though

misspecification errors accumulate and become

more important, thus proper specification of the

model is more important when using the comparable

index approach than when using the event study

approach."

· · ·So they caveat -- they have lots of -- they

have a very important qualifications [sic] on

their discussion.

· · ·Q.· ·You agree that Fischel did not use the

entire class period for his observation window.

Right?

Page 215

· · ·A.· ·I agree.

· · ·Q.· ·So his observation window is inside of

the limiting case that's discussed on Page 906.

Right?

· · · · · MR. FITZGERALD:· Objection to form.

· · ·A.· ·If you're asking me is four years

longer than 228 days, I agree with that.· I don't

agree that this is an appropriate -- citing to

this article is an appropriate basis for that,

given what I just said about the qualification --

you know, the -- that language that I just

pointed to.

· · · · · MR. BROOKS:· Okay.

· · · · · THE VIDEOGRAPHER:· Okay.· The time is

2:18.· We're off the record.

· · · · · · ·(A recess was taken.)

· · · · · · ·(Article entitled "The Loss

· ·Causation Requirement for Rule 10b-5 Causes

· ·of Action:· The Implications of Dura

· ·Pharmaceuticals, Inc. v. Broudo marked

· ·Exhibit 8.)

· · · · · THE VIDEOGRAPHER:· Okay.· We're back on

the record.· The time is 2:35.

BY MR. BROOKS:

· · ·Q.· ·You have Exhibit 8 in front of you.

Page 216

· · ·A.· ·I do.

· · ·Q.· ·And what is Exhibit 8?

· · ·A.· ·An article that I cowrote in "The

Business Lawyer."

· · ·Q.· ·This is the article that you referred

to earlier that the Seventh Circuit cited to.· Is

that right?

· · ·A.· ·Yes.

· · ·Q.· ·And it's titled "The Loss Causation

Requirement for Rule 10b-5 Causes of Action:· The

Implications of Dura Pharmaceuticals, Inc. vs.

Broudo."· Right?

· · ·A.· ·Yes.

· · ·Q.· ·Turn to Page 167.

· · · · · · · (Witness complies.)

· · ·Q.· ·There's a section there -- well, before

we go there, sorry, what was the purpose of the

article, generally?

· · ·A.· ·You know, it was really to talk about

Dura Pharmaceuticals in the context of loss

causation.· So I think this article was 2007, if

I remember, and I think Dura came out in '05.

· · ·Q.· ·Do you still stand by the article?

· · ·A.· ·Yes.

· · ·Q.· ·Is there anything you'd change in the

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article, given the ensuing years?

· · ·A.· ·No.

· · ·Q.· ·So Page 167, there's a section on

proper choice of an industry index.· Right?

· · ·A.· ·Yes.

· · ·Q.· ·And you note that it's important in

selecting the index to find -- to pay attention

to which firms are truly comparable.· Right?

· · ·A.· ·Yes.

· · ·Q.· ·Okay.· Why is that important?

· · ·A.· ·Well, because if -- because what's

going to be in your residual or your abnormal

return will be a function of what you're

controlling for.

· · ·And so, you know, if you don't have a

comparable industry index, or the less precise

your industry index is, the more it's going to be

captured by your residual.

· · ·Q.· ·Okay.· And you wrote --

· · ·A.· ·Just to be clear, when I say

"residual," I mean abnormal return estimate.

· · ·Q.· ·Okay.· And what should be comparable

are the lines of business between the index and

the company that you're analyzing.· Right?

· · ·A.· ·Yes, and that's how I phrased it here.

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· · ·Q.· ·And you wrote in this paragraph that

the information source for the selection of firms

to be used as industry comparables can include

the firm's own financial filings and (10-K and

10-Q), equity analyst reports, and the

constituents of widely used industry indexes such

as the Dow Jones, Internet Index or the S&P

Telecom Index.· Do you see that?

· · ·A.· ·I do.

· · ·Q.· ·And that's still true today.· Right?

· · ·A.· ·Yes.

· · ·Q.· ·So the first choice here is to collect

comparables from the firm's own financial

filings.· Right?

· · · · · MR. FITZGERALD:· Objection to form.

· · ·A.· ·Yes.· But I want to be clear on my

answer.· You said first.· Yes, it's the first

that's mentioned, but we don't have a ranking

of -- of one is better than the other.· These are

examples of how one might construct an industry

comparable.

· · ·Q.· ·So Professor Fischel used the S&P

financial -- financials index as his industry

comparable.· Right?

· · ·A.· ·Yes.

Page 219

· · ·Q.· ·And that's something you've criticized

him for?

· · ·A.· ·No.· I use -- well, just to be clear, I

used the S&P 500 Financials Index as well.

· · ·Q.· ·So you're not criticizing

Professor Fischel for choosing the S&P 500

index -- withdrawn.

· · ·You're not criticizing Professor Fischel

for using the S&P financials index as the

comparable index in his regression?

· · · · · MR. FITZGERALD:· Objection to form.

· · ·A.· ·Well, I'm not criticizing him in the

sense that we both use it.· I do criticize him

for using that model -- excuse me, for using that

model and failing to recognize that model will

necessarily have in the residuals calculated from

that model information, non-fraud information for

lines of business of Household that affect

similarly situated firms.

· · ·Q.· ·Just so we're clear, Professor Fischel

was correct to use the S&P 500 -- withdrawn.

· · ·Professor Fischel was correct to use the S&P

financials as a comparable peer index?· That's

your testimony?

· · · · · MR. FITZGERALD:· Objection to form.

Page 220

· · ·A.· ·He's correct to use it in the sense

that I use it too.· He's incorrect -- but I

think -- so the problem with his model is not

using the S&P 500 financials.· I use that too.

It's that his inferences from that model are

incorrect, and there's a better model which

includes another index.

· · ·Q.· ·And that model -- withdrawn.

· · ·That index is the CSFB index that you cite

in your report.· Is that right?

· · ·A.· ·Correct.

· · ·Q.· ·You understand that Household competed

with banks.· Right?

· · · · · MR. FITZGERALD:· Objection to form.

· · ·A.· ·I mean, at some general level, that

might be true.· At a more specific level, it's a

consumer finance company.

· · ·Q.· ·Do you understand that they competed

with thrifts?

· · ·A.· ·You know, at that -- you know, you

could put it in those general level, that at some

level that might be true.· But for the time that

we're talking about, the fact that it's a

consumer finance company and that has subprime

and nonprime exposure is -- is very important.

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· · · · · · ·(Excerpt from Household

· ·International, Inc. Form 10-K for year ending

· ·December 31, 2001 marked Exhibit 9.)

· · · · · MR. FITZGERALD:· This is number?

· · · · · MR. BROOKS:· Number 9.

· · · · · MR. FITZGERALD:· Thanks.

BY MR. BROOKS:

· · ·Q.· ·I've handed you Exhibit 9, which is an

excerpt from Household's Form 10-K for the fiscal

year ended December 31, 2001.· Do you see that?

· · ·A.· ·I do.

· · ·Q.· ·Okay.· Turn to the second page of the

exhibit, which says Page 9 of 20 at the top.

· · ·A.· ·I'm there.

· · ·Q.· ·Okay.· Do you see there's a heading

"Competition"?

· · ·A.· ·I do.

· · ·Q.· ·Read that to yourself, if you would.

· · · · · · · (Witness complies.)

· · ·A.· ·I'm finished.

· · ·Q.· ·Okay.· So Household told the market

that the consumer finance services industry in

which it operates is highly fragmented and

intensely competitive.· Right?

· · ·A.· ·Yes.

Page 222

· · ·Q.· ·And continued, "We generally compete

with banks, thrifts, insurance companies, credit

unions, mortgage lenders and brokers, finance

companies, securities brokers and dealers, and

other domestic and foreign financial institution

in the United States, Canada and the United

Kingdom."· Right?

· · ·A.· ·That's what it says.

· · ·Q.· ·Okay.· So these types of companies that

Household is telling the market it competes with

are the same types of companies that are in the

S&P financials index.· Right?

· · ·A.· ·I believe that's accurate.

· · ·Q.· ·And you don't disagree with this

statement about who Household competes with.

Right?

· · ·A.· ·Well, at a general level, I don't

disagree with that.

· · ·Q.· ·I mean, they're telling the market this

is who we compete with.· Correct?

· · · · · MR. FITZGERALD:· Objection to form.

· · ·A.· ·The document says we generally compete

with these institutions.· That's what the

document says.

· · ·Q.· ·And you're not saying that this

Page 223

document is false in any way?

· · ·A.· ·No.

· · ·Q.· ·Is it false by omission?

· · · · · MR. FITZGERALD:· Objection to form.

· · ·A.· ·I'm not saying this document is false

in any sense.· That's -- no.

· · ·Q.· ·Do you think they should have offered a

more specific group to tell investors to they

were competing with?

· · · · · MR. FITZGERALD:· Objection to scope and

form.

· · ·A.· ·Well, it's outside my scope.· I would

assume the answer to that would depend on SEC

regulations in terms of what needs to be

disclosed and discussed in the 10-K.

· · ·Q.· ·Well, in order to not mislead

investors, should they have identified subprime

consumer finance companies here?

· · · · · MR. FITZGERALD:· Objection to scope

again.

· · ·A.· ·No.· I'm not -- I'm not provide

something an opinion, nor does my choice of

industry index lead to any conclusions about

whether a particular document or the 10-Ks is

misleading or not.· You know, I know, generally

Page 224

speaking, there's regulations about the 10-K so I

would assume one would look to those in

understanding the 10-K.· But I'm certainly not

providing the opinion that this is a

misrepresentation.

· · ·Q.· ·Is an appropriate source from which to

choose an index.· Right?· Or a comparables?

· · ·A.· ·You can certainly use -- one potential

choice is the firm's own financial filings.· And,

as I said, we both use S&P 500 financials.

· · ·Q.· ·And the goal, reading back from Exhibit

eight, is to find firms that are truly comparable

in terms of their line of business.· That's

right.· Isn't it?· Is?

· · ·A.· ·Correct.

· · ·Q.· ·Okay.· And these are the firms that

Household is saying are truly comparable in terms

of line of business.· Aren't they?

· · · · · MR. FITZGERALD:· Objection to form.

· · ·A.· ·You're mischaracterizing the document.

· · ·Q.· ·Which one?

· · ·A.· ·The Exhibit 8.

· · ·Q.· ·In what way?

· · ·A.· ·So you changed the wording.· The

wording here is "we generally compete," I'm

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