The Editors recently sat down with Chiao Chen, Pomerantz’s Director of Financial Analysis, for a “behind the scenes” look at damages analysis, a critical aspect of securities litigation.
Pomerantz Monitor: Please describe the path that led you to your role with Pomerantz.
Chiao Chen: Having worked in a variety of roles within investment management firms, I was looking to transition to a new environment in which I could utilize my financial experience and expand my expertise. Pomerantz, a leading global securities ligation law firm, was seeking a hands-on financial leader to oversee their damages team. This seemed a natural fit for my abilities and a path to advance my professional development.
PM: What is financial analysis in the context of securities fraud?
CC: Financial analysis in the context of securities fraud is an analysis of data related to securities transactions where fraud is suspected as a cause for loss. Securities fraud usually involves corporations misrepresenting information that investors rely on to make decisions. When companies falsely tout their financial prospects or fail to disclose adverse information to the market, the value of their securities is artificially inflated. When the truth surfaces, the value of those securities plunges and investors suffer. Most, but not all, cases at Pomerantz are litigated on behalf of an entire class of similarly damaged investors. For a class to be certified, attorneys and their clients must demonstrate, among other things, that the class is so numerous that joinder of all members is impracticable, that there are questions of law or fact common to the class, and that the claims or defenses of the Lead Plaintiffs are typical of the claims or defenses of the class. Financial analysis provides a framework to generate empirical evidence per the information available for each individual case.
PM: You are part of Pomerantz’s Case Origination Team. What is your role there?
CC: The attorneys are constantly looking for red flags in the market. If there’s a sudden drop in a stock price on a high volume of trading, they will investigate potential fraud. My team and I work closely with the attorneys. When they identify a case of potential interest, we immediately search our clients’ portfolios to see whether they suffered losses and calculate their potential damages. In the meantime, the attorneys are investigating potential claims in the case. Our proprietary damages software allows us to instantly calculate damages for various scenarios that the attorneys propose.
PM: Describe the role your team plays when Pomerantz competes with other firms to be named Lead Counsel in securities class actions.
CC: Once a securities lawsuit is filed and published, the clock starts ticking. Investors have 60 days within which to move the court to be appointed Lead Plaintiff. All law firms must make their motions on behalf of their clients public. My team reviews all the transactions from competing firms’ submissions and loss summaries. We manually evaluate competing firms’ data to perform an apples-to-apples comparison. We review the transactions to identify a competitive angle for our attorneys to challenge, such as incorrect calculations and/or anything that may suggest the competing firms’ client’s data may be atypical.
PM: It seems like the intersection of mathematics and detective work.
CC: Yes, mathematics and detective work are an apt way to describe this part of the process. Within certain standardized calculations, my team reviews differences and/or errors to give our attorneys an advantage to help challenge competing firms’ clients. We look for miscalculations, transaction prices not within the high/low range for the date, transactions that are outside of the class period and transactions that may suggest an investor was betting against the company.
PM: Your team monitors over $7 trillion in assets to identify clients’ exposure to securities fraud. How do you accomplish that quickly at such a scale?
CC: We monitor our client’s exposure with our proprietary software, JADA2, which uses highly sophisticated technology that has been tailored to our needs. JADA2 can handle a robust data set, based on the parameters we set, so that we may access and analyze our client’s data quickly and efficiently.
PM: With your “behind the scenes” experience, what advice would you give to institutional investors to help them protect their assets from securities fraud?
CC: The best practice for institutional investors is to ensure that a comprehensive, unbiased due diligence is completed prior to investing. As Ronald Reagan said when signing the 1987 Intermediate-Range Nuclear Forces Treaty with Mikhail Gorbachev, “Trust, but verify.”
