Former SEC Chief Economist Lehn Opines on Materiality of SEC Allegations and Defendants’ Intent

Excerpts from “Expert Report of Kenneth M. Lehn”:

“8. I have been asked by counsel for the Defendants to form an opinion as to whether the alleged misrepresentations and omissions regarding the DSPP and the Bank’s capital ratios materially affected Indymac’s stock price. I have also been asked to determine whether the Defendant’s trading in Indymac stock provides a reliable basis to conclude that they intended to conceal material information from Indymac’s shareholders.”

“9. Based on this review and analysis, as well as my background and expertise, I have reached the following principal conclusions:

– The economic evidence does not provide a reliable basis to conclude that the alleged false and misleading statements and omissions materially affected Indymac’s stock price.

– Defendants’ trading behavior and public statements do not provide a reliable basis to conclude that the Defendants intended to conceal material information from Indymac’s shareholders.”

“11….I find that there is no reliable basis to conclude that the alleged misstatements and omissions related to Indymac’s DSPP materially affected Indymac’s stock price.”

“19. As a result of these adverse changes in economic conditions, it was well understood by market participants that Indymac’s capital ratios could fall below regulatory “well-capitalized thresholds and that the Company might need to raise additional capital.”

“38. On May 1, 2008, the first trading day following Indymac’s alleged first disclosure that it was raising capital through its DSPP during the first quarter of 2008, Indymac’s stock price exhibited a large positive abnormal return of +19.9 percent.”

“38….”Indeed, a May 1, 2008 KBW analyst report states that KBW analysts were not surprised by Indymac’s use of its DSPP and that they believe that Indymac needs to raise much more capital:”

“44. Contrary to the SEC’s claims, I find that Indymac’s Forms 10-Q and 10-K filings did disclose whether the Bank’s risk-based capital ratio numbers were or were not based on double risk-weighting of subprime assets.”

“46/48.….So long as the Bank was considered well-capitalized by the OTS, there is no reason to believe that Indymac’s stock price would have been materially impacted by further disclosures concerning the methodology used for determining the Bank’s risk-based capital ratio or additional information regarding the specific OTS-approved capital ratio criteria.”

“49….In fact, I understand that Indymac Bank’s risk-based capital ratio would have remained above 10 percent even if the $18 million contribution were excluded from the Bank’s calculations and the full amount of the identified audit adjustments were included in the Bank’s calculations.”

“51. The economic evidence concerning the Defendants’ trading in Indymac common stock and their negative public statements about conditions in the housing and credit markets and the resultant impact on Indymac’s business does not provide a reliable basis to conclude that the Defendants intended to conceal material information from Indymac’s shareholders.”

“52. Neither Mr. Perry nor Mr. Keys sold any of their Indymac common stock holdings between the time of the first alleged false and misleading statement on February 12, 2008 and July 14, 2008 the first day of trading following the announcement that Indymac Bank was seized by regulators. See Exhibit P. In fact, as the exhibit demonstrates, Mr. Perry spent over $2.6 million purchasing Indymac common stock during this time period. The exhibit also shows that both Mr. Perry and Mr. Keys lost virtually their entire investment in Indymac common stock. Mr. Perry’s and Mr. Key’s stock and vested options were worth $69.7 million and $3.0 million, respectively, on December 31, 2006. Defendants lost virtually the entire value of that investment, as well as the value of their subsequent stock purchases…… Defendants would have had a financial incentive to sell their Indymac holdings rather than purchase additional shares prior to the disclosure of the alleged missing information if Defendants had intended to conceal material information from Indymac’s stockholders in an attempt to artificially inflate Indymac’s stock price.”

“54. Additionally, Defendants made numerous negative statements during this same time period about the collapse of the housing and credit markets and the impact of those adverse changes in economic conditions on Indymac’s business and future prospects. Exhibit Q lists a selection of some of the negative statements made by Defendants or included in signed company filings in 2008. It would not have been in Mr. Perry’s and Mr. Key’s financial interest to make these negative statements prior to selling their Indymac stock holdings.”

To access Mr. Lehn’s complete report click here.

Posted on April 6, 2012, in Postings. Bookmark the permalink. Leave a comment.

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