MCC: Cornerstone Research recently opened an office in London. What prompted this move?
Meehan: London is one of the significant litigation markets outside of the United States, and it was important for us to be here to address European litigation and regulatory matters for our clients’ current and future needs. We have been working internationally for many years, and our London office brings us closer to these venues. Our firm started out over 25 years ago with two regional offices, one in Menlo Park, California, and one in Cambridge, Massachusetts. We have grown into a broad-based firm with more than 500 staff members and seven U.S. offices. Having been with the firm since its founding, I’m pleased to be leading our London office.
MCC: What financial industry trends are you seeing in terms of regulatory matters being pursued by the European Commission? Where do these matters fit within the broader landscape of issues facing legal departments?
Barnes: As cases are becoming larger and more frequent with increased activity by the various global regulatory bodies, including the European Commission, we are finding that the multidisciplinary expertise we bring is critical. The regulatory cases that involve financial institutions require not only an understanding of economic and competition issues, but also expertise in financial institutions and complex financial instruments.
For example, there have been a number of high-profile matters in the financial institutions space, some alleging manipulation of foreign exchange markets, Libor and other interest rate markets. There was an EU investigation into the credit default swap market, which is particularly interesting as it relates to the intersection of competition or antitrust economics and financial markets. There are similar matters that involve allegations relating to the gold and other metals markets. It’s been exciting for me to return to London and work on these cases from Europe, after being in our New York office for several years.
Any large company in any industry may be engaged in litigation or arbitration, but after the credit crisis, financial institutions saw an enormous increase in this regulatory activity, such as on the regulation of mortgage-backed securities, credit derivatives, and related securities. To some extent, these types of cases are still cropping up, and some are legacies from matters that arose immediately post-credit crisis. The difference is that, five years ago, credit-crisis-related matters were top of mind for general counsel; however, if you were to talk to GCs of large financial institutions today, regulatory investigations would most likely be one of the main topics commanding their attention.
MCC: Has a more stringent regulatory environment affected your clients’ needs?
Barnes: Given the changes that regulatory investigations have brought, including the fact that many matters now give rise to actual legal cases, clients are looking for a more internally focused effort in addressing potential problems. We are being asked to get involved at an earlier stage. Whether it’s a formal regulatory investigation or a private investigation, our role is in research and analysis for clients who want to understand both the scope and concerns of a potential issue.
MCC: How do economic and financial consultants fit into this new regulatory picture and the changing focus of litigation?
Meehan: Cornerstone Research provides expert, and often very specialized, analysis of the economic and finance aspects of litigation, arbitration and other matters. We match experts to clients’ needs, drawing on a large pool of international academics from the economics and finance departments of top business schools as well as industry practitioners. This intellectual support is integral to our work and directly constitutes much of the enduring value we bring to clients. Given the high-profile nature of our clients and their matters, Cornerstone Research’s ability to fill the need for nuanced expertise on a broad span of issues is garnering significant interest.
MCC: Can you give some examples?
Meehan: It seems as if Europe generally, and the UK more specifically, is moving away from the opt-in to the opt-out approach to collective or class actions. As a result, we have heard several times that experience in dealing with the economic issues involved in the certification of a class will be much in demand as these actions start to become more prevalent. As a firm, Cornerstone Research has been addressing these issues for many years and in many different contexts, from the competition arena to securities litigation and even extending into the realm of structured finance products, such as residential mortgage-backed securities and collateralized debt obligations. As such, we will be ideally placed to provide the advice that our clients will need when navigating this changing and complex landscape.
Another area where the firm has an enormous amount of accumulated experience is that of loss causation. This is the determination of the extent to which price drops in securities can be attributed to the particular allegations in a case and the extent to which they are driven by other unrelated factors. For example, in a securities litigation involving banks and other financial institutions, being able to disentangle the potential impact of alleged misrepresentations regarding asset quality from the effect of a general drying up of liquidity is crucial. In order to do this, an understanding of the relevant economics needs to be coupled with an appreciation of market practicalities and the ability to analyze the relevant data in a meaningful and sophisticated manner. Cornerstone Research, together with our roster of experienced experts, is well positioned to tackle this sort of complicated analysis.
MCC: Cornerstone Research releases an annual report on M&A-related litigation. According to your latest research, more than 90 percent of deals valued over $100 million are challenged by shareholders. How are experts utilized in these types of matters?
Barnes: In these lawsuits, plaintiffs typically allege that a target’s board of directors violated its fiduciary duties by conducting a flawed sales process that failed to maximize shareholder value. Common allegations include the failure to conduct a sufficiently competitive sale, the existence of restrictive deal protections that discouraged additional bids and conflicts of interest. Another typical allegation is that the target board failed to disclose enough information about the sale process and the financial advisor’s valuation. In these matters we provide valuation, disclosure, corporate governance, strategy, executive compensation, sale process and other analyses. In several matters, we have reviewed comparable mergers to determine that the level of detail and timeliness of disclosures were consistent with standard industry and corporate governance practices. We have also evaluated fairness opinions and valuations, compared alternative bids, analyzed hedging by various counterparties, and calculated damages arising from corporate transaction litigation.
MCC: As finance experts, what kinds of analyses and perspectives can you bring to the table when advising corporate counsel?
Meehan: Clients in Europe are especially looking to Cornerstone Research for our expertise in the areas of international arbitration, competition, energy and commodities, and regulation in financial institutions and other segments. Our deep understanding of valuation and general damages provides the sophisticated analyses that our clients require. For example, for financial institutions counsel, we use advanced economic and financial techniques to determine the extent to which losses on investments can reasonably be attributed to alleged misrepresentations and omissions in offering materials, and the extent to which such losses are the result of factors unrelated to disclosures in these materials.
MCC: What can you tell me about the firm’s work in international trials and arbitration?
Barnes: We address interesting issues, particularly in the international arbitration space. These are commercial damages claims where, hypothetically speaking, two companies enter into a joint venture agreement, and one party alleges that the other party breached the agreement, causing losses and justifying a damages claim. Here, the analysis requires finance expertise, but the trick lies in the fact that there are many ways that the estimates can be seriously miscalculated. For instance, the commonly accepted discounted cash-flow approach, by definition, requires that you estimate a discount rate; however, there are a myriad of ways in which one can get the discount rate wrong, often significantly wrong. This is of particular concern in dealing with cross-border investments where there are issues about selecting the appropriate market benchmark and accounting for control premia or an illiquidity discount. Our vast experience is a real asset to clients in damages valuation.
Meehan: We also bring significant experience in the procedures and customs appropriate to different international venues. For example, we applied our experience with finance and securities markets to address the issues in the first case to reach trial under Ireland’s Companies Act. Our staff and experts have consulted in arbitration matters in venues throughout the world, including the International Centre for the Settlement of Investment Disputes, the U.N. Commission on International Trade Law, the International Chamber of Commerce the International Centre for Dispute Resolution, and the London Court of International Arbitration, as well as in disputes involving the Energy Charter Treaty. In addition, our staff and experts have degrees from many of the world’s leading universities and in-depth knowledge of businesses around the globe and their languages.
MCC: Please give our readers your final thoughts on the expansion of your European presence.
Meehan: As our clients continue to see increased activity from the various regulatory bodies across the globe, we are committed to providing enhanced support for their litigation and international arbitration needs. Cornerstone Research’s approach of finding the right expert from a large international pool supports our clients’ needs for specific expertise to address each situation. Our staff consultants’ expertise in finance and competition as well as in vertical markets such as financial institutions, pharmaceuticals and energy allows for robust research and analysis of issues that arise in litigation and regulatory matters. We are pleased that Cornerstone Research’s presence in Europe has been met with such a positive reception.
The views expressed in this interview are solely those of Mr. Meehan and Dr. Barnes, who are responsible for the content, and do not necessarily represent the views of Cornerstone Research.
Published May 1, 2015.