Bankruptcy and Insolvency

Bankruptcy is a legal proceeding involving a person or business that is unable to repay their outstanding debts. The process begins with a petition filed by the debtor, which is most common, or on behalf of creditors, which is less common. All of the debtor’s assets are measured and evaluated, and the assets may be used to repay a portion of the outstanding debt.

The U.S. Department of Justice Prevails as Court Rejects Starr’s $40 Billion Appeal

The U.S. Department of Justice Prevails as Court Rejects Starr’s $40 Billion Appeal

One of AIG’s largest shareholders, Starr International Company, Inc. (“Starr”) sued the United States, alleging that the Government’s acquisition of AIG equity in connection with its bailout of the firm and subsequent actions relating to a reverse stock split were unlawful. The U.S. Court of Federal Claims (“Claims Court”) held a trial on Starr’s direct claims, for which Starr sought over $40 billion in relief on behalf of itself and other shareholders. The Claims Court ultimately held that the Government’s acquisition of AIG equity constituted an illegal exaction in violation of Section 13(3) of the Federal Reserve Act, 12 U.S.C. Section 343, but declined to grant relief for either that illegal exaction or for Starr’s reverse stock split claims holding that Starr suffered no damages.

In its conclusion, the Court of Appeals acknowledged and affirmed the opinions and factual basis for those opinions as expressed in the testimony of Dr. Mordecai, which addressed market evidence of no economic loss, and hence zero damages to AIG shareholders from the transaction, as well as opinions which addressed matters of generally-accepted industry custom and practice involving corporate restructuring transactions, and the corresponding economic valuation of credit and equity.

Starr appealed the denial of direct relief for its claims. The Government cross-appealed, arguing that Starr lacked standing to pursue its equity acquisition claims directly or, alternatively, that the Government’s acquisition of equity did not constitute an illegal exaction.

On May 9, 2017, a Federal Circuit panel concluded that Starr and the shareholders represented by Starr lacked standing to pursue the equity acquisition claims directly, as those claims belonged exclusively to AIG. The panel therefore vacated the Claims Court’s judgment that the Government committed an illegal exaction and remanded with instructions to dismiss the equity acquisition claims that seek direct relief. The panel also concluded that the Claims Court did not err in denying relief for Starr’s reverse stock split claims, and affirmed the Claims Court’s judgment as to the denial of direct relief for the reverse stock split claims.

As the damages expert for the Government, cited prominently by Federal Court of Claims Judge Thomas C. Wheeler in his decision, Dr. Mordecai had previously summarized his testimony at trial according to four primary points:

  • First, he provided an opinion on the initial rescue, asserting that it “did not result in an economic loss to AIG’s shareholders.”
  • Second, Dr. Mordecai addressed the need for the Government to obtain an equity component in AIG. Dr. Mordecai opined that “[w]ithout the equity component, the Revolving Credit Facility (“RCF”) [would] not [have] provide[d] a return to adequately compensate for the significant risk of lending to AIG.”
  • In his third opinion, he critiqued as economically irrelevant and flawed, Dr. Cragg’s attempts to compare the AIG rescue to other government interventions.
  • Finally, he critiqued Dr. Kothari’s estimate of the alleged harm suffered by both the Credit Agreement Class and the Reverse Stock Split Class as being fundamentally flawed. According to Dr. Mordecai, Dr. Kothari’s estimates of the alleged harm suffered by both classes was flawed because share dilution does not equal economic loss, Dr. Kothari ignored that AIG’s stock price actually increased as a result of the initial rescue, and Dr. Kothari did not estimate a value for the losses to shareholders.

Among his other opinions, Dr. Mordecai had testified at trial that AIG’s shareholders did not suffer economic loss from the Government’s rescue and that Plaintiffs’ expert’s damage calculations were fundamentally flawed because AIG’s stock price actually increased as a result of the rescue. He had also opined that, based on a study of large bankruptcies, it was unlikely that AIG’s shareholders would recover anything if the company had filed for bankruptcy protection.

The U.S. Department of Justice Prevails as Court Rejects Starr’s $40 Billion Appeal

Testimony by Compass Lexecon affiliated corporate governance expert Robert Daines rebutting plaintiff allegations of effective corporate control acknowledged and closely tracked facts and opinions as testified by Dr. Mordecai regarding no economic loss and hence no damages from share dilution.

Dr. Mordecai worked closely with a team of attorneys at the United States Department of Justice including Kenneth Dintzer, Scott Austin, Brian Mizoguchi, John Roberson, Mariana Acevedo, Renee Gerber and Vince Phillips; John Sturc of the U.S. Treasury Department; Kit Wheatley of the Federal Reserve Board of Governors; and outside counsel including John Kiernan and Nick Tompkins of Debevoise & Plimpton LLP and Lynn Earl Busath, Jonathan Martin, Matt Kelly and Alan Tabak of Davis Polk & Wardwell LLP.

Dr. Mordecai was principally supported by a team in the Compass Lexecon New York office led by Michael Kwak, which included Tristram Worth, Mihir Gokhale, Nick Fasano and Chris Fiore, in addition to other teams in the Chicago and Pasadena offices of Compass Lexecon.

MF Global

Bankruptcy Court Approves Settlement of MF Global Litigation Trust Claims Against Corzine et al.

David K.A. Mordecai, President of Risk Economics, filed two expert reports on behalf of the Litigation Trustee of the MF Global Litigation Trust in MF Global Holdings Ltd. Investment Litigation, Joseph Deangelis (Tavakoli) v. Corzine et al, In the United States District Court Southern District of New York 12 MD 2338 (VM), 11 Civ. 7886 (VM), under Judge Victor Marrero.

The opinions provided in Dr. Mordecai’s reports, filed in August and September 2015, focused primarily on causation (as well as foreseeability), within the context of the accumulation of Euro sovereign repo-to-maturity exposure in excess of the firm’s creditworthiness and capital base. He subsequently testified at deposition in this matter during November 2015, and defendants initiated settlement negotiations subsequent to Dr. Mordecai’s deposition.

On September 16, 2013, the Litigation Trustee had directed the filing of an amended complaint in the Adversary Proceeding (Adv. Docket No. 22), which ultimately consolidated this matter with the Multi-District Litigation (the “MDL“) under the caption DeAngelis v. Corzine, Docket No. 11-CV-07866 in the United States District Court for the Southern District of New York (MDL Docket No. 513).

The Litigation Trustee entered into a certain Stipulation and Agreement of Settlement dated as of July 6, 2016 (the “MDL Settlement Agreement“), which resolved the Litigation Trust Claims. The Litigation Trustee, with MF Global Holdings Ltd. (“MFGH“), as Plan Administrator, moved on July 20, 2016 for approval of the MDL Settlement Agreement (Docket No. 2271), and the Bankruptcy Court approved the MDL Settlement Agreement on August 10, 2016 (Docket No. 2282).

On August 24, 2016, the Litigation Trustee and the Plan Administrator moved for approval of the agreement allocating the consideration received by the Litigation Trust and the Plan Administrator under the MDL Settlement Agreement (Docket No. 2291). The Bankruptcy Court approved the allocation agreement on December 1, 2016 (Docket No. 2322).

Dr. Mordecai was primarily supported by Samantha Kappagoda from Risk Economics, and a team of economists. He worked with a team of attorneys led by Bruce Bennett, and which included Michael McCauley, Michael Schneidereit and Alexandra Fries from Jones Day.

MF Global

David K.A. Mordecai is President and Co-Founder of Risk Economics, a New York City based advisory firm. Risk Economics specializes in the application of computational economics to the proprietary development and scalable implementation of robust modeling and data analytic frameworks for valuation, strategic and systemic risk analysis, and dynamic asset-liability management.

As lead for the Risk Economics® litigation, regulation and arbitration expert advisory practice, David Mordecai serves as an expert on loss causation and economic damages related to market structure, financial institutions governance, and complex issues related to finance, economics and market standards and practices within securities, derivatives, reinsurance, and commodities markets, as well as market structure within a broad range of non-financial industry sectors. His expertise includes industrial and financial engineering, the valuation of fixed income securities and structured products, including over-the-counter derivatives (in particular fixed income and credit derivatives), complex insurance and reinsurance liabilities, as well as asset liability and risk management models and practices. He has advised and provided technical oversight for internal regulatory investigations, as well as stress-testing for global financial institutions. Having testified extensively at deposition, trial, arbitration and international arbitration, he has been admitted as an expert in federal, state and county courts, and cited favorably in court decisions.

MF Global

MF Global Holdings Ltd. as Plan Administrator v PricewaterhouseCoopers LLP Proceeds to Trial

David K.A. Mordecai, President of Risk Economics, filed two expert reports on behalf of the MF Global Plan Administrator in MF Global Holdings Ltd. as Plan Administrator v PricewaterhouseCoopers LLP. This claim seeks in excess of $2 billion in damages for the professional negligence of accounting firm PricewaterhouseCooper (PwC) as MF Global’s auditor. The opinions provided in Dr. Mordecai’s reports, filed in August and November 2015, focused primarily on causation.

On August 5, 2016, U.S. District Court Judge Victor Marrero upheld the claims brought by MF Global Holdings against PwC. Judge Marrero’s decision, which cited Dr. Mordecai’s opinions extensively, denied PwC’s summary judgment motion, and clears the way for the case to proceed to trial.

Dr. Mordecai is being primarily supported by Samantha Kappagoda from Risk Economics. He is working with a team of attorneys led by Daniel J. Fetterman, which includes Michael C. Harwood, Trevor J. Welch, Christian T. Becker, David J. Mark, and Frank DiCarlo.

MF Global

David K.A. Mordecai is President and Co-Founder of Risk Economics, a New York City based advisory firm. Risk Economics specializes in the application of computational economics to the proprietary development and scalable implementation of robust modeling and data analytic frameworks for valuation, strategic and systemic risk analysis, and dynamic asset-liability management.

As lead for the Risk Economics® litigation, regulation and arbitration expert advisory practice, David Mordecai serves as an expert on loss causation and economic damages related to market structure, financial institutions governance, and complex issues related to finance, economics and market standards and practices within securities, derivatives, reinsurance, and commodities markets, as well as market structure within a broad range of non-financial industry sectors. His expertise includes industrial and financial engineering, the valuation of fixed income securities and structured products, including over-the-counter derivatives (in particular fixed income and credit derivatives), complex insurance and reinsurance liabilities, as well as asset liability and risk management models and practices. He has advised and provided technical oversight for internal regulatory investigations, as well as stress-testing for global financial institutions. Having testified extensively at deposition, trial, arbitration and international arbitration, he has been admitted as an expert in federal, state and county courts, and cited favorably in court decisions.

Zero Damages: Court of Claims Agrees with Testimony of David K.A. Mordecai in Rejecting Hank Greenberg’s $40 Billion Damage Claim in AIG Financial Rescue Litigation

Zero Damages: Court of Claims Agrees with Testimony of David K.A. Mordecai in Rejecting Hank Greenberg’s $40 Billion Damage Claim in AIG Financial Rescue (Starr International v. United States) Litigation

In one of the largest and most closely watched cases arising from the global financial crisis, Maurice “Hank” Greenberg and Starr International challenged the United States Government’s financial rescue of American International Group, Inc. (“AIG”) that began in September 2008 (Starr International Company, Inc. v. The United States).

The plaintiffs, represented by David Boies, Chairman of Boies, Shiller & Flexnor LLP, asserted both Fifth Amendment taking and illegal exaction claims on behalf of two classes of AIG shareholders:

  • Credit Agreement Class comprised of AIG shareholders who held common stock during September 16-22, 2008 when the Government received the right to 79.9 percent ownership of AIG in exchange for an $85 billion loan; and
  • Reverse Stock Split Class comprised of AIG shareholders who held common stock on June 30, 2009 when the board of AIG proposed a twenty-for-one reverse stock split that reduced the number of AIG’s issued shares, but left the number of authorized shares unchanged. Plaintiffs sought approximately $40 billion in damages ($35.4 billion for the Credit Agreement Class and $4.7 billion for the Reverse Stock Split Class).

The Court found for Plaintiffs on their illegal exaction claim, however concluded that AIG shareholders were not damaged because AIG would have filed for bankruptcy but for the Government’s intervention, leaving AIG shareholders with worthless shares. The Court denied Starr’s reverse stock split claim in its entirety, concluding that the motivation for the split was to ensure the continued listing of AIG stock on the New York Stock Exchange, and that contrary to plaintiffs’ claim, there was no evidence that the reverse stock split was designed to allow the Government’s preferred shares to be exchanged for common shares.

David K.A. Mordecai, President of Risk Economics, and NYU Courant Institute of Mathematical Sciences Visiting Scholar and Adjunct Professor submitted an expert report on behalf of the Government in April 2014, testified at deposition in June 2014, and again at trial in U.S. Federal Claims Court in November 2014.

The Court accepted Dr. Mordecai as an expert in “financial economics, fixed income and credit markets, credit default swap markets, and distressed lending.” Dr. Mordecai was the damages expert for the Government.

At trial, Dr. Mordecai summarized his testimony into four primary points:

  • First, he provided an opinion on the initial rescue, asserting that it “did not result in an economic loss to AIG’s shareholders.”
  • Second, Dr. Mordecai addressed the need for the Government to obtain an equity component in AIG. Dr. Mordecai opined that “[w]ithout the equity component, the Revolving Credit Facility (“RCF”) [would] not [have] provide[d] a return to adequately compensate for the significant risk of lending to AIG.”
  • In his third opinion, he critiqued as economically irrelevant and flawed, Dr. Cragg’s attempts to compare the AIG rescue to other government interventions.
  • Finally, he critiqued Dr. Kothari’s estimate of the alleged harm suffered by both the Credit Agreement Class and the Reverse Stock Split Class as being fundamentally flawed. According to Dr. Mordecai, Dr. Kothari’s estimates of the alleged harm suffered by both classes was flawed because share dilution does not equal economic loss, Dr. Kothari ignored that AIG’s stock price actually increased as a result of the initial rescue, and Dr. Kothari did not estimate a value for the losses to shareholders

Dr. Mordecai opined, among other things, that AIG’s shareholders did not suffer an economic loss from the Government’s rescue and that Plaintiffs’ expert’s damage calculations were fundamentally flawed because AIG’s stock price actually increased as a result of the rescue. He also opined that, based on a study of large bankruptcies, it was unlikely that AIG’s shareholders would recover anything if the company had filed for bankruptcy protection.

Dr. Mordecai’s study was cited prominently by Federal Court of Claims Judge Thomas C. Wheeler in his decision, concluding that zero damages should be awarded to Plaintiffs despite prevailing on their illegal exaction claim: “In the end, the Achilles’ heel of Starr’s case is that, if not for the Government’s intervention, AIG would have filed for bankruptcy. In a bankruptcy proceeding, AIG’s shareholders would most likely have lost 100 percent of their stock value. DX 2615 (Dr. Mordecai’s) chart showed that equity claimants typically have recovered zero in large U.S. bankruptcies).”

Zero Damages: Court of Claims Agrees with Testimony of David K.A. Mordecai in Rejecting Hank Greenberg’s $40 Billion Damage Claim in AIG Financial Rescue Litigation

Dr. Mordecai worked closely with a team of attorneys at the United States Department of Justice including Kenneth Dintzer, Scott Austin, Brian Mizoguchi, John Roberson, Mariana Acevedo, Renee Gerber and Vince Phillips; John Sturc of the U.S. Treasury Department; Kit Wheatley of the Federal Reserve Board of Governors; and outside counsel including John Kiernan and Nick Tompkins of Debevoise & Plimpton LLP and Lynn Earl Busath, Jonathan Martin, Matt Kelly and Alan Tabak of Davis Polk & Wardwell LLP.

Dr. Mordecai was principally supported by a team in the Compass Lexecon New York office led by Michael Kwak, which included Tristram Worth, Mihir Gokhale, Nick Fasano and Chris Fiore, in addition to other teams in the Chicago and Pasadena offices of Compass Lexecon.

David K.A. Mordecai Served as a Technical Advisor to the Unsecured Creditor Committee in the Lehman Brothers Bankruptcy Proceedings

David K.A. Mordecai Served as a Technical Advisor to the Unsecured Creditor Committee in the Lehman Brothers Bankruptcy Proceedings

David K.A. Mordecai served as a technical advisor to the Unsecured Creditor Committee (“UCC”) in the Lehman Brothers bankruptcy proceedings. In this capacity, his role involved technical oversight and peer review for a valuation team conducting independent analysis on behalf of the UCC with regard to an extensive portfolio of structured notes with complex payoffs referencing equity, credit, interest rates, and currencies. The valuation of this exotic structured note portfolio, with a notional amount outstanding in excess of $15 Billion, involved Monte Carlo simulation as well as econometric analysis of historical market data in conjunction with market-implied forward prices.

Dr. Mordecai worked on this engagement with a team from FTI Consulting, which included Scott Friedland, Michael Kwak and Tristram Worth, among others.

David K.A. Mordecai Served as a Technical Advisor to the Unsecured Creditor Committee in the Lehman Brothers Bankruptcy Proceedings

David K.A. Mordecai is President and Co-Founder of Risk Economics, Inc, a New York City based advisory firm. The Risk Economics® litigation advisory practice provides advisory services and testimonial expertise on complex issues related to financial instrument valuation models and frameworks, market and industry standards and practices for the financing, risk management, active trading, and hedging of OTC derivatives and structured products. Dr. Mordecai is Senior Advisor to and a Member of the Advisory Committee of Compass Lexecon.

As lead for the Risk Economics® litigation and arbitration advisory practice, David Mordecai serves as an expert on loss causation and economic damages related to market structure, financial institutions governance, and complex issues related to finance, economics and market standards and practices within securities, derivatives, reinsurance, and commodities markets, as well as market structure within a broad range of non-financial industry sectors. His expertise includes industrial and financial engineering, the valuation of fixed income securities and structured products, including over-the-counter derivatives (in particular fixed income and credit derivatives), complex insurance and reinsurance liabilities, as well as asset liability and risk management models and practices. Having testified extensively at deposition, trial, arbitration and international arbitration, he has been admitted as an expert in federal, state and county courts, and cited favorably in court decisions.

See Compass Lexecon 2011 Annual Newsletter.

David K.A. Mordecai Participated in the Santa Fe Institute and Fidelity Investments Software Complexity Conference

David K.A. Mordecai Participated in the Santa Fe Institute and Fidelity Investments Software Complexity Conference

David K.A. Mordecai, President of Risk Economics, participated in the jointly sponsored Santa Fe Institute (SFI) and Fidelity Investments Software Complexity: Implications for the Capability, Integrity and Security of Large Scale Software Systems Conference. Dr. Mordecai’s presentation was entitled Implications for the Financial Industry. The conference took place on May 11, 2011 at the Fidelity Investments office in Boston, MA.

This conference explored ways in which the study of complex systems in other domains of science and technology can be valuable for large-scale software systems, surveyed the state of the art in verification and validation of large-scale software systems from the academic and corporate perspectives, and considered implications of large-scale systems for the financial industry.

David K.A. Mordecai Participated in the Santa Fe Institute and Fidelity Investments Software Complexity Conference