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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
In re:
Adv. Pro. No. 08-01789 (BRL)
BERNARD L. MADOFF INVESTMENT
SECURITIES LLC,
Debtor,
SIPA LIQUIDATION
(Substantively Consolidated)
IRVING H. PICARD, Trustee for the Liquidation of Adv. Pro. No. 10-05287 (BRL)
Bernard L. Madoff Investment Securities LLC,
Plaintiff,
v.
11 Civ. 03605 (JSR) (HBP)
SAUL B. KATZ, et al.,
Defendants.
DECLARATION OF
BRUCE G. DUBINSKY, MST, CPA, CFE, CVA, CFF, CFFA
1
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I, Bruce G. Dubinsky, declare under penalty of perjury:
1.
I am Bruce G. Dubinsky, a Managing Director at Duff and Phelps, LLC (“D&P”),
and a retained expert in the above-captioned matter. I submit this Declaration in support of the
motion for partial summary judgment brought by Irving H. Picard, trustee for the substantively
consolidated liquidation of the business of Bernard L. Madoff Investment Securities LLC, under
the Securities Investor Protection Act, and the estate of Bernard L. Madoff.
2.
Attached as Exhibit 1 is a true and correct copy of my Initial Expert Report dated
November 22, 2011, and submitted to Defendants on or about November 22, 2011 (and a
corrected version submitted on January 6, 2012) (the “Expert Report”). I hereby incorporate by
reference the contents of the Expert Report as my sworn testimony as if fully rewritten herein.
3.
A true and correct description of my background and qualifications is set forth in
the Expert Report at ¶¶ 2-11 and Appendix A.
4.
The opinions rendered in the Expert Report and the bases thereof are detailed in
various sections of my Expert Report, including, but not limited to, ¶¶ 12-27 and Appendix B,
which identify (a) the methodology that I employed and/or supervised in connection with the
analyses performed, and (b) the sources of information and data that form the basis of my
findings, conclusions and opinions.
5.
The information sources and data that form the factual predicate for my findings,
conclusions and opinions, include, among other things, voluminous BLMIS books and records
such as customer statements, portfolio management reports, portfolio management transaction
reports, as well as bank account statements and wire transfer documents.
6.
Because of the voluminous and highly technical nature of these underlying
documents (detailed in my Expert Report at ¶¶ 12-27 and Appendix B), BLMIS books and
2
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records along with certain third-party data were loaded by FTI Consulting, Inc. into multiple
Microsoft SQL Server Databases (the “SQL Databases”), and provided to D&P for use in
connection with the Expert Report. Databases, such as Microsoft SQL, are industry standard
tools used to consolidate and perform computations on large data sets, such as those obtained
during this investigation.
7.
To the extent any such data in the SQL Databases were used to support the
analyses or the opinions I rendered in the Expert Report, the accuracy of the data was tested by
D&P to ensure reliability.
8.
I understand from counsel that these SQL Databases were produced to Defendants
in discovery, and are available to the Court upon request.
9.
The Defendants have had a full and fair opportunity to question me at my
deposition on January 11, 2012 about my qualifications, methodology, and underlying source
materials, as well as about the findings, conclusions and opinions I rendered in my Expert Report
at my deposition on January 11, 2012.
There were a number of exhibits entered at my
deposition, many of which are referenced below.
10.
Attached as Exhibit 2 is a copy of Form BD for Bernard L. Madoff, dated
December 31, 1959, with the Bates numbers PUBLIC0003607-PUBLIC0003614.
11.
Attached as Exhibit 3 is a copy of Madoff Holdings Ltd. incorporation
documents, with the Bates number PUBLIC0006083.
12.
Attached as Exhibit 4 is a copy of Special Resolution of Madoff Holdings
Limited, with the Bates number PUBLIC0008959.
13.
Attached as Exhibit 5 is a copy of Bernard L. Madoff Lease Summary 885 Third
Avenue, with the Bates number CWIE-BR00002468.
3
Case 1:11-cv-03605-JSR Document 107
14.
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Attached as Exhibit 6 is a copy of Portfolio Netcap Totals by Group-A&B dated
March 31, 1993, with the Bates numbers MADTBB03079814-9910.
15.
Attached as Exhibit 7 is a copy of Bernard Madoff, “Letter to Client” dated
March 16, 1999, with the Bates number AMF00139075.
16.
Attached as Exhibit 8 is a copy of excerpts from Frank J. Fabozzi, The Handbook
of Fixed Income Securities, 1372 (7th ed. McGraw Hill 2000).
17.
Attached as Exhibit 9 is a copy of Arshanapalli, et al., New Evidence on the
Market Impact of Convertible Bond Issues in the U.S. 17-18 (2005).
18.
Attached as Exhibit 10 is a copy of excerpts from Frank Fabozzi, Jinlin Liu, &
Lorne N. Switzer, Market Efficiency and Returns from Convertible Bond Hedging and Arbitrage
Strategies (2009).
19.
Attached as Exhibit 11 is a copy of New York Exchange Bonds Daily Records,
dated January 9, 1985.
20.
Attached as Exhibit 12 is a copy of the S&P Bond Guide, dated February 1985.
21.
Attached as Exhibit 13 is a copy of Following a Trade: A Guide to DTCC’s
Pivotal Roles in How Securities Change Hands.
22.
Attached as Exhibit 14 is a copy of excerpts from Moody’s Industrial Manual
23.
Attached as Exhibit 15 is a copy of excerpts from Moody’s Industrial Manual,
24.
Attached as Exhibit 16 is a definition of “Transfer Agent” from the U.S.
(1985).
(1985).
Securities and Exchange Commission’s website.
25.
Attached as Exhibit 17 is a copy of the Securities Exchange Act § 17A(c).
4
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26.
Attached as Exhibit 18 is a copy of the 15 U.S.C. § 78 (2010).
27.
Attached as Exhibit 19 is a copy of excerpts from Moody’s Bank & Finance
Manual (1980); Moody’s Industrial Manual (1984); Moody’s Industrial Manual (1980);
Moody’s Industrial Manual (1978); Moody’s Bank & Finance Manual (1981); Moody’s
Industrial Manual (1979); Moody’s Public Utility Manual (1979); and Moody’s Industrial
Manual (1982).
28.
Attached as Exhibit 20 is a copy of trading authorization guidelines dated July 3,
1991 at Bates number AMF00139560.
29.
Attached as Exhibit 21 is a copy of Madoff Tops Charts; Skeptics Ask How by
Michael Ocrant (MAR/Hedge, May 2001).
30.
Attached as Exhibit 22 is a copy of the S&P Indices.
31.
Attached as Exhibit 23 is a copy of National Securities Clearing Corporation-
Rules and Procedures, page 51 (October 11, 2011), with Bates number MMAD-BR0002 1287.
32.
Attached as Exhibit 24 is a copy of OEX & XEO S&P 100 Index Options, A
Discussion on the Benefits and Uses of the First Listed Index Option.
33.
Attached as Exhibit 25 is an excerpt from the New York Stock Exchange website
– funerals of U.S. Presidents.
34.
Attached as Exhibit 26 is a copy of FINRA Notice 95-26 (April 1995).
35.
Attached as Exhibit 27 is a copy of the Prospectus, Fidelity Spartan U.S. Treasury
Money Market Fund, U.S. Government Money Market Fund, & Money Market Fund (June 29,
2005).
36.
Attached as Exhibit 28 is a copy of STMTPro from the AS/400 at BLMIS, with
Bates number MDPTSS00001484.
5
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37.
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Attached as Exhibit 29 is a copy of a document bearing Bates numbers
MESTAAF00009202 – MESTAAF00009203.
38.
Attached as Exhibit 30 is a copy of a document bearing Bates number
MDPTGG00000002.
39.
Attached as Exhibit 31 is a copy of a document bearing Bates number KFON-
BR00030551
40.
Attached as Exhibit 32 is a copy of a document bearing Bates numbers ELIP-
BR00004715-4876.
41.
Attached as Exhibit 33 is a copy of a document bearing Bates numbers
MADTSS00329114-127.
42.
Bates
Attached as Exhibit 34 are handwritten documents recovered from BLMIS, with
numbers
MADTSS01124263,
MADTSS01124265,
MADTSS01124267-8,
MADTSS01124272.
43.
Bates
Attached as Exhibit 35 are handwritten documents recovered from BLMIS, with
numbers
MADTSS01124091,
MADTSS01124093,
MADTSS01124089,
MADTSS01120262, MADTSS01124092, MADTSS01124095.
44.
Attached as Exhibit 36 are excerpts from 17 C.F.R. 279.1 [44 FR 21008, Apr. 9,
1979] from the electronic code of Federal Regulations.
45.
Attached as Exhibit 37 is a copy of Investment Advisers Act Rule § 203-1 from
the SEC website.
46.
Attached as Exhibit 38 is a copy of 15 U.S.C. § 80b-3.
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47.
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Attached as Exhibit 39 is a copy of the Uniform Application for Investment
Advisor Registration for BLMIS filed January 7, 2008 from FINRA website, with Bates number
PUBLIC0003840.
48.
Attached as Exhibit 40 is a copy of SEC Rule 17a-5.
49.
Attached as Exhibit 41 is a copy of General Instructions to FORM X-17A-5
PART 11A (FOCUS Report).
50.
Attached as Exhibit 42 is a copy of BLMIS December 2006 FOCUS Report,
Bates numbers PUBLIC0002663-64.
51.
Attached as Exhibit 43 are copies of excerpts from BLMIS FOCUS Reports,
Bates numbers PUBLIC0002693, PUBLIC0002664, PUBLIC0002888, PUBLIC0002859,
PUBLIC0002801, PUBLIC0002780, PUBLIC0002959, PUBLIC0003022, PUBLIC0003085.
52.
Attached as Exhibit 44 are copies of excerpts from JPMC 703 monthly bank
statements, Bates numbers JPMSAB0002808-09, JPMSAB0003289-90, JPMSAB0003768,
JPMSAB0003703-04,
JPMSAB0004355,
JPMSAB0004311,
JPMSAB0004570,
JPMSAB0003948, JPMSAB0003455.
53.
Attached as Exhibit 45 are copies of excerpts from BLMIS FOCUS Reports,
Bates numbers PUBLIC0000100, PUBLIC0000070, PUBLIC0000040, PUBLIC0000010,
PUBLIC0000219. PUBLIC0000189, PUBLIC0000159, PUBLIC0000129, PUBLIC0000338,
PUBLIC0000308, PUBLIC0000278, PUBLIC0000248, PUBLIC0000457, PUBLIC0000427.
PUBLIC0000397,
PUBLIC0000367,
PUBLIC0000576,
PUBLIC0000546,
and
PUBLIC0000516.
54.
Attached as Exhibit 46 is a copy of AIPCA Professional Standards, Auditing
Section 220.03.
7
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55.
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Attached as Exhibit 47 is a copy of New York State Accountancy Regulations,
Title 8, Section 29.10a-5.
56.
Attached as Exhibit 48 is a copy of SEC Rule 17a-5.
57.
Attached as Exhibit 49 is a copy of one page from the New York State Education
Department website.
58.
The foregoing Exhibits 2 to 49 are excerpts from Exhibits 25-A, 25-B, and 25-C
from my deposition in this matter held on January 11, 2012.
59.
I affirm that the deposition testimony that I gave was truthful at the time given
and continues to be true and accurate.
60.
I further affirm that the findings, statements, conclusions and opinions in the
Expert Report and in this Declaration are truthful and accurate.
8
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Case 1:11-cv-03605-JSR Document 107-1
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EXHIBIT 1
(Part 1 of 3)
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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
In re:
Adv. Pro. No. 08-01789 (BRL)
BERNARD L. MADOFF INVESTMENT
SECURITIES LLC,
Debtor,
SIPA LIQUIDATION
(Substantively Consolidated)
IRVING H. PICARD, Trustee for the Liquidation of
Bernard L. Madoff Investment Securities LLC,
Plaintiff,
v.
Adv. Pro. No. 10-5287 (BRL)
11-CV-03605 (JSR) (HBP)
SAUL B. KATZ, et al.,
Defendants.
INITIAL EXPERT REPORT OF
BRUCE G. DUBINSKY, MST, CPA, CFE, CVA, CFF, CFFA
BAKER & HOSTETLER LLP
45 Rockefeller Plaza
New York, New York 10111
Telephone: (212) 589-4200
Facsimile: (212) 589-4201
Attorneys for Irving H. Picard, Trustee for the
Substantively Consolidated SIPA Liquidation of
Bernard L. Madoff Investment Securities LLC and
Bernard L. Madoff
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TABLE OF CONTENTS
I.
THE ASSIGNMENT................................................................................................................ 6
II. EXPERT BACKGROUND AND QUALIFICATIONS .......................................................... 6
III. Summary of ASSIGNMENT, scope and methodology............................................................ 8
A.
Information Sources .......................................................................................................... 8
B.
Conduct of Information Review and Analysis .................................................................. 9
IV. Summary of opinions.............................................................................................................. 11
V. FACTUAL BACKGROUND................................................................................................. 13
A.
Bernard L. Madoff Investment Securities ....................................................................... 13
B.
House 17 Operations ....................................................................................................... 14
C.
Madoff Securities International Limited ......................................................................... 15
D.
Key Individuals ............................................................................................................... 16
i.
Bernard L. Madoff........................................................................................................... 16
ii. Frank DiPascali ............................................................................................................... 16
iii. David Kugel .................................................................................................................... 17
iv. Annette Bongiorno .......................................................................................................... 17
v.
Daniel Bonventre............................................................................................................. 18
vi. Eric Lipkin....................................................................................................................... 18
vii. Joann “Jodi” Crupi .......................................................................................................... 19
viii. Jerry O’Hara and George Perez—Computer Programmers ............................................ 19
ix. Friehling and Horowitz ................................................................................................... 20
E.
Computer Systems Overview.......................................................................................... 20
VI. EXPERT OPINIONS.............................................................................................................. 24
A.
OPINION NO. 1: HOUSE 17 WAS NOT A LEGITIMATE BUSINESS. .................... 24
i. Fictitious Trading in House 17 - There is no evidence that the purported investment
transactions for House 17 customers ever occurred at least as far back as the 1970s. In fact,
the evidence shows the trading did not occur. ....................................................................... 24
a. The Purported Convertible Arbitrage Strategy – the 1970s to the 1990s: There is no evidence
that the purported convertible arbitrage strategy for House 17 customers actually occurred. In fact,
the evidence proves that the purported trades did not occur. ...........................................................24
(i)
Convertible arbitrage strategy - House 17 Customers......................................................25
(ii)
Purported convertible security trades exceeded the entire reported market volume for
certain days...............................................................................................................................27
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(iii) Purported purchase prices of convertible securities on customer accounts did not
represent true prices..................................................................................................................30
(iv)
Convertible securities continued to be purportedly traded by House 17 even after they
were called for conversion. ......................................................................................................31
(v)
House 17 did not account for dividend payments or accrued interest on the convertible
bonds thereby evidencing the fictitious nature of the underlying transactions. .......................32
(vi) There is no evidence that House 17 converted the convertible securities into common
shares..................................................................................................................................33
(vii)
Fictitious Convertible Arbitrage Trade Confirmations ................................................37
b. Following the 1992 SEC investigation of A&B, BLMIS purportedly transitioned from
convertible arbitrage to the split strike conversion investment strategy. .........................................42
c. The Split Strike Conversion Strategy- the 1990s and later: There is no evidence that the
transactions purporting to represent a split strike conversion strategy for House 17 customers ever
occurred. In fact, the evidence shows that these transactions were fictitious. .................................47
(i) Purported equity and option trades exceeded the entire reported market volume for
certain days...............................................................................................................................48
(ii)
Hundreds of thousands of purported House 17 trades, affecting over 5,500 accounts,
were priced outside the trading day’s price range evidencing that they could not have been
executed....................................................................................................................................48
(iii) House 17 purportedly bought low 83% of the time and sold high 72% of the time
(VWAP Trades) evidencing the fictitious nature of the trades. ...............................................50
(iv)
Thousands of purported securities, affecting over 3,700 accounts, were recorded by
House 17 as having settled on weekends or holidays when the exchanges are closed. ...........51
(v)
Thousands of purported House 17 split strike conversion equity and option trades,
affecting nearly 6,000 accounts, were recorded as having settled on days not within the
standard settlement duration timeframe. ..................................................................................52
d. There are no legitimate records from the DTC (or other clearing houses or custodians)
evidencing any trades occurring from House 17..............................................................................53
(i)
Reconciliation of House 5 holdings to House 17 holdings via DTC records...................54
(ii)
Fake DTC Screen Reports created by House 17 ..........................................................56
(iii)
Reconciliation of House 5 options trades to OCC........................................................64
e. Approximately $4.3 billion of dividends reported on House 17 customer statements were
fictitious and were never received by BLMIS on behalf of its customers. ......................................65
f.
House 17 was “Schtupping” certain customer returns. ............................................................68
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g. The computer system used by House 17 was basically a system used to facilitate the fictitious
trading activity and to print trading documentation and customer statements to support such
fictitious activities. ...........................................................................................................................75
h. The underlying computer code generated and utilized by House 17 was developed and
modified over the years. ...................................................................................................................78
i. Underlying computer code in House 17 produced a random order generator to support
fictitious trades on customer statements...........................................................................................81
ii. Various reports that House 17 prepared were false......................................................... 87
a.
Customer statements contained fictitious trades that were backdated. ....................................87
(i) The financial and regulatory statements produced by BLMIS were false and
misrepresented the firm’s true financial state of affairs. ..........................................................93
a.
Registration statement ADV filed with the SEC was false and was not timely. ..................93
b. FOCUS reports and the audited financial statements were false and misrepresented the true
state of BLMIS. ............................................................................................................................94
B.
c.
F&H Audit Template Opinions Found at BLMIS................................................................97
d.
F&H were not independent auditors as required by the AICPA and other regulatory bodies .
..............................................................................................................................................99
OPINION NO. 2: HOUSE 17 WAS A PONZI SCHEME. .......................................... 100
i.
Indicia of Ponzi ............................................................................................................. 100
a.
Definition of Ponzi scheme ....................................................................................................100
b.
Background on Ponzi schemes...............................................................................................100
ii. There was no legitimate trading or investment activity and, therefore, no profits from
House 17............................................................................................................................... 101
a.
No trading occurred in House 17 and redemptions were made using Other People’s Money.....
................................................................................................................................................102
b.
No other legitimate income-producing business activities were identified............................103
c. Dividends that were purported to have been distributed to House 17 customers were paid with
Other People’s Money....................................................................................................................104
d. Apart from the liquidity crisis, no financial support vis-à-vis any profits from House 5 was
evidenced........................................................................................................................................104
e.
The 703 Account dealt almost entirely with customer deposits and redemptions. ................105
f.
House 17 was dependent on increasing cash inflows and promised large returns to customers..
................................................................................................................................................107
iii. Further evidence that House 17 was not a legitimate business and was a Ponzi scheme is
that BLMIS was hopelessly insolvent.................................................................................. 109
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a.
Balance Sheet Test: ................................................................................................................112
(i)
a.
Determination of Solvency of BLMIS ...........................................................................115
House 5 Financial Background ..........................................................................................117
iv. Selected Valuation Approaches .................................................................................... 118
Income Approach ...................................................................................................................119
b.
Guideline Company Method ..................................................................................................120
c.
Comparable Transaction.........................................................................................................121
v.
a.
The evidence shows that House 17 was a Ponzi scheme. ............................................. 122
VII. BASES FOR THE OPINIONS IN MY REPORT................................................................ 123
APPENDICES.............................................................................................................................. 124
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I.
THE ASSIGNMENT
1.
In June 2011, I was retained by the law firm of Baker & Hostetler LLP (“Baker”) counsel for
Irving H. Picard, Trustee (“Trustee”) for the Substantively Consolidated SIPA Liquidation of
Bernard L. Madoff Investment Securities LLC (“BLMIS”) and Bernard L. Madoff
(“Madoff”), to provide forensic accounting analysis and render certain expert opinions (“the
Assignment”) related to:

Whether or not BLMIS’s Investment Advisory business (herein after referred to as
“IA Business” or “House 17”) was, in fact, a legitimate business; and

Whether or not House 17 was a “Ponzi” scheme.
II.
EXPERT BACKGROUND AND QUALIFICATIONS
2.
I am a Managing Director at Duff and Phelps, LLC (“D&P”) and City Leader of D&P’s
Washington, D.C. office and was retained by Baker to serve as an expert witness in
connection with the Assignment. My practice at D&P places special emphasis on providing
forensic accounting and dispute analysis services to law firms litigating commercial cases, as
well as corporations, governmental agencies and law enforcement bodies in a variety of
situations.
3.
I earned a Bachelor’s of Science Degree in Accounting from the University of Maryland,
College Park, MD and a Master’s in Taxation (“MST”) from Georgetown University,
Washington, D.C. I am a Certified Public Accountant (“CPA”), Certified Fraud Examiner
(“CFE”), Certified Valuation Analyst (“CVA”), Certified in Financial Forensics (“CFF”) and
a Certified Forensic Financial Analyst (“CFFA”), all in good standing, and was formerly a
Registered Investment Advisor Representative.
4.
I have been qualified and testified as an expert in various federal and state courts as an expert
witness in the areas of forensic accounting and fraud investigations; bankruptcy; solvency;
commercial damages; business valuations; investment theory; federal and state income
taxation; abusive tax shelters; accounting ethics and standards; accounting malpractice;
investment advisory issues; and a variety of other financial and tax matters. Additionally, I
have professional experience in the area of computer forensics and related computer
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investigations and have undergone training as a part of the fraud and forensic training as both
a Certified Fraud Examiner and a Certified Forensic Financial Analyst.
5.
Some of the more notable fraud and forensic accounting investigations that I have conducted
include:

International Brotherhood of Teamsters–Campaign compliance and related fraud
investigations for the International Officer Elections pursuant to the Consent
Decree – S.D.N.Y., 1997-present 1;
6.

Lehman Brothers Bankruptcy2;

Washington Teachers Union fraud3; and

Firstpay payroll company fraud and Ponzi scheme.4
A current and accurate copy of my curriculum vitae and Federal Rules of Civil Procedure
Rule 26 disclosures are attached hereto as Appendix “A.”
7.
The materials reviewed and considered in forming opinions and conclusions made in this
report include documents and other data referenced herein and listed attached hereto as
Appendix “B.”5 The opinions expressed herein are based upon my understanding of the facts
in this case, as well as information gained during the course of D&P’s performance of the
Assignment. Further, I relied upon my education, training and over 28 years of professional
experience, and my opinions and conclusions herein are stated to a reasonable degree of
accounting certainty.
8.
As litigation service engagements performed by Certified Public Accountants are deemed to
be consulting services as defined by the American Institute of Certified Public Accountants
(“AICPA”), my work on the Assignment was performed in accordance with the applicable
standards as set forth in the Standards for Consulting Services established by the AICPA.
Further, as a result of having other relevant professional certifications, as more fully described
1
United States v. Int’l Bhd. of Teamsters, No. 88 Civ. 4486 (LAP) (S.D.N.Y. 1989).
In re Lehman Brothers Holdings, et al., No. 08‐13555 (JMP) (Bankr. S.D.N.Y. 2008).
3
United States v. Hemphill, 514 F.3d 1350 (Ct. App. D.C. Feb 8, 2008); United States v. Hemphill, No. 03-CR-00516
(RJL) (D.D.C. 2003); United States v. Bullock, No. 03-CR-00345 (RJL) (D.D.C. 2003); United States v. Holmes, No.
03-CR-00032(RJL) (D. D.C. 2003).
4
Wolff v. United States, 372 B.R. 244 (Bankr. D.Md. Aug. 3, 2007); Wolff v. United States, No. 03 30102 (PM)
(Bankr. D. Md. 2006).
5
See discussion infra regarding scope of documentation reviewed.
2
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hereinafter, I adhered to the applicable standards of those governing organizations in the
performance of my work in this matter and the rendering of these opinions.
9.
Fact discovery in this case has not concluded as of the filing of this report, and related
investigations are concurrently being conducted by various law enforcement agencies to
determine the existence of possible criminal and/or civil violation acts of some of the
individuals/entities described herein and others. Accordingly, this report is based upon the
information available to me and reviewed to date, and I hereby reserve the right to
supplement or amend this report in the event further additional information becomes available
for my review.
10.
In accordance with applicable professional standards of the Association of Certified Fraud
Examiners, of which I am a member in good standing, this report contains no opinions on the
guilt or innocence of any person(s) and/or party(s) named and/or discussed in the report.6
11.
I am being compensated for my work in this matter at the rate of $750.00 per hour, and my
fees are not contingent upon any finding or result in this matter.
III.
SUMMARY OF ASSIGNMENT, SCOPE AND METHODOLOGY
A. Information Sources
Baker provided access to information, including but not limited to the following:7
12.

A database containing over 28 million documents representing, among other things: (1)
customer statements; (2) bank account statements and other documents obtained
through third-party subpoenas; (3) internal documents and correspondence from
BLMIS; (4) and other documents, data, information and correspondence found on
BLMIS’s computer systems;
6
Code of Ethics, ACFE (last visited November 21, 2011), http://www.acfe.com/code-of-ethics.aspx. As there are
parallel, ongoing criminal investigations and indictments pending in actions related to this matter, as well as a
number of individuals who have pled guilty and are cooperating with the Federal authorities, independent interviews
were not practicable or possible.
7
Our access to documentation that was collected by the Trustee and made available to us was not limited in any
manner and allowed D&P to search for information and documentation that both supported the opinions contained
herein as well as any countervailing evidence, if any. A complete listing of the documents considered is included in
Appendix “B” of this report.
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
A database containing customer statement information compiled from underlying
supporting documentation and bank account information compiled from underlying
supporting documentation such as bank statements and wire transfer documents;

Electronic media and records obtained from BLMIS’s offices and storage facilities
including nearly 19,000 backup tapes, hard drives, cell phones, Blackberry devices and
other electronic information sources;

Hard copy documents housed in a BLMIS-rented warehouse in Queens, NY containing
over 11,000 large banker boxes of documents and information;

Deposition transcripts for persons deposed by Baker as well as other transcripts in
connection with the parallel liquidation proceeding in the United Kingdom;8 and

Visits to the BLMIS offices at 885 Third Avenue in Manhattan and to the BLMISrented Queens, NY document warehouse.
13.
In addition to the information to which we were provided access, we obtained additional
information where necessary to our investigation from publicly available sources. A
complete listing is included in Appendix “B” of this report.
B. Conduct of Information Review and Analysis9
14.
The work conducted by D&P in connection with the Assignment was planned, supervised and
staffed in accordance with applicable professional standards. The work conducted by D&P
included, but was not limited to:

Review and analysis of documents, emails, etc;

Review and analysis of various bank accounts of BLMIS and Madoff;

Review and analysis of customer statements, trade confirmations and other related
documentation for House 17’s customers dating as far back as records were available –
back to the 1970s;
8
MSIL v. Raven, et. al., Claim No. 2010 Folio 1468.
Records, documents and other information for certain periods were no longer available because the time period in
question spans nearly 50 years (1960-2008). Nonetheless, the opinions contained herein are supported by available
documentation, which include over 28 million documents dating back to the 1970s and by alternative analysis where
historical documentation was no longer available.
9
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
Review and analysis of certain purported trading activity for House 17’s customers
dating as far back as records were available--back to the 1970s;

Review and analysis of certain trading activity for the market-making business (“House
5”);

Restoration, reconstruction, review and analysis of major portions of the AS/400
computer system utilized by House 17;10

Review and analysis of certain third party information regarding BLMIS and/or House
17 purported trading activity;

Review and analysis of certain accounting records;

Review and analysis of certain vendor files and invoices for supporting documentation
of expenses;
15.

Computer forensic analysis of electronic media evidence; and

Review of deposition transcripts and other sworn testimony.
FTI Consulting, Inc. (“FTI”), hired directly by Baker, performed certain work and baseline
analyses at the direction and supervision of Baker. Such was conducted largely before the
retention of D&P. To the extent any such data was relied upon, or used to support analyses or
the opinions herein, the accuracy of the data was tested by D&P to ensure reliability.11
16.
Given the sheer volume of transactional data and documents in this investigation, a vast
amount of analyses were performed using electronic computer analytics and data mining
algorithms. Further, advanced computer models were developed and utilized for certain
quantitative conclusions. Such analytics and models were developed and utilized consistent
with applicable professional standards.
10
See infra for description of computer systems.
By way of example, statistical sampling was conducted on transactional data. Random samples of data were
selected and underwent extensive testing, including “ticking and tying” of information to source documents (e.g.,
confirmation of information taken from historical microfilm customer statements or underlying bank statement
transactional data).
11
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IV.
SUMMARY OF OPINIONS
17.
This section is meant to provide only a brief summary of my expert opinions in this matter
and to highlight the bases for such opinions which are fully discussed and supported
hereinafter.
18.
Based on my experience and the results of my investigation of BLMIS (described in detail
throughout this report) I have concluded that: 1) the Investment Advisory business (i.e.,
House 17) was not a legitimate business; and 2) House 17 was a Ponzi scheme.
19.
There is no evidence that the purported investment transactions for House 17 customers ever
occurred at least as far back as the 1970s.12 In fact, the evidence shows the trading did not
occur. Reconciliations of: 1) House 17 equity positions to available BLMIS Depository Trust
& Clearing (“DTC”) records and 2) option trades with the available Options Clearing
Corporation (“OCC”) records indicate that no securities transactions were executed by House
17.
20.
The so-called “convertible arbitrage trading strategy” purportedly implemented by BLMIS in
the 1970s utilized fictitious trades that in many instances exceeded the entire reported market
volume for the particular security on the day it was purportedly traded. On numerous trading
days, trades were recorded at prices that did not represent true prices, as the prices reported
for the purported trades were outside the range of market reported trading prices on a given
day. Dividend payments and/or accrued interest were not reported by House 17 on many
customer statements even though the real convertible securities paid such dividends and/or
interest. Further, convertible securities were reported by House 17 as being traded on days
after the actual date of conversion reported by the issuing corporation, thereby evidencing the
fictitious nature of the purported trades. Lastly, there was no evidence that the purported
convertible securities were ever actually converted, again supporting the fictitious nature of
the purported trading activity.
21.
The so-called “split-strike conversion strategy,” purportedly put into place by BLMIS in the
1990s, utilized fictitious trades that in many instances exceeded the entire reported market
12
See discussion infra regarding David Kugel, who recently pled guilty to federal securities and related fraud charges
on November 21, 2011 and stated that there was no legitimate trading in House 17 as far back as the 1970s. United
States v. Kugel 10-CR-228, T’script of Plea Allocution DKT entry 11-21-11 (S.D.N.Y.) Nov. 21, 2011.
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volume for the particular security on numerous trading days. Many purported trades were
recorded at prices that did not represent true prices as the prices reported were outside the
range of reported trading prices on a given day. House 17 supposedly executed 83 percent of
the buy transactions by share volume below the Volume Weighted Average Price (“VWAP”)
and executed 72 percent of the sell transactions by share volume above the VWAP, statistics
that evidence the fictitious nature of the trades.
22.
Further, purported trades were recorded as being settled on weekends or holidays when the
U.S. stock and option exchanges were closed and were also supposedly settled after the
normal acceptable industry mandated time period of T+1 (for options) or T+3 (for equities),
again supporting the opinion that these trades simply never occurred. In addition, billions of
dollars of purported dividends earned that were reported on House 17 customer statements
were fictitious and were never received by BLMIS, again showing the fictitious nature of the
trades.
23.
Additionally, House 17 created fake reports from the DTC trading clearinghouse which were
designed, in part, by utilizing the IBM AS/400 computer system as well as PC-based systems.
House 17 customer statements contained fictitious trades that were backdated using special
software (STMTPro) modified in-house to reprint customer statements after the fact. Also,
extensive in-house computer programs were created to conceal the fictitious investment
transactions.
24.
House 17 was “schtupping”13 certain House 17 customers’ purported investment returns
utilizing a process to provide those customers with extra fictitious trades that were rigged to
generate additional fictitious gains in order to reach pre-determined rates of return thresholds.
The process involved a careful monitoring of certain accounts to ascertain levels of reported
investment returns throughout the year and those that were falling short, were given
additional fictitious trades, typically in December of that year, in order to bump the purported
yearly returns to levels that House 17 had promised those customers.
25.
Additionally, various regulatory reports were falsified to conceal the fictitious investment
transactions utilizing false financial and other information.
13
See discussion infra on the context surrounding the so-called “schtupping” of House 17 customer returns.
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26.
House 17 was a Ponzi scheme, utilizing new customer monies to fund its operations as well as
to fund the withdrawal of fictitious profits and principal for its older customers. The Ponzi
scheme had been operating for many years as is evidenced by the fact that House 17 was not
generating any legitimate profits since no trading activity was taking place. Additionally,
House 17 was not receiving legitimate financial support from House 5 in amounts sufficient
to satisfy the cash requirement needs of the House 17 customer withdrawals and House 17
was not receiving any legitimate outside financial support vis-à-vis loans or otherwise.
27.
As further proof of the illegitimate nature of House 17 and to support the opinion that House
17 was a Ponzi scheme, the overall solvency of BLMIS was assessed. Businesses operating
as a Ponzi scheme are hopelessly insolvent by their very nature. As further proof, a solvency
analysis was conducted and it was determined that BLMIS was insolvent as of at least
December 11, 2002 (a date selected by counsel for the six-year period prior to BLMIS’s
bankruptcy filing, “Valuation Date”). BLMIS’s customer liabilities were approximately $12
billion as of December 11, 2002, far exceeding the fair market value of its assets by $10
billion dollars.
V.
FACTUAL BACKGROUND14
A. Bernard L. Madoff Investment Securities
28.
In 1960, Madoff founded BLMIS as a sole proprietorship. BLMIS, a market making business
in Over-the-Counter stocks (“OTC”), was registered as a broker-dealer with the Securities and
Exchange Commission (“SEC”) as of January 19, 196015 and operated three business units:
(1) a market making business; (2) a proprietary trading business (together with the market
making business known inside BLMIS as “House 5”); and (3) an investment advisory
business (known as the IA Business or inside BLMIS as House 17).
14
My understanding of the factual background is based upon various sources of information including the pleadings
in this case, deposition transcripts and/or testimonial transcripts in connection with the parallel liquidation
proceeding in the United Kingdom, and documents where footnoted. This recitation of the factual background serves
to provide only a background summary of the facts as I understand them. It is my understanding that the foundation
for the facts set forth in this section of my report will be laid out at trial through evidentiary materials and will form
the factual predicate for any opinions contained herein that are based upon such facts.
15
Form BD for Bernard L. Madoff, December 31, 1959. PUBLIC0003607-PUBLIC0003614
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29.
In 1987, BLMIS moved from its location at 110 Wall Street to the iconic “Lipstick Building”
located at 885 Third Avenue in Manhattan, eventually leasing the 17th, 18th, and 19th floors.16
House 5 was located on the 18th and 19th floors.17 Eventually, House 17 moved from the 18th
floor to the 17th floor.18
30.
In 2001, BLMIS was reorganized as a single-member LLC with Madoff as the sole member.19
31.
In August 2006, BLMIS registered as an investment adviser with the SEC claiming to have
23 accounts and $11.7 billion in assets under management.20
32.
During 2008, House 17’s cash reserves dwindled to the point where customer redemption
requests exceeded the cash balance available. At his plea hearing on March 12, 2009, Madoff
confessed to federal authorities that the IA Business was a fraud.21
B. House 17 Operations
33.
The House 17 customer accounts were administered in two groups: (1) the split-strike
conversion accounts; and (2) the non-split-strike conversion accounts (which included the
convertible arbitrage accounts).
34.
A convertible arbitrage trading strategy aims to generate profits by taking advantage of the
pricing mismatches that can occur between the equity and bond/preferred equity markets.
This strategy is implemented when the bond market or preferred equity market is incorrectly
valuing the option component of the security relative to the underlying common stock price.
The investor is looking then to benefit from a change in the expectations for the stock or bond
over a period of time (see discussion infra for additional details on convertible arbitrage).
35.
The split-strike conversion accounts were overseen by Frank DiPascali (“DiPascali”).22 This
group of accounts employed a strategy which purported to invest in a basket of common
stocks within the S&P 100 Index which was hedged by call and put options to limit customer
gains and losses. Madoff would purportedly decide when to unwind positions upon which the
16
Bernard L. Madoff Lease Summary 885 Third Avenue. CWIE-BR00002468
LAZAA0004351- LAZAA0004352
18
Bernard L. Madoff Lease Summary 885 Third Avenue. CWIE-BR00002468
19
BLMIS Articles of Incorporation for New York State. MADTSS01160346
20
BLMIS ADV Form at 8, Aug. 25, 2006. PUBLIC0003729
21
See United States v. Madoff, No. 09-CR-213 (DC), Transcript of Plea Allocution of Bernard L. Madoff at 23, ECF
No. 50 (S.D.N.Y. March 12, 2009).
22
See generally, Frank DiPascali, No. 09-CR-764 (RJS), Plea Allocution, Dkt. Entry 8/11/2009 (S.D.N.Y. 2011);
United States v. Frank DiPascali, No. 09-CR-764(RJS), Information, ECF No. 7 (S.D.N.Y. 2011).
17
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stocks were sold and the investments were moved into U.S. Treasuries and/or money market
funds and cash reserves.
36.
The non-split strike conversion accounts initially represented a significant portion of overall
House 17 accounts, but became a small percentage of total House 17 accounts in the 1990s.
Generally, the non-split-strike conversion accounts were titled in the name of BLMIS’s oldest
House 17 customers.
37.
Although BLMIS was touted as one of the most technologically advanced brokerages in the
country and was widely acknowledged as being “at the forefront of computerized trading,”23
as is discussed hereinafter, House 17 neither provided its customers with electronic customer
statements nor was there real-time access to their individual House 17 accounts at BLMIS.
C. Madoff Securities International Limited
38.
In February 1983, BLMIS established its foreign operations with the registration of Madoff
Holdings Limited in London.24 In September 1988, Madoff Holdings Limited began
operating as Madoff Securities International Limited (“MSIL”).25 MSIL operated under the
Financial Services Authority (and its predecessors) in the U.K.26 and became one of the first
U.S. members of the London Stock Exchange.27 As of December 31, 2007, MSIL employed
approximately 25 people.28
23
BLMIS web archive Oct. 23, 2005,
http://web.archive.org/web/20051023123110/http://www.madoff.com/dis/display.asp?id=20 (last visited Aug. 1,
2011).
24
Madoff Holdings Ltd. Incorporation documents. PUBLIC0006083
25
“Special Resolution” indicating that Madoff Holdings Ltd. changed its name to Madoff Securities International
Limited). PUBLIC0008959
26
MSIL Financial Statement and Directors Report. PUBLIC0005755 at PUBLIC0005757
27
BLMIS website, Oct. 23, 2005,
http://web.archive.org/web/20051023123110/http://www.madoff.com/dis/display.asp?id=20 (last visited Aug. 1,
2011).
28
MSIL Financial Statement and Directors Report. PUBLIC0005785 at PUBLIC0005798
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D. Key Individuals
i.
Bernard L. Madoff
39.
Madoff was the principal of BLMIS and oversaw both House 5 and House 17 businesses.29
40.
On December 11, 2008, Madoff was arrested for securities fraud and related charges.30
41.
On March 12, 2009, Madoff pled guilty to 11 counts of an indictment including federal
securities fraud and related offenses.31
42.
On June 29, 2009, Judge Dennis Chin sentenced Madoff to the maximum of 150 years in
federal prison.32
ii.
Frank DiPascali
DiPascali started at BLMIS in 1975 right after he graduated from high school.33 Over his
43.
years with BLMIS, he worked as a research analyst, options trader,34 in addition to other
roles.35 DiPascali managed House 17 and was critical to the day-to-day activities of the IA
Business, interfacing with clients and overseeing House 17 employees.36
44.
In 2009, DiPascali was charged with a ten count criminal information, and he subsequently
entered into a plea agreement. In his plea allocution, DiPascali admitted to learning of the
fraud in the late 1980s or early 1990s, and he stated that no purchases or sales of securities
actually took place in the client accounts.37 Instead, DiPascali created fraudulent account
29
BLMIS ADV Form at 23, Aug. 25, 2006. PUBLIC0003729 Madoff served as Chairman of the Board of Directors
of NASDAQ in 1990, 1991, and 1993, and was a member of the Board of Governors for NASD. BLMIS website,
Oct. 23, 2005, http://web.archive.org/web/20051023123110/http://www.madoff.com/dis/display.asp?id=20 (last
visited Aug. 1, 2011).
30
United States v. Madoff, 586 F.Supp.2d 240, 244 (S.D.N.Y. 2009).
31
United States v. Madoff, 09-CR-213, Plea Allocution at pp. 7-8, ECF No. 50 (S.D.N.Y. March 12, 2009).
32
Id. at 49. In his plea allocution, Madoff admitted to operating a Ponzi scheme “to the best of his recollection” from
the early 1990s until December 2008. Additionally, he stated that no securities had ever been purchased on behalf of
the House 17 customers. Id. at 24, 29. While I have considered information contained in Madoffs’ plea allocution,
my opinions in no way are predicated or based upon information contained therein and as set forth herein my
investigation contradicts the duration of fraud claimed by Madoff. Moreover, David Kugel recently pled guilty in
this matter (see discussion infra) and has admitted that the fraud started in the early 1970s at House 17 and that no
trading activity actually took place for House 17 customers, further supporting my opinions contained in this
report. Information contained in the Madoff plea allocution was considered solely as part of the record in this matter.
33
United States v. DiPascali, No. 9-CR-764, Plea Allocution at 45, Dkt. Entry 08/11/2009 (S.D.N.Y. Aug. 11, 2009).
34
Id.
35
Id. at 47.
36
Id.
37
Id. at 46.
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statements using information gleaned from historical stock data to create the returns that
Madoff had promised the clients.38
45.
On August 11, 2009, DiPascali pled guilty to federal securities fraud and related offenses.
DiPascali is facing 125 years in prison, but has yet to be sentenced.
iii.
46.
David Kugel
David Kugel (“Kugel”) worked for BLMIS for more than 40 years, originally starting in
1970.39 Prior to working for BLMIS, Kugel worked as a trader specializing in convertible
securities.40 For BLMIS, Kugel purportedly traded in convertible securities and applied an
arbitrage strategy to these stocks, buying both the convertible security and then shorting the
underlying stock.41 This arbitrage strategy is similar to the purported strategy that BLMIS
claimed to employ in the House 17 accounts from at least the 1970s to the 1990s.42
47.
On November 21, 2011 (just one day before this report was issued), Kugel pled guilty to
federal securities fraud and related offenses, admitting that the investment fraud at House 17
started in the 1970s.43 Kugel is awaiting sentencing.44
iv.
48.
Annette Bongiorno
Annette Bongiorno (“Bongiorno”) worked at BLMIS from July 1968 until December 11,
2008. 45 She managed hundreds of House 17 accounts and supervised House 17 employees
including the key punch operators responsible for entering the purported trades.46 Many of
38
Id. at 47.
United States v. Kugel, 10 Cr. 228 (LTS), Plea Allocution at 35-36 (S.D.N.Y. Nov. 21, 2011).
40
See generally, Kugel Plea Allocution supra.
41
See generally, Kugel Plea Allocution supra.
42
See infra on convertible arbitrage strategy.
43
“As to Counts One, Three, Four, and Five, I provided historical trade information to other BLMIS employees,
which was used to create false, profitable trades in the Investment Advisory clients’ accounts at BLMIS. Specifically,
beginning in the early ‘70s, until the collapse of BLMIS in December 2008, I helped create fake, backdated trades. I
provided historical trade information – sorry - first to Annette Bongiorno, and late to Joanne Crupi, and others which
enabled them to create fake trades that, when included on the account statements and trade confirmations of
Investment Advisory clients, gave the appearance of profitable trading when in fact no trading had actually
occurred. I helped Bongiorno, Crupi and others create these fake, backdated trades based on historical stock prices
and were executed only on paper.” United States v. Kugel, 10 Cr. 228 (LTS), Plea Allocution at 32 (S.D.N.Y. Nov.
21, 2011).
44
See U.S v. Kugel, No. 10-CR-228 (LTS), Information (S.D.N.Y. Nov. 21, 2011).
45
United States v. Bongiorno, No. 10-CR-228, Superseding Indictment at pg. 5, ECF No. 36 (S.D.N.Y. Nov. 17,
2010).
46
Id.
39
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the accounts that Bongiorno managed were close friends and family of Madoff and BLMIS
employees, and included some of the oldest Madoff clients.47
49.
Bongiorno was charged with federal securities fraud and related offenses on November 18,
2010.48 She is awaiting trial.
v.
50.
Daniel Bonventre
As BLMIS’s Director of Operations, Daniel Bonventre (“Bonventre”) ran the back office at
BLMIS and oversaw the firm’s accounting and securities clearing functions for at least 30
years.49 He was responsible for overseeing the accounting functions for both House 17 and
House 5, including maintenance of the BLMIS general ledger.50 Bonventre provided
information used in the creation of the Financial and Operational Combined Uniform Single
(“FOCUS”) reports and the BLMIS financial statements.51
51.
Bonventre was charged with federal securities fraud and related offenses.52 Bonventre is
awaiting trial.
vi.
52.
Eric Lipkin
Eric Lipkin (“Lipkin”) started at BLMIS in the mid-1980s and by 1992 was working in
BLMIS’s payroll and benefits department, processing the payroll and administering the
BLMIS 401(k) plan.53 In approximately 1996, Lipkin began working with Bongiorno,
Bonventre, DiPascali, Jodi Crupi, Jerrry O’Hara, and George Perez to maintain false customer
accounts, with Lipkin creating letters to clients indicating the purported balances in their
BLMIS accounts.54
53.
Lipkin admitted to manufacturing customer statements to reflect the false holdings of
customer accounts, as well as, falsifying the books and records of BLMIS.
47
Lipkin was
See generally, Bongiorno Indictment supra at 45.
Bongiorno, Indictment at pp. 70-96.
49
United States v. Bonventre, No. 10-CR-228 (LTS), Superseding Indictment at pp. 60-92, ECF No. 36-1 (S.D.N.Y.
Nov. 17, 2010).
50
Id. at p. 4.
51
Id. at 51.
52
United States v. Bonventre, No. 10-CR-228 (LTS), Superseding Indictment at pp. 60-92, ECF No. 36 (S.D.N.Y.
Nov. 17, 2010).
53
Press Release, U.S. Attorney’s Office, Manhattan Attorney Announces Guilty Plea Of Another Employee Of
Bernard L. Madoff Investment Securities LLC, (June 6, 2011); United States v. Lipkin, No. 10-CR-228 (LTS),
Information at pg. 5, ECF No. 138 (S.D.N.Y. June 6, 2011).
54
Id. at 5-6.
48
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charged with federal securities fraud and related offenses.55 Lipkin entered into a cooperation
agreement and on June 6, 2011, pled guilty to all six counts.56 Lipkin awaits sentencing.
vii.
Joann “Jodi” Crupi
Joann “Jodi” Crupi (“Crupi”), who worked for BLMIS for approximately 25 years,57
54.
performed many tasks for BLMIS. Crupi tracked the daily activity in the primary checking
account for the IA Business operations (the “703 Account”) to ensure there was enough
money for pending redemptions, and she authorized wire transfers into and out of the account.
Crupi created a Daily Report, delivered to Madoff every day, which reflected the 703
Account balance, customer deposits, and all pending customer redemptions.58 Similar to
Bongiorno, Crupi was also responsible for managing several House 17 customer accounts,59
for which she manufactured statements in order to produce the promised rates of return.60
Crupi was charged with federal securities fraud and related offenses on November 18, 2010.61
55.
viii.
56.
Jerry O’Hara and George Perez—Computer Programmers
Jerry O’Hara (“O’Hara”) was hired in 1990 as a programmer in House 17 to create and
maintain the systems and functions that falsified customer account statements. George Perez
(“Perez”) was hired in 1991 to assist O’Hara. Perez and O’Hara’s programs and systems
created fake trade blotters and reports.62 Additionally, they maintained the systems that
falsified the trading data using historical stock prices to manufacture the customer statements
and other reports sent to customers.63
O’Hara and Perez were both charged with federal securities fraud and related offenses.64
57.
O’Hara and Perez await trial.
55
Id. at 7.
United States v. Lipkin, 10-CR-228 (LTS), Cooperation Agreement, ECF No. 138 (S.D.N.Y. June 6, 2011); United
States v. Lipkin, 10-CR-228 (LTS), Minute Entry, Dkt. Entry 06/06/11 (S.D.N.Y. June 6, 2011).
57
United States v. Crupi, No. 10-CR-228 (LTS), Superseding Indictment at pp. 5, ECF No. 36 (S.D.N.Y. Nov. 17,
2010).
58
Id. at 5-6, 44-45.
59
Id. at 14-15, 20-21, 25-26.
60
Id. at 14-15, 20-21, 25-26, 33-37.
61
Id. at 60-92, 94-95.
62
Id. at 27-38.
63
See MDPTTT00000001- MDPTTT00002748
64
United States v. Bonventre, No. 10-CR-228 (LTS), Superseding Indictment, ECF No. 36 (S.D.N.Y. Nov. 18,
2010).
56
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ix.
58.
Friehling and Horowitz
The BLMIS financial statements were purportedly audited by Friehling and Horowitz, C.P.A.,
P.C. (“F&H”), a three-person CPA firm.65
59.
Jerome Horowitz (“Horowitz”), a licensed CPA in the State of New York,66 worked for
Alpern & Avellino before establishing his own accounting firm. Saul Alpern was Madoff’s
father-in-law and founder of the accounting firm. When Horowitz retired, his firm retained
the Madoff account and continued to perform the tax and audit services for the Madoff
brokerage firm. These duties were transitioned to David G. Friehling (“Friehling”) when
Horowitz retired.
60.
On November 3, 2009, in the United States District Court Southern District of New York,
Friehling pled guilty to federal securities fraud and related offenses.67
61.
As a result of the plea, Friehling was forced to surrender his CPA license to the State of New
York and is currently awaiting sentencing.
E. Computer Systems Overview
62.
In operating either a market-making business or an investment advisory business such as
BLMIS, a minimum amount of computer hardware, software and connections to information
sources and regulatory systems is required. Often, firms engaged in market trading activities
develop information technology systems that enable and facilitate certain key functions, such
as customer management and provision of timely market information.
63.
Customer management systems obtain information from clients regarding deposits, market
orders and withdrawals, as well as verify the accuracy of the same. Market information
systems facilitate timely communication of news and current market information instrumental
to investing decisions. This information may come from third party vendors, such as
Bloomberg, Dow Jones, and Thomson Reuters, as well as directly from the financial
65
See Audit Report to the 2000 audited financial statements. MADTEE00046020
Office of the Professions, New York State Education Department (Nov. 20, 2011),
http://www.nysed.gov/coms/op001/opsc2a?profcd=07&plicno=017210&namecheck=HOR.
67
United States v. Friehling, No. 09-CR-700, Plea Agreement, Dkt. Entry 1/3/09 (S.D.N.Y. Nov. 3, 2009).
66
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exchanges, such as NASDAQ. Systems that integrate customer management and market
information systems aid in the trading and investment divisions’ interaction with trading
markets by, among other things, identifying investment opportunities and generating optimal
execution strategies.
64.
The following table provides a summary of the key systems, both hardware and software,
implemented in House 5 and House 17.
Table 1
Name
ACES
Bloomberg
Connectivity Overview
CTCI Circuit
Custom Software
Custom Software
Data
Warehouse
DTC System
68
Description
Routed orders between order-entry firms
and market makers that have established
relationships with BLMIS.
Provided nearly instant financial and
economic data.
Approximately 80 connections to handle
order flow. These systems included
extranet providers, private lines and VPN
internet connections.
Reported trades to tape and cleared trades
through the NASDAQ/Trade Reporting
Facility (“TRF”) and received trade
acknowledgements.
Software used to identify customer
accounts, individual securities, trading
activity, pricing, dividend and proxy
information, checks and other information
related to maintaining the accounts.
Custom software printed customer
statements and storing optical images.
An Oracle database that received and
processed data from various transactional
databases and systems.
Enabled securities movements for NSCC’s
(described infra) net settlements and
settlement for institutional trades.
House 5
House 17




Limited68





House 17 had very limited connectivity capabilities that basically consisted of an internet connection and an FTP
site. No connections to DTC or exchanges were identified and/or found.
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Name
Description
Facilitates electronic communication of
trade-related messages between equity
market participants by incorporating the
free Financial Information eXchange
(“FIX”) protocol, JAVA, XML and
TIBCO integration technologies.
Fix Engine
Created forms that overlaid files generated
on the AS/400 in order to simplify
printing.
FormsPrint
A popular system for small and
intermediate sized companies, that hosted
IBM Application
System 400 (“AS/400”) its information systems.
A proprietary order entry and management
system that was integrated with the MISS
M2
system.
Provided to query and review executions
and make corrections in a batch process
Maid
rather than one at a time.
Provided backup and disaster recovery
MIMIX
functionality.
A central order management system for
most trading activities, including market
making and proprietary activities. MISS
handled, on average, 400,000 trades a day
with a capacity of over 1.4 million
MISS
executions.
Delivered bond and dividend
Muller
announcement data.
Provided real-time market data and trading
NASDAQ QIX
system.
Tracked order events, including the
Order Audit Trail
origination, transmission and the
System (OATS)
cancellation or execution.
Custom software that facilitated the
generation of customer statements through
Report Program
manual entry, as well as interaction with
Generator (“RPG”)
House 5 systems.
Trading platforms that executed trades and
ROBO and Blackbox
managed Profit and Loss accounting.
House 5
House 17















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Name
Securities Industry
Automation
Corporation (“SIAC”)
Settled Cash
(SETCSH17)
STMTPro
StorQM
Stratus VOS
Superbook
Thomson One
Ticker Plant
Time and Sales
Time Slicing Web
Applications
65.
Description
Provided real-time market data from
SIAC’s Consolidated Tape/Ticker System
(“CTS”) and Consolidated Tape
Association (“CTA”).
Data file of customer account activity.
Revise customer statements from previous
months if necessary.
Off-the-shelf product that enabled viewing
and managing legacy reports.
Front-end processing system to maximize
trading speed.
A component of the M2 system that
provided a consolidated view of all
available market data for a particular
security.
Provided trading functions.
An architecture system for data
distribution.
Used by clients to view their historical
trade data.
Customer order portal that enabled
registered clients to enter and track orders.
House 5
House 17










As discussed in greater detail later in this report, while House 5 had robust computer systems
that one would expect to see in a broker-dealer trading environment, the dearth of such
comparable systems in House 17 is in stark contrast and shows that trading in House 17 did
not occur.
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VI.
EXPERT OPINIONS
A. OPINION NO. 1: HOUSE 17 WAS NOT A LEGITIMATE BUSINESS.69
i.
Fictitious Trading in House 17 - There is no evidence that the purported
investment transactions for House 17 customers ever occurred at least as far
back as the 1970s. In fact, the evidence shows the trading did not occur.70
a. The Purported Convertible Arbitrage Strategy – the 1970s to the
1990s: There is no evidence that the purported convertible arbitrage
strategy for House 17 customers actually occurred. In fact, the
evidence proves that the purported trades did not occur.
66.
Convertible securities are generally fixed income and preferred equity instruments that allow
the purchaser to convert that security to shares of stock under pre-specified conditions set
forth by the issuer. Although there can be a myriad of covenants for convertible securities,
the most common conditions include a pre-determined strike price (i.e., price at which the
securities can be converted) and a pre-determined timeframe necessary in order to convert the
security into shares of common stock.71
67.
Corporate convertible securities include the following:
68.

Convertible Bonds: Corporate bonds that can be converted to company equity at some
predetermined ratio during a certain period of time.

Warrants: Similar to call options in that they provide an investor with the right (but not
the obligation) to purchase a security at a predetermined price during a certain period of
time, but issued by the company usually as a benefit to bondholders.

Convertible Preferred Stock: Preferred stock that can be converted to common equity at
some predetermined ratio during a specified period of time.
A convertible arbitrage trading strategy aims to generate profits by taking advantage of the
pricing mismatches that can occur between the equity and convertible instruments. This
69
I am using the plain English meaning of the term “legitimate” to mean “being exactly as purposed: neither
spurious nor false.” See Legitimate, Merriam Webster (Nov. 20, 2011), http://www.merriamwebster.com/dictionary/legitimate. Further, I am not opining on the trading activities or other business activities of
House 5 beyond its relevance to my opinions related to House 17.
70
All discussion and opinions related to trading activities or positions held in House 17 are assumed herein to be
purported, including, but not limited to, all references to “trades,” “securities held” or “trading.” The opinion herein
encompasses the convertible arbitrage and split strike conversion trading strategies for House 17 which were the
trading strategies utilized for nearly all of its customers. A few self-directed trades for a single IA Business customer
were identified as being purportedly executed through House 5. The de-minimis number of these transactions does
not impact my opinions herein.
71
Frank J. Fabozzi, The Handbook of Fixed Income Securities, 1372 (7th ed. McGraw Hill 2000).
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strategy is implemented when the convertible instrument is incorrectly valuing the option
component of the security relative to the underlying common stock price. The investor is
looking then to benefit from a change in the expectations for the stock or convertible security
over a period of time.
69.
Normally, this arbitrage is initiated by simultaneously purchasing convertible securities and
selling short enough shares of the underlying common stock to create a delta neutral hedge.
(“Delta neutral” implies that the investor is protected from price movement of the common
stock.)72
70.
With this trading strategy, if the underlying stock loses value, the potential arbitrageur will
benefit from the short sale of the stock, while still receiving constant interest payments to the
extent the underlying instrument was a bond. Conversely, if the stock price improves in
value, the loss on the short sale will be mitigated by the increase in the option value of the
underlying security.
(i)
71.
Convertible arbitrage strategy - House 17 Customers
During the 1970s through the mid-1990s, Madoff purportedly utilized a convertible arbitrage
investment strategy. House 17 customer statements suggest that this purported trading
strategy occurred, in theory, as the statements showed long convertible positions,
corresponding short positions, and positions converted and unwound (i.e., the short positions
were purchased back and/or the convertible security was sold).
72.
In order to investigate House 17’s purported convertible arbitrage strategy, customer
transactions and statements were analyzed both in aggregate (i.e., across all customer
accounts) and on an individual customer account basis. The months of October 1979,
November 1979 and March 1981 were utilized and included all customer accounts that held
funds with BLMIS at that time.73 In addition to the three sample months, eight Avellino &
72
73
Arshanapalli, New Evidence on the Market Impact of Convertible Bond Issues in the U.S. 17-18 (2005).
The customer ledger data for these three months were fully coded into a database by the Trustee’s consultants.
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Bienes74 (“A&B”) accounts were utilized and analyzed from November 1978 through to the
date when the accounts transitioned to the purported split strike conversion strategy.75
73.
For the relevant time period, House 17 customer statements purportedly employing the
convertible arbitrage strategy were tested against historical, independent market trading
records for the applicable securities.76 The daily price range, total daily volume and corporate
actions (e.g., dividends) of each security in question were analyzed in comparison to those
identified on the customer statements.
74.
An example of how the purported transactions in House 17 were constructed can be seen in
Table 2 below. Customer statements from House 17 depicted that the clients were long in
convertible securities and short in the underlying common stock. In this instance, the
statement purports the customer was long Macmillan Inc. convertible debentures and short the
underlying common stock. However, as described in the following paragraphs, there are a
number of reasons why this trade, as presented (as well as the majority of the House 17
convertible arbitrage transactions in general) could not have occurred.
Table 2
A&B 1A0045 Account – Macmillan Inc Sub Deb Conv 8.75 – Due 2/15/2008
A
B
C
D
E
F
G
H
I
74
Bates
MF00370649
MF00370649
MF00370649
MF00370649
MF00370649
MF00371844
MF00371844
MF00371844
MF00371844
Statement Transaction
Date
Date
1/31/1985
9-Jan
1/31/1985
9-Jan
1/31/1985
10-Jan
1/31/1985
10-Jan
1/31/1985
17-Jan
3/31/1985
14-Mar
3/31/1985
14-Mar
3/31/1985
14-Mar
3/31/1985
14-Mar
Long
706,000
705,000
41,300
5,152
Short
Security
MACMILLAN INC SUB DEB CONV 8.750 2/15/2008
MACMILLAN INC SUB DEB CONV 8.750 2/15/2008
41,300 MACMILLAN INC
5,152 MACMILLAN INC
MACMILLAN INC FRACTIONAL SHARES
705,000 MACMILLAN INC SUB DEB CONV 8.750 2/15/2008
MACMILLAN INC
706,000 MACMILLAN INC SUB DEB CONV 8.750 2/15/2008
MACMILLAN INC
Price
Debit
138
$ 1,000,191.12
138
998,774.42
44 7/8
44 3/4
JRNL
DELV
RECD
DELV
RECD
Total
$ 1,998,965.54
Credit
$ 1,853,337.50
230,552.00
30.20
$ 2,083,919.70
A detailed overview of A&B is discussed infra in this report.
These accounts include: 1A0045 through 1A0051 and 1B0018. As noted supra in this report, the underlying data
used in these analyses were validated and tested. These eight accounts were utilized as the customer data associated
with these accounts were fully coded by the Trustee’s consultants into a database.
76
New York Stock Exchange Daily Stock Records, Over the Counter Exchange Daily Stock Records, American
Stock Exchange Daily Stock Record, Wall Street Journal New York Exchange Bonds, and Moody’s Industrial
Manuals.
75
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(ii)
75.
Purported convertible security trades exceeded the entire reported
market volume for certain days.
Given there were relatively few actual convertible securities issued during the timeframe
House 17 purportedly utilized this strategy (i.e., 1970s through mid-1990s) (see Figure 1), it
would have been highly unlikely to find adequate trading volume necessary to generate the
dollar returns that appear on the customer statements in this timeframe.77
Figure 1
Total Amount of Issuances in Market ($ bn)
$80
$70
$60
$50
$40
$30
Primary Purported Madoff Convertible Arbitrage Strategy Timeframe
$20
$10
$-
76.
To test if the purported trades could have been legitimate, the daily volume from the long
convertible positions as indicated on the customer ledgers were compared to the historical
market volume for those securities on the specific days the trades purportedly occurred.
Customer ledgers from the three months, October 1979, November 1979 and March 1981
were analyzed to aggregate the relevant transactions to be tested. 117 unique convertible
security transactions were compared to historical daily trading volume of these securities.78
Of these securities, 110 of the 117 unique convertible securities that resulted in purported
trades (95%) exceeded the daily market volume traded for that day by an average of over 150
77
SDC Database of Convertible Securities Issuances, includes only issuances greater than $100 million. Frank
Fabozzi, Jinlin Liu, & Lorne N. Switzer, Market Efficiency and Returns from Convertible Bond Hedging and
Arbitrage Strategies (2009).
78
There were 66 additional instances where publicly available market data could not be identified.
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times the entire reported daily volume for all trades in the market.79 In fact one security, UAL
Inc. Preferred Security A, purportedly traded nearly 1,219 times the actual daily volume, a
fact that shows the purported trades were fictitious.80
Figure 2
Breakdown of Purported Securities Exceeding Daily Volume for Three Months
32%
32%
2%
34%
77.
No Trades Occurred
Exceeded 1-2x
Exceeded 2-50x
Exceeded by Greater than 50x
To further test the volume analysis, eight A&B accounts were tested to determine whether the
transactions exceeded the actual daily market volume for the chosen convertible securities
between 1978 and 1998 (“A&B Time Period”).81 The daily historical volume for the
convertible securities was compared to the volume House 17 purportedly traded per the
customer account records, and results were similar to that of the three months analysis
79
A volume analysis was also performed for all the common equity that was shorted for the transactions executed
during these three months. Data was collected from the Daily Stock Price Record-New York Stock Exchange and
the Daily Stock Price Record-American Stock Exchange, which provide the end-of-month short positions. The
purported House 17 month-end short positions for these three months were then compared to the publicly available
data. The investigation concluded that of the 166 short positions for which data was publicly available, 57% of the
House 17 purported short common shares positions exceeded the daily historical volume for the common shares. In
fact, one position exceeded the daily volume by approximately 270 times the actual reported total market short
position.
80
Two of the largest European exchanges (London Stock Exchange and the Frankfurt Stock Exchange) were
analyzed to assess whether or not these securities were traded in those markets. The investigation shows that none of
the convertible securities were traded on those exchanges and could not have made up for the potential excess
volume that was not traded on the U.S. exchanges.
81
This is the time period for which convertible arbitrage information was available for these accounts.
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described above. 1,079 of the convertible securities in these eight accounts (over 90% of the
total) exceeded the daily volume on the transaction day by an average of nearly 30 times the
actual daily volume. Nearly forty percent of the trades occurred where there was no reported
volume at all in that particular security for that particular day. In one instance, the volume
reported by House 17 was over 500 times the total volume reported in the entire market.
78.
Accordingly, the purported securities trades underlying the convertible arbitrage strategy for
House 17 customers could not have been legitimate trades as they exceeded the reported
volume of the entire market on the securities House 17 purportedly executed.
Figure 3
Breakdown of Purported Securities Exceeding Daily Volume for 8 A&B Accounts
10%
44%
41%
5%
79.
No Trades Occurred
Exceeded 1-2x
Exceeded 2-50x
Exceeded by Greater than 50x
These volume discrepancies are further illustrated with an individual transaction on a single
customer ledger. Referring to Table 2, on January 9, 1985, the A&B customer statement
states that $1,411,000 par amount of Macmillan, Inc. subordinate debt was traded (Row A
and Row B). However, on that day, this security did not change hands in the open market
(see Figure 4 below for listing of traded securities for January 9, 1985).82 Accordingly,
82
New York Exchange Bonds Daily Records, Wall St.J.,Jan. 9, 1985.
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House 17 simply could not have legitimately traded Macmillan, Inc. subordinate debt on that
day.83
Figure 4
(iii)
80.
Purported purchase prices of convertible securities on customer
accounts did not represent true prices.
The purchase prices for the convertible securities as stated on the House 17 customer ledgers
were tested against the historical market prices to determine if the purported House 17 trades
fell within the actual daily market trading range. As House 17 often purportedly executed the
same security several times per day for the accounts, each unique trade price was tested
against the historical trading range for that day. For the months, October 1979, November
83
The Macmillan Inc. subordinated debt could not have traded on the OTC market either. While the New York
Exchange Bonds listing does not reflect OTC trading, the S&P Bond Guide captures the month-end high and low
traded prices for the exchanges and the OTC market. A review of the February 1985 S&P Bond Guide as of monthend January 1985 for the exchanges and the OTC market indicates that the high traded price for the MacMillan
subordinated debt in January 1985 was $154 and the low was $141.5. Given that the House 17 customer statements
indicate a traded price of $138 as of January 9, 1985, this price is outside the possible traded range in both the
exchanges and OTC market and could not have been traded in either market. S&P Bond Guide, February 1985, p. 10.
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1979 and March 1981, 166 unique trade prices were tested.84 Of the 166 unique trade prices,
126, or 76 percent, were outside the actual daily market trading price range showing that the
prices listed on the customer statements were fictitious.85
81.
The pricing discrepancies were further tested during the A&B Time Period for the eight A&B
accounts to determine if the same anomalies described above occurred throughout the
timeframe during which House 17 was purportedly implementing a convertible arbitrage
strategy for these accounts. Of the 1,127 securities with unique prices that were tested, 857,
or 76 percent, were outside the actual reported daily market price range.
82.
This pricing issue is further illustrated earlier in Table 2 with the Macmillan, Inc. sub-debt
long position. The statement shows that $1,411,000 par value of the Macmillan convertible
bond was traded on January 9, 1985 at a price of $138 (Row A and Row B). However, given
that there was no trading of the bond on this date; House 17 could not have purchased the
Macmillan, Inc. sub-debt for $138. 86
(iv)
83.
Convertible securities continued to be purportedly traded by House 17
even after they were called for conversion.
Many convertible securities have the option for the company to call the security at a
predetermined date or at the company’s discretion. That is, the company has the right to
convert the convertible securities into common shares. In instances where the bond or
preferred equity is called, the shares are converted on the record date at a determined amount.
Once the security is converted by the company it can no longer be held by an investor.
However, there are several instances where customer statements show that a convertible
84
In some instances historical data was unavailable. In the case of the Over-the-Counter (“OTC”) transactions, the
only publicly available information was the bid-ask and close prices. Therefore, no conclusive range could be
determined.
85
In those cases where the purported House 17 trades were higher or lower than the actual recorded daily market
traded prices, the House 17 prices themselves would have been the daily high or low. In the event that the out of
range prices on the House 17 customer statements were the result of an inadvertent typing error (sometimes referred
to as “fat fingering” ), House 17 would have had to issue corrected trade confirmations and customer statements with
actual market prices. There is no evidence of any corrections or reissuance to account for these corrections.
86
New York Exchange Bonds Daily Records, Wall St. J., Jan. 9, 1985.
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arbitrage transaction was purportedly still being held by a House 17 customer despite the fact
that the security had already been called.
84.
In the case of Macmillan, Inc., Table 2 the subordinated debentures were converted into
1,645,071 shares of common stock in January 1985, however House 17 purportedly closed
out its position on March 14, 1985 (Row H). 87 This transaction simply could not have been
legitimately completed as depicted on the customer statement given that the debentures were
retired by MacMillian, Inc. well before the March 14, 1985 date that House 17 purports to
convert the convertible security and buy back the common shares.
(v)
85.
House 17 did not account for dividend payments or accrued interest on
the convertible bonds thereby evidencing the fictitious nature of the
underlying transactions.
One major component of a convertible arbitrage transaction is that the underlying convertible
security pays a regular coupon or dividend. This additional income impacts how the
transaction is executed as the coupon or dividend is considered in the valuation of the
underlying security, which is used to determine whether an arbitrage situation exists. In many
instances, however, House 17 did not account for the coupon or dividend payment during the
purported convertible arbitrage transactions.
86.
An analysis was performed to identify actual dividend or coupon payments for those
convertible securities in which House 17 customers were purportedly invested as of the exdividend date. The dates and amounts were then reconciled to the customer ledgers to
confirm whether or not House 17 accurately recorded these payments. In many instances, the
coupon or dividend payments were not recorded as being paid to the customer.
87.
For example, Textron Inc. Preferred Convertible security paid a dividend of $0.52/share to
record holders as of June 15, 1982 (see Figure 5).88 A&B account A10045 was an account
holder as of this record date and should have received a dividend payment worth $6,592.56
(12,678 shares times $0.52/share). However, this payment does not appear on the A&B
account 1A0045 ledger.
87
88
MacMillan, Inc. at 4079, Moody’s Industrial Manual, (1985).
Textron Inc. at 3553, Moody’s Industrial Manual (1985).
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Figure 5
88.
Based upon the foregoing discussion regarding dividend discrepancies, this investigation and
analysis shows that trading in House 17 did not occur.
(vi)
89.
There is no evidence that House 17 converted the convertible securities
into common shares.
Companies
panies that have publicly traded securities typically use third-party
party institutions known as
transfer agents to keep track of the individuals and entities that own their stocks and bonds.
Most transfer agents are banks or trust companies, but sometimes a ccompany
ompany acts as its own
transfer agent.89 Companies that issue preferred convertible stock and convertible
subordinated debt must do so through these transfer or conversion agents.
90.
The transfer agent maintains records of pertinent shareholder information, such as names,
addresses and number of shares owned. The transfer agent also adminis
administers dividend
payments for companies, including dividends to be paid to each shareholder and making
dividend distributions by mailing out dividend checks or through other means.
means 90
91.
Given these agents stand directly between the issuing company and the security holder,
operations with these agents would have been essential to carrying out House 17’s
17 purported
convertible arbitrage strategy. The Secur
Securities and Exchange Act of 1934 requires that transfer
agents be registered with the SEC, or if the transfer agent is a bank, with a bank regulatory
agency.91 As a result, the SEC has strict rules and regulations in place for all registered
89
See Transfer Agents, U.S. Securities and Exchange Commission (11/20/11),
http://www.sec.gov/answers/transferagent.htm.
90
Id.
91
The Securities Exchange Act § 17A(c), 15 U.S.C. §78 (2010).
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transfer agents that include minimum performance standards regarding the issuance of new
certificates and related recordkeeping.
92.
In order to convert shares of preferred convertible stock or convertible subordinated debt into
common stock, shareholders must contact the company’s transfer agent and complete the
following:
93.

Complete and sign a conversion notice provided by a conversion agent, and deliver
such notice to the conversion agent;

Deliver a certificate or certificates representing the shares of convertible preferred
stock/subordinated debt to be converted to the conversion agent; and

If required, furnish appropriate endorsements and transfer documents.92
In order to have converted preferred convertible stock and convertible debt into common
stock, House 17 would have needed documentation from any entity that could convert the
shares and successfully execute the purported convertible arbitrage strategy. To test whether
proper documentation existed, ten purportedly converted securities were tested for proper
documentation as shown in Table 3.93
92
Such documentation usually contains most, if not all, of the following information: conversion date, conversion
factor (shares or price), total principal amount, total number of shares, name(s) and address(es) of person(s) in whose
name(s) the shares required to be delivered on conversion of the shares are to be registered.
93
Data obtained from Moody’s Industrial Manual for each of the respective years indicated in the table. The transfer
agent for each company is listed by year; data was reviewed for the year in which conversion occurred. Aetna Life at
4303, Moody’s Bank & Finance Manual (1980); Reliance Group Inc. at 2478, Moody’s Bank & Finance Manual
(1980);Eaton Corp. at 296, Moody’s Industrial Manual (1984); GATX Corp. at 1156, Moody’s Industrial Manual
(1980); Lear Siegler at 384, Moody’s Industrial Manual (1978); Liberty National Corp. at 1493, Moody’s Bank &
Finance Manual (1981); TenneCo Corp. at 3143, Moody’s Industrial Manual (1979); Texas Gas Transmission Corp.,
Moody’s Public Utility Manual (1979); Trane Co. at 6053, Moody’s Industrial Manual (1982); TRW Inc. at 4518,
Moody’s Industrial Manual (1982).
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Table 3
Transfer Agents as of Conversion Date
Security
AETNA LIFE & CAS CO PDF CONV $2
Date of
Purported
Conversion
Transfer Agents for Date of Purported
Transaction
8/22/1980
Hartford National Bank & Trust
Morgan Guaranty Trust
RELIANCE GROUP INC PFD SER B CONV $2.20
7/25/1979
First Jersey National Bank Jersey City
EATON CORP PFD SER B CONV $10
3/13/1984
AmeriTrust Co., Cleveland
GATX CORP PFD CONV $2.50
6/3/1980
Manufacturers Hanover Trust
LEAR SIEGER INC PFD CONV $2.25
1/10/1979
Irving Trust Co.
United California Bank
94.
LIBERTY NATL CORP PFD CONV $2.125
7/13/1981
Liberty National Bank & Trust
TENNECO CORP PFD $1.60
10/24/1979
Chemical Bank
TEXAS GAS TRANSMISSION CORP PREF CONV
$1.50
12/12/1979
Chemical Bank
TRANE CO SUB DEB CONV 4.000 9/15/1992
9/23/1982
Morgan Guaranty Trust
TRW INC PREF SER 1 CONV $4.40
12/11/1981
Morgan Guaranty Trust
No relevant documentation related to transfer agents or the conversion of any of the
underlying convertible securities was identified. Absent this documentation and
communication with the transfer agents, House 17 could not have converted the underlying
shares into common stock for any of the thousands of transactions in its convertible arbitrage
strategy.
95.
Further, House 17 did not consistently report on the customer statements that it had converted
the convertible securities into the required number of common shares based on the correct
conversion factor. For example, Coopers Industry Inc. Preferred Security B was purportedly
traded by House 17 on May 19, 1980. The adjusted conversion factor at this time was 7.2
common shares per convertible security; the adjustment was effective as of April 1980 due to
a 2-for-1 stock split (i.e., prior to April 1980, the conversion factor was 3.6). House 17,
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however, did not account for the stock split and continued to use the unadjusted conversion
factor of 3.6 shares. As a result, House 17 customers who owned Coopers Industry Inc.
Preferred Security B during this time period received half the com
common
mon shares they were
purportedly owed when the convertible security was converted to common shares in July
1980. As shown below, the House 17 customers received 12,938 common shares when they
should have received 25,876 shares based on the adjusted conversion
sion factor.
Figure 6
Figure 7
96.
Additionally, when the convertible security is converted into common stock, a fractional
share often remains, as the number of shares
shares-to-par
par value is not cleanly divisible by the
conversion factor/price. For example, if the conversion factor on 100 convertible securities is
0.3 common shares, upon conversion the owner would receive 33 1/3 common shares. When
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this occurs, the company will pay out the fractional share in cash on the date of the
conversion. The payment value is the fraction of a share multiplied by the trading price for
the common stock on the date converted.
97.
In instances where fractional shares appear on the House 17 customer ledgers, they were not
paid out at the price on the conversion date, which is required. For example, House 17
recorded a journal entry of $18.90 on May 7, 1982 for fractional shares of Textron Inc. (Row
D in Table 4). This equates to a common share price of $23.63, multiplied by the fraction of
a share left after converting 12,678 shares of Textron Preferred at the conversion factor of 1.1
shares of common/share of preferred. $23.63 was not the price of the common stock as of the
conversion date. The value of the fractional share would not be known until the conversion
date, which in this case was June 30, 1982 (Row E). On June 30, 1982, the common share
price for Textron was $18.88, which, after converting at the conversion factor of 1.1 shares,
would result in a fractional share payment of $15.10 not the $18.90 that House 17 recorded on
May 7th (i.e., a difference of 25%).
Table 4
A
B
C
D
E
F
98.
Bates
MF00147263
MF00147263
MF00147263
MF00147263
MF00147806
MF00147806
Statement Date
5/28/1982
5/28/1982
5/28/1982
5/28/1982
6/30/1982
6/30/1982
Transaction
Date
29-Apr
29-Apr
30-Apr
7-May
30-Jun
30-Jun
Long
12,678
13,945
Short Security
7,065 TEXTRON INC
6,880 TEXTRON INC
TEXTRON INC PFD CONV $2.08
TEXTRON INC FRACTIONAL SHARES
12,678 TEXTRON INC PFD CONV $2.08
TEXTRON INC
Price
23 3/4
23 7/8
25 1/8
JRNL
DELV
RECD
Total
Debit
$
$
Credit
167,793.75
164,260.00
318,334.79
18.90
$
318,334.79
$
332,072.65
Based upon the foregoing discussion regarding House 17’s incorrect conversion processes,
this investigation and analysis show that trading in House 17 did not occur.
(vii)
99.
Fictitious Convertible Arbitrage Trade Confirmations
Upon close examination, trade confirmations fabricated by House 17 to support the
convertible arbitrage trades were actually prepared backwards. A good exemplar of this was
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a purported convertible trade executed for the account referenced in the customer statement
Figure 8.94
100.
The purported convertible trade was as follows:

A purchase of 761 shares of Aetna Life & Casualty $2 Pfd on 6/23/80, settlement
on 6/30/80 at $83 7/8 per share. The shares had a conversion factor of 2.25.

Two sales of Aetna Life & Casualty common stock; one for 1052 shares at $39 1/8
and one for 660 shares at $39 ¼.

The purported trade was to be an eight week trade that was pre-calculated to
generate $3,191 in total profits with a close out date of 9/1/80.95
94
The customer name has been redacted.
See Adding Machine Tape calculating projected profit on the purported trade. MADTS00401002. See also,
MADTSS00400966 at MADTSS00400966 and MADTSS00401003 for handwritten notes detailing specifics of
purported trade.
95
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101.
The year-end
end 12/31/80 customer statement for account holder Madoff
Madoff-X1
X1 shows the
purported transaction as follows in Figure 8 below:
Figure 8
102.
The customer statement shows the purported purchase of the Aetna Life Pfd and short sale of
the Aetna Life common stock. However, the purported trade confirmations fabricated by
House 17 show the opposite
osite of what the purported trades were supposed to be. Shown below
in Figure 9, Figure 10 and Figure 11, the trade confirmations show
w that the Aetna Life
L Pfd
was sold rather than bought on 6/
6/30 and that the Aetna common stock was bought on 7/2/80,
clearly the direct opposite of what the customer statement was showing for the purported
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trades.96 The fictitious trade confirmations fabricated by House 17 for th
this example simply
got it wrong.
Figure 9
Figure 10
96
The customer statements showed only the settlement dates and not the trade dates. June 30, 1980 was the
purported settlement date for the purported June 23, 1980 trade for Aetna Pfd.
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Figure 11
103.
The Aetna convertible arbitrage purported trade example discussed above suffers from other
similar deficiencies for the convertible arbitrage examples discussed supra in this section.
This
his investigation and analysis similarly support that convertible arbitrage trading in House
17 did not occur.
104.
Most importantly,, as shown on the trade confirmation ((Figure 9), Madoff purportedly
purchased 761 shares of Aetna Life $2 Pfd for $83.875 on June 23, 1980. However,
according to the Daily Stock Price Record ((Figure 12 below), this security did not change
hands in the open market that day. Therefore, it would not have been possible for House 17 to
legitimately trade Aetna Life $2 Pfd on that day.
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Figure 12
b. Following the 1992 SEC investigation of A&B, BLMIS purportedly
transitioned from convertible arbitrage to the split strike conversion
investment strategy.
105.
A&B was an accounting firm at its origin, but developed exclusively into a “private
investing” firm in the mid-1980s given the investing business had increased in relative
importance to the extent that it was “financially wise” to end the accounting practice.97 A&B,
however, was never registered as a broker dealer, an investment company, or an investment
adviser.98 As of 1992, A&B had three partners: Frank Avellino (“Avellino”) was a 50%
partner, Michael Bienes (“Bienes”) and Dianne Bienes were each 25% partners.99
106.
A&B first began investing with House 17 in the 1960s through its predecessor, Alpern &
Avellino.100 Saul Alpern was Madoff’s father-in-law and founder of the accounting firm.
A&B attracted investor funds by promising guaranteed rates of return (typically 13%-18%)
97
Avellino and Bienes Dep. Ex. 02901-02902, July 7, 1992.
Avellino and Bienes Dep. July 7, 1992. MADOFF_EXHIBITS-03014
99
Avellino & Bienes Agreement of General Partnership (executed Aug. 12, 1988). MBISAA0003076, 3079
100
SEC v. Avellino & Bienes, et al, No. 92-CV-08314 (JES), Complaint for Preliminary and Permanent Injunctive
and Other Equitable Relief, ECF No. 4 (S.D.N.Y. Nov, 25, 1992).; Linda Sandler & Allan Dodds Frank, Madoff's
Tactics Date to 1960s When Father-In-Law Was Recruiter, available at http://www.bloomberg.com/apps/news?
pid=newsarchive&sid=at1ierlaVQyg (last visited Nov. 17, 2011).
98
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on money collected from individuals and entities101 and labeling the transactions with
investors as "loans."102 A&B issued letters to investors that specified the rate of return on
these loans.103 A&B in turn invested customer funds with BLMIS and retained the difference
between the returns BLMIS promised to A&B and the returns A&B promised to its
underlying investors.104 At the time of the SEC's investigation in 1992, A&B was one of
House 17's largest sources of investor monies, funneling hundreds of millions of dollars into
House 17's investments through A&B.105
107.
On November 17, 1992, the SEC filed a complaint against A&B and Avellino and Bienes
individually, seeking, among other things, a permanent injunction for having unlawfully
operated as an unregistered investment company.106 Avellino and Bienes entered into a
consent decree in which they agreed not to sell securities without a registration statement or
acting as an investment company. In addition, they agreed pay fines to the SEC totaling
$350,000.107
108.
Prior to approximately June 23, 1992, A&B maintained IA accounts with House 17 with the
following account numbers: 1A0045, 1A0046,108 1A0047, 1A0048, 1A0049 and 1A0050 (the
"Existing A&B IA Accounts").109 During that time, A&B used these House 17 accounts to
invest money pooled from investors.110 Prior to its creation as described below on or around
June 23, 1992, A&B IA account number 1A0053 did not exist. Documents provided in
101
A&B Loans Detail by Investor. SECSDK0000325- SECSDK0000834; SEC v. Avellino & Bienes, et al, No. 92CV-08314 (JES), Complaint for Preliminary and Permanent Injunctive and Other Equitable Relief, ECF No. 4
(S.D.N.Y. Nov, 25, 1992).
102
See, e.g., Avellino and Bienes Dep. Ex. 02913;02925-02934, July 7, 1992.
103
Avellino & Bienes, et al, No. 92-CV-08314 (JES), Complaint for Preliminary and Permanent Injunctive and Other
Equitable Relief, ECF No. 4 (S.D.N.Y. Nov, 25, 1992).
104
Frontline Transcript of Interview of Michael Bienes, available at http://www.pbs.org/wgbh/pages/frontline/
madoff/interviews/bienes.html (last visited Nov. 17, 2011); SEC v. Avellino & Bienes, et al, Complaint for
Preliminary and Permanent Injunctive and Other Equitable Relief. MADOFF_EXHIBITS-03058
105
BLMIS customer statements for A&B accounts through June 1992.
106
Avellino & Bienes, et al, No. 92-CV-08314 (JES), Complaint for Preliminary and Permanent Injunctive and Other
Equitable Relief, ECF No. 4 (S.D.N.Y. Nov, 25, 1992).
107
SEC v. Avellino & Bienes, et al, No. 92-CV-08314 (JES), Final Judgment of Permanent Injunction and Other
Equitable Relief and Consent Against Avellino & Bienes, Frank J. Avellino and Michael S. Bienes, ECF No. 3
(S.D.N.Y. Nov, 25, 1992).
108
Account number 1A0046 was in the name of the A&B Pension Plan & Trust. See Account Maintenance File for
1A0046. AMF00309438-9450
109
See Arbitrage Portfolio Transaction Reports (MF00545002-MF00545003); Portfolio Management Reports as of
June 30, 1992. MF00011542-51; See also Avellino and Bienes Dep. Ex. 03223, Nov. 20, 1992.
110
BLMIS customer statements for A&B accounts through June 1992; Avellino and Bienes Dep., Nov. 20, 1992.
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connection with the SEC investigation of A&B indicated that as of June 18, 1992 A&B owed
its investors almost $399,819,455 despite the fact that the purported aggregate equity balance
of the Existing A&B IA Accounts only totaled approximately $364 million.111 Thus, the
aggregate total amount reflected in the Existing A&B IA Accounts was approximately $35.8
million less than A&B had represented to the SEC it owed to underlying investors. Avellino
and Bienes had testified to the SEC that A&B utilized an account or accounts at Chemical
Bank to handle investor funds and that the balance maintained in these account(s) was
typically $2 million to $3 million but never higher than $6 million.112 Assuming that the
Chemical Bank Account held all $6 million, this meant that A&B had a funding shortfall of at
least approximately $29.8 million ($399.8 million owed to investors less $364.0 million
purported aggregate equity balance of the A&B accounts and less a maximum of $6 million
that could be purportedly held at Chemical Bank at any time) in its House 17 accounts.113
109.
The existence of this funding shortfall significantly contradicted sworn testimony by Avellino
and Bienes provided to the SEC in which they claimed that A&B had a significant "cushion"
between what it owed on "loans" from investors and what it held in capital in its accounts at
BLMIS, which would protect customers from potential losses.114 The shortfall explained
above demonstrates that a cushion did not exist in June 1992. Therefore, around June 1992,
House 17 created an additional account for A&B (the "1A0053 Account") and manufactured
fictitious trading in this account in order to conceal the shortfall.115 Backdated transactions
manufactured in the 1A0053 Account were designed to show realized and unrealized gains
from securities and options transactions totaling approximately $65.9 million, which satisfied
the shortfall and provided some of the purported cushion.116 However, there is no evidence
111
A&B Loans Detail by Investor. SECSDK0000325; Arbitrage Portfolio Transaction Reports. MF00545002MF00545003; Portfolio Management Reports as of June 30, 1992. MF00011542-51
112
Avellino and Bienes Dep. Ex. 02917-02918, July 7, 1992.
113
A&B Loans Detail by Investor. SECSDK0000325; Arbitrage Portfolio Transaction Reports. MF00545002MF00545003; Portfolio Management Reports as of June 30, 1992. MF00011542-51); Avellino and Bienes Dep. Ex.
02917-02918, July 7, 1992.
114
Avellino and Bienes Dep. Ex. 02944-02951, July 7, 1992.
115
1A0053 Account June 30, 1992 statements. MADTBB02391076-02391078 and MADTBB02391007-02391017
116
1A0053 Account Nov. 1989 to Dec. 1992 statements. MADTBB02397292; MADTBB02397300;
MADTBB02397304; MADTBB02391086; MADTBB02390998-2391007; MADTBB02391009;
MADTBB02391011; MADTBB02391013; MADTBB02391015; MADTBB02391017; MADTBB02391076;
MADTBB02391078; MADTBB003346469; SECSDK0010189; MADTBB03347804; MADTBB03346114;
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that this balance was the result of deposits and investments of funds received by either A&B
or by A&B clients.117 Instead, House 17 created fictitious backdated transactions to make it
appear that the account had equity sufficient to make up the shortfall.118
110.
In addition, generally House 17 created new account numbers sequentially, based on the date
on which they were opened (e.g., 1A0045, 1A0046, 1A0047, etc.). For example, account
1A0052 (opened for a different BLMIS customer), was created in May 1992 and the first
transaction posted to the account was the purported purchase of S&P 100 options on May 1,
1992.119 Account 1A0054 (opened for a different BLMIS customer) was created in
September 1992, with the first transaction posted on September 22 for the purported purchase
of McKesson Corp. convertible subordinated debt.120 Chronologically, the 1A0053 Account
would have been created after 1A0052 (May 1992) and before 1A0054 (September 1992),
and the 1A0053 Account therefore should not have reflected any transactions as occurring in
1989, 1990, 1991 or at any time prior to its creation in June 1992. However, the account
statements generated for the 1A0053 Account reflected backdated transactions as early as
November 1989.121 The out of order sequencing of the account creation dates, as well as the
backdated trades on the June 1992 customer statement, support that the 1A0053 account was
fabricated by House 17 specifically in response to the SEC investigation (see Figure 13).122
MADTBB03345819-5823; MADTBB02391071; MADTBB03345824; MADTBB03345825-5830;
MADTBB03345817-5818; SECSDK0000035; MADTBB03345466-5467; SECSDK0000141, 143-149;
MADTBB03345474-5475; MADTBB03345492; MADTBB03345476-5484; MADTBB03347613-7614;
MADTBB03345495-5496; MADTBB03345485-5487; MADTBB03345497-5503; MADTBB03347604-7605;
MADTBB03345504; MADTBB03114024; MADTBB03114026
117
1A0053 Account June 30, 1992 statements. MADTBB02391076—02391078 and MADTBB02391007-02391017
118
1A0053 Account June 30, 1992 statements. MADTBB02391076—02391078 and MADTBB02391007-02391017
119
See 1A0052 account May 31, 1992 statement. MF00462572
120
See 1A0054 account September 30, 1992. MF00454666
121
1A0053 Account Nov. 1989 statement. MADTBB03346469
122
It is worth noting that the Transaction IDs (“TRN” column) for the various transactions on this customer
statement are out of sequence with the reported dates of the transactions. See MADTBB02391013
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Figure 13
111.
After the liquidation of A&B, many of its former investors reinvested their returned funds
directly with BLMIS, leading to a great influx of new BLMIS accounts.123 (See Figure 14
below which highlights the dramatic increase in House 17 customer accounts after the
liquidation of A&B in 1992). With the advent of these new accounts, House 17 implemented
a new investment strategy.
123
Portfolio Netcap Totals by Group-A&B dated March 31, 1993. MADTBB03079814-9910
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Figure 14
Number of House 17 Accounts
6,000
5,000
4,000
3,000
2,000
1,000
0
c. The Split Strike Conversion Strategy- the 1990s and later: There is no
evidence that the transactions purporting to represent a split strike
conversion strategy for House 17 customers ever occurred. In fact, the
evidence shows that these transactions were fictitious.
112.
In the early 1990s, House 17 changed its primary purported investment strategy from
convertible arbitrage to a split strike conversion strategy, stating that “the opportunity within
the marketplace to trade convertible arbitrage has decreased.”124 A Split Strike Conversion
(“SSC”) investment strategy typically involves the buying of a basket of stocks closely
correlated to an index, while concurrently selling call options on the index and buying put
options on the index. House 17 purportedly used a SSC strategy that was purchasing a basket
of stocks and options based on the S&P 100 equity index, which included the 100 largest U.S.
stocks as determined by the S&P Index Committee.125
113.
The SSC strategy, in proper use, reduces a portfolio’s volatility (and risk) by limiting the
investor’s gains and losses that are possible. This is commonly referred to as a “collar
124
Bernard Madoff, “Letter to Client.” March 16, 1999. AMF00139075; See also, Trading Authorization Guidelines
July 3, 1991. AMF00139560
125
Michael Ocrant, Madoff Tops Charts; Skeptics Ask How at 1, 89 MAR/Hedge, May 2001. See also,
http://www.standardandpoors.com/indices/sp-100/en/us/?indexId=spusa-100-usduf--p-us-l--
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strategy,” where the investor purchases a put option to provide protection on the downside
(i.e., limiting losses the investor would incur if the market value of the equity portfolio
drops); this protection is partially paid for by selling a call option that limits the upside gain.
114.
While the collar strategy of SSC will limit volatility, it will not eliminate volatility entirely.
In fact, a properly designed and executed SSC strategy would trade with the same volatility as
the S&P 100 index when the market value of the equity portfolio fell between the exercise
prices of the options.
(i)
115.
Purported equity and option trades exceeded the entire reported
market volume for certain days.
Over the period January 2000 through November 2008 (the “Analyzed Time Period”), there
were 105 days when House 17 transacted in equities above the market volume in the
exchanges as reported by Bloomberg. In total, over those days, there were 912 instances when
House 17 purported stock transactions exceeded the overall market volume for the day.126
116.
For the Analyzed Time Period, House 17 traded 378 unique call options in 1,385 unique
transactions. Of these purported call transactions, 64.4 percent of the contracts traded above
the daily market volume, including 56.4 percent of transactions with purported volume
occurring at 10 times above the daily market volume.
(ii)
117.
Hundreds of thousands of purported House 17 trades, affecting over
5,500 accounts, were priced outside the trading day’s price range
evidencing that they could not have been executed.
During the Analyzed Time Period, 99,972 equity transactions were purportedly traded outside
of the daily market traded price range, across 5,328 House 17 customer accounts.127 These
purported transactions were derived from 496 unique transactions, 321 of which, based on
what was recorded on House 17 customer statements, traded above the daily high price and
175 of which traded below the daily low price. The purported prices for these transactions
exceeded the daily high by as much as $8.96 and were below the daily low by as much as
126
An analysis was also performed on the Frankfurt and London Stock Exchanges for these securities. The analysis
confirms that for those securities that were traded on these exchanges, the House 17 purported volume exceeded the
aggregate historical daily volume for the U.S., London Stock Exchange and Frankfurt Stock Exchange.
127
This time period was chosen based on the available trade data in the Settled Cash database (see description supra).
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$105.04. On average, the purported transactions exceeded the daily high by $1.00 and were
below the daily low by $2.39.
118.
Equity trades, such as the purported transactions recorded by BLMIS on House 17 customer
records, that would have been reported as having been executed outside the daily price range
of the entire U.S. equities market could not have occurred. The data used in this analysis was
obtained from Bloomberg, which receives its data directly from the exchanges and the overthe-counter markets. In the event that the out of range prices on the House 17 customer
statements were the result of an inadvertent typing error (sometimes referred to as “fat
fingering” ), House 17 would have had to issue corrections with the appropriate prices.128
There is no evidence of any corrections or reissuance. And more importantly, for the period
during which DTC records are available, there are no DTC records evidencing these
purported trades.
119.
In addition to the equity transactions discussed above, thousands of purported option trades
were examined and these also traded outside of the daily price range. During the Analyzed
Time Period, 34,501 options transactions traded outside of the daily price range, across 5,271
customer accounts. Of the 49 unique options traded, 25 were traded above the daily high
price and 24 were traded below the daily low price.
120.
Options traded above the high price by as much as $15.25 higher and at an average of $2.17
above the high. Options traded below the daily low by as much as $6.05 lower and at an
average of $1.48 below the low.
121.
Similar to the equity trades discussed above, the purported options transactions recorded by
BLMIS on House 17 customer records would have been reported as having been executed
outside the daily price range of the entire U.S. options market and could not have occurred.
128
National Securities Clearing Corporation- Rules and Procedures, page 51, October 11, 2011. As the BLMIS
Training Manual itself states, “An investor can sell a security from a long position at any price as long as a buyer can
be found;” as there would have been no buyer on the other side of these trades, these transactions could not have
been executed. BLMIS Trading Manual. MMAD-BR00021287.
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The data used in this analysis was obtained from the Chicago Board of Options Exchange
(“CBOE”).129
122.
Based upon the foregoing discussion regarding pricing discrepancies, this investigation and
analysis show that the SSC trading in House 17 did not occur.
(iii)
123.
House 17 purportedly bought low 83% of the time and sold high 72%
of the time (VWAP Trades) evidencing the fictitious nature of the
trades.
VWAP, or Volume-Weighted Average Price, is exactly what it sounds like: the average price
weighted by total volume. VWAP equals the dollar value of all trading periods divided by the
total trading volume for the current day. The formula is as follows:
௩௪ ௔௣
Pvwap= Volume Weighted Average Price
Pj= price of trade j
Qj= quantity of trade j
௝ ௝
௝ ௝
௝
j= each individual trade that takes place over the defined period of time, excluding cross trades and
basket cross trades
124.
Calculation starts when trading opens and ends when trading closes. This is a common way to
summarize the price of a stock on a given day. For example, some brokers will accept an
order where the client gets a price based on the VWAP. Also, some institutions grade their
traders by comparing the trader’s performance to the VWAP. The VWAP has become more
important recently because of its use in algorithmic trading. The theory is that if the price of a
buy trade is lower than the VWAP, it is a good trade. The opposite is true if the price is higher
than the VWAP.
129
The S&P 100 Index options (OEX), which were purportedly traded by House 17, were traded exclusively on the
CBOE. OEX & XEO S&P 100 Index Options, A Discussion on the Benefits and Uses of the First Listed Index Option
at http://www.cboe.com/LearnCenter/pdf/OEX_12-05-01.pdf. (last visited November 18, 2011)
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125.
Another trading anomaly stemming from the purported SSC strategy in House 17 was how
frequently House 17 reported that they purchased or sold equity at extremely favorable prices.
A comparison of trading records for House 17 accounts against the market derived VWAP for
the respective stocks over the Analyzed Time Period indicates that approximately 83 percent
of the buy transactions by share volume were executed below the VWAP while 72 percent of
the sell transactions by share volume were executed above the VWAP.
126.
Given that House 17 was consistently outperforming VWAP, two observations can be
made. First, assuming the purported trades had actually been placed, the ability to
consistently obtain significant positive variance to VWAP on both the buy side and sell side
of the trades would be indicia of potential front-running by House 17.
127.
Alternatively, if House 17 was not front-running (which it was not), then the statistics of the
purported House 17 trades showing that they were consistently beating VWAP by a wide
margin is further evidence of the fictitious nature of the trades. A comparison of the purchase
and sale of the same stock being actually traded by House 5 on the same day makes this
clear.130 The VWAP on those trades was consistently at or near VWAP, a finding that one
would expect to see if algorithmic trading was actually being utilized.
(iv)
128.
Thousands of purported securities, affecting over 3,700 accounts, were
recorded by House 17 as having settled on weekends or holidays when
the exchanges are closed.
During the Analyzed Time Period, 7,736 trades were recorded as having settled on weekend
days in 3,743 House 17 accounts. Given that the markets were closed on each of the 27 dates
identified as weekend days on the customer statements, these settlements were not possible.
On Saturday, January 8, 2000 alone, 3,732 of the approximately 4,215 House 17 accounts
showed 7,464 trade settlements. These trades could not have settled on a Saturday, further
evidencing that the trades in House 17 did not occur.
129.
During the Analyzed Time Period, House 17 customer statements show 37 trades settled on
recognized market holidays. Specifically, seven trades settled on September 4, 2000 and
September 1, 2008, both of which fell on Labor Day in their respective years. On February
130
For the Analyzed Time Period, approximately 51% of buy transactions executed out of House 5 were below the
VWAP versus 82% in House 17; approximately 48% of sell transactions executed out of House 5 were above the
VWAP versus 75% for House 17.
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17, 2003, Washington’s Birthday, one trade settled. On Memorial Day, May, 31, 2004, two
trades settled. 27 trades settled on June 11, 2004, the Presidential funeral of Ronald Reagan,
when the market was closed, once again evidencing that the trades in House 17 did not
occur.131
(v)
130.
Thousands of purported House 17 split strike conversion equity and
option trades, affecting nearly 6,000 accounts, were recorded as having
settled on days not within the standard settlement duration timeframe.
For equity transactions, the industry requirement for settlement is three days after the trade
date (“T+3”).132 Firms found to be in violation of the settlement timing requirements are
subject to discipline by the DTC and NSCC, including expulsion, suspension or other
limitations of trading, as well as potential fines, interest expense or other penalties.133 The
customer statements generated by House 17 show equity transactions clearing outside the T+3
industry standard for a number of customer accounts. 340,774 trades were recorded as having
settled outside the industry required timeframes of the T+3 industry norm. Of these trades,
338,431, or 99.3 percent, settled four days after the trade date (“T+4”), which not only does
not comply with standard trading practices, but would have resulted in the disciplinary actions
described above by DTC and NSCC. For a number of accounts nearly 100 percent of trades
in these accounts were settled outside the T+3 standard.
131.
Similarly, with regard to purported option trades, a high percentage of option transactions
were recorded as having settled in a timeframe outside the industry norms, which for options
is trade date plus one day (“T+1”).134 House 17 statements regularly showed option
transactions clearing outside the T+1 industry norm for a number accounts. During the
Analyzed Time Period, House 17 customer statements show 546,999 option trades settling
outside the T+1 industry norm. Of these trades, 539,449 or 98.6 percent, settled two days
131
New York Stock Exchange Special Closings, New York Stock Exchange (last visited 11/14/11),
http://www.nyse.com/pdfs/presidents_closings.pdf (last visited 11/14/11).
132
FINRA Notice 95-26, Conversion To T+3 Settlement, Reg. T, And SEC Rule 15c3-3(m), And Ex-Dividend
Schedule (April 1995).
133
Rules, By-Laws, and Organization Certificate of the Depository Trust Company at 61-62 (June 2011); National
Securities Clearing Corporation, Rules and Procedures at 62 (Effective October 21, 2011).
134
See Index Options Product Specifications, The Options Clearing Corporations(last visited Nov. 18, 2011),
http://www.optionsclearing.com/clearing/clearing-services/specifications-index-options.jsp.
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after the trade date (T+1), which does not comply with standard trading practices. These nonstandard trade settlements further confirm that trading in House 17 did not occur.
d. There are no legitimate records from the DTC (or other clearing
houses or custodians) evidencing any trades occurring from House 17.
135
132.
The Depository Trust & Clearing Corporation (“DTCC”) was formed in 1999 by combining
the DTC and the National Securities Clearing Corporation (“NSCC”).136 The DTCC, through
its subsidiaries, provides clearance and settlement for almost all equity, bond, government
securities, mortgage-backed securities, money market instruments and over-the-counter
derivative transactions in the U.S. market.137 Therefore, for any of these types of trades to
occur in the U.S., the individual securities transaction must be routed through the DTCC
before it can be finalized.
133.
Transfers of securities between licensed brokers are conducted by the DTC through
automated book-entry changes to the broker’s accounts. Instead of trading paper stock
certificates, as was the case in the early years of the trading markets, brokers make trades on a
computer and the DTC keeps an electronic record of these transactions. A broker’s account at
the DTC shows the number of each security owned by that broker and a history of trades.138
134.
The NSCC, originally created in 1976 before it merged into the DTCC in 1999, provides
clearance and settlement services of equity, bond, exchange traded funds and unit investment
trust transactions.139 The NSCC acts as an intermediary between an exchange market (such as
135
Our search through over 28 million electronic records as well as over 11,000 boxes of hard copy documents did
not reveal any evidence that the equity trades purportedly executed on behalf of House 17’s customers ever occurred.
See discussion infra regarding other analysis dating back to the 1970s which supports this finding.
136
About DTCC: History (The Depository Trust & Clearing Corporation) at 17(Aug. 17, 2011). See also, Responding
to Wall Street’s Paperwork Crisis, The Depository Trust & Clearing Corporation (last visited Nov. 20, 2011),
http://www.dtcc.com/about/history/.
137
An Introduction to DTCC Services and Capabilities (The Depository Trust & Clearing Corporation) at 2(Aug. 16,
2011). See also, An Overview, The Depository Trust & Clearing Corporation (last visited Nov. 20, 2011),
http://www.dtcc.com/downloads/about/Introduction_to_DTCC.
138
Following a Trade: A Guide to DTCC’s Pivotal Roles in How Securities Change Hands (The Depository Trust &
Clearing Corporation) at (Aug. 16, 2011). See also, Products & Services Equities Clearance, The Depository Trust
& Clearing Corporation (last visited Nov. 20, 2011),
http://www.dtcc.com/downloads/about/Broker_to_Broker_Trade.
139
About DTCC: National Securities Clearing Corporation (The Depository Trust & Clearing Corporation)(Aug. 17,
2011). See also, About DTCC: National Securities Clearing Corporation (NSCC), The Depository Trust & Clearing
Corporation *(last visited Nov. 20, 2011), http://www.dtcc.com/about/subs/nscc.php.
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the NYSE) and the DTC. The NSCC takes all the trade information from an exchange and
acts as a central counterparty guaranteeing the trade. A summary of the net securities
positions and net money to be settled as a result of that day’s transactions is transmitted to the
broker.140
135.
Founded in 1973 and operating under the jurisdiction of the SEC and the Commodity Futures
Trading Commission (“CFTC”), the OCC is the largest equity derivatives clearing
organization. The OCC clears U.S. listed options and futures on numerous underlying
financial assets including common stocks, currencies and stock indexes.
136.
The OCC clears transactions for put and call options on common stocks and other equity
issues, stock indexes, foreign currencies, interest rate composites and single-stock futures.
137.
As a registered Derivatives Clearing Organization (“DCO”) under the CFTC’s jurisdiction,
the OCC offers clearing and settlement services for transactions in futures and options on
futures. Additionally, the OCC provides central counterparty clearing and settlement services
for securities lending transactions.141
(i)
138.
Reconciliation of House 5 holdings to House 17 holdings via DTC
records.
BLMIS maintained an account with the DTC (the “0646” account) for which trades would be
cleared and/or custodied.142 However, based on our investigation and analysis of available
DTC documentation during the time period of October 2002 through October 2008, only
securities positions for House 5 clients (including those out of MSIL) as recorded on House 5
trading records were held at DTC.143 Accordingly, there is no evidence that the security
holdings purportedly held on behalf of House 17’s customers were held at DTC for the time
period examined.
140
Following a Trade (The Depository Trust & Clearing Corporation), Aug. 16, 2011 at 6. See also, Products &
Services Equities, supra..
141
See What is the OCC?, The Options Clearing Corporation (last visited Nov. 20, 2011),
http://www.theocc.com/about/corporate-information/what-is-occ.jsp.
142
BLMIS had a DTC account from at least 1977. See The Depository Trust Participant Agreement, June 1977.
SNOW0000658-SNOW0000733 See also the February 13, 2007 email from BLMIS to a customer stating, “We clear
through DTC.” IBLSAA0000350
143
Records for the DTC were only available back to January, 2002. A trade reconciliation process from House 17 to
MSIL was performed, which concluded that, based on execution and volume data, trades from House 17 were not
executed by MSIL.
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139.
For the years 2002-2008, the following analysis was performed:

Identified all unique securities positions purportedly held by House 17 on October
31st of each year as this was the fiscal year-end for BLMIS (“Step 1”);144

Identified unique securities held by House 5 that corresponded to those identified
in Step 1 on October 31st of each year (“Step 2”);

140.
DTC BLMIS position records were identified for the securities in Step 2.
For the seven year period analyzed, all of the securities identified in Step 2, which were held
on behalf of House 5 customers as reported in House 5 trading records, were reconciled to the
DTC thus, confirming that the House 5 securities positions in fact existed.
141.
The remaining securities purportedly held on behalf of House 17 customers as recorded in the
House 17 trading record, were not shown on DTC records and were not held at DTC;
therefore, they could not have been legitimately executed as reported by BLMIS to its House
17 customers.
142.
Further, Figure 15 below compares the purported House 17 securities positions with the
House 5 securities positions in common as of October 31 from 2002-2008. As shown in
Figure 15, the extreme volume of purported equity positions from House 17 on each October
31 dwarfs the numbers of the actual positions from House 5 that were reconciled with the
DTC.
144
October 31 was the fiscal year-end for BLMIS and was the date for which DTC records were available for the
2002-2008 time period.
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Figure 15
(ii)
143.
Fake DTC Screen Reports created by House 17
Over 160 documents purportedly containing screen print-outs representing DTC inquiry lookups were found in the records of BLMIS.145 However, upon closer forensic examination, the
documents contain typed-in text that appears to replicate certain DTC system screens. The
metadata contained within these documents show that the documents were created after the
supposed date of the screen look-up inquiry as depicted in the text within the document.
145
ELIP-BR00004715-4876
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144.
For example, ELIP-BR000047
4720 contained thee following text which was typed
type into the
document:
Figure 16
A forensic examination of the metadata embedded in this document shows the following:146
145.
146
Metadata was examined utilizing Pinpoint Laboratories Metaview program.
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146.
While the text in the document ind
indicates
icates that the information was obtained from DTC on
November 30, 2006 at 16:13:35 hrs, the metadata shows that this document was actually
created on December 19, 2006 111:16:00 AM, twenty days after the date which appears in the
text of the document.
147.
More importantly, the fake DTC screen print shows that BLMIS is holding 8,550,017 shares
off AT&T common stock as of November 30, 2006.
6. Yet according to DTC reports,
reports BLMIS
only held 4,378 shares of AT&T on November 30, 2006.
148.
Further, the following two documents (Figure 17 and Figure 18 respectively) contain
information pertaining to two different United States Treasury bills yet show the exact same
date and time stamp when they were supposedly retrieved from the DTC system.
Figure 17
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Figure 18
149.
The fictitious nature of these documents is clearly evident since there would be no way to
print these DTC screen inquiry reports for account 0646
0646-Madoff
Madoff from DTC at the exact same
minute and second as depicted on both documents. In fact, embedded metadata for these two
documents show that the first document, ELIP
ELIP-BR00004761,
BR00004761, was created on January 5, 2007
at 11:48 a.m. some four hours before the date depicted in the document. The second
document, ELIP-BR00004767,
BR00004767, was also created on January 5, 2007 at 11:48 a.m. four hours
before the date depicted in the document. Creation of these fictitious DTC screens serves no
legitimate business purpose other than to document purported tradi
trading
ng activity that did not
actually occur.
150.
In addition to the fake DTC documents described above, additional investigation revealed that
House 17 custom-developed
developed software was created to print a replica of a report called the
Customer Position Statement from DTC. The imitation report was populated with the
fictitious securities holdings to make it appear that House 17 actually had custody of the
purported securities recorded on its customer statements. Three components of computer
programs were located on the
he AS/400 system in House 17 and were utilized in combination to
create the fake DTC participant position report:
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
A data file named DTCABAL containing fictitious security positions.

A Report Program Generator (RPG) II program named DTC021 that formats the
data from DTCABAL, adding headers and formatting to the data to replicate the
look and feel of a real DTC report.

A form definition file named DTCS that instructs the FormsPrint software
(published by Integrated Custom Software, Inc.) to apply additional formatting
f
to
the report to further approximate the look
look-and-feel
feel of a real DTC report.
151.
As part of the investigation, a copy of an actual DTC report from House 5 as of July 18, 1996
was found that was apparently utilized by BLMIS as the source for designing the imitation
DTC report. A portion of that report appears in Figure 19.147
Figure 19
152.
Through detailed computer analysis, the fake DTC report was re
re-created
created using the
DTCABAL file, the DTC021 RPG program, and the FormsPrint software located on a system
147
This document contained numerous handwritten notes ((see pages MADTSS00329120- MADTSS00329124)
where the writer commented on the difficulty of changing the point size of the text without rendering the size of the
entire page too big, thus showing the steps undertaken to try to create an exact replica of the official DTC report.
MADTSS00329114-127
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backup tape from the BLMIS location ((see below for screen shots of the data files). The fake
report appears below in Figure 20:
Figure 20
153.
There is no legitimate business reason to generate a fake DTC report, as a legitimate trading
or investment advisory business
usiness would be directly connected to the DTC to process trades and
would have the ability to generate original participant position statement reports directly from
the DTC. This further supports the opinion that the House 17 trading did not occur.
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Figure 21
Excerpt from DTCABAL data file
Figure 22
PORTION OF DTC021 RPG Code
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Figure 23
DTCS Form Specification for FormsPrint software from Integrated Custom Software, Inc.
Figure 24
DTCS Box Definition Screen
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(iii)
154.
Reconciliation of House 5 options trades to OCC.
BLMIS maintained an account with the OCC for clearing equity option trades, such as those
purportedly made in accordance with the split strike conversion strategy (explained in more
detail herein). However, based on the investigation and analysis of the OCC documentation
available for October 2002 through October 2008, only option trades executed for House 5
clients (as well as those from MSIL) as reported on House 5 trading records, were cleared
through OCC. Accordingly, there is no evidence that any options purportedly executed on
behalf of House 17’s customers ever cleared through the OCC for the time period examined.
155.
A similar analysis as described supra for House 17’s equity trades was performed with
respect to options transactions. For the years 2002-2008:

Identified all unique options traded in House 17 as of October 31st of each year as
this was the fiscal year-end for BLMIS (“Step 1”);148

Identified options traded out of House 5 that matched those identified in Step 1 as
of October 31st of each year (“Step 2”);

156.
OCC clearing records were identified for the options in Step 2.
For the seven year period analyzed, all of the options identified in Step 2, which were traded
on behalf of House 5 customers as reported in House 5 trading records, were reconciled to the
OCC thus confirming that the House 5 options in fact occurred and cleared.
157.
The remaining options purportedly traded on behalf of House 17 customers as recorded in the
House 17 trading records, were not shown on OCC records and were not cleared through
OCC; therefore they could not have been legitimately executed as reported by BLMIS to its
House 17 customers.
158.
For example, on October 31, 2005, records from House 5 and the OCC indicate that 20
options described as “S&P 100 INDEX NOVEMBER 590 CALL” were purchased and held
by BLMIS. The aggregate number of “S&P 100 INDEX NOVEMBER 590 CALL” options
as reported on the House 17 customer statements for the same date number 658,342.
148
October 31 was the fiscal year end for BLMIS and was the date for which OCC records were available for the
2002-2008 time period.
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Therefore, options purportedly traded and held for House 17 could not have been executed
through House 5 nor were they cleared through the OCC account associated with BLMIS.
e. Approximately $4.3 billion of dividends reported on House 17
customer statements were fictitious and were never received by
BLMIS on behalf of its customers.
159.
For shares held in brokerage accounts, the default choice for receiving dividend payments is
for the distributing company (i.e. the company actually declaring and paying the dividend) to
credit to the brokerage firm (in this case, BLMIS) for the entirety of the dividends to be
delivered to the brokerage firm’s customers. On payment dates, the brokerage firm will credit
the applicable apportioned dividend amount to accounts of customers who are shareholders of
record of the companies that have declared and paid the dividends.149
160.
Although BLMIS was regularly recording dividend payments on House 17 customer
statements, the evidence is that such dividend payments were never received by BLMIS.
161.
House 17 customer account statements reflect dividend payments from the securities
purportedly held in their respective customer accounts. To test whether House 17 actually
received the dividend payments which were being reflected in the customer account
statements, account number 1-B0039-3-0 was randomly selected in order to identify securities
for which dividends were paid.
162.
Figure 25 below shows the January 31, 2007 customer account statement for account 1B0039-3-0 and identifies the dividend payments that were purportedly received during that
month:
149
See SEC Transfer Agents, supra, Holding Your Securities – Get the Facts, U.S. SEC (last visited Nov. 20, 2011),
http://www.sec.gov/investor/pubs/holdsec.htm; Transfer Agent, United Technologies, (last visited Nov. 20,2011),
http://utc.com/Investor+Relations/Transfer+Agent.
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Figure 25
163.
Based
ed on this customer statement, all dividends purportedly received by all House 17
customers for these same securities for all of January 2007 were then aggregated and
analyzed. These amounts
unts are summarized below:150
Table 5
Payment Date
January 2, 2007
January 2, 2007
January 2, 2007
January 3, 2007
January 4, 2007
January 5, 2007
January 31, 2007
Total
150
Company
Dividends
Merck & Co
$ 6,404,388
Pepsico Inc
3,876,222
Walmart Stores Inc
3,255,099
Hewlett Packard Co
3,166,718
United Parcel Services Inc
3,155,807
Schlumberger Ltd
1,152,440
Fidelity Spartan
467,950
$ 21,478,624
The Fidelity Spartan U.S. Treasury Money Market Fund continued to be referenced by House 17 as such even
though its name changed
anged to the Fidelity U.S. Treasury Money Market Fund effective August 15,, 2005. Prospectus,
Fidelity Spartan U.S. Treasury Money Market Fund, U.S. Government Money Market Fund, & Money Market Fund
(June 29, 2005).
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164.
As previously discussed, these purported dividend payments, if actually received by BLMIS,
would have been delivered to BLMIS by the distributing companies’ respective transfer
agents. At the time of the January 2007 dividend payments, the transfer agents for the above
selected companies were:151
Table 6
Company
Merck & Co
Pepsico Inc
Walmart Stores Inc
Hewlett Packard Co
United Parcel Services Inc
Schlumberger Ltd
Fidelity Spartan
165.
Transfer Agent
Wells Fargo Bank
The Bank of New York
Computershare Trust Company
Computershare Trust Company
Mellon Investor Services
Computershare Trust Company
Fidelity Service Company
An analysis was then conducted of all House 17 bank account statements for the months of
December 2006 and January 2007 to determine whether or not there were additions to the
BLMIS bank accounts in the amounts reflecting the purported total dividend payments to the
House 17 customers.152 No transactions from the above transfer agents or for the amounts
indicated for the purpose of dividend payments were identified. Without these distributions
directly from the corporations, these dividend payments to BLMIS (and its customers) could
not have actually occurred.
166.
Additional analyses were performed on dividends purportedly received by all House 17
customers between the years 1998 through 2008.153 During this time period, there were over
8,300 dividend transactions (on an aggregate basis for approximately 6,500 customer
accounts) totaling approximately $4.3 billion of dividend payments reflected on customer
account statements.154 A breakdown by year of these dividend payments is shown below:
151
Transfer agents were identified by reviewing 2006 and 2007 year-end SEC filings (e.g., proxy statements and/or
annual reports). In all cases the transfer agents identified by these reports were the same in both years, confirming
the transfer agents identified in the table.
152
A search for additions in the amounts listed as well as amounts approximating these amounts was conducted to
ensure that all possibilities were considered. No such matches or approximate matches were found. In fact, no
transactions from any of the transfer agents representing any amount of dividend payments were noted.
153
House 17 bank account statements were available from December 1998 through December 2008.
154
A complete database of dividend payments from customer statements was available from December 1995 through
December 2008. Total purported dividend distributions for this period totaled $4,594,442,711.77. While BLMIS
bank statements prior to 1998 are no longer available from the bank and were not found in the BLMIS records,
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Table 7
Year
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Total
167.
$
$
Dividends
137,316,449
134,029,662
139,026,901
181,808,199
228,056,457
388,056,582
701,081,346
482,627,455
839,021,313
615,471,114
493,162,860
4,339,658,338
The dividend transactions reported on the House 17 customer account statements were
compared to the House 17 bank statements (i.e., the 703 Account). Of the more than 8,300
dividend transactions traced, not one purported dividend payment matched to a cash addition
on the BLMIS bank statements.
168.
The foregoing analysis regarding dividend payments further shows that trading in House 17
did not occur.
f. House 17 was “Schtupping” certain customer returns.
169.
Documents and computer programs uncovered in the course of the investigation revealed that
House 17 was falsifying customers’ purported investment returns through the use of fictitious
trades implemented through a special basket trading program. The name of the special basket
trading program was called “B.SCHUPT [sic]”. The word “schtup” is a Yiddish word
meaning to “push” connoting the act of giving an extra effort in order to meet expectations.155
While the special basket trading file was named B.SCHUPT [sic] it is logical to conclude that
this was simply a spelling error on the part of the House 17 employee(s) who devised the
name.
nevertheless, there was no legitimate documentary evidence that any prior dividend payments were ever received by
BLMIS on behalf of its House 17 customers.
155
See Schtup, Yiddish Dictionary Online (last visited Nov. 20, 2011), http://www.yiddishdictionaryonline.com.
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170.
The investigation revealed that the use of the B.SCHUPT [sic] program was to allow for the
truing up of customer accounts whose fictitious trades throughout the year had not yielded the
rates of return that had been targeted by House 17. In fact, certain House 17 customer
accounts were analyzed and it was determined that these accounts achieved over a 250%
return in less than a 30-day period as a result of additional fictitious option trades
implemented through the B.SCHUPT [sic] trades.
171.
For example, in December 2003, a four-page packet of instructions (two pages of which were
handwritten instructions signed by DiPascali) contained explicit instructions and details
surrounding a B.SCHUPT [sic] special trading basket that was to be run for that period.156
The instructions included 29 accounts that were to receive the benefits of the special
B.SCHUPT [sic] option trades.
156
See MADTSS01124263-68
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Figure 26
172.
To investigate the effect of the B.SCHUPT [sic] option trades, one test account was initially
selected for detailed analysis. Account 1B0227 was selected from the listing. This account
was to receive 1.5 units of the special basket trade.
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EXHIBIT 1
(Part 2 of 3)
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Figure 27
173.
The options associated with the B.SCHUPT [sic] file are shown below:
Figure 28
174.
Using the information above, 1B0227, and the “Quant” value of 1.5, the account will record
purchasing 15 contractss (1.5 times the QTY figure in the option table above) of the S&P
Index OEBAJ option on December 1, 2003, and 30 contractss (1.5 times the QTY) of S&P
Index OEBAK option on December 18, 2003. These amounts were traced into the customer
trading records from House 17 and shows a purported total investment of $6,045 in these
options:
Table 8
Account_No Purchase Date Symbol Price
Value
1-B0227-4-0
12/1/2003 OEBAJ $ 1.80 $ 2,715.00
1-B0227-4-0
12/18/2003 OEBAK $ 1.10 $ 3,330.00
175.
The final two pages of the instructions shown below detail the sale dates and sale prices of the
options to be traded:
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Figure 29
176.
The OEBAJ options purportedly bought on December 1, 2003 for $1.80 per option were
purportedly sold on December 31
31, 2003 for $6.50, realizing a return of 261% in 30 days.
days The
OEBAK options purportedly
urportedly bought on December 18, 2003 for $1.10 were purportedly sold
on December 31, 2003 for $3.80, rea
realizing a return of 245% in 13 days.
177.
For the Account 1B0227 discussed above, these purported option sales yield $21,105
$
of sales
proceeds on December 31,, 2003
2003,, with a purchase price of $6,045. This is a total return of
250%
% over the period of the investment
investment.
178.
In total, the B.SCHUPT [sic]] program in December 2003 highlighted 29 accounts needing
additional investment returns with an initial purported investment of $2,099,,227 in the two
options. The resulting $5,2299,836 from the purported sale of the options yielded
elded a 149%
return over an average of 21.5
.5 days held.
179.
Examining the portfolio management reports (“PMR”) for account 11-B0227
B0227 for 2003 reveals
telling facts. In November 2003, the PMR shows a 9.63% annualized return for the current
year which is dramatically
lly lower than the 18% “Benchmark” rate of return shown on the
PMR.
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Figure 30
180.
Examining the December 2003 PMR for account 11-B0227
B0227 in just one month later, the
annualized return for the current year went from just 9.63% to 17.73%, an increase of over
84%.
Figure 31
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181.
This enormous change in the annualized return for account 1-B0227 is a direct result of the
fictitious trades implemented through the B.SCHUPT [sic] basket trading program. The
fictitious option trades were recorded as shown below:
Figure 32
182.
The 29 accounts listed on the December 2003 special B.SCHUPT [sic] basket trading were
closely analyzed to determine if the same or similar effect was present. The average
annualized return for the Current Year as recorded on their respective November 2003 PMRs
was 9%. After the B.SCHUPT [sic] program was run for the month of December 2003, the
average annualized return for the Current Year on the December PMRs for the respective
accounts was 21%. Accordingly, the running of the B.SCHUPT [sic] program increased
purported annualized investment returns for the 29 accounts by an average of 141% from
November 2003 to December 2003. This process was nothing more than a total fabrication of
fictitious trades in an attempt to “push” the investment returns close to the 18% Benchmark
Rate of Return as originally recorded on the PMRs for these accounts. Hence the name of the
file B.SCHUPT [sic] or the true Yiddish word “Schtup.”
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183.
Additional examples of the “schupt” account listings and instructions were also located for
the years 2004, 2005, 2006, and 2007.157 Similar to the instructions discussed above, the
additional “schupt” listings also listed specific units of each fictitious trade to make for
specific accounts. Account numbers and holders varied by year.
184.
In those additional years, the fictitious trades allocated pursuant to the Schupt instructions
yielded a range of returns to each account over December of each year between 140% in 2002
and 268% in 2004. Similar to the discussion above regarding the changes in the PMRs
subsequent to the fictitious trades being allocated, the account PMRs for those accounts in
2002, 2004, 2006, and 2007 showed similar patterns.
g. The computer system used by House 17 was basically a system used to
facilitate the fictitious trading activity and to print trading
documentation and customer statements to support such fictitious
activities.
185.
House 5 and House 17 computer systems capabilities were vastly different. House 5 systems
contained many of the components one would expect to find in a broker-dealer environment
where actual trades were being executed. Simply put, House 17 did not.
186.
A summary description of House 5 trading systems in place as of December 2008 that was
prepared by Lazard, Ltd. (“Lazard”), is depicted below in Figure 33158:
157
Handwritten documents recovered from BLMIS. MADTSS01124091, MADTSS01124093, MADTSS01124089,
MADTSS01120262 While a “schupt” file was not located for all years other than those listed above, there were,
however, other documents located that appeared to contain similar information and to be following the same pattern.
158
Lazard was the financial advisor to the Trustee who handled the liquidation sale of House 5 assets after Madoff’s
arrest in December 2008. Lazard is an international financial advisory and asset management firm, specializing in
providing advice on complex financial and strategic initiatives.
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Figure 33
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187.
Figure 34 is a more detailed diagram as of the trading systems in place at House 5 in
December 2008159:
Figure 34
188.
Not surprisingly, none of these trading systems described above were found in the House 17
computer environment nor were any systems allowing for trade execution or anything similar
were found. In fact, as described below, House 17 relied on an IBM AS/400 computer along
with a local area network of personal computers to perpetrate the fictitious trading activities
to and generate the paper necessary to support the fictitious trading activities.
159
Prepared by Lazard. LAZAA0004174
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189.
The software utilized by House 5 versus House 17 differed dramatically. The software
utilized by House 5 was a combination of commercially-available, off-the-shelf software and
interface systems (e.g., Bloomberg workstation, Thomson One, DTC, OCC) as well as
custom-programmed software (e.g., the House 5 BLMIS Information System). However, the
software utilized by House 17 was primarily custom-built in-house software (i.e., the House
17 BLMIS information system), supported only partially by commercially available, off-theshelf software employed to perform specific functions, such as Integrated Custom Software
Inc’s FormSprint software for generating printed forms and Vision Solutions MIMIX
software for supporting backup, restore, and disaster recovery.
190.
While information in programs restored from House 17 backup tapes revealed certain limited
electronic communications and interfaces for the AS/400 system, it was determined that the
House 17 BLMIS custom RPG software did not communicate with any of the standard
platforms one might expect to see in a trading and/or investment environment. Investment
related data received by the House 17 custom RPG software was received from House 5
through either an electronic file transfer (“ftp”) or via a manual process by which an operator
inserted a tape into the House 17 AS/400 that contained data from the House 5 custom
software. While House 5 utilized extensive systems to execute trades (e.g., MISS,
M2/Superbook) and receive market data (e.g., Bloomberg, Muller) there was no evidence to
show that House 17 connected to any of the connections available to the House 5 systems
(e.g., NASDAQ, DTC, Bloomberg, Thomson, OATS). As a result, House 17 would have
needed to place the purported trades through either House 5 or an outside broker-dealer;
evidence of that occurring was not found.
h. The underlying computer code generated and utilized by House 17 was
developed and modified over the years.
191.
A model 520 AS/400 and a Magstar 3570 tape subsystem were procured and used to restore a
working version of the House 17 AS/400 system to allow for analysis and investigation.
Numerous libraries (i.e., repositories of data or code) were restored which contained both
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code and data files.160 The majority of the restored code used to run and operate the AS/400
was written in IBM Report Program Generator II (“RPG II”) language, which was identified
from a number of factors including the following:

The source from the restored backup tape was identified by the AS/400 system as
“RPG36” code. Attribute flags (i.e., an identifying piece of data related to a
particular source) identified that the code was created in the System/36 notation
version of RPG II and, therefore, intended to run on an IBM System/36 platform.

In order to work properly, the AS/400 had to be placed in System/36 emulation
mode. If the program was started without being placed in system/36 emulation
mode, the system consistently produced an error.161

Also, the majority of the code was located in the IBM default location for creating
RPGII code, which is a sub-library named QS36SRC within the TGIF library on
the AS/400.
160
During the computer investigation, it became apparent that certain code and data files no longer existed on the
tapes containing the backup of the House 17 system from December 2008. Restoration of prior backup tapes
confirmed this fact.
161
For example, one such error indicated, “Command menu in library *LIBL not found.” When placed into
System/36 emulation mode, the error disappeared.
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Figure 35
Screen shot of Restored AS/400: House 17 Main Menu
Figure 36
Screen shot of Restored AS/400: BTS (Basket Trading System) Menu
(Option 20 from MADF17 menu)
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192.
Based on my review of the code, it appears that the majority of the code was developed in the
late 1970s through the early-to-mid 1980s. It also appears that this code was initially used in
the House 5 operations and then at some point was converted for use in the House 17
operations. Programmer documentation contained within the programs themselves show that
there were hundreds, if not thousands, of modifications to the programs, many of which
occurred in the early 1990s at a time when the amount of BLMIS customers increased
dramatically. (See discussion supra regarding A&B and the transition of its customers directly
to BLMIS.)
i. Underlying computer code in House 17 produced a random order
generator to support fictitious trades on customer statements.
193.
House 17 custom written software included code that enabled the assignment of prices and
volumes for securities transactions to individual customer accounts in a scheme that was
basically backing into data that would otherwise be generated in the normal course of
business if one was utilizing a legitimate order or time slicing trading system.
194.
In practice, it is the decision of a portfolio manager to determine what stocks to buy and how
many shares will be purchased. Once determined, the role of a trader is to determine how best
to purchase these stocks, balancing transaction costs and assorted market risks. This role is
often exclusively automated by computers programmed with basic (or sometimes very
sophisticated) trading algorithms.
195.
Most common amongst these approaches is to either “volume-weight” or “time-weight” the
execution of a large block of shares. These approaches strike a balance between risk and cost.
A volume-weighted approach attempts to purchases shares at the same pace as the market is
trading so that the buyer is never too large nor too small a participant. A time-weighted
approach seeks to spread the desired transaction evenly over a fixed and pre-determined
period of time.162
162
David Cushin, et al., The Transaction Cost Challenge: A Comprehensive Guide for Institutional Equity Investors
and Traders (New York: ITG Inc. 1999).
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196.
House 17 did not have a legitimate trading system using algorithms to execute trades as
described above. What it had was a self-created program that simply mimicked and
backfilled the output that would normally be the result of trades actually being executed by a
system using trading algorithms. A detailed analysis of the code that was utilized in this
regard confirms this.
197.
A review of input and output files, as well as customer statements, indicated that a Java
custom written application utilized an input file containing trade dates, settlement dates,
security descriptions, pricing and other information, such as customer account numbers. It
also contained the price that was to be allocated to each transaction.
198.
The program utilized information from the input file and then generated a random set of
orders for the specific security, randomly varying both the number of shares and the price for
each order. The random number of shares was generated using a random function that was
artificially limited by a configurable high and low value (i.e., 500 shares as a minimum and
10,000 as a maximum). The number of shares was also artificially limited by the total
number of shares identified in the input file (i.e., if the input file totaled one million shares
across all transaction in the input file, then the output of the program does not exceed one
million shares across all orders in the output file). The random price for each order was also
artificially limited by a configurable parameters which limited the range in the generated
prices (i.e., a 5¢ bound would limit the randomly generated price to within five cents of the
price identified in the input file).
199.
The following example shows the input, processing and results of the random order
generation program. The first input file shown below in Figure 37 identifies the total number
of shares, 1,039,261, of Abbott Laboratories, as well as the average price $48.41 assigned to
that transaction on all applicable customer statements in House 17.163
163
See MESTAAF00009202- MESTAAF00009203.
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Figure 37
200.
One of the accounts to which the purported Abbott Laboratories transactions was allocated
was account number 1-C1260-3. The following excerpt from the customer statement file
demonstrates the Abbott Laboratories pricing.
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Figure 38
201.
Also found during the investigation was an output file gen
generated
erated by the Java random order
generation program that utilized the input files including the Abbott Laboratories shares and
pricing. The excerpts from the full output file shown below in Figure 39 show that the
random order generation utilized the total number of shares from the input file as well as the
price from the input file as the basis for generating the randomly priced and sized (i.e.,
number of shares) orders.
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Figure 39
Abbott Laboratories Output164
202.
To confirm the processing performed by the Java random order generator code, the Java
program code found in the records was compiled and executed using the input file found
located during the investigation. The following screen shot shows that the order size (i.e.,
quantity of shares) and price differ at the individual transaction level, but the total number of
164
See MESTAAF00000037- MESTAAF00000041.
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shares across all orders, as well as the average price across all orders, is equal to the input
values for Abbott Laboratories.
Figure 40
Abbott Laboratories Output165
203.
As supported by internal BLMIS emails, this process was used to generate fictitious
backdated trade histories. For example, an email on May 24, 2008 from BLMIS internal
computer programmers detailed the requirements for the program as they “needed to generate
about 600,000 random orders based on a set of criteria for the past 16 months.”166
165
166
See MDPTGG00000002
See KFON-BR00030551
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204.
A legitimate business conducting an investment advisory, broker-dealer or proprietary
market-making business would have no need for a random order generation program for
backfilling trade data such as the one described above, as all of the orders would have a
record generated from an external party that registered the trade (e.g., DTC) at the time the
trade was properly executed, even for trades executed by a computer based trading algorithm.
The fact that BLMIS built a random order generation program to backfill support for
purported trades further illustrates that the securities listed on customer statements generated
in House 17 were fictitious.
ii.
Various reports that House 17 prepared were false.
a. Customer statements contained fictitious trades that were backdated.
205.
House 17 customer statements contained false information regarding purported securities
trades. Specifically, some customer statements reported trades that were purportedly
executed in a prior month’s period, sometimes stretching back years, but in actuality were
never recorded on that previous month’s statement (“prior month backdated trades”). For
example, a March 1998 statement for account 1-A0035-3-0 showed purported transactions
that occurred in March 1998, as well as trades going back to April 1997. If these trades had
actually occurred and settled on the stated dates during the prior months or even years, they
would have appeared on their respective monthly statement (i.e., a transaction in June 1997
would have appeared on the June 1997 customer statement). Many of these trades, however,
did not appear on these previous month statements. Customer statements were analyzed for
instances of such backdating by comparing the listed traded prices on the customer statement
and the daily range of the stock prices for the respective dates in the prior year.
206.
In the aggregate, the customer statements show a total of 14,749 prior month backdated trades
which took place between December 1995 and November 30, 2008 across 893 accounts. The
number of backdated trades per account range from 1 to 3,669. Furthermore, 50 of the 893
accounts contained more than 30 backdated trades.
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207.
The ability of BLMIS to backdate trades in House 17 was facilitated by the use of the custom
software written by House 17 programmers in a module called STMTPro.167 STMTPro
allowed a House 17 user to restore a previous month’s customer statement to the AS/400. For
example, the data tape containing the Settled Cash table (i.e., SETCSH17 data file) for the
desired month would be inserted into the AS/400. STMTPro would then restore that version
of the SETCSH17 to a temporary location on the AS/400. STMTPro allowed the operator to
change any item on a pre-existing customer statement (e.g., a purchase or sale of a security,
the payment of a dividend) through a data entry screen (see Figure 41 below for STMTPro
directions), and it also allowed the operator to print a revised customer statement. Were these
prior month backdated trades an actual “error” in the customer statements, a corrected
customer statement should have been issued as is standard in the industry. This did not occur
in House 17. Instead, House 17 backdated trades on one month’s statement and did not
produce or reissue to customers revised statements for the prior months that indicated that
these were restated statements.
167
STMTPro is the specific procedure that is executed on the AS/400. House 17’s Programming Development
Manager Member List shows various modules such as STMTPRO03-Correct EOM Statements –User 1 and
STMTMPRO08-Correct Prior STMTS From ASOF Trades (+Months). MDPTSS00001484
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Figure 41
208.
An example
xample of how House 17 used STMTP
STMTPro to
o backdate and manipulate transactions on
customer statements is discussed below. First
First, Figure 42 below shows an example of a log
file that was maintained by House 117,
7, which tracked the various iterations of backdated
changes for a particular group of customer accounts. Focusing attention on one particular
account numbered 1-M0140--3-0,
0, the log file records the date and months for numerous
iterations of changes being made to that account.
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Figure 42
209.
For illustrative purposes, the analysis focused on three months of changes to show what was
happening. Seq#24, 50 and 76 were selected. As the log file indicates, Sequence 24 was run
on April 27, 2004. Sequence 50 was run on April 29, 2004 and Sequence 76 was run on April
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30, 2004. As the log file shows, Sequence 24, 50 and 76 all relate to December 2003 as the
month that is being changed.
210.
First, Figure 43 below shows the results of the backdating activity on the underlying data used
to produce monthly statements for House 17 customers.168 Sequence 24 and shows that there
is margin interest being reported for both November and December 2003 in the respective
amounts of $15,419.45 and $15,989.41 for a total of $31,408.86. Moving to the Sequence 50
iteration shows that the November and December entries for margin interest have now been
removed from the statement as if they never existed. Looking at the third portion of Figure
43, Sequence 76 shows that an entry for Fidelity Spartan U.S. Treasury Money Market for
3,850 shares has now been added to the account.
168
Figure 43 was created using documents that were created from running the House 17 STMTPro computer
program using data retrieved from backup tapes that were collected by the Trustee. Trustee’s consultants conducted
the restoration process in this regard and the resulting output documents were created from that process, hence the
header listed on the top of each document in Error! Reference source not found. indicating the actual run date
being February 11, 2010.
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Figure 43
211.
There were numerous examples of these types of backdating changes that were routinely
being made to customer accounts at House 17 over the years. The manner in which these
changes were being made months after the date of the original customer statement (in this
example December 2003 was the original date of the customer statement and yet changes are
being made nearly five months later in April 2004) shows how House 17 was manipulating
customer statements and recording the fictitious trades.
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(i)
The financial and regulatory statements produced by BLMIS were
false and misrepresented the firm’s true financial state of affairs.
a. Registration statement ADV filed with the SEC was false
and was not timely.
212.
BLMIS was registered with the SEC as a broker-dealer as of January 19, 1960 and, it was not
until 46 years later that it was registered beginning in 2006, as an investment adviser. Based
on a review of regulatory requirements, and as further addressed below, BLMIS should have
registered with the SEC as an investment adviser beginning in 1979 when Form ADV was
required for investment advisers.169
213.
Investment advisers must register with the SEC by filing the Uniform Application for
Investment Adviser Registration170 (“Form ADV”) unless they are exempt from
registration.171 Investment advisers with 15 or more clients must register with the
Commission.172 Despite having more than 15 accounts, BLMIS did not register as an
Investment Adviser until August 2006. Between 1979 and 2006, BLMIS had more than 15
accounts and by not filing Form ADV as required, misrepresented its total number of clients
(see Figure 14 for the number of accounts from 1978 to 2008).
214.
Further, between 2006 and 2008 Madoff misrepresented the number of clients in his IA
Business on the Form ADV. In or about January 2008, BLMIS filed with the SEC an
Amended Uniform Application for Investment Adviser Registration. On the application,
BLMIS reported representation of 23 customer accounts and assets under management of
approximately $17.1 billion.173 In actuality, in or around January 2008, BLMIS had
approximately 4,900174 active customer accounts and purported assets under management of
approximately $74 billion.175 Historical records show that there were more than 8,000
customer accounts at BLMIS over the life of the business.176
169
The Securities Exchange Act of 1934, 15 U.S.C. § 80b-3 (2010); [44 FR 21008, Apr. 9, 1979]
Id.
171
Investment Advisers Act Rule §§ 203-1 & 203(b).
172
Investment Advisers Act § 203(b)(3).
173
PUBLIC0003840
174
SQL Query - All Customer Accounts - January 2008
175
SQL Query - All Customer Accounts – as of December 31, 2007
176
SQL Query - All Customer Accounts - All Years
170
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b. FOCUS reports and the audited financial statements were
false and misrepresented the true state of BLMIS.
215.
As a registered broker-dealer operating through 2008, BLMIS was required to file FOCUS
reports with the SEC.177 FOCUS reports are financial and operational reports that set forth,
among other information, assets, liabilities, revenues, and expenses of the company.
216.
In addition, BLMIS was required to file Annual Audited Reports.178 These Annual Audited
Reports contain information about income, cash flows, changes in stockholders’, partners’, or
sole proprietors’ equity, and statement of financial condition.
217.
The BLMIS FOCUS and Annual Audited Reports reveal inconsistencies with the business in
which BLMIS was purportedly engaged as well as material misstatements in its financial
statements. Both the FOCUS reports and Annual Audited Reports require broker-dealers to
list the amount of cash on hand, as well as all of its other assets and liabilities. The reports
BLMIS filed, however, often did not reflect the assets and liabilities BLMIS should have
reported and, therefore, contained numerous misstatements as discussed in the following
paragraphs.
218.
BLMIS underreported the amount of cash it held on its FOCUS reports. For example, based
on an analysis of House 17 bank account statements, on an almost nightly basis, BLMIS
swept funds from the 703 Account into overnight deposits. According to the FOCUS report
instructions, the funds in the 703 Account and the overnight deposits are considered “cash”
and should have been included in the “cash” line on the FOCUS and Annual Audit Reports.179
These accounts were excluded from the reported cash balances and in fact, cash in the 703
Account and the overnight deposits often exceeded the “cash” actually reported by BLMIS in
the FOCUS and Annual Audited Reports.
219.
For example, the December 2006 FOCUS report listed $4,882,332 as the amount of cash on
hand.180 As of December 31, 2006, the ending balance of the 703 Account was $394,700 and
177
SEC Rule 17a-5, 17 C.F.R. 240.17a5.
SEC Rule 17a-5(d), 17 C.F.R. 240.17a5(d).
179
Instructions to FORM X-17A-5 PART IIA - All “cash” item except for “cash in banks subject to withdrawal
restrictions” shall be included on the “cash” line of the report. http://www.sec.gov/about/forms/formx-17a-5_2a.pdf
180
PUBLIC0002664
178
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the amount in overnight deposits was approximately $295,000,000, totaling $295,394,700 of
cash on hand.
220.
BLMIS’s underreporting of its cash position was not isolated to the December 2006 FOCUS
report. In every reporting period examined from December 31, 2006 through December 31,
2008, BLMIS underreported its cash position and thus, provided false and inaccurate
statements to the SEC. Based on the 703 Account alone, cash reported on the FOCUS reports
were significantly understated. Table 9 Figure 10below shows a comparison of “cash and
cash equivalents”181 reported on FOCUS reports and cash in the 703 Account:
Table 9
703 Account
Date
FOCUS182
Overnight
183
Investment
221.
703 Account
Ending Balance184
09/06
$4,293,419
$140,000,000
$800,207
12/06
4,882,332
295,000,000
394,700
03/07
3,716,017
160,000,000
2,000,000
06/07
5,175,146
145,000,000
292,099
09/07
5,460,095
120,000,000
376,500
12/07
164,382,040
235,000,000
742,309
03/08
222,737,426
220,000,000
135,534
06/08
257,374,499
170,000,000
1,712,804
09/08
187,651,497
480,000,000
418,000
The FOCUS reports also did not properly reflect BLMIS’s liabilities. For example, an entity
filing a FOCUS report must report “Bank loans payable.” As explained infra in greater detail
in this report, during the House 17 liquidity crisis in late 2005, BLMIS obtained a $95 million
loan in November 2005, and an additional $50 million in January 2006 from JPMorgan Chase
181
FASB ASC 305-10-20 defines cash equivalents as, “short-term investments of high liquidity, which are readily
convertible into certain amounts of cash, subject to an insignificant risk of changes in value.”
182
Amounts taken from Line 1 – Cash for each respective FOCUS report.
183
Amounts obtained from JPMC 703 respective monthly bank statement.
184
Amounts obtained from JPMC 703 respective monthly bank statement ending balances.
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(“JPMC”) collateralized, in part, by a loan from a customer. The loans were repaid in June
2006. Yet the FOCUS report for the period ending December 2005 (“December 2005 FOCUS
Report”) reported that BLMIS had no bank loan obligations outstanding.
222.
Prior to September 2006, BLMIS recorded de-minimis commission revenue on the FOCUS
report “Commissions” revenue line.185 Nor did BLMIS report commission revenue on its
Annual Audited Reports prior to October 2006. While this fact may have actually been true,
it totally contradicts the contention that if House 17 was actually executing trades, customer
commissions should have been reflected in the “Commissions” line item. The fact that no
commission revenue was reported further shows that no trading in House 17 occurred.
223.
As mentioned above, BLMIS registered with the SEC as an Investment Adviser in August
2006. The FOCUS and Annual Audited Reports filed by BLMIS after that time included
amounts listed for “Commissions.” Comparing the revenue reported in the Annual Audited
Reports for the fiscal years immediately before and after BLMIS registered as an investment
adviser demonstrates the significance of the “newly” reported commission revenue. For the
fiscal year ended 2005, BLMIS reported no commission revenue in its FOCUS report. By
contrast, for the fiscal year ended 2007, BLMIS reported $103,174,848 of commission
revenue which represented approximately 60% of total reported BLMIS revenues for the year.
However, since no trading activity occurred in House 17, no commission revenue was
generated and the FOCUS reports thereby contained false information.
224.
In addition, the FOCUS and Annual Audited Reports did not reflect other activity that would
be expected of a broker conducting trades for investment adviser customers. BLMIS’s
FOCUS and Annual Audited Reports did not include: (a) customer receivables, such as
margin accounts; (b) customer payables, such as positive cash balances held by BLMIS on
behalf of customers; or (c) a computation for reserve requirements for customer activity as
required by the SEC under Rule 15c3-3, all of which would be reported by a broker- dealer
with managed investment accounts.
225.
For example, the December 2005 FOCUS report had no amounts recorded under the captions
“Receivables from customers” and “Payable to customers.” In addition, the credit and debit
185
From Q1 1983 through Q3 1987, BLMIS reported $5,404 in commissions.
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balance amounts in customer security accounts that form the basis for the computation for the
Rule 15c3-3 reserve requirement were left blank.
226.
The failure to report financial information demonstrating customer activity was not isolated
to the December 2005 FOCUS report. None of the FOCUS reports and Annual Audited
Reports included customer receivables or customer payables, and none included customer
account balances in their computations for 15c3-3 reserve requirements.
227.
As noted above, Friehling and F&H were not independent with respect to the BLMIS audit.
Additionally, the investigation and analysis show that the FOCUS reports and Annual
Audited Financial Statements contained material misstatements, inaccuracies and excluded
required information.
c. F&H Audit Template Opinions Found at BLMIS
228.
During a search of electronic files, numerous Microsoft® Word documents were found
relating to the audits purportedly being performed by F&H. Several versions of standard
AICPA template audit opinions were found on the House 17 computer of Eric Lipkin. These
files contained metadata indicating that Eric Lipkin created the documents.186
229.
It appears that BLMIS was using different versions of template audit opinions depending on
where they were directing the letter to be sent as several versions containing long form versus
short form audit opinions were discovered. Further, as is evidenced in Figure 44 below,
instructions were included to assure that certain audit opinion letters were not used as updated
versions were created.
186
ELIP-BR00007195
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Figure 44
230.
Also, during a tour of the House 17 space in the Lipstick Building, cases of F&H stationery
station
and envelopes were found. Cases of F&H unused station
stationery were also found in the
warehouse where BLMIS stored documents. In my experience it is highly unusual
unusua to find the
amount of stationery
ry that was found at the client’s premises.
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d. F&H were not independent auditors as required by the
AICPA and other regulatory bodies.
231.
The AICPA, the New York State Education Department Office of the Professions and the
SEC standards require that auditors maintain client independence.187 For example, the
AICPA requires that “an auditor must be free from any obligation to or interest in the client,
its management, or its owners.”188
232.
Under SEC regulations, independence is impaired when an accountant has “[b]rokerage or
similar accounts maintained with a broker-dealer that is an audit client, if…[t]he value of
assets in the accounts exceeds [$500,000].”189
233.
According to the New York State Society of Certified Public Accounts, independence will be
considered to be impaired if the public accountant, or a partner in the firm, (i) had a direct or
material indirect financial relationship with any officer, director, employee or principal
stockholder of the enterprise, or (ii) if the licensee or a member of his or her or the partner's
immediate family, is or has been involved in any situation creating a conflict of interest,
during the period covered by the examination or at the time of issuance of a report.190
234.
F&H was not independent with respects to the rules, regulations and requirements of the
AICPA, the State of New York and the SEC. In particular, Friehling and/or his wife had
investment accounts at BLMIS from the early 1980s. Between the years 1983 and 2008, the
Friehling accounts had an average equity balance of at least $6.2 million.191 It was also noted
that Friehling’s former partner, Horowitz, also had investment accounts in BLMIS.
235.
F&H provided tax and possibly other services to BLMIS. It is unclear whether these services
also violated independence rules.192
187
AIPCA Professional Standards, Auditing Section 220.03; New York State Accountancy Regulations, Title 8,
Section 29.10a-5; Title 17, Code of Federal Regulations, Section 240.17a-5(f)(3)
188
Code of Professional Conduct, ET § 101 (Am. Inst. of Certified Pub. Accountants 1988) Professional Standards,
Auditing Section 220.03; 8 NYCRR§ 29.10a(5); 17 C.F.R> §240.17a-5(f)(3).
189
17 C.F.R. § 210.2-01(b)(c); SIPA (15 U.S.C.78fff-3).
190
New York State Education Department Office of the Professions Rules of the Board of Regents, 8 NYCRR §
29.10a(5). Commodity and Securities Exchanges Rule, 17 C.F.R. §§210.2-01(b)(c). Further according to the
AICPA, an auditor “must be free from any obligation to or interest in the client, its management, or its owners.”
191
Per review of “All Accounts Listing” databases, Horowitz accounts with BLMIS had an average purported equity
balance of $5.5 million from 1983 - 2008.
192
F&H invoices were not available and therefore, a listing of other services and relative fees
cannot be prepared and analyzed. Professional standards limit the services that can be performed
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B. OPINION NO. 2: HOUSE 17 WAS A PONZI SCHEME.
i.
Indicia of Ponzi
a. Definition of Ponzi scheme
236.
According to the Association of Certified Fraud Examiners, a Ponzi scheme is “an illegal
business practice in which new investors’ money is used to make payments to earlier
investors.”193 The scheme is so named due to the widespread publicity of a fraud perpetrated
by Charles Ponzi from 1919 to 1920 in Boston, MA.194 Black’s Law Dictionary defines a
Ponzi scheme is “a fraudulent investment scheme in which money contributed by later
investors generates artificially high dividends for the original investors, whose example
attracts even larger investments. Money from the new investors is used directly to repay or
pay interest to old investors, usually without any operation or revenue-producing activity
other than the continual raising of new funds.”195
b. Background on Ponzi schemes.
237.
A Ponzi scheme begins as an investment opportunity - sometimes legitimate, other times
not.196 The fraudster solicits investors with promises of returns within a specified time period
(e.g., a return of 50% in 6 months). Before the return becomes due, the fraudster will have
by an auditor and consider, among others, the nature of and fees obtained for the other services in
relation to the fees received for performing an audit. (See for example, SEC Rule
17 C.F.R. §210.2-01(c)(4).)
193
Fraud Examiners Manual, 2009 at 1.1731.
Encyclopedia of Fraud 602 (3rd ed. 2007).
195
Black’s Law Dictionary 1180 (7th ed. 1999). This definition concurs with that of the SEC, which defines a Ponzi
scheme as, “…an investment fraud that involves the payment of purported returns to existing investors from funds
contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in
opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on
attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead
of engaging in any legitimate investment activity.” Frequently Asked Questions, U.S. SEC (last visited Nov. 20,
2011), http://www.sec.gov/answers/ponzi.htm#PonziWhatIs
Moreover, this definition is also consistent with opinions issued by the Second Circuit: “A ‘Ponzi’ or ‘Pyramid’
scheme is a fraudulent investment scheme in which money contributed by later investors is used to pay artificially
high dividends to the original investors, creating an illusion of profitability, thus attracting new investors.” Bear,
Stearns Sec. Corp. v. Gredd (In re Manhattan Inv. Fund Ltd.), 397 B.R. 1, 8 (S.D.N.Y. 2007); aff’d, 328 Fed. Appx.
709 (2d Cir. N.Y. 2009).
196
Alex Altman, A Brief History of Ponzi Schemes, (Dec. 15, 2008); Time (last visited Aug. 11, 2011),
http://www.time.com/time/business/article/0,8599,1866680,00.html.
194
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solicited investment from other individuals and use that investment to pay the previously
promised return (hereinafter referred to as “Other People’s Money”). In strict accounting
terms, money is paid out as a return, described as income, but is actually a distribution of
capital. Instead of returning profits, the fraudster spends cash reserves.197
238.
The appearance of a successful investment often draws more investors into the scheme. In
fact, many of the original investors will reinvest their proceeds and principal back with the
fraudster. This infusion of cash aids the fraudster in continually paying out the next round of
investors.198 Instead of actually investing the money the fraudster collects, the funds not used
to pay other investors are usually used for personal enrichment.
239.
The Ponzi scheme is dependent on a continuous flow of funds for its existence. Without cash
coming in, the scheme is no longer able to pay older investors and collapse is inevitable.199
Early investors who exit the scheme in time often escape with their principal and a substantial
“phantom gain,” so called because the gain is just a portion of other investors’ principal. It is
the later investors, and those who have not withdrawn from the scheme, who suffer the fallout
upon collapse.200
ii.
240.
There was no legitimate trading or investment activity and, therefore, no
profits from House 17.
As noted herein, a Ponzi scheme: (1) purports to be a legitimate business; (2) is dependent on
a continuous flow of funds for its existence; and (3) generates artificially high dividends for
the original investors. The only source of cash to House 17 sufficient to pay off investors was
generated through a steady network of closely guarded relationships that helped to feed cash
into House 17. House 17 had no profits from trading, received limited monies from House 5
and had no evidence of any outside financial support sufficient to fund pay offs to investors.
The only source of cash available sufficient enough for House 17 to pay purported investment
profits as well as redemption requests to its investors was from Other People’s Money.
197
Encyclopedia of Fraud 603 (3rd ed. 2007).
Encyclopedia of Fraud 601 (3rd ed. 2007).
199
Steven L.Skalak, Thomas W. Golden, Mona M. Clayton & Jessica S. Pill, A Guide to Forensic Accounting
Investigation, 496 (2nd Edition, Wiley, 2011).
200
Id.
198
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a. No trading occurred in House 17 and redemptions were made using
Other People’s Money.
241.
In order for House 17 to have realized the investment returns as reported on its customer
statements and continue to make cash disbursements to customers from these earnings, the
purported trades would have had to have been actually executed in the market. They were not.
In comparison to House 5, which had nearly 80 connections to handle order flow, execution
capabilities through its proprietary MISS system, connections to the exchanges and real time
market data and information providers, House 17 had limited connectivity to the world
outside of House 5. House 17’s computer systems consisted largely of the AS/400 and
hardware and software necessary only to perpetrate the fictitious trading activities and
produce customer statements and related fictitious trading documentation.
242.
As detailed above, the investigation and analysis of House 17 showed that beginning at least
in the 1970s, the trades that House 17 purported to trade could not have been executed. The
analyses show, among others:

Trading volumes that exceed the daily U.S. trading volume for securities;

Trading prices that were either above or below the reported daily market trading
price range;

Dividends that were not recorded to customers;

Trades executed on holidays and weekends;

Trades that settled at non-standard settlement durations; and

Purchasing of securities at market lows and selling securities at market highs at an
unattainable consistent rate.
243.
Further, had the securities reported on the House 17 customer statements actually been
executed, a custody record would be available from the DTC. Analyses conducted during this
investigation, however, show that only those securities traded through House 5 were
custodied at or cleared through BLMIS’s DTC and OCC accounts. As the DTC is also the
clearing and custody agent for OTC trading, House 17 trades could not have been executed in
the OTC market.
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244.
The trading of derivatives, such as options, in the OTC market is largely conducted under
agreements published by the International Swaps and Derivatives Association (“ISDA”).
ISDA agreements set forth the standard terms to which the counterparties would be bound by
the derivative transaction. While ISDA agreements were in effect for BLMIS, they were
executed for derivative trades outside the scope of House 17’s strategy (e.g., swaps) and were
issued and signed by House 5 employees. No ISDA agreements were located for any
purported House 17 option trades.
245.
The investigation showed that not only were House 17 trades not executed through House 5,
but they could not have been executed by MSIL on European exchanges. In many instances
trades purportedly traded by House 17 were not traded on European exchanges since those
equities were not registered to be sold on those exchanges. In other instances, the purported
trades were traded at volumes on those European exchanges that were dwarfed by the
volumes reflected on House 17 customer statements confirming that they were not legitimate
trades.
246.
The investigation and analyses show that, without actual trades being executed through House
17, payment of fictitious profits as well as customer redemptions could only have been
fulfilled using Other People’s Money.
b. No other legitimate income-producing business activities were identified.
247.
House 17 had no legitimate income-producing activities. Although acting as an investment
adviser, no trades were executed and the entity was dependent on an increasing supply of
investor funds in order to continually meet investor redemptions. Further evidence shows that
Madoff was not charging an investment advisory fee, which is normal in the industry.
Despite claims of charging a few cents per share commission on each trade, any such
commission income was illusory as no trading actually took place. Accordingly, there is no
evidence of any other legitimate business or any other legitimate source that would potentially
provide a revenue stream for House 17 sufficient enough to cover distributions to its
customers.
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c. Dividends that were purported to have been distributed to House 17
customers were paid with Other People’s Money.
248.
Dividends that were to be paid to the purported owners of securities on record were not paid
to House 17 customers from actual corporate dividend distributions. Instead, they were paid
with Other People’s Money. No records exist showing actual transfers of corporate dividend
distributions to the House 17 bank accounts nor is there evidence of communication between
House 17 and the transfer agents or corporations that would have disbursed the dividends.
From 1995 to 2008, nearly $4.6 billion in purported dividends were paid out to House 17
customers using Other People’s Money (see discussion supra).
d. Apart from the liquidity crisis, no financial support vis-à-vis any profits
from House 5 was evidenced.
249.
The investigation and analysis of cash flows and cash transfers between House 5 and House
17 show that aside from the House 17 liquidity crisis (described infra) and transfers during
the waning days of BLMIS in December 2008, House 5 did not provide financial support to
House 17. Furthermore, other than during the House 17 liquidity crisis, the investigation
shows that House 17 received no financial support from third parties (i.e., loans). Therefore,
any distributions to House 17 customers came from Other People’s Money.
250.
In fact, monies were being diverted not from House 5 to House 17, but from House 17 to
House 5. During the investigation it was discovered that a significant percentage of the
revenue accounted for in the FOCUS reports for House 5 was derived from Other People’s
Money being transferred to House 5 via (1) House 17 directly, (2) House 17 to a third party
brokerage account, or (3) House 17 to MSIL (see Table 10).
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Table 10
2000
2001
2002
2003
2004
2005
2006
2007
2008
Total
Revenue reported on
FOCUS Reports
("A")
$209,788,597.00
169,110,236.00
106,009,938.00
128,868,567.00
138,684,401.00
113,506,829.00
163,150,034.00
167,439,512.00
91,112,071.00
$1,287,670,185.00
House 17 Other
People's Money in
FOCUS Report
("B")
$75,582,928.71
72,403,594.92
60,483,440.69
97,366,815.48
88,966,001.61
69,307,036.65
73,217,621.96
121,243,287.50
56,372,251.50
$714,942,979.02
Total Excluding
House 17 Other
People's Money in
FOCUS Report
("C")
$134,205,668.29
96,706,641.08
45,526,497.31
31,501,751.52
49,718,399.39
44,199,792.35
89,932,412.04
46,196,224.50
34,739,819.50
$572,727,205.98
"B" as a percent
of "A"
36.0%
42.8%
57.1%
75.6%
64.1%
61.1%
44.9%
72.4%
61.9%
55.5%
Note: 2008 figures are through Q3 2008.
e. The 703 Account dealt almost entirely with customer deposits and
redemptions.
251.
The main account used by House 17, the 703 Account, consisted almost entirely of deposits
from customers (which were commingled) and inflows and outflows from overnight interestbearing accounts, which were themselves funded from customer money. There were no
additions as a result of trading, dividends or any other legitimate income producing source.
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Figure 45201
Cash Additions to 703 Account
3%
Customer Additions
Other
97%
252.
Since there is no income-producing activity, Ponzi schemes are at risk of liquidity shortages
when incoming cash flows diminish and outgoing redemptions increase. At one point, the
balance of the 703 Account became so dangerously low that House 17 faced a severe liquidity
crisis, which nearly forced the Ponzi scheme to unravel. From approximately October 2005
through June 2006, House 17 investor redemptions requests far exceeded investor deposits
during this period. BLMIS survived, in part, by borrowing bonds from a long-time customer
of Madoff, and transferring cash from the House 5 bank accounts to meet redemptions.
On November 14, 2005, BLMIS requested a $95 million loan202 from JPMC, collateralized by
253.
a Federal Home Loan Bank Bond in the principal amount of $100 million due April 8,
2009.203 According to JPMC records, the $100 million Federal Home Loan Bank Bond was
received from the customer on November 4, 2005. However, BLMIS paid the customer
approximately 30% interest204 on the bond by quarterly deposits into various accounts at
JPMC held by the customer.
201
Based on account activity from December 1998 to December 2008. “Other” transactions include, but are not
limited to, overnight sweep additions, other incoming wires or checks.
202
BLMIS request for loan to JPMorgan on November 14, 2005. JPMSBT0002332 at 2336.
203
Id.; JPMorgan Position Statement as of December 31, 2005. SECSBM0000041
204
Customer loan account document. MADTSS01163051
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254.
JPMC credited $95 million to the 703 Account on November 14, 2005.205
255.
On January 18, 2006, BLMIS requested an additional $50 million loan206 from JPMC.
Collateral for this loan was two more Federal Home Loan Bank Bonds from the customer,
one bond was worth $9 million and the other was worth $45 million, together totaling $54
million.207
256.
On January 23, 2006, JPMC credited the 703 Account with $50 million.208
257.
On June 1, 2006, BLMIS notified JPMC that it was repaying both loans, for a total amount of
approximately $145 million209 in principal, from the 703 Account.
258.
Separately, the House 17 bank accounts were reduced so dramatically during the liquidity
crisis that BLMIS used the House 5 bank account (“621 account”) to meet four separate
investor redemption requests totaling approximately $262 million.210
259.
By June 2006, after the liquidity crisis had subsided, BLMIS transferred $261.8 million of
new investor money in the House 17 bank accounts to the House 5 bank accounts. The
transfer effectively reimbursed the House 5 bank accounts for the investor redemptions paid
from those accounts.
260.
The liquidity crisis is but another indicator that House 17 was a Ponzi scheme.
f. House 17 was dependent on increasing cash inflows and promised large
returns to customers.
261.
In order to continue its Ponzi scheme, House 17 was dependent on a constant and ever
increasing inflow of cash in order to satisfy customer redemptions. As shown in Figure 46, a
very large network of feeders beginning in the early 1990s (e.g., Fairfield Greenwich Group
205
JPMorgan Chase Statement of Account ending November 30, 2005, JPMSAB0002491 at 2511.
BLMIS request for loan to JPMorgan on November 14, 2005. JPMSBT0002332 at 2338 and 2341
207
Id.
208
JPMorgan Chase Statement of Account ending January 31, 2006, JPMSAB0002865 at 2909
209
JPMSBT0002332 at p. 2342
210
BONY bank statements SECSBJ0008118, SECSBJ0008135 and SECSBJ0008137 and Customer Statements
MDPTPP05530971, MDPTPP00020510 and MDPTPP02979426.
206
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established its first account at House 17 in 1991) sustained a much smaller group of House 17
customers who were withdrawing large sums of cash from customer accounts.211
262.
The split strike conversion accounts (blue line) consisted of nearly 4,500 accounts; the nonsplit strike conversion accounts (red line) consisted of only 300 accounts. As the non-split
strike conversion accounts began to withdraw greater amounts of money from at least 1992,
House 17 was forced to attract increasingly greater amounts of cash through its investors,
many of which were feeder funds.
Figure 46
Net Cash Holdings of Split Strike Accounts and
Non-Split Strike Accounts
$20
$15
$ Billions
$10
Split Strike Accounts
$5
Non-Split Strike Accounts
$0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
($5)
($10)
263.
Given there were no profits from actual trading, investment or other legitimate business
activity, House 17 had to use Other People’s Money to pay back other investors thereby
meeting the classic definition of a Ponzi scheme (see Figure 47).
211
Figure 46 assumes a zero dollar start beginning in 1991.
2008
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Figure 47
House 5
Other
incomeproducing
businesses
House 17
New Customer Cash Additions
Older Customer Cash Withdrawals
Third-Party
Financing
Trading
Dividends
iii.
264.
Further evidence that House 17 was not a legitimate business and was a Ponzi
scheme is that BLMIS was hopelessly insolvent.
The term “insolvent” means:
(A) with reference to an entity other than a partnership and a municipality, financial condition
such that the sum of such entity's debts is greater than all of such entity's property, at a fair
valuation, exclusive of
(i) property transferred, concealed, or removed with intent to hinder, delay, or defraud
such entity's creditors; and
(ii) property that may be exempted from property of the estate under section 522 of this
title.212
265.
Madoff’s business was run as a sole proprietorship until 2001 at which time it was converted
to a Limited Liability Corporation named Bernard L. Madoff Investment Securities, LLC with
Madoff being the sole member/shareholder. At the time and all times thereafter, BLMIS was
212
11 U.S.C. § 101(32) (2011).
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comprised of the operations of both House 5 and House 17. (See discussion supra on the
description of House 5 and House 17.) On December 11, 2008, BLMIS was placed into
bankruptcy and on June 9, 2009 a consolidation order was granted by the United States
Bankruptcy Court for the Southern District of New York, which had the effect of
consolidating the bankruptcy of Bernie Madoff with that of BLMIS.
266.
In assessing the legitimacy of House 17, the solvency of BLMIS was evaluated as of
December 11, 2002 (a date selected by counsel for the six-year period prior to the BLMIS
bankruptcy filing date). To complete the solvency analysis, the relevant assets and liabilities
of both House 5 and House 17 were considered.
267.
Important assumptions involving solvency: In evaluating the solvency of BLMIS, an
important predicate assumption has been made. The standard of value that was assumed was
Fair Market Value (“FMV”). Fair Market Value as used herein is defined as the price at
which property would change hands between a willing buyer and willing seller, neither being
under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.
213
Accordingly, in the case of assessing the FMV of BLMIS, a willing buyer is assumed to
be a hypothetical one that would have completed proper due diligence and if fraud at BLMIS
was discovered at that time (i.e. December 2002), would have assessed that fact and any
resulting value ascribed would be materially less than any value assuming no fraud existed.
268.
In fact once the fraud was discovered, BLMIS was liquidated and under an order signed by
U.S. Bankruptcy Judge Burton Lifland, a bidding process was ordered for House 5 with an
auction proceeding on April 27, 2009. Castor Pollux Securities bought the trading business
for $25.5 million, with $1 million payable at closing and $24.5 million in deferred
compensation through December 2013.214 By August 2011, however, the board of directors
of Castor Pollux decided to voluntarily wind-down the business as attempts to raise additional
capital had failed. According to publicly available data, the Trustee has only received
approximately $1.2 million from the sale.215
213
Treas. Reg. § 20.2031-1b; Rev. Rul. 59-60, 1959-1 C.B. 41.
See Press Release Irving H. Picard – Trustee Announces Winning Bid of Up to $25.5 Million for Madoff Market
Maker Business. PR Newswire (last visited Nov. 18, 2011), http://www.prnewswire.com/news-releases/trusteeannounces-winning-bid-of-up-to-255-million-for-madoff-market-maker-business-61997332.html.
215
See http://online.wsj.com/article/SB10001424052970203388804576617230200603402.html
214
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269.
However, to conduct a solvency analysis in the light most favorable to a finding of solvency,
House 5 was valued using the FMV standard of value which assumes House 5 as a going
concern rather than in a liquidation which would have yielded little if any value as evidenced
by the Trustee’s sale discussed above. Additionally, where other assumptions were made in
the analysis, those assumptions were generally made in the light most favorable to the
determination of a finding of solvency. Further, certain assumptions regarding aggregate
compensation expense were made solely for the purposes of assessing the solvency of
BLMIS. Accordingly, no analysis and, therefore, no opinion is made as to the reasonableness
of, or the propriety of the compensation or other perquisites received by any individual
employee, director or officer of BLMIS during these time periods.
270.
To evaluate the solvency of BLMIS as of the Valuation Date, three tests are typically used
when a company is in bankruptcy.216 These tests include:
271.

Balance Sheet217

Ability to Pay Debts218

Capital Adequacy219
Under these tests, to be solvent, a company is required to pass the Balance Sheet Test (further
described below). The company is also required to have the ability to pay debts and be
adequately capitalized in order to be considered solvent.220
216
11 U.S.C. § 548
11 U.S.C. § 548 (a)(1)(B)(ii)(I)
218
11 U.S.C. § 548(a)(1)(B)(ii)(III)
219
11 U.S.C. § 548(a)(1)(B)(ii)(II)
220
Adequate Capital requires that a company’s capital be sufficient to afford managers a reasonable chance of
executing a reasonable business strategy in expected market conditions. Judgment of capital adequacy should
consider: (1) capital already obtained; (2) capital to which the company has reasonable access; and (3) the
Company’s flexibility to meet unexpected developments. In general, a company’s capital requirements are driven by
characteristics of its industry, its business strategy, the reasonably foreseeable actions of competitors, customers and
suppliers, and contemporary external economic and capital market conditions. In its plainest meaning, the ability to
pay debts is the ability to avoid default. Put another way, default is the inability to pay one’s debts. Thus the
simplest measure of ability to pay is (one minus) the probability of default. It is, for example, the probability of
default that a credit rating is intended to reflect.
217
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a. Balance Sheet Test:221
272.
Solvency, employing the Balance Sheet Test, is generally defined as the Fair Market Value
of a company’s assets (often determined by valuing the business enterprise on a going
concern basis versus a liquidation basis) exceeding the stated amount (or expected value
where appropriate) of its liabilities. There are three approaches commonly used to estimate
the FMV of assets: an Adjusted Balance Sheet Approach, an Income Approach and a Market
Approach.
273.
A major assumption in the determination of FMV is that all of the relevant information as of
the valuation date is disclosed to a hypothetical buyer of the business. This information
includes, but is not limited to, accurate financial information and any other operating
performance information that might affect the perception of value. In the case of House 5, it
is now known that the revenue information that was contained in the FOCUS reports was
significantly overstated, utilizing fictitious revenues derived from Other People’s Money from
House 17. Combined with the fact that House 17 was not a legitimate business and was
perpetrating a Ponzi scheme, these facts would have had a materially negative impact on any
FMV attributable to House 5 as of December 11, 2002 (see discussion supra). Moreover, to
the extent that it would have been publicly known at the time that House 5 was reporting
revenues that included hundreds of millions of dollars of Other People’s Money from the IA
Business, House 5 would have been so tainted by the negative association to the problems
identified throughout this report that the House 5 business would have been virtually
valueless.
274.
Adjusted Balance Sheet Approach:222 The Adjusted Balance Sheet Approach begins with a
review of a company’s balance sheet, prepared in accordance with U.S. generally accepted
accounting principles (“GAAP”) as of or near the valuation date. Assets and liabilities
omitted from U.S. GAAP accounts (i.e., off balance sheet assets and liabilities) are then
221
As of December 2002, for purposes of the solvency analysis, House 5 was considered to be a going concern and
was valued as such. A liquidation value would not have been appropriate in this analysis and would have produced a
significantly lower value than a value premised on a going concern value.
222
AICPA Consulting Services Executive Committee, Statement on Standards for Valuation Services 18, June 2007.
This approach is further detailed in Shannon P. Pratt, Robert F. Reilly & Robert P. Schweihs, Valuing a Business 311,
(McGraw-Hill 4th Ed. 2000).
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considered. Finally, the adjusted balance sheet analysis revalues all assets to reflect their
FMV and subtracts all non-operating liabilities at their stated values (or expected costs basis
where appropriate).
Income Approach:223 The Income Approach indicates the FMV of a business based on the
275.
value of the cash flows that the business can be expected to generate in the future. This
approach evaluates the present value of the future economic benefits that accrue to an investor
in a business. These benefits, or future cash flows, are discounted to the present at a rate
commensurate with the company’s inherent risks. The present worth of future cash flows
determines the FMV of the business. The approach thus necessitates projections of future free
cash flows and an estimation of the terminal value representing the value of the cash flows
after the end of the projection period. The formula is as follows:
n
PV  
i 1
Ei
1 k 
i
where:
PV
n
=
=
Ei
=
Present value;
The last period for which economic income is expected; n may equal infinity (i.e., ∞) if
the economic income is expected to continue in perpetuity;
Expected economic income in the ith period in the future (paid at the end of the period);
k
=
Discount rate (the cost of capital, e.g., the expected rate of return available in the market
for other investments of comparable risk and other investment characteristics
i
=
The period (usually stated as a number of years) in the future in which the prospective
economic income is expected to be received
276.
As explained above the present value calculation utilizes a discount rate represented by k.
The discount rate here was calculated using the CAPM and was determined to be 16.5
percent.224 See Appendix C for further detail.
223
Statement on Standards for Valuation Services, supra, 16-18; Pratt, Reilly& Schweihs, supra,153-154.
The CAPM rate of return on equity capital is calculated using the formula: Ke = Rf + B * ERP + Ssp + Alpha
where:Ke = Rate of return on equity capital; Rf = Risk free rate of return; B = Beta or systematic risk for this type of
equity investment; ERP = Equity risk premium; The expected return on a broad portfolio of stocks in the market
(Rm) less the risk free rate (Rf); Ssp = The small company premium adjustment to the cost of equity due to the size
of the subject company; Alpha =Adjustment to the cost of equity due to characteristics specific to the subject
company.
224
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Market Approach:225 The Market Approach indicates the FMV of a business based on a
277.
comparison of the business to comparable firms in similar lines of business that are publiclytraded, comparable public or private sale transactions in similar businesses or prior
transactions in a company’s securities is generally estimated in this approach through the
Guideline Company Method or the Guideline Transaction Method.
Guideline Company Method:226 The Guideline Company Method indicates the FMV of a
278.
business by comparing it to publicly-traded companies in similar lines of business. The
conditions and prospects of companies in similar lines of business depend on common factors
such as overall demand for their products and services. An analysis of the market multiples of
companies engaged in similar businesses yields insight into investor perceptions, and
therefore, the value of the subject company.
279.
After identifying and selecting the guideline publicly-traded companies, their business and
financial profiles are analyzed for relative similarity. Considerations of factors such as size,
growth, profitability, risk, and return on investment are also analyzed and compared to the
comparable businesses. Once these differences and similarities are assessed, for purposes of
the House 5 valuation, equity value (“EV”) multiples (i.e., EV/ Book Value) of the publiclytraded companies are calculated. These multiples are then applied to the subject company’s
operating results, and adjusted for special and nonrecurring items, to estimate the FMV of the
subject company’s enterprise. A control premium is then applied to this value to calculate the
indicated Fair Market Value of the equity on a marketable, controlling basis.
280.
Guideline Transaction Method: The Guideline Transaction Method estimates the FMV of a
business based on exchange prices in actual transactions and on asking prices for controlling
interests in public or private companies currently offered for sale. The process essentially
involves comparison and correlation of the subject company with other similar companies.
Adjustments for differences in factors described earlier (i.e., size, growth, profitability, risk,
and return on investment) are also considered.
281.
In selecting comparable transactions, merger and acquisition databases and financial
publications are typically searched to identify transactions that are disclosed and to gather
225
226
Statement on Standards for Valuation Services, supra, 18-20; Pratt, Reilly & Schweihs, supra, 226.
Pratt, Reilly & Schweihs, supra, 260-261.
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information about the prices paid for similar businesses under similar circumstances. The
acquisitions are relevant indicators of an actual market participant’s perception of Fair Market
Value, and therefore, are a useful valuation indicator.
(i)
282.
Determination of Solvency of BLMIS
The Balance Sheet Test was employed to evaluate the solvency of BLMIS.227 Two business
segments of BLMIS were considered: House 17 and House 5. First, House 17, was analyzed.
As discussed supra, House 17 was a Ponzi scheme and was not a legitimate business. Since it
would be inappropriate to consider House 17 as a going concern for purposes of a solvency
analysis, the only relevant balance sheet components to consider are the cash held by
BLMIS’s House 17, its customer liabilities and other liabilities of general creditors. Second,
House 5, which was treated in this analysis as a going concern as of the December 2002 was
analyzed (see discussion supra regarding critical predicate assumptions). To determine the
FMV of House 5, a complete business valuation of House 5 was performed. The resulting
components of House 17 and House 5 were combined in order to arrive at a final conclusion
of whether BLMIS was insolvent as of December 11, 2002.
283.
The information relied upon for the solvency analysis was the best information available to
form the basis for the opinions expressed herein. FOCUS reports, filed with the SEC, were
obtained and the financial information contained in the reports was used as the basis for
analyzing BLIMS’s historical and projected financial performance. However, as more fully
described below as well as in other sections of this Report, the FOCUS reports are known to
have contained false information regarding the operations of BLMIS and were adjusted
accordingly.
284.
Cash Held as of December 11, 2002 - The total positive balances in the House 17 related
accounts were approximately $1.5 billion as of December 11, 2002.228
227
The Balance Sheet Test is the most clearly defined test by the Bankruptcy code and it is the first test typically
employed when determining the solvency of an enterprise. That notwithstanding, as will be demonstrated below, the
depth of BLMIS’s insolvency is so great that there is virtually no way that BLMIS’s debts (predominantly customer
liabilities of $12 billion as of December 31, 2002) could be paid as they came due nor did BLMIS have a level of real
capital adequate to run its business.
228
It has been assumed for purposes of the solvency analysis, that certain brokerage/other accounts were business
accounts attributable to House 17 rather than personal accounts of Madoff and/or his wife Ruth. Account opening
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285.
Customer Liabilities of House 17 as of December 2002- In order to determine customer
liabilities, FTI calculated which customers had contributed more cash to House 17 than they
withdrew. These amounts for all of these customers were aggregated on a given day to
derive the total customer liability as of that date. As of October 31, 2002 and December 31,
2002 the customer liability was $11.9 billion and $12.0 billion, respectively.229
286.
FTI determined the principal balance of a customer by crediting the amount of cash deposited
from the inception of the customer account and subtracting the amount of cash withdrawn
from a customer account through the date of determination.230 In addition to accounting for
the cash-in and cash-out transactions, FTI also accounted for the direct transfer and
withdrawal of real securities that were either deposited or withdrawn by customers from their
accounts. By focusing on cash (or securities) deposited or withdrawn from a customer’s
account, the method excluded the following:

Any purported earnings/gains from trading activity reflected in the account
holders’ account statements;231

Any interest earned on cash balances from customer deposits in House 17’s 703
Account; and

Any transfers of Other People’s Money between accounts (i.e., transfers to an
account for which the transferor account did not have sufficient principal at the
time of the transfer).
287.
In order to assess the accuracy of FTI’s calculation of the principal balance of a customer a
review of the full customer liabilities was undertaken for purposes of inclusion in a solvency
analysis. Access was provided to information including numerous data bases including
information derived from customer statements (or alternative sources if necessary) and other
documentation that would indicate whether the account was a business or personal account was not
available. However, to view the facts in the light most favorable to the determination of solvency, we have included
the value of those accounts in the analysis.
229
Net Loser Amounts by Account - 09302011.xlsx. MOTTAA00000922
230
Id. In certain circumstances customers deposited securities into their accounts. For purposes of calculating the
customer liability, the customer’s account was credited with a principal deposit at the time that the securities were
liquidated.
231
Any adjustment for the time value of money is also excluded from the calculation. To the extent that some form
of investment return or time value of money was deemed appropriate, the customer liability would increase, which
would have the effect of further deepening BLMIS’s insolvency.
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information which isolated the cash transactions that allowed for the calculation of customer
liabilities described above. Additional testing for completeness and accuracy of the
information was conducted by comparing the information in the databases to source
documents as well as the replication of queries that were used to extract relevant information
from the date bases. 232 Finally, a recalculation of customer liabilities was completed. As a
result of testing the majority of the tables provided it was determined for purposes of the
solvency analysis contained herein, that the customer liabilities was materially accurate and
reliable for purposes of use in the solvency analysis.
288.
Valuation of House 5 as of December 11, 2002 - To determine the value of House 5, a
business valuation was performed as described below. Due to the situation at hand, the lack
of transparent financial information, with limited access to detailed underlying support, was a
limiting factor in conducting the business valuation. In order to conduct the analysis in the
light generally most favorable to the solvency of BLMIS, where transparency was lacking, a
judgment was made to generally err in favor of adjustments that supported a higher value of
House 5.
a. House 5 Financial Background
289.
House 5 operated as a securities broker-dealer registered with the SEC. It provided
executions for broker-dealers, banks, and financial institutions, and was a member of the
National Association of Securities Dealers, Inc.
290.
In order to properly understand the financial condition of House 5, its financial statements
covering two decades as well as numerous industry and equity analyst reports were analyzed
and relied upon. For purposes of this Report, all financial information is presented for the
year ending (“y/e”) December 31 (unless otherwise noted) and based on Adjusted FOCUS
report data (see definition of “Adjusted” in Appendix C). The following table shows
summary financial data for the periods prior to the valuation date.
232
The customer statements were retrieved from Microfilm and electronic (StorQM) records retained by BLMIS.
These records were compiled electronically by the Trustee’s consultants. Bank records were obtained directly from
the banks or retrieved from BLMIS files for the period December 1998 to December 2008 and compiled
electronically as well. These electronic data bases were tested and validated at the 98% confidence level with a
variation of only 2%, the data was determined to be accurate and reliable in all material respects.
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Table 11
Adjusted FOCUS Report Historical Financials233
y/e
2000
House 5 – Adjusted Financials
134.2
Total Revenue
Commissions and clearance paid to all other brokers
Clearance paid to non-brokers
Communications
Occupancy and equipment costs
Adjustment for advisor occupancy
Promotional costs
Data processing costs
Regulatory fees and expenses
Other expenses
30.6
4.1
8.6
2.9
-.5
.2
.6
6.5
69.2
13.8
2.6
5.6
3.3
-.6
.1
.8
4.4
39.2
4.8
2.9
6.8
3.9
-.7
.1
.7
4.8
31.8
Total Operating Expenses before Compensation
122.0
69.2
55.1
Pre-Comp Operating Income
12.2
27.5
-9.6
Clerical and administrative employees' expenses
Adjustment to market participant headcount reduction
45.8
-6.9
52.3
-7.8
23.1
-3.5
-26.7
-16.9
-29.2
.5
.0
.0
Income before income taxes (EBT)
-27.2
-16.9
-29.3
Tax Expense @ 40%
-10.9
-6.8
-11.7
After Tax Income (Loss)
-16.3
-10.2
-17.6
Operating Income (EBIT)
Interest expense
iv.
291.
Selected Valuation Approaches
The Income Approach and Market Approach were selected to estimate the Fair Market Value
of House 5, as explained below.
233
y/e
y/e
2001
2002
($ in millions)
96.7
45.5
For the Income Approach the discounted cash flow
Since the valuation conclusion in this report is based on the premise of value that House 5 is a going concern, any
evidence to the contrary would have a significant negative impact on the valuation.
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(“DCF”) method was considered. For the Market Approach, the Guideline Company and
Comparable Transaction Methods were considered.
a. Income Approach
292.
The most common and generally accepted method within the Income Approach is the DCF
method. A DCF model is typically developed based on estimates of future revenues, overall
operating costs, working capital requirements and capital expenditures, among other things.
For House 5, projected financial information (“PFI”) was derived based on a review and
analysis of House 5’s historical operating and financial performance, as well as a comparison
to other industry participants. After conducting additional analysis, PFI was estimated for the
calendar years ending December 31, 2003 through 2007 (the “Projection Period”).
293.
As of the Valuation Date, House 5 was operating sub-optimally with less leverage and more
non-restricted cash than its peers. Specifically, the calculated Leverage Ratio for House 5 as
of the Valuation Date was 1.55, while the weighted average Leverage Ratio of the Concluded
Guideline Companies was 3.17.234 Additionally, House 5 held $107 million of non-restricted
cash, for a Cash Ratio of 27 percent, compared to eight percent for the Concluded Guideline
Companies as of the Valuation Date.235 House 5’s financial performance was adjusted to
reflect a higher Leverage Ratio and lower Cash Ratio, which had the effect of increasing the
valuation. By relevering the business, the resulting value derived is significantly increased.
The predicate assumption for re-levering is based on the assumption that the business would
be able to borrow more money to invest in the business. Accordingly, if the fraud and/or
Ponzi was known at that time, the ability to borrow additional funds for House 5 would have
been severely negatively impacted. See Appendix C for further detail.
294.
Pro forma year end 2002 financial statements were derived by estimating income and expense
based on historical information adjusted for the recapitalization describe above and in greater
detail in Appendix C. PFI for the projection period was estimated by extrapolating growth in
revenue and expenses over the Projection Period. Below is a table of projected income and
expenses for the period from 2003-2007.236
234
The ratio of total assets to total liabilities. See page 8 of Appendix C.
The ratio of non restricted cash to total assets. See page 8 of Appendix C.
236
See Appendix C for assumptions related to this projection.
235
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Table 12
2003
Financial Metrics
Pre-Comp Operating Income
Comp Expense
Adjustment
Net Compensation
EBIT
295.
$58.5
19.4
-2.9
16.5
$42.0
2004
$61.7
20.5
-3.1
17.4
$44.3
2005
($ in millions)
$64.8
21.5
-3.2
18.3
$46.5
2006
2007
$68.3
22.7
-3.4
19.3
$49.0
$72.0
23.9
-3.6
20.3
$51.7
The estimated Fair Market Value of House 5 was then calculated as the sum of the present
value of the projected Free Cash Flows and the present value of the terminal value. The Fair
Market Value of House 5 on a marketable, controlling interest basis was estimated to be $460
million using the Income Approach and is predicated on the caveats detailed supra in
paragraphs 267 and 268. (See Appendix C for a detailed discussion of the valuation including
assumptions used and limiting conditions).
b. Guideline Company Method
296.
A series of selection criteria were applied to publicly traded companies to derive a group of
comparable companies most similar to House 5 (see Appendix C for a discussion of specific
selection criteria).
297.
Once the Concluded Guideline Company set was established, trading multiples of the
comparable companies were computed to be uses to estimate the value of House 5. First, EV
was calculated on a marketable, controlling interest basis, reflecting a control premium. The
EV for each company was calculated as the product of the closing stock price as of the day
prior to the Valuation Date and the number of shares outstanding from most recent quarterly
report as of the Valuation Date, plus a control premium of 40 percent.237 Then multiples of
EV to Book Value (“BV”), Revenue, and Cash Earnings were then calculated for the selected
237
The control premium of 40 percent is based on the mean and median Mergerstat control premium study during
the three years preceding the Valuation Date. 2002 Mergerstat Yearbook Industry Premiums.
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comparable companies. The results from the comparable companies were then applied to
House 5 to estimate value. See Appendix C for further detail.
298.
Based on the Guideline Company Method as described above, the indicated Fair Market
Value of House 5 on a marketable, controlling interest basis was $420 million as of the
Valuation Date and is predicated on the caveats detailed supra in paragraphs 267 and 268.
This concluded value is based on the average of the range of results indicated by application
of the BV, Cash Earnings and Revenue multiples as calculated using the Concluded Guideline
Companies’ valuations and financial metrics as described above and in Appendix C.
c. Comparable Transaction
299.
To identify comparable transactions, merger transactions were screened in the relevant
industry group or met keyword criteria that occurred in the two years prior to the valuation
date. These criteria identified 13 potentially similar transactions; however, in each case the
resulting company was too dissimilar to House 5 to make a reliable comparison for purposes
of estimating value. As a result, the Comparable Transaction Method was not directly relied
upon as a value indicator and was instead used primarily to corroborate the results of the
Income Approach.
300.
Based on the above analyses, the Fair Market Value of 100 percent of the equity of House 5,
on a marketable, controlling interest basis, was estimated at $450 million, as of the Valuation
Date. The following table summarizes these findings:
Table 13
Valuation Approach
Income Approach
Guideline Company Approach
Concluded Fair Market Value (rounded)
Indicated Fair
Market Value
($ millions)
$460
$420
$450
Note: Since the valuation conclusion in this report is based on the premise of value that House 5
is a going concern, any evidence to the contrary would have a significant negative impact on the valuation.
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301.
Accordingly, the solvency of BLMIS as of December 11, 2002 was computed as follows:
FMV of House 5
PLUS: House 17 Cash Balances
(in $ billions)
$0.45
$1.50
LESS: Customer Liabilities
INSOLVENT
302.
$11.90
($9.95)
The resulting negative $9.95 billion demonstrates that BLMIS was deeply insolvent as of
December 11, 2002.238 As a result of failing the Balance Sheet Test, it was determined that
an analysis of BLMIS’s capital adequacy or ability to pay debts was unnecessary since it is
inconceivable that the business could pay its debts or operate based on the depth of its
insolvency. Further, as a result of the growing customer liability from approximately $12
billion in December 2002 to approximately $19.7 billion on December 11, 2008, it is my
opinion the BLMIS was insolvent at all times after December 11, 2002 as well.
303.
It is my opinion, that even if you ascribed any additional value to the individual assets of
Bernie and Ruth Madoff, or MSIL as of December 2002 through anytime up to December
2008, the significantly deep level of insolvency for BLMIS would not be affected in an
amount anywhere closely sufficient to render BLMIS solvent.
v.
304.
The evidence shows that House 17 was a Ponzi scheme.
The investigation as detailed above shows that House 17 was a Ponzi scheme based on the
fact that:

There was no legitimate income producing activities and limited outside financial
support—as a result all redemptions and payments to customers was facilitated
using Other People’s Money;
238
For purposes of the analysis the information provided by counsel regarding the assets of Bernie and Ruth Madoff
(including real properties, investments, etc.) were considered (for example Bernie and Ruth’s personal bank accounts
had a balance of $24.8 million on December 11, 2002). An estimate of value of MSIL was also considered, which,
based on a multiple of 1.5 (rounded) times book value is $68.4 million. There could also be potential other creditor
liabilities that may also have a negative impact on solvency. To the best of my knowledge I am unaware of any asset
amounts that would change the conclusion of insolvency of BLMIS. These assets were not formally included in the
analysis.
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
Greater inflows of cash from investors, including institutional feeder funds, were
required to satisfy increasing outflows from a smaller group of customers; and

House 17 was insolvent.
VII.
BASES FOR THE OPINIONS IN MY REPORT
305.
I base my opinions below on my formal education and over twenty eight years of practical
experience as a C.P.A. and an expert in forensic accounting, fraud examinations, computer
forensics, accounting, taxation, business valuations, bankruptcy accounting and investment
advisory services. Additionally, my opinions and the bases for them are based in part on my
knowledge of Generally Accepted Accounting Principles, industry accepted accounting
practices, fraud examination theory, forensic accounting theory, commercial damage theory,
business valuation theory, the Internal Revenue Code and related taxing authority
pronouncements and rulings, investment theory and knowledge, investment advisory
knowledge and economic forecasting methodology.
306.
I further base my opinions on the documents that were made available to me by the lawyers at
Baker. These documents are listed in Appendix B. I understand that these documents have,
or will be produced by the parties in this litigation. I reserve the right to supplement and/or
amend my opinions contained in this report should additional materials and/or documents
become available that require such supplementation.
________________________________________
Bruce G. Dubinsky, MST, CPA, CFE, CVA, CFF, CFFA
November 22, 2011 (originally submitted)
January 6, 2012 (submitted with corrections)
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 55 of 179
Expert Report of Bruce G. Dubinsky
Page 124 of 124
APPENDICES
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 56 of 179
Expert Report of Bruce G. Dubinsky
APPENDIX A
QUALIFICATIONS OF BRUCE G. DUBINSKY
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 57 of 179
P R O F E S S I O N A L
Bruce G. Dubinsky
Managing Director
Duff & Phelps, LLC
Professional
Experience
C R E D E N T I A L S
Bruce Dubinsky, MST, CPA, CVA, CFE, CFF, CFFA is a Managing Director in the
Dispute and Legal Management Consulting Practice and City Leader of the Washington,
D.C. office of Duff & Phelps, LLC. Bruce has over twenty-eight years experience providing
accounting, tax, expert witness and forensic accounting services.
 Bruce’s practice places special emphasis on providing dispute consulting, forensic
accounting and expert witness services to a variety of clients including law firms, general
counsels of corporations, governmental agencies and law enforcement bodies. Bruce
frequently works on complex litigation cases where the claims in many instances are in the
tens of billions dollars.
 Bruce has been qualified and testified as an expert witness in cases involving criminal and
civil fraud, commercial business damages, intellectual property and patent damages,
business valuations, federal income taxation, bankruptcy, accounting malpractice and
standard of care cases as well as various other disputes. He has been employed on
numerous occasions as an expert for federal income tax matters by the United States
Department of Justice as well as the Office of Chief Counsel for the Internal Revenue
Service. Many of these cases involved abusive tax shelters and Listed Transactions
which surrounded the purchase and sale of notional principle contracts for a variety of
derivative financial instruments valued in the hundreds of millions of dollars.
 Bruce is currently leading the forensic investigation on campaign finance fraud for the United
States Department of Justice through appointment by the U.S. District Court for the
Southern District of New York for the 2010-2011 International Brotherhood of Teamsters
(IBT) International Officers Election. Bruce has led the forensic investigation for the past
three election cycles for the IBT dating to 1997.
 During 2009, Bruce was one of the forensic accounting investigators who worked on the
Lehman Brothers bankruptcy investigation conducted by the Special Examiner appointed by
the bankruptcy trustee for the Lehman Brothers bankruptcy estate.
 In 2003, Bruce and his team investigated fraud allegations on behalf of the Washington
Teachers Union where the presiding officers were thought to have embezzled millions of
dollars from union coffers. This investigation resulted in the perpetrators being convicted of
various federal crimes in the United States District Court for the District of Columbia
and incarcerated as a result.
Phone: 202-649-1212  Fax: 240-312-2340  Mobile: 240-413-3145  E-mail: bruce.dubinsky@duffandphelps.com
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 58 of 179
Bruce G. Dubinsky, Managing Director
Page 2
Professional
Experience
(continued)
Areas of Bruce’s practice included:
 Fraud Investigations
 Complex Tax Controversy Cases
 Commercial Damage/Lost Profits Analysis
 Intellectual Property Damages
 Accounting Malpractice





Bankruptcy Investigations/Compliance
Investment/Securities Damages
Campaign Finance Compliance
White Collar Criminal Fraud
Boardroom Investigations
Representative Cases:
 Hired as a testifying forensic accounting expert for the defense in the Parmalat SpA
fraud case, one of the world’s largest accounting fraud cases to date. Provided expert
testimony in multi-day deposition regarding various matters including the nature of the
frauds perpetrated, methods utilized by various alleged fraudsters and the underlying
transactions at issue.
 Hired as a testifying damages expert for the defense in a case with nearly $1 billion
dollars of alleged damages for an alleged patent licensing breach of contract case
involving hard disk drive spindle motors and related hard disk drive component products.
 Hired as a testifying forensic accountant and damages expert in a case involving hundreds
of millions of dollars of consumer credit card and debt accounts in several asset-backed
securitization vehicles.
 Hired as a testifying forensic accountant expert in several cases surrounding alleged
fraudulent tax shelters involving hundreds of millions of dollars in unpaid federal income
taxes.
 Hired as a testifying forensic accountant in a white collar criminal case involving
allegation of bankruptcy and tax fraud.
 Hired as a testifying damages expert in a health care insurance case involving breach of
contract and other claims.
 Hired as a testifying damages expert in a case involving lost profits arising from intentional
disruption of distributorship channels.
 Hired as a testifying damages expert in a case involving lost profits and damages arising
from alleged trespassing and unauthorized utilization of a internet service provider
network.
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 59 of 179
Bruce G. Dubinsky, Managing Director
Page 3
Professional
Experience
(continued)
Selected Professional Accomplishments:
 In 2007 Bruce was named one of the “Top 100 Most Influential People in the Accounting
Profession” by Accounting Today, the premier news vehicle for the tax and accounting
community for over 22 years. He was described in the article as “a pioneer of forensic
accounting.”
.
 In 2005 Bruce received the distinguished award as the Fraud Examiner of the Year from
the Washington Metropolitan Chapter of Certified Fraud Examiners for his work on the
Washington Teachers Union embezzlement case. He also received the Fraud Examiner
of the Year in 2001 for his efforts in the International Brotherhood of Teamsters
investigative work.
 Bruce currently serves on Editorial Board of The Value Examiner, an independent,
professional development journal dedicated to the exploration of value and its
ramifications for consultants. It is the singular source of timely, technical, in-depth
articles written for consultants by practitioners and academics at the top of their
respective fields.
 Bruce was a contributing editor for the CPA Digest, a nationally published, technical
journal for the accounting profession, for two years. After serving as a contributing editor
and writer, he remained an Editorial Board Advisor for one year. Bruce also served as a
Continuing Education Course evaluator for McGraw Hill Publishing Company as well as
a technical reviewer for Fraud Alert, published by PDI, Inc. in Chicago, IL. He has written
and published articles on various matters relating to forensic accounting, fraud
investigations, business valuations and commercial damages for a variety of legal and
professional publications.
 Bruce has also served as a member of the Commercial Panel of Arbitrators for the
American Arbitration Association. He was selected to the panel on the basis of his
involvement in the business and legal community, in recognition of his expertise and
leadership in forensic and public accounting, and his reputation for integrity and fair
judgment.
 Bruce has been quoted as an expert in numerous print media as well as appearing on local
and national television and radio newscasts, to discuss various tax, accounting and fraud
issues.
 Bruce frequently lectures at the college level on issues relating to forensic accounting and
accounting ethics. He has presented seminars to law firms, professional groups and law
enforcement bodies, including the Federal Bureau of Investigation.
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 60 of 179
Bruce G. Dubinsky, Managing Director
Page 4
Professional
Experience
(continued)
Prior Relevant Work Experience:
Mr. Dubinsky began his career as an auditor at one of the large international public
accounting firms. Following several years practicing as an auditor, he served in the tax
department as a Senior Tax Specialist, including a position in the National Tax Practice
Group. Following the public accounting firm, he served as an officer for a financial acquisition
group, and then co-founded a multi-faceted real estate development and construction company.
He later served as the head of the tax department for a C.P.A. firm in Maryland. Prior to joining
Duff and Phelps, Mr. Dubinsky became a partner in another C.P.A. firm where he built the
forensic accounting and litigation services practice group which eventually split off and
became Dubinsky & Company, P.C., which was later acquired by Duff and Phelps.
Masters of Science-Taxation, (high honors), Georgetown University, Washington, D.C. – 1986
Bachelors of Science - Accounting, University of Maryland – 1983
Education &
Certifications
Mr. Dubinsky continues his education in the field of forensic accounting, damage analysis,
data mining, computer forensics and related topics through annual extensive course study
 Certified Public Accountant - Maryland, 1985
 Certified Fraud Examiner - Association of Certified Fraud Examiners, 1998
 Certified Valuation Analyst - National Association of Certified Valuators and Analysts,
1997
 Certified Forensic Financial Analyst - National Association of Certified Valuators and
Analysts, 2008
 Certified in Financial Forensics - American Institute of Certified Public Accountants,
2010
 Commercial Arbitrator - American Arbitration Association, 2002-2004
 Registered Investment Advisor Representative - State of Maryland, 1999-2008
Professional
Associations &
Affiliations
National Association of Certified Valuators and Analysts
 Litigation and Forensics Board, Term: 2007-2010 Chair- 2008-2010
 Editorial Review Board, 2010-present
Association of Certified Fraud Examiners
American Institute of Certified Public Accountants
 Business Valuation & Forensic Services Section
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 61 of 179
BRUCE G. DUBINSKY, MST, CPA, CVA, CFE, CFF, CFFA
FEDERAL RULE 26(a)(2)(B) DISCLOSURE
FEDERAL RULES OF CIVIL PROCEDURE
TESTIMONY AT TRIAL AND/OR DEPOSITION
(underline denotes party represented)
Estate of Elizabeth S. Snow, Deceased, Philip
F. Brown, Executor v. United States of
America
U.S. District Court of Washington at Tacoma
Case No. 3:10-cv-05793-RBL
October 27, 2011 (Deposition)
Clay Vance Richardson et al v. Frontier
Spinning Mills Inc. et al.
General Court of Justice
Superior Court, North Carolina
Case No: 10 CVS 1040
June 3, 2011 (Deposition)
HCP et al v. Sunrise Senior Living
Management, Inc. et al.
Court of Chancery of the State of Delaware
Case Nos. 4691-VCS; 4692-VCS; 4693-VCS;
4694-VCS; 4696-VCS; 4697-VCS; 4698-VCS;
4699-VCS
July 21, 2010 (Deposition)
ClassicStar Mare Lease Litigation
James D. Lyon, Chapter 7 Trustee of
ClassicStar, LLC v. Tony P. Ferguson et al.
U.S. District Court Eastern District of
Kentucky, Lexington
MDL No. 1877; Civil Action No. 5:07-cv0353JMH and 5:09-215-JMH
May 13, 2010 (Deposition)
Bemont Investments LLC v. United States
United States District Court for the Eastern
District of Texas-Sherman Division
Case No: 4:07cv9 & 4:07cv10
March 25, 2010 (Trial)
August 28, 2009 (Deposition)
June 24, 2008 (Deposition)
www.duffandphelps.com
South Florida Physician’s Network, LLC
and United Health Networks, Inc. and
United Health Network of Florida, Inc.
American Arbitration Association
Case No. 32 193 Y 00567 10
August 11, 2011 (Deposition)
Glynn v. EDO Corporation
U.S. District Court for the District of
Maryland
Case No. 1:07-cv-01660-JFM
February 25, 2011 (Deposition)
Perot Systems Government Services, Inc. v.
21st Century Systems, Inc. et al.
Circuit Court for Fairfax County Virginia
Case No. 2009-08867
June 22, 2010 (Trial)
May 28, 2010 (Deposition)
Sands Capital Management, LLC v. Scott E.
O’Gorman
American Arbitration Association
Case No. 16 148 Y 00459 09
April 28, 2010 (Trial)
HCP Laguna Creek CA et al v. Sunrise
Senior Living Management, Inc.
U.S. District Court for the District of Eastern
Virginia
Case No: 1:09 CV 824-GBL/JFA
February 26, 2010 (Deposition)
Case 1:11-cv-03605-JSR Document 107-2
Global Express Money Orders, Inc. v. Farmers
& Merchants Bank et al
Circuit Court for Baltimore City
Case No: 24-C-08-004896 OT
January 13, 19 & 25, 2010 (Deposition)
Wills Family Trust v. Martin K. Alloy et al.
Circuit Court for Montgomery County, MD
Case Nos: 252430-V & 2722511-V
June 1 & 2, 2009 (Trial)
Judge Ronald B. Rubin
April 10, 2009 (Deposition)
Elize T. Meijer and Marcel Windt, Trustees in
the Bankruptcy for KPNQwest, N.V. and
Global Telesystems v. H. Brian Thompson
U.S. District Court for the Eastern District of
Virginia – Alexandria Division
Case No: 1:08CV673
December 2, 2008 (Deposition)
World-Wide Network Services, LLC, et al. v.
Dyncorp, Inc. and EDO Corp.
United States District Court for the Eastern
District of Virginia
Case No:1:07-cv-00627-GBL-BRP
January 24, 2008 (Deposition)
Harslem et al. v. Ernst & Young, LLP
American Arbitration Association
Case No: 30 107 Y 00303 06
November 6 & 7, 2007 (Trial)
United States v. Timothy D. Naegele,
Defendant
U.S. District Court for the District of Columbia
Criminal Action: Case No. 05-0151 (PLF)
September 24 & 25, 2007 (Trial);
January 9, 2007 and January 10, 2007 (Daubert
Testimony)
In re Parmalat Securities Litigation
U.S. District Court for the Southern District of
New York
Civil Action: Case No. 04 MD 1653 (LAK)
August 22-24, 2007 (Deposition)
John E. Gallus et al. v. Ameriprise Financial,
Inc.
United States District Court, District of
Minnesota
Civil Action, Docket No.: 0:04-cv-4498
January 23, 2007 (Deposition)
Filed 01/26/12 Page 62 of 179
In re UnitedHealth Group, et al. v. American
Multispecialty Group d/b/a/ Esse Health
American Arbitration Association
Case No. 57 193 Y 00004 08
June 9 & 10, 2009 (Trial)
April 24, 2009 (Deposition)
Southgate Master Fund v. United States
U.S. District Court for the Northern District of
Texas – Dallas Division
Case No: 3:06-CV-2335-K
January 14-15, 2009 (Trial)
September 17, 2008 (Deposition)
Hoehn Family, LLC v. Price Waterhouse
Coopers, LLC
Circuit Court of Jackson County Missouri at
Independence
Case No: 0516-CV36227
September 3, 2008 (Deposition)
Calomiris v. Tompros, et al.
Superior Court for the District of Columbia
Case No: ADM 2000-2175-00
January 17, 2008 (Trial)
Rosenbach et al. v. KPMG, LLP et al.
American Arbitration Association
Case No: 13 181 Y 00437 06
October 22, 2007 (Trial)
Autoscribe Corp. v. 9801Washingtonian
Office, Inc. et al.
Circuit Court for Montgomery County,
Maryland
Civil Action: Case No. 274847
September 11, 2007 (Deposition)
Jerald M. Spilsbury et al. v. KPMG, LLP et
al.
District Court, Clark County, Nevada
Civil Action: Case No: A479003
July 12, 2007 (Deposition)
Michael J. Sullivan and Jill P. Sullivan v.
KPMG LLP and QA Investments LLC
Superior Court of New Jersey Law Division,
Monmouth County
Civil Action, Docket No.: MON-L-4279-04
November 30, 2006 & December 12, 2006
(Deposition)
www.duffandphelps.com
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Case 1:11-cv-03605-JSR Document 107-2
In Re: Estate of First Pay, Inc.; Bankruptcy
No. 03-30102-PM
United States Bankruptcy Court – District of
Maryland (Greenbelt Division)
Michael G. Wolff v. United States of America:
Adversary No 05-1700-PM
Judge Mannes
August 9, 2006 (Trial)
Riddle Farm Financial Limited Partnership v.
Route 50 Partners, LP and Worcester
Partners, LP and Riddle Farm Associates, LP
and Goodwin H. Taylor, Jr.
Circuit Court for Worcester County, State of
Maryland
Case No. 23-C-03-0913
April 4 & 5, 2006 (Trial)
February 3, 2006 (Deposition)
May 16, 2005 (Hearing)
Tolt Ventures, L.L.C., et al. v. KPMG, LLP et
al.
District Court of Harris County, Texas, 333rd
Judicial District
Cause No. 2003-69957
January 27, 2006 (Deposition)
Richard W. Coleman, Jr. v. KPMG et al.
Matter in Arbitration by Agreement of the
Parties
October 31-November 2, 2005 (Trial)
October 17-19, 2005 (Trial)
August 22, 2005 (Deposition)
Minebea Co., Ltd, Precision Motors Deutsche
Minebea GmbH, and Nippon Miniature
Bearing Corp. v. George Papst, Papst
Licensing GmbH, and
Verwaltungsgesellachaft MIT Beschrankter
Haftung
U.S. District Court for the District of Columbia
Case No. 97-05-90 (SSH) (DAR)
August 4 & 5, 2005 (Trial);
June 2, 2005 (Hearing)
May 11, 2005 (Deposition)
Hemanth Rao, et al. v. H-QUOTIENT, Inc.,
Douglas A. Cohn, and Laurence Burden
United States District Court for the District of
Virginia- Eastern District
February 10 and 11, 2005 (Trial)
Filed 01/26/12 Page 63 of 179
Robert K. Cohen, et al. v. KPMG, L.L.P., et
al.
State Court of Fulton County, Georgia
Case No. 2003VS060471
May 23, 2006 (Deposition)
Estate of Keith R. Fetridge v. Aronson &
Company, A Professional Corporation
Circuit Court for Montgomery County,
Maryland
Case No. 256856
Judge Eric Johnson
March 9, 2006 (Trial)
William C. Eacho III & Donna Eacho v.
KPMG, LLP et al.
Superior Court for the District of Columbia
Case No. 04-005746
November 29 & December 1, 2005
(Deposition)
Lawrence L. Gaslow v. KPMG et al.
Supreme Court Of The State Of New York
County Of New York
Case No. 600771/04
August 8, July 1, and June 30, 2005
(Deposition)
Joseph J. Jacoboni v. KPMG LLP
United States District Court for the Middle
District of Florida – Orlando Division
Case No. 6:02-CV-510-Orl-22DAB(M.D.Fla.)
May 4, 2005 (Deposition)
James, LTD. v. Saks Fifth Avenue, et al.
Circuit Court for Arlington County, Virginia
Chancery No. 03-802
January 12 and 25, 2005 (Trial)
December 10, 2004 (Deposition)
www.duffandphelps.com
3 of 6
Case 1:11-cv-03605-JSR Document 107-2
Sensormatic Security Corp. v. Sensormatic
Electronics Corporation, ADT Security
Services, Inc., & Wallace Computer Services,
Inc.
United States District Court for the District of
Maryland Southern Division
Case No. 02-Civ-1565 (DKC)
September 28, 2004, February 19, 2004 &
October 24, 2003 (Deposition)
Alex Alikhani v. System Engineering
International, Inc.
American Arbitration Association
No. 16 168 00611 03
August 31, 2004 (Trial)
Joseph J. Jacoboni v. KPMG LLP
United States District Court for the Middle
District Of Florida
Orlando Division
Case No. 6:02-CV-510-Orl-22DAB (M.D.Fla.)
October 15, 2003 (Deposition)
Jordan v. Washington Mutual Bank, F.A.
United States District Court, District of
Maryland
Case No. H02CV1465
March 12, 2003 (Deposition)
Epstein v. Epstein
Circuit Court for Montgomery County,
Maryland
Family law No: 21608
January 8, 2003 (Trial)
Cates v. Cates
Circuit Court of Fairfax County, Virginia
Chancery No 176170
June 17, 2002 (Deposition)
Boryczka, et al. v. Phil Collyer v. Apex Data
Services, Inc.
Circuit Court of Fairfax County, Virginia
Chancery No 171437
March 12, 2002 (Deposition)
Rinearson v. Rinearson
Circuit Court of Fairfax County, Virginia
Chancery No. 170354
Judge Robert Wooldridge, Jr.
January 24, 2002 (Trial)
Filed 01/26/12 Page 64 of 179
Todd Roy Earl Bentley III v. Deutsche Post
Global Mail, LTD
Superior Court of The State of California
For The County of Los Angeles
Case No: BC 293389
September 23, 2004 & September 14, 2004
(Deposition)
Ruben A. Perez, et al v. KPMG LLP, et al
92nd Judicial District Court
Hidalgo County, Texas
Cause No: C-2593-02-A
November 7, 2003 (Deposition)
Semtek International, Inc. v. Lockheed
Martin Corporation
Circuit Court for Baltimore City, Maryland
Case No. 97183023/CC 3762
September 30 – October 1, 2003 (Trial)
June 17, 2003 & May 27, 2003 (Deposition)
Midland Credit v. MBNA America Bank
Superior Court State Of Arizona, County Of
Maricopa
Case No. CV2001-002497
February 27, 2003 & November 26, 2002
(Deposition)
Surface Joint Venture v. E.I. Dupont De
Nemours & Company, Inc.
United States District Court For The Western
District Of Texas, Austin Division
Civil Action No. A 02CA 04 3SS
January 3, 2003 (Deposition)
Phil Adams Company Profit Sharing Plan v.
Trautman Wasserman, Inc.
& CIBC Oppenheimer, Inc.
NASD Arbitration, Washington, D.C.
May 22, 2002 (Trial)
Frank A. Pietranton, Jr. et al. v. Kenneth J.
Mahon & Mahon, Inc.
Circuit Court of Arlington County, Virginia
Chancery No. 00-617
Judge Benjamin NA Kendrick
February 13, 2002 (Trial)
Amtote International, Inc., v. Bally’s of
Maryland, Inc.
Circuit Court for Baltimore County, Maryland
Civ. No. 03-C-01-001715
October 19, 2001 (Deposition)
www.duffandphelps.com
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Case 1:11-cv-03605-JSR Document 107-2
America Online, Inc., v. Netvision Audiotext,
Inc. et al.
United States District Court- Eastern District of
Virginia
Case No 99-1186-A
October 16, 2001 (Deposition)
Marvin BenBassett v. Ritz Camera Centers,
Inc.
Circuit Court for Montgomery County,
Maryland
Case No. 207934
February 23, 2001 (Deposition)
Giesting & Associates, Inc. v. Harris Corp.
Inc.
United States District Court, Middle District of
Florida, Orlando Division
No. 6:98-cv-1363-Orl-3ABF (M.D. Fla.)
Judge David A. Baker
November, 2000 (Trial)
First Guaranty Mortgage Corporation v.
Greater Atlantic Federal Savings Bank, et al.
Circuit Court for Arlington County, Virginia
Chancery No. 99-488
Judge Joann Alper
September 29, 2000 (Trial)
Sportsolution, Inc. v. National Football
League Players Association
United States District Court, Middle District of
Florida, Orlando Division
Case No. 98-1154-Civ-Orl-22C
Judge Duffy
March 22-23, 2000 (Trial)
York Distributors, A Division Of Home
Paramount Pest Control Companies, Inc. v.
FMC Corporation/Agricultural Products
Group
In The United States District Court For The
District Of Maryland
Civil Action No. L-98-2533
January 27, 2000 (Deposition)
Laura I. Merriex, et al. v. Robert S. Beale, Jr.,
M.D., PC
Superior Court For The District of Columbia
Case No. 96-CA05313
Judge Diaz
August 1999 (Trial)
Filed 01/26/12 Page 65 of 179
In Re: Robert S. Beale, Jr.
In Re: Robert S. Beale, Jr., M.D., P.A.
United States Bankruptcy Court – District of
Maryland (Baltimore Division)
Case Nos: 99-65815-ESD; 00-55731-ESD
Judge E. Stephen Derby
August 2, 2001 (Trial)
Diamond v. Diamond
Circuit Court of Fairfax County, Virginia
Chancery No. 165804
Judge M. Langhorne Keith
February 6, 2001 (Trial)
Bell Atlantic-Maryland, Inc. v. Furguson
Trenching Company, Inc. et al.
Circuit Court for Anne Arundel County,
Maryland
Case No. C-98-498130C
Judge Michael Looney
November 1, 2000 (Trial)
United States of America v. Lawrence Edwin
Crumbliss
United States District Court, Eastern District
of North Carolina, Western Division
Criminal Case No: 5:99-CR-24-BR
Judge Britt
July 21, 2000 (Trial)
Kontzias v. CVS, Inc.
Circuit Court of Fairfax County, Virginia
Civil Action No. 178049
Judge Thatcher
March 21, 2000 (Trial)
Brown v. Brown
Circuit Court for Baltimore County, Maryland
Case No. 03-C-98-003633
Judge Daniels
September 30, 1999 (Trial)
Rees, Broome & Diaz, P.C. v. Bella Vista
Condominium Association
Circuit Court for Arlington County, Virginia
Chancery No. 98-260
Judge Joann Alper
June 2, 1999 (Trial)
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Case 1:11-cv-03605-JSR Document 107-2
Charnis v. Kats et. al.
Circuit Court for Montgomery County,
Maryland
Civil No.174341-V
Judge Donohue
March 1999 (Trial)
Regina L. Amann v. Washington Romance
Writers (Board of Directors), et. al.
Circuit Court for Montgomery County,
Maryland
Civil No.166949
February 1998 (Deposition)
Kasten v. Kasten
District of Columbia Superior Court
Judge Duncan-Peters
March 1997 (Trial)
Zittelman v. The Sun Box Company
Arbitration Case- Rockville, Maryland
Judge Miller
December 1995 (Trial)
Filed 01/26/12 Page 66 of 179
Robert S. Joselow v. Robert J. Katz, et. al.
Superior Court of the District of Columbia
Civil No.96-00871
May 4, 1998 (Deposition)
International Fidelity Company v. Williams
Overman Pierce & Company LLP
In the United States District Court
For the Eastern District of North Carolina
Raleigh Division
Case No. 5:96-CV-1001-BO(1)
October 1997 (Deposition)
Roddy v. O'Brien
Circuit Court of Maryland for Montgomery
County
Master of the Court Mahayfee
October 1996 (Trial)
Commercial Recovery Systems, Inc. v. MCI
Telecommunications Company, Inc.
Arbitration Case-Washington, D.C.
January 1995 (Trial)
Revised 11/11
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Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 67 of 179
Articles Published By
Bruce G. Dubinsky, MST, CPA, CVA, CFE, CFF, CFFA
Bruce G. Dubinsky and W. Christopher Bakewell et al., Valuation of Patents: Legislative and
Judicial Developments on Damages in Infringement Cases, The Value Examiner, May/June
2009.
Steve Pomerantz and Bruce G. Dubinsky, Monte Carlo Simulation Analysis: A Tool for
Projecting the Unknown, CPA Expert, AICPA Newsletter for Providers of Business Valuation,
Forensic & Litigation Services, Winter 2007.
Steve Pomerantz and Bruce G. Dubinsky, Monte Carlo Simulation Analysis: Part II: Beyond the
Theory, CPA Expert, AICPA Newsletter for Providers of Business Valuation, Forensic &
Litigation Services, Spring 2007.
Steve Pomerantz and Bruce G. Dubinsky, Monte Carlo Simulation Analysis: Part III: A Case
Story, CPA Expert, AICPA Newsletter for Providers of Business Valuation, Forensic &
Litigation Services, Summer 2007.
Bruce G. Dubinsky and Christine L. Warner, Uncovering Accounts Payable Fraud Using “Fuzzy
Matching Logic: Part 1,” Fraud Magazine (Journal of the Association of Certified Fraud
Examiners), July/August 2006.
Bruce G. Dubinsky and Christine L. Warner, Uncovering Accounts Payable Fraud Using “Fuzzy
Matching Logic: Part 2,” Fraud Magazine (Journal of the Association of Certified Fraud
Examiners), July/August 2006.
Bruce G. Dubinsky, The Quagmire of Business Valuation, The Legal Times, Washington, D.C.,
October 21, 2002.
Bruce G. Dubinsky, Cooking the Books, Maryland State Bar Association Newsletter, Baltimore,
April 2002.
Bruce G. Dubinsky, Math Formula Fights Fraud, The Legal Times, Washington, D.C., February
2001.
Bruce G. Dubinsky, Fraud Specialists, The Legal Times, Washington, D.C., March 2000.
Bruce G. Dubinsky, Protect Your Firm Against Fraud, The Legal Times, Washington, D.C.,
February 2000.
The CPA Digest, Harcourt Brace Publishing Company, 116 articles published on various
subjects from April 1993 to September 1994.
Revised 11/2011
Case 1:11-cv-03605-JSR Document 107-2
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APPENDIX B
DOCUMENTS CONSIDERED
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Appendix “B”
Page 1 of 50
APPENDIX “B”
LISTING OF DOCUMENTS
CONSIDERED BY
BRUCE G. DUBINSKY, MST, CPA, CVA, CFE, CFF, CFFA
I have considered the pleadings in this case, as well as documents & other information
produced by the parties to this case & gathered during my research. Accordingly, my report &
Appendix C contain various footnote references & discussion of documents specifically relied
upon by me in issuing my expert opinions in this case. In addition to the documents cited in my
report & Appendix C, the following documents were considered by me in issuing my expert
opinions in this report. Documents identified / named below are to be considered inclusive of
any & all exhibits to the particular document.
DOCUMENTS
ARTICLES
1
2
3
4
5
6
7
8
9
10
Alex Altman, A Brief History of Ponzi Schemes, Time (Dec. 15, 2008)
http://www.time.com/time/business/article/0,8599,1866680,00.html.
Bala Arshanapalli, Frank Fabozzi, Lorne N. Switzer, Guillaume Gosselin, New Evidence on the
MarketImpact of Convertible Bond Issues in the U.S.(Jan. 2004).
Frank J. Fabozzi, Jinlin Liu, & Lorne N. Switzer, Market Efficiency & Returns from Covertible
Bond Hedging & Arbitrage Strategies, The J. of Alternative Investments (Winter 2009).
George Batta, Gerorge Chacko, & Bala G. Dharan, A liquidity-Based Explanation of Convertible
Arbitrage Alphas (May 2010).
Igor Lonkasrki, Jenke ter Horst, & Christ Veld, The Rise & Demise of the Convertible Arbitrage
Strategy (Jan. 23, 2009).
Jacob Bunge, Trading Firm, Built on Madoff Platform, Closes Doors, Wall St. J. (Oct. 7, 2011)
http://online.wsj.com/article/SB10001424052970203388804576617230200603402.html.
Linda Sandler & Allan Dodds Frank, Madoff's Tactics Date to 1960s When Father-In-Law Was
Recruiter, http://www.bloomberg.com/apps/news?pid=newsarchive&sid=at1ierlaVQyg.
Mark Hutchinson & Liam Gallagher, Convertible Bond Arbitrage (June 2004).
Michael Ocrant, Madoff Tops Charts; Skeptics Ask How at 1, 89 MAR/Hedge, May 2001.
Rene M. Stulz, Hedge Funds: Past, Present, & Future, 21:2 J. of Economic Perspectives (Spring
2007).
Page 1 of 50
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Appendix “B”
Page 2 of 50
BOOKS
11
12
13
14
15
16
17
Association of Certified Fraud Examiners, Fraud Examiners Manual (Association of Certified
Fraud Examiners 2009).
David Cushin, The Transaction Cost Challenge: A Comprehensive Guide for Institutional Equity
Investors & Traders (ITG Inc. 1999).
Frank J. Fabozzi, The Handbook of Fixed Income Securities (7th Ed. 2005).
Henry Campbell Black, Black’s Law Dictionary (Bryan A. Garner, ed. West Publishing 7th ed.
1999).
Shannon P. Pratt, Robert F. Reilly, & Robert P. Schweihs, Valuing a Business 311 (McGraw-Hill
4th ed. 2000).
Standard & Poor's, Stock & Bond Guide (McGraw-Hill 1985).
Steven L. Skalak, Thomas W. Golden, Mona M. Clayton & Jessica S. Pill, A Guide to Forensic
Accounting Investigation (John Wiley & Sons 2d ed. 2011).
STATUTES
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
11 U.S.C. § 101(32) (2011).
11 U.S.C. § 548 (2010).
11 U.S.C. § 548 (a)(1)(B)(1) (2010).
11 U.S.C. § 548(a)(1)(B)(2) (2010).
11 U.S.C. § 548(a)(1)(B)(III) (2010).
17 C.F.R. § 210.2-01(b)(c).
17 C.F.R. § 240.17(a)-5(f)(3).
8 NYCRR§ 29.10a(5)
Code of Professional Conduct, ET § 101 (Am. Inst. of Certified Pub. Accountants 1988)
Professional Standards, Auditing Section 220.03
Investment Advisers Act § 203(b)(3).
Investment Advisers Act Rule §§ 203-1 & 203(b).
SEC Rule 17a-5, 17 C.F.R. 240.17a5.
The Securities Exchange Act of 1934, 15 U.S.C. § 80-b-3 (2010); [44 FR 21008, Apr. 9, 1979]
The Securities Exchange Act § 17A(c), 15 U.S.C. §78 (2010).
Treas. Reg. § 20.203191b; Rev. Rul. 59-60, 1959-1 C.B. 41.
ONLINE RESOURCES
33 Code of Ethics, ACFE, http://www.acfe.com/code-of-ethics.aspx.
Company Information, Bernard L. Madoff Investment Securities, (Apr. 2001) http://www.
34
madoff.com/letters/mvl.asp?home=1.
Company Information, Bernard L. Madoff Investment Securities, (Dec. 2001) http://www.
35
madoff.com/letters/mvl.asp?home=1.
Company Information, Bernard L. Madoff Investment Securities, (Jan. 2002) http://www.
36
madoff.com/letters/mvl.asp?home=1.
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Appendix “B”
Page 3 of 50
ONLINE RESOURCES
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
Company Information, Bernard L. Madoff Investment Securities, (July 2000) http://www.
madoff.com/letters/mvl.asp?home=1.
Company Information, Bernard L. Madoff Investment Securities, (July 2000) http://www.
madoff.com/letters/mvl.asp?home=1.
Company Information, Bernard L. Madoff Investment Securities, (June 1998) http://www.
madoff.com/letters/mvl.asp?home=1.
Company Information, Bernard L. Madoff Investment Securities, (June 2000) http://www.
madoff.com/letters/mvl.asp?home=1.
Company Information, Bernard L. Madoff Investment Securities, (Mar. 2000) http://www.
madoff.com/letters/mvl.asp?home=1.
Company Information, Bernard L. Madoff Investment Securities, (May 2006) http://www.
madoff.com/letters/mvl.asp?home=1.
Company Information, Bernard L. Madoff Investment Securities, (Oct. 1997) http://www.
madoff.com/letters/mvl.asp?home=1.
Company Information, Bernard L. Madoff Investment Securities, (Oct. 2000) http://www.
madoff.com/letters/mvl.asp?home=1.
Company Information, Bernard L. Madoff Investment Securities, (Oct. 2005) http://www.
madoff.com/letters/mvl.asp?home=1.
Frontline Transcript of Interview of Michael Bienes, available at
http://www.pbs.org/wgbh/pages/frontline/madoff/interviews/bienes.html
Legitimate, Merriam Webster (Nov. 20, 2011), http://www.merriamwebster.com/dictionary/legitimate
New York Stock Exchange Special Closings, New York Stock Exchange,
http://www.nyse.com/pdfs/presidents_closings.pdf.
Office of the Professions, New York State Education Department (Nov. 20, 2011),
http://www.nysed.gov/coms/op001/opsc2a?profcd=07&plicno=017210&namecheck=HOR.
Schtup, Yiddish Dictionary Online, http://www.yiddishdictionaryonline.com.
Standard & Poor's Reports Index Returns, Standard & Poor's,
http://www.st&ard&poors.com/indices/sp-100/en/us/?indexld=spusa-100-usduf--p-us-1--.
The Hedge Fund 100, Institutional Investor,
http://www.institutionalinvestor.com/default.asp?page=250.
AGENCY RESOURCES
53 AICPA, Statement on Standards for Valuation Services (June 2007).
54 AIPCA, Professional Standards, Auditing Section 220.03
55 FASB, Accounting Standards Codification 305-10-20 (2010).
FINRA Notice 95-26, Conversion To T+3 Settlement, Reg. T, & SEC Rule 15c3-3(m), & Ex56 Dividend Schedule (Apr. 1995).
57 National Securities Clearing Corporation, Rules & Procedures (Oct. 21, 2011).
58 New York State Accountancy Regulations, Title 8, Section 29.10a-5.
Press Release, U.S. Attorney’s Office, Manhattan Attorney Announces Guilty Plea Of Another
59 Employee Of Bernard L. Madoff Investment Securities LLC (June 6, 2011).
60 SEC, Frequently Asked Questions, http://www.sec.gov/answers/ponzi.htm#PonziWhatIs.
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Appendix “B”
Page 4 of 50
AGENCY RESOURCES
61 SEC, Holding your Securities - Get The Facts, http://www.sec.gov/investor/pubs/holdsec.htm.
62 SEC, Transfer Agents, http://www.sec.gov/answers/transferagent.htm.
The Depository Trust & Clearing Corp., About DTCC: National Securities Clearing Corporation
63 (Aug. 17, 2011) http://www.dtcc.com/about/subs/nscc.php..
The Depository Trust & Clearing Corp., An Introduction to DTCC Services & Capabilities (Aug.
64 16, 2011).
The Depository Trust & Clearing Corp., An
65 Overview,http://www.dtcc.com/downloads/about/Introduction_to_DTCC.
The Depository Trust & Clearing Corp., Following a Trade: A Guide to DTCC’s Pivotal Roles in
66 How Securities Change H&s (Aug. 16, 2011).
The Depository Trust & Clearing Corp., Products & Services Equities Clearance,
67 http://www.dtcc.com/downloads/about/Broker_to_Broker_Trade.
The Depository Trust Corp., Rules, By-Laws, & Organization Certificate of the Depository Trust
68 Company a(June 2011).
The Options Clearing Corp., Index Options Product Specifications,
69 http://www.optionsclearing.com/clearing/clearing-services/specifications-index-options.jsp
The Options Clearing Corp., What is the OCC?, http://www.theocc.com/about/corporate70 information/what-is-occ.jsp.
OTHER RESOURCES
Press Release, Trustee Announces Winning Bid of Up to $25.5 Million for Madoff Market Maker
71 Business (New York: Apr. 27, 2011) http://www.prnewswire.com/news-releases/trustee-announceswinning-bid-of-up-to-255-million-for-madoff-market-maker-business-61997332.html.
72 Providence Capital, LLC., Providence Select Fund (May 2005) (presentation).
73 Thomas Leung, Convertible Arbitrage Portfolio Manager Position Business Plan.
PLEADINGS
74
75
76
77
78
79
80
81
Transcript from Hearing, Picard v. Katz, No. 11-CV-03605 (JSR) (HBP) (S.D.N.Y. Aug. 19, 2011).
Administrative Proceeding, Initial Decision, In the Matter of Marc N. Geman, No. 3-9032 (SEC
Aug. 5, 1997).
Appeal Memorandum, Picard v. Katz, No. 11-CV-03605 (JSR) (HBP) (S.D.N.Y. Oct. 1, 2011).
Appeal Motion, Picard v. Katz, No. 11-CV-03605 (JSR) (HBP) (S.D.N.Y. Oct. 7, 2011).
Appendix to Sonnenschein Invesetors’ Motion & Memorandum of Law in Support of Motion to
Exclude the Expert Report & Testimony of William Lenhart, In re Bayou Group LLC, No. 0622306 (Bankr. S.D.N.Y. 2007).
Brief for Appellants Sterling Equities Associates, et. al., In re Bernard L. Madoff Inv. Sec. LLC, 102378-bk(L) (2d. Cir. Aug. 6, 2010).
Brief for Trustee-Appellee Irving H. Picard, In re Bernard L. Madoff Inv. Sec. LLC, 10-2378-bk(L)
(2d. Cir. Sept. 20, 2010).
Brief of Appellee SIPC, In re Bernard L. Madoff Inv. Sec. LLC, 10-2378-bk(L) (2d. Cir. Sept. 20,
2010).
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Appendix “B”
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PLEADINGS
82 Case Management Order, Picard v. Katz, No. 11-CV-03605 (JSR) (HBP) (S.D.N.Y. Sept. 28, 2011).
Civil Cover Sheet on Motion to Withdraw the Reference, Picard v. Katz, No. 10-5287 (BRL)
83
(Bankr. S.D.N.Y. May 31, 2011).
Complaint for Preliminary & Permanent Injunctive & Other Equitable Relief, SEC v. Avellino &
84
Bienes, No. 92-CV-08314 (JES) (S.D.N.Y. Nov. 25, 1992).
85 Complaint, Picard v. Avellino, No. 10-05421 (BRL) (Bankr. S.D.N.Y. Dec. 10, 2010).
86 Complaint, Picard v. Bongiorno, No. 10-04215 (BRL) (Bankr. S.D.N.Y. Nov. 12, 2010).
87 Complaint, Picard v. Bonventre, No. 10- (BRL) (Bankr. S.D.N.Y.).
88 Complaint, Picard v. Crupi, No. 10-04216 (BRL) (Bankr. S.D.N.Y. Nov. 12, 2010).
89 Complaint, Picard v. O'Hara, 09 CV 9425 (S.D.N.Y. Nov. 13, 2009).
90 Complaint, Picard v. Pitz, No. 10-04213 (BRL) (Bankr. S.D.N.Y. Nov. 12, 2010).
91 Complaint, SIPC v. Friehling, 09 CV 2467 (S.D.N.Y. Mar. 18, 2009).
92 Complaint, SIPC v. Madoff, 08 CIV 10791 (S.D.N.Y. Dec. 11, 2008).
Consent Consolidation Order, In re Bernard L. Madoff Inv. Sec. LLC, No. 08-1789 (BRL) (Bankr.
93
S.D.N.Y., Jun. 9, 2009).
Cooperation Agreement from Department of Justice, United States v. Lipkin, S3 Cr. 228 (LTS)
94
(S.D.N.Y. May 31, 2011).
Decision Granting Order Upholding Trustee's Determination of Net Equity, etc., In re Bernard L.
95
Madoff Inv. Sec. LLC, No. 08-1789 (BRL) (Bankr. S.D.N.Y. Mar. 1, 2010).
Declaration in support of the Trustee's Opp to Sterling Defs' Motion to Withdraw Reference, Picard
96
v. Katz, No. 10-5287 (BRL) (Bankr. S.D.N.Y. June 17, 2011).
Declaration in Support of Trustee's Opp to the Sterling Defs' Motion to Dismiss, Picard v. Katz, No.
97
10-5287 (BRL) (Bankr. S.D.N.Y. July 8, 2011).
Defs' Answer to Complaint, Picard v. Katz, No. 11-CV-03605 (JSR) (HBP) (S.D.N.Y. Oct. 11,
98
2011).
99 Defs' Initial Disclosures, Picard v. Katz, No. 11-CV-03605 (JSR) (HBP) (S.D.N.Y. Sept. 26, 2011).
Defs' Objection to Trustee's Determination of Claims, Picard v. Katz, No. 10-5287 (BRL) (Bankr.
100
S.D.N.Y. Apr. 7, 2011).
Expert Report of Lisa M. Collura, FTI Consulting, In re Bernard L. Madoff Inv. Sec. LLC, No. 11
101
Civ. 03605 (JSR) (HBP) (S.D.N.Y. Nov. 22, 2011).
Expert Report of Matthew B. Greenblatt, FTI Consulting, In re Bernard L. Madoff Inv. Sec. LLC,
102
No. 11 Civ. 03605 (JSR) (HBP) (S.D.N.Y. Nov. 22, 2011).
Hearing Transcript, United States v. Bernard L. Madoff, 08 MJ 2735 (DC) (S.D.N.Y. Mar. 10,
103
2009).
104 Indictment, United States v. Bonventre, S1 10 Cr. 228 (LTS) (S.D.N.Y.).
105 Indictment, United States v. O'Hara, 10 CRIM 228 (S.D.N.Y. Mar. 17, 2010).
106 Information, United States v. Friehling, S1 09 Cr. 700 (AKH) (S.D.N.Y. July 17, 2009).
107 Information, United States v. Kugel, No. 10-CR-228 (LTS) (S.D.N.Y. Nov. 21, 2011).
108 Information, United States v. Lipkin, S3 10 Cr. 228 (LTS) (S.D.N.Y. Jun. 6, 2011).
Joseph Looby's Affidavit in Support of Net Equity, In re Bernard L. Madoff Inv. Sec. LLC, No. 08109
1789 (BRL) (Bankr. S.D.N.Y. Oct.16, 2009).
Jury Trial Dem&ed Complaint, Goldweber v. Sterling Equities Associates, 10 CV 5786 (S.D.N.Y.
110
Jul. 30, 2010).
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PLEADINGS
111
112
113
114
115
116
117
118
119
120
121
122
123
124
125
126
127
128
129
130
131
132
133
134
135
136
Memo of Law in of SIPC in Support of Trustee's Motion for Cert, Picard v. Katz, No. 11-CV-03605
(JSR) (HBP) (S.D.N.Y. Oct. 7, 2011).
Memo of Law in Support of Motion to Dismiss or for Summary Judgment, Picard v. Katz, No. 105287 (BRL) (Bankr. S.D.N.Y. July 7, 2011).
Memorandum of Law in Support of Sterling Defendants’ Motion to Dismiss the Amended
Complaint or, in the Alternative, for Summary Judgment, SIPC v. Bernard L. Madoff Inv. Sec.
LLC, No. 08-01789 (BRL) (S.D.N.Y.).
Motion to Dismiss or in the Alternative For Summary Judgment, Picard v. Katz, No. 10-5287 (BRL)
(Bankr. S.D.N.Y. July 7, 2011).
Notice of Motion to Direct Entry of Final Judgment & Cert, Picard v. Katz, No. 11-CV-03605 (JSR)
(HBP) (S.D.N.Y. Oct. 7, 2011).
Notice of Motion to Dismiss the Amended Complaint or, in the Alternative, for Summary Judgment,
Sec. Investor Protection Corp. v. Bernard L. Madoff Inv. Sec., No. 08-01789 (BRL) (S.D.N.Y.).
Opinion, Picard v. Katz, No. 11-CV-03605 (JSR) (HBP) (S.D.N.Y. Sept. 27, 2011).
Order Appointing Trustee & Removing to Bankruptcy Court, S.E.C. v. Bernard L. Madoff, Civ. 0810791 (S.D.N.Y. Dec. 15, 2008).
Order Appointing Trustee & Removing to Bankruptcy Court, S.E.C. v. Bernard L. Madoff, Civ. 0810791 (S.D.N.Y. Dec. 15, 2008).
Order of the Court Regarding Lipkin Charges, United States v. Lipkin, S3 10 Cr. 228 (LTS)
(S.D.N.Y. Jun. 6, 2011).
Order, In re Bernard L. Madoff Inv. Sec. LLC, 10-2378-bk (L) (2d. Cir. Aug. 16, 2011).
Order, In re Bernard L. Madoff Inv. Sec. LLC, 10-2378-bk(L) (2d. Cir. Aug. 16, 2011).
Order, Picard v. Katz, No. 11-CV-03605 (JSR) (HBP) (S.D.N.Y. Sept. 28, 2011).
Partial Judgment on Consent Imposing Permanent Injunction, S.E.C. v. Friehling, 09 Civ. 2467
(S.D.N.Y. Nov. 4, 2009).
Plea Agreement from Department of Justice, United States v. Friehling, S1 09 Cr. 700 (AKH)
(S.D.N.Y. Nov. 3, 2009).
Plea Allocution, United States v. Bernard L. Madoff, 08 MJ 2735 (DC) (S.D.N.Y. Mar. 12, 2009).
Plea Allocution, United States v. Friehling, S1 09 Cr. 700 (AKH) (S.D.N.Y. Nov. 3, 2009).
Plea, United States v. DiPascali, 09 CR 764 (RJS) (S.D.N.Y. Aug. 11, 2009).
Press Release of Plea from U.S. Attorney's Office, United States v. Lipkin, S3 10 Cr. 228 (LTS)
(S.D.N.Y. Jun. 6, 2011).
Production Request, Picard v. Katz, No. 11-CV-03605 (JSR) (HBP) (S.D.N.Y. Sept. 16, 2011).
Redacted Complaint, Picard v. Lipkin, No. 10-04218 (BRL) (Bankr. S.D.N.Y. Nov. 12, 2010).
Reply Brief for Appellants Sterling Equities Associates, et. al., In re Bernard L. Madoff Inv. Sec.
LLC, 10-2378-bk(L) (2d. Cir. Oct. 11, 2010).
Rule 56.1 Sterling Defs' Statement of Material Facts, Picard v. Katz, No. 10-5287 (BRL) (Bankr.
S.D.N.Y. July 7, 2011).
Sealed Complaint, United States v. O'Hara, 09 MAG 2484 (S.D.N.Y. Nov. 12, 2009).
Sentencing Transcript, United States v. Bernard L. Madoff, 08 MJ 2735 (DC) (S.D.N.Y. June 29,
2009).
Superseding Indictment, United States v. Bonventre, S2 10 Cr. 228 (LTS) (S.D.N.Y. Nov. 18,
2010).
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PLEADINGS
137
138
139
140
141
142
143
144
145
146
147
148
149
150
151
Supp Memo of Law in Further Opp to Sterling Defs' Motion to Dismiss, Picard v. Katz, No. 11-CV03605 (JSR) (HBP) (S.D.N.Y. July 22, 2011).
Supp Memo of Law in Further Opp to Sterling Defs' Motion to Dismiss, Picard v. Katz, No. 11-CV03605 (JSR) (HBP) (S.D.N.Y. July 22, 2011).
Supp Memo of Law in Further Support to Sterling Defs' Motion to Dismiss, Picard v. Katz, No. 11CV-03605 (JSR) (HBP) (S.D.N.Y. Aug. 12, 2011).
Transcript from Hearing, Picard v. Katz, No. 11-CV-03605 (JSR) (HBP) (S.D.N.Y. Sept. 28, 2011).
Trustee's Amended Third Interim Report, In re: Bernard L. Madoff Inv. Sec. LLC, No. 08-1789
(BRL) (Bankr. S.D.N.Y. Apr. 14, 2009).
Trustee's Counter-Statement to Rule 56.1, Picard v. Katz, No. 10-5287 (BRL) (Bankr. S.D.N.Y. July
8, 2011).
Trustee's Fifth Interim Report for the Period Ending Mar. 31, 2011, In re Bernard L. Madoff Inv.
Sec. LLC, No. 08-1789 (BRL) (Bankr. S.D.N.Y. May 16, 2011).
Trustee's First Interim Report for the Period Dec. 11, 2008 through June 30, 2009, In re Bernard L.
Madoff Inv. Sec. LLC, No. 08-1789 (BRL) (Bankr. S.D.N.Y. July 9, 2009).
Trustee's Fourth Interim Report for the Period Ending Sept. 30, 2010, In re Bernard L. Madoff Inv.
Sec. LLC, No. 08-1789 (BRL) (Bankr. S.D.N.Y. Oct. 29, 2010).
Trustee's Memo in Opp to the Sterling Defs' Motion to Dismiss, Picard v. Katz, No. 10-5287 (BRL)
(Bankr. S.D.N.Y. July 8, 2011).
Trustee's Memo of Law in Opp to Sterling Defs' Motion to Withdraw Reference, Picard v. Katz, No.
10-5287 (BRL) (Bankr. S.D.N.Y. June 17, 2011).
Trustee's Memo of Law in Support of Motion to Direct Entry of Final Judgment & Cert, Picard v.
Katz, No. 11-CV-03605 (JSR) (HBP) (S.D.N.Y. Oct. 7, 2011).
Trustee's Second Interim Report for the Period Ending Oct. 31, 2009, In re Bernard L. Madoff Inv.
Sec. LLC, No. 08-1789 (BRL) (Bankr. S.D.N.Y. Nov. 23, 2009).
Trustee's Third Interim Report for the Period Ending Mar. 31, 2010, In re Bernard L. Madoff Inv.
Sec. LLC, No. 08-1789 (BRL) (Bankr. S.D.N.Y. Apr. 14, 2010).
United States v. Madoff, 586 F.Supp.2d 240, 244 (S.D.N.Y. 2009).
INVESTMENT DATA
152
153
154
155
156
157
158
159
160
161
162
163
164
Acton Corp. at 2004, Moody's Industrial Manual (1981).
Aetna Life at 3953, Moody's Bank & Finance Manual (1979).
Aetna Life at 4303, Moody's Bank & Finance Manual (1980).
AGS Computers Inc. at 2514, Moody's Industrial Manual (1987).
Air Florida System Inc. at 1429, Moody's Industrial Manual (1980).
AlcoStard Corp., Moody's Industrial Manual (1987).
Allied Stores Corp. at 42, Moody's Industrial Manual (1979).
Aluminum Co. of America at 651, Moody's Industrial Manual (1981).
AMAX Inc. at 566, Moody's Industrial Manual (1980).
AMAX Inc. at 63, Moody's Industrial Manual (1978).
Amerada Hess Corp. at 1382, Moody's Industrial Manual (1979).
American Airlines Inc. at 1049, Moody's Transportation Manual (1978).
American Airlines Inc. at 1433, Moody's Transportation Manual (1980).
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INVESTMENT DATA
165
166
167
168
169
170
171
172
173
174
175
176
177
178
179
180
181
182
183
184
185
186
187
188
189
190
191
192
193
194
195
196
197
198
199
200
201
202
203
204
205
206
207
208
American Broadcasting Companies Inc. at 667, Moody's Industrial Manual (1981).
American Broadcasting Companies Inc. at 871, Moody's Industrial Manual (1982).
American Brothers Inc. at 579, Moody's Industrial Manual (1980).
American Brothers Inc. at 661, Moody's Industrial Manual (1981).
American Express Co. NY at 2451, Moody's Bank & Finance Manual (1982).
American General Corp. Tex at 2908, Moody's Bank & Finance Manual (1985).
American General Corp. Tex at 3008, Moody's Bank & Finance Manual (1986).
American General Insurance Co. Houston at 17, Moody's Bank & Finance Manual (1978).
American General Insurance Co. Houston at 2101, Moody's Bank & Finance Manual (1980).
American Group at 3024, Moody's Bank & Finance Manual (1986).
American Group at 3967, Moody's Bank & Finance Manual (1979).
American Home Products Corp. at 1390, Moody's Industrial Manual (1979).
American Maize Products at 2554, Moody's Industrial Manual (1989).
American Medical at 677, Moody's Industrial Manual (1981).
American Telephone at 108, Moody's Public Utility Manual (1979).
American Telephone at 34, Moody's Public Utility Manual (1980).
Ames Department Stores Inc. at 2555, Moody's Industrial Manual (1985).
Amfac Inc. at 3016, Moody's Industrial Manual (1988).
AMR at 1420, Moody's Transportation Manual (1985).
Anacomp Inc. at 704, Moody's OTC Industrial Manual (1980).
Anadarko Petroleum Corp. at 2589, Moody's Industrial Manual (1990).
Anheuser Busch Companies Inc. at 923, Moody's Industrial Manual (1982).
Anheuser Busch Companies Inc. at 975, Moody's Industrial Manual (1986).
Apache Corp. at 2576, Moody's Industrial Manual (1989).
Argo Petroleum Corp. at 1712, Moody's Industrial Manual (1980).
Argo Petroleum Corp. at 567, Moody's OTC Industrial Manual (1979).
ArmCo. Inc. at 143, Moody's Industrial Manual (1979).
ASE Daily Stock Price Record, Quarter 1 (1981).
ASE Daily Stock Price Record, Quarter 1 (1981).
ASE Daily Stock Price Record, Quarter 1 (1982).
ASE Daily Stock Price Record, Quarter 1 (1983).
ASE Daily Stock Price Record, Quarter 2 (1980).
ASE Daily Stock Price Record, Quarter 2 (1981).
ASE Daily Stock Price Record, Quarter 2 (1983).
ASE Daily Stock Price Record, Quarter 2 (1983).
ASE Daily Stock Price Record, Quarter 3 (1980).
ASE Daily Stock Price Record, Quarter 3 (1980).
ASE Daily Stock Price Record, Quarter 3 (1980).
ASE Daily Stock Price Record, Quarter 3 (1981).
ASE Daily Stock Price Record, Quarter 3 (1983).
ASE Daily Stock Price Record, Quarter 4 (1978).
ASE Daily Stock Price Record, Quarter 4 (1980).
ASE Daily Stock Price Record, Quarter 4 (1981).
ASE Daily Stock Price Record, Quarter 4 (1983).
Page 8 of 50
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Appendix “B”
Page 9 of 50
INVESTMENT DATA
209
210
211
212
213
214
215
216
217
218
219
220
221
222
223
224
225
226
227
228
229
230
231
232
233
234
235
236
237
238
239
240
241
242
243
244
245
246
247
248
249
250
251
252
ASE Daily Stock Price Record, Quarter 4 (1985).
Ashl Oil Inc. at 167, Moody's Industrial Manual (1979).
Ashl Oil Inc. at 60, Moody's Industrial Manual (1982).
Associated Dry Goods Corp. at 1048, Moody's Industrial Manual (1983).
Atlantic Richfield Co. at 182, Moody's Industrial Manual (1979).
Atlantic Richfield Co. at 185, Moody's Industrial Manual (1978).
AvCo. Corp. at 1034, Moody's Industrial Manual (1984).
AvCo. Corp. at 1389, Moody's Industrial Manual (1978).
AvCo. Corp. at 1433, Moody's Industrial Manual (1979).
Avnet Inc. at 1436, Moody's Industrial Manual (1979).
Baldwin United Corp. at 10, Moody's Bank & Finance Manual.
Bally Manufacturing Corp. at 202, Moody's Industrial Manual (1979).
BanCorp Hawaii Inc. at 838, Moody's Bank & Finance Manual (1983).
Bangor Punta Corp. at 208, Moody's Industrial Manual (1979).
Bangor Punta Corp. at 681, Moody's Industrial Manual (1980).
BarclayHedge BenchMark DataFeeder (Aug 2011).
BarclayHedge Global DataFeeder (Aug. 2011).
BarclayHedge Graveyard DataFeeder (July 2011).
BarclayHedge Historical Hedge Fund Data (1980-1989).
Barnett s of Florida Inc. at 955, Moody's Bank & Finance Manual (1985).
Baxter Travenol Laboratories Inc. at 108, Moody's Industrial Manual (1981).
Baxter Travenol Laboratories Inc. at 219, Moody's Industrial Manual (1978).
Baxter Travenol Laboratories Inc. at 220, Moody's Industrial Manual (1979).
Baxter Travenol Laboratories Inc. at 86, Moody's Industrial Manual (1980).
Beatrice Foods Co. at 2598, Moody's Industrial Manual (1983).
Beatrice Foods Co. at 2604, Moody's Industrial Manual (1984).
Beech Aircraft Corp. at 1412, Moody's Industrial Manual (1978).
Beech Aircraft Corp. at 1454, Moody's Industrial Manual (1979).
Begen Brunswig Corp. at 2099, Moody's Industrial Manual (1981).
BelCo Petroleum Corp. at 1455, Moody's Industrial Manual (1979).
Belden Corp. at 1947, Moody's Industrial Manual (1980).
Bell at 2606, Moody's Industrial Manual (1983).
Bell at 2614, Moody's Industrial Manual (1984).
Bendix Corp. at 1000, Moody's Industrial Manual (1982).
Bendix Corp. at 231, Moody's Industrial Manual (1979).
Beneficial Corp. at 1944, Moody's Bank & Finance Manual (1979).
Beneficial Corp. at 45, Moody's Bank & Finance Manual (1978).
BF Goodrich Co. at 1525, Moody's Industrial Manual (1983).
Birmingham Steel Corp. at 2630, Moody's Industrial Manual (1988).
Bloomberg Historical Hedge Fund Data (1980-1989).
Bloomberg, Barmenia Renditefonds DWS Hedge Fund Description (Oct. 25, 2011).
Bloomberg, DWS Akkumula Hedge Fund Description (Sept. 30, 2011).
Bloomberg, DWS Intervest Hedge Fund Description (Oct. 25, 2011).
Bloomberg, Ermitage Selz Fund Ltd - € Hedge Fund Description (Sept. 30, 2011).
Page 9 of 50
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Appendix “B”
Page 10 of 50
INVESTMENT DATA
253
254
255
256
257
258
259
260
261
262
263
264
265
266
267
268
269
270
271
272
273
274
275
276
277
278
279
280
281
282
283
284
285
286
287
288
289
290
291
292
293
294
295
296
Bloomberg, First Eagle Global - A Hedge Fund Description (Oct. 25, 2011).
Bloomberg, GAM Japan Equity Inc - USD Hedge Fund Description (Oct. 24, 2011).
Bloomberg, GAM Selection Hedge Inc Hedge Fund Description (Oct. 14, 2011).
Bloomberg, GAM Singapore/Malaysia EQTY Hedge Fund Description (Oct. 24, 2011).
Bloomberg, GAM Worldwide Inc Hedge Fund Description (Oct. 24, 2011).
Bloomberg, Haussman Holdings NV-A USD Hedge Fund Description (Oct. 14, 2011).
Bloomberg, Liberty Ermitage Selz - € - Feb Hedge Fund Description (Aug. 31, 2011).
Bloomberg, Permal U.S. Opportunities - A Hedge Fund Description (Oct. 14, 2011).
Bloomberg, ZWEIG - DIMENNA Intl LTD - A Hedge Fund Description (Aug. 31, 2011).
Boeing Co. at 1074, Moody's Industrial Manual (1985).
Bristol Myers Co. at 737, Moody's Industrial Manual (9180).
Bristol Myers Co. at 807, Moody's Industrial Manual (1981).
Brunswick Corp. at 1054, Moody's Industrial Manual (1982).
Brunswick Corp. at 825, Moody's Industrial Manual (1981).
Bunker Ramo Corp. at 1485, Moody's Industrial Manual (1979).
Burlington Northern Inc. at 517, Moody's Transportation Manual (1980).
Calanese Corp. at 1111, Moody's Industrial Manual (1982).
Calanese Corp. at 1115, Moody's Industrial Manual (1982).
Calfed Inc. at 950, Moody's Bank & Finance Manual (1987).
Calfed Inc. at 958, Moody's Bank & Finance Manual (1986).
Cannon Group Inc. at 2994, Moody's Industrial Manual (1986).
Capital Cities ABC Inc. at 2659, Moody's Industrial Manual (1988).
Cardinal Distribution Inc. at 1959, Moody's OTC Industrial Manual (1989).
Carrier Corp. at 315, Moody's Industrial Manual (1978).
Carrier Corp. at 318, Moody's Industrial Manual (1979).
Castle Cooke at 2670, Moody's Industrial Manual (1988).
Castle Cooke at 2672, Moody's Industrial Manual (1988).
Caterpillar TraCor Co. at 329, Moody's Industrial Manual (1979).
Caterpillar TraCor Co. at 332, Moody's Industrial Manual (1979).
CBI Industries Inc. at 2715, Moody's Industrial Manual (1990).
CBI Industries, Inc., Moody's Industrial Manual.
CBS at 335, Moody's Industrial Manual (1978).
CBS Inc. at 331, Moody's Industrial Manual (1978).
Champion Corp. at 1177, Moody's Industrial Manual (1984).
Champion Corp. at 348, Moody's Industrial Manual (1978).
Champion Corp. at 892, Moody's Industrial Manual (1981).
Champion Intl Corp. at 352, Moody's Industrial Manual (1978).
Champion Intl Corp. at 818, Moody's Industrial Manual (1980).
Champion Intl Corp. at 896, Moody's Industrial Manual (1981).
Charter Co. at 2005, Moody's Industrial Manual (1979).
Charter Co. at 2005, Moody's Industrial Manual (1980).
Charter Co. at 2154, Moody's Industrial Manual (1980).
Chemical New York Corp. at 102, Moody's Bank & Finance Manual (1986).
Chemical New York Corp. at 91, Moody's Bank & Finance Manual (1984).
Page 10 of 50
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Appendix “B”
Page 11 of 50
INVESTMENT DATA
297
298
299
300
301
302
303
304
305
306
307
308
309
310
311
312
313
314
315
316
317
318
319
320
321
322
323
324
325
326
327
328
329
330
331
332
333
334
335
336
337
338
339
340
Chemical New York Corp. at 91, Moody's Bank & Finance Manual (1984).
Chris Craft Industries at 2164, Moody's Industrial Manual (1981).
Chris Craft Industries at 2164, Moody's Industrial Manual (1981).
Chromalloy American Corp. at 1494, Moody's Industrial Manual (1978).
Chromalloy Amern at 1495, Moody's Industrial Manual (1978).
Chubb Corp. at 5587, Moody's Bank & Finance Manual (1986).
Chubb Corp. at 7338, Moody's Bank & Finance Manual (1986).
Circle K Corp. at 1171, Moody's Industrial Manual (1985).
Circle K Corp. at 1173, Moody's Industrial Manual (1985).
City Investing at 387, Moody's Industrial Manual (1979).
City Investing at 388, Moody's Industrial Manual (1979).
City Investing Co. at 383, Moody's Industrial Manual (1979).
City Investing Co. at 383, Moody's Industrial Manual (1979).
CityFed Fin at 985, Moody's Bank & Finance Manual (1986).
CityFed Financial Corp. at 983, Moody's Bank & Finance Manual (1986).
Cluett Peabody at 2704, Moody's Industrial Manual (1985).
Cluett Peabody at 2705, Moody's Industrial Manual (1985).
Coastal States Gas at 396, Moody's Industrial Manual (1978).
Coastal States Gas at 408, Moody's Industrial Manual (1979).
Coastal States Gas Corp. at 392, Moody's Industrial Manual (1978).
Coastal States Gas Corp. at 403, Moody's Industrial Manual (1979).
Colonial Gas Co. at 412, Moody's Public Utility Manual (1986).
Colonial Gas Co. at 419, Moody's Public Utility Manual (1986).
Colt Inds Inc. at 428, Moody's Industrial Manual (1979).
Colt Inds Inc. at 884, Moody's Industrial Manual (1980).
Colt Industries Inc. at 424, Moody's Industrial Manual (1979).
Columbia Pictures Entertainment Inc. at 2746, Moody's Industrial Manual (1989).
Columbia Pictures Entertainment Inc. at 1462, Moody's Industrial Manual (1989).
Comcast at 458, Moody's OTC Industrial Manual (1989).
Comcast Corp. at 456, Moody's OTC Industrial Manual (1989).
Compact Video at 848, Moody's OTC Industrial Manual (1980).
Compact Video Systems Inc. at 848, Moody's OTC Industrial Manual (1980).
Compaq at 2720, Moody's Industrial Manual (1988).
Compaq at 2781, Moody's Industrial Manual (1990).
Compaq Computer Corp. at 2720, Moody's Industrial Manual (1988).
Compaq Computer Corp. at 2780, Moody's Industrial Manual (1990).
Concept Inc. at 1232, Moody's Industrial Manual (1982).
Condec Corp. at 2046, Moody's Industrial Manual (1980).
Conner Peripherals Inc. at 1581, Moody's Industrial Manual (1990).
Conner Peripherals Inc. at 2789, Moody's Industrial Manual (1991).
ConoCo Inc. at 899, Moody's Industrial Manual (1980).
ConoCo Inc. at 899, Moody's Industrial Manual (1990).
ConseCo Inc. at 5684, Moody's Bank & Finance Manual (1989).
Consumers Power Co at 540, Moody's Public Utility Manual (1978).
Page 11 of 50
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Appendix “B”
Page 12 of 50
INVESTMENT DATA
341
342
343
344
345
346
347
348
349
350
351
352
353
354
355
356
357
358
359
360
361
362
363
364
365
366
367
368
369
370
371
372
373
374
375
376
377
378
379
380
381
382
383
384
Consumers Power Co at 540, Moody's Public Utility Manual (1980).
Continental Corp. at 4008, Moody's Bank & Finance Manual (1979).
Continental Oil Co at 439, Moody's Industrial Manual (1978).
Cooper Industries Inc. at 117, Moody's Industrial Manual (1980).
Cooper Industries Inc. at 146, Moody's Industrial Manual (1981).
Cooper Industries Inc. at 468, Moody's Industrial Manual (1979).
Core Laboratories Inc. at 2060, Moody's Industrial Manual (1980).
CPT Corp. at 1243, Moody's OTC Industrial Manual (1981).
Crocker National Corp. at 316, Moody's Bank & Finance Manual (1980).
Crouse Hinds Co. at 936, Moody's Industrial Manual (1980).
Crown Zellerbach Corp. at 1026, Moody's Industrial Manual (1981).
Crum Forster at 94, Moody's Bank & Finance Manual (1978).
Crystal Oil Co. at 2220, Moody's Industrial Manual (1981).
CSX Corp. at 643, Moody's Transportation Manual (1986).
Curtiss Wright Corp. at 2730, Moody's Industrial Manual (1982).
Damson Oil Corp. at 2230, Moody's Industrial Manual (1981).
Dart Industries Inc. at 1142, Moody's Industrial Manual (1988).
Dart Industries Inc. at 513, Moody's Industrial Manual (1979).
Del Monte Corp. at 539, Moody's Industrial Manual (1979).
Detroit Edison Co. at 630, Moody's Public Utility Manual (1979).
Digital Equipment Corp. at 1605, Moody's Industrial Manual (1980).
Digital Equipment Corp. at 2248, Moody's Industrial Manual (1981).
Digital Equipment Corp. at 267, Moody's Industrial Manual (1986).
Digital Equipment Corp. at 2753, Moody's Industrial Manual (1982).
Digital Switch Corp. at 1283, Moody's OTC Industrial Manual (1982).
Digital Switch Corp. at 522, Moody's OTC Industrial Manual (1983).
Dillingham Corp. at 2100, Moody's Industrial Manual (1980).
Dillingham Corp. at 2250, Moody's Industrial Manual (1981).
Dreyfus Corp. at 5749, Moody's Bank & Finance Manual (1985).
Eastern Air Lines Inc. at 1438, Moody's Transportation Manual (1980).
Eaton Corp. at 1312, Moody's Industrial Manual (1982).
Eaton Corp. at 296, Moody's Industrial Manual (1984).
Eaton Corp. at 599, Moody's Industrial Manual (1979).
Emhart Corp. at 600, Moody's Industrial Manual (1978).
Emhart Corp. at 618, Moody's Industrial Manual (1979).
Emons Industries Inc. at 1524, Moody's Transportation Manual (1979).
Energy Factors Inc. at 1818, Moody's OTC Industrial Manual (1985).
ENSTAR Corp. at 2822, Moody's Industrial Manual (1984).
ERC Corp. at 2092, Moody's Bank & Finance Manual (1978).
ERC Inc. at 2812, Moody's Industrial Manual (1985).
Esterline Corp. at 2137, Moody's Industrial Manual (1980).
Ethyl Corp. at 1645, Moody's Industrial Manual (1979).
Evaluation Research Corp. at 2812, Moody's Industrial Manual (1983).
Expeditors of Washington at 2175, Moody's Transportation Manual (1986).
Page 12 of 50
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Appendix “B”
Page 13 of 50
INVESTMENT DATA
385
386
387
388
389
390
391
392
393
394
395
396
397
398
399
400
401
402
403
404
405
406
407
408
409
410
411
412
413
414
415
416
417
418
419
420
421
422
423
424
425
426
427
428
Fairchild Industries Inc. at 1147, Moody's Industrial Manual (1981).
Federal National Mortgage Ass'n at 2918, Moody's Bank & Finance Manual (1990).
Federal National Mortgage Ass'n at 2924, Moody's Bank & Finance Manual (1988).
Federal Paper Board Co. Inc. at 1657, Moody's Industrial Manual (1979).
Federal Paper Board Co. Inc. at 2808, Moody's Industrial Manual (1982).
Filmways Inc. at 1642, Moody's Industrial Manual (1978).
Filmways Inc. at 1663, Moody's Industrial Manual (1979).
First Boston Inc. at 5427, Moody's Bank & Finance Manual (1986).
First Executive Corp. at 4033, Moody's Bank & Finance Manual (1979).
First Executive Corp. at 4371, Moody's Bank & Finance Manual (1980).
First Fiity BanCorp. at 1043, Moody's Bank & Finance Manual (1988).
First Jersey National Corp. at 2635, Moody's Bank & Finance Manual (1985).
First Pennsylvania at 192, Moody's Bank & Finance Manual (1977).
First Pennsylvania at 221, Moody's Bank & Finance Manual (1978).
First Pennsylvania Corp. at 100, Moody's Bank & Finance Manual (1977).
First Pennsylvania Corp. at 219, Moody's Bank & Finance Manual (1978).
First Pennsylvania Corp. at 219, Moody's Bank & Finance Manual (1978).
First Pennsylvania Corp. at 321, Moody's Bank & Finance Manual (1986).
First Pennsylvania Corp. at 327, Moody's Bank & Finance Manual (1987).
First Pennsylvania Corp. at 327, Moody's Bank & Finance Manual (1987).
First Pennsylvania Corp., Moody's Bank & Finance Manual.
Fisher Scientific Co. at 2159, Moody's Industrial Manual (1980).
Flagships Inc. at 1724, Moody's Bank & Finance Manual (1982).
Fleet Norstar Financial Group Inc. at 2014, Moody's Bank & Finance Manual (1989).
Flexi Van Corp. at 2071, Moody's Transportation Manual (1982).
Flight Corp. at 1434, Moody's Transportation Manual (1981).
Flowers Industries Inc. at 2991, Moody's Industrial Manual (1992).
Fluor Corp. at 665, Moody's Industrial Manual (1978).
FMC Corp. at 1114, Moody's Industrial Manual (1980).
Foremost McKesson at 688, Moody's Industrial Manual (1978).
Foremost McKesson at 707, Moody's Industrial Manual (1979).
Forum Group Inc. at 1580, Moody's OTC Industrial Manual (1983).
Forum Group Inc. at 1766, Moody's OTC Industrial Manual (1986).
Forum Group Inc. at 1867, Moody's OTC Industrial Manual (1985).
Frankfurter Allgemeine Daily Stock Price Record (Jan. 3, 1981).
Frankfurter Allgemeine Daily Stock Price Record (Sept. 22, 1979).
Fred Meyer Inc. at 1059, Moody's OTC Industrial Manual (1979).
GAF Corp. at 1147, Moody's Industrial Manual (1980).
GAF Corp. at 1223, Moody's Industrial Manual (1981).
GAF Corp. at 1385, Moody's Industrial Manual (1985).
GAF Corp. at 1424, Moody's Industrial Manual (1982).
GAF Corp. at 1431, Moody's Industrial Manual (1984).
GAF Corp. at 1477, Moody's Industrial Manual (1983).
Galaxy Oil Co. at 854, Moody's OTC Industrial Manual (1979).
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Appendix “B”
Page 14 of 50
INVESTMENT DATA
429
430
431
432
433
434
435
436
437
438
439
440
441
442
443
444
445
446
447
448
449
450
451
452
453
454
455
456
457
458
459
460
461
462
463
464
465
466
467
468
469
470
471
472
Galaxy Oil Co. at 993, Moody's OTC Industrial Manual (1980).
GATX Corp. at 1156, Moody's Industrial Manual (1980).
GATX Corp. at 350, Moody's Industrial Manual (1989).
Geico Corp. at 4377, Moody's Bank & Finance Manual (1987).
Geico Corp. at 5671, Moody's Bank & Finance Manual (1983).
GenCorp. Inc. at 3050, Moody's Industrial Manual (1984).
General Cinema Corp. at 333, Moody's Industrial Manual (1988).
General Dynamics Corp. at 1237, Moody's Industrial Manual (1981).
General Growth Properties at 6364, Moody's Bank & Finance Manual (1984).
General Motors Corp. at 1292, Moody's Industrial Manual (1988).
Giant Group Ltd at 2885, Moody's Industrial Manual (1987).
Gould Inc. at 804, Moody's Industrial Manual (1978).
Government Employees Insurance Co. at 133, Moody's Bank & Finance Manual (1978).
Government Employees Insurance Co. at 4382, Moody's Bank & Finance Manual (1980).
Government Employees Insurance Co. at 5677, Moody's Bank & Finance Manual (1983).
Grace WR at 825, Moody's Industrial Manual (1979).
Graphic Scanning Corp. at 1018, Moody's Industrial Manual (1980).
Graphic Scanning Corp. at 1409, Moody's Industrial Manual (1982).
Graphic Scanning Corp. at 907, Moody's Industrial Manual (1978).
Great American Corp. at 1009, Moody's Bank & Finance Manual (1978).
Great American Corp. at 2143, Moody's Bank & Finance Manual (1988).
Great Western Financial Corp. at 2746, Moody's Bank & Finance Manual (1986).
Greyhound Corp. at 2101, Moody's Transportation Manual (1983).
Grumman Corp. at 1249, Moody's Industrial Manual (1980).
GTE Corp. at 1872, Moody's Public Utility Manual (1986).
GTE Corp. at 1936, Moody's Public Utility Manual (1982).
Gulf at 1262, Moody's Industrial Manual (1980).
Gulf at 845, Moody's Industrial Manual (1978).
Gulf at 862, Moody's Industrial Manual (1979).
Gulf United Corp. at 2757, Moody's Bank & Finance Manual.
Gulf United Corp. at 2757, Moody's Bank & Finance Manual (1983).
Hanna MA Co. at 3008, Moody's Industrial Manual (1989).
Harnischfeger Industries Inc. at 1383, Moody's Industrial Manual (1987).
Hartmarx Corp. at 2931, Moody's Industrial Manual (1985).
Hasbro Inc. at 3038, Moody's Industrial Manual (1986).
Hechinger Co. at 1737, Moody's OTC Industrial Manual (1987).
Helen of Troy Corp. at 2049, Moody's OTC Industrial Manual (1989).
Heritage Communications Inc. at 3041, Moody's Industrial Manual (1986).
Hilton Hotels Corp. at 2031, Moody's Bank & Finance Manual (1979).
HJ Heinz Co. at 1294, Moody's Industrial Manual (1980).
Holiday Corp. Inc. at 1484, Moody's Transportation Manual (1986).
Holiday Inns Inc. at 1369, Moody's Transportation Manual (1981).
Holiday Inns Inc. at 1557, Moody's Transportation Manual (1982).
Home Centers of America Inc. at 1659, Moody's OTC Industrial Manual (1983).
Page 14 of 50
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Appendix “B”
Page 15 of 50
INVESTMENT DATA
473
474
475
476
477
478
479
480
481
482
483
484
485
486
487
488
489
490
491
492
493
494
495
496
497
498
499
500
501
502
503
504
505
506
507
508
509
510
511
512
513
514
515
516
Home Depot Inc. at 2950, Moody's Industrial Manual (1987).
Horn at 2942, Moody's Industrial Manual (1983).
Hospital Corp. of America at 449, Moody's Industrial Manual (1982).
Hospital Financial Corp. at 953, Moody's OTC Industrial Manual (1978).
Household Corp. at 1741, Moody's Bank & Finance Manual (1978).
Household Inc. at 4946, Moody's Bank & Finance Manual (1982).
Household Inc. at 4946, Moody's Bank & Finance Manual (1982).
Household Inc. at 5488, Moody's Bank & Finance Manual (1983).
Household Inc. at 6494, Moody's Bank & Finance Manual (1984).
Houston Oil at 2273, Moody's Industrial Manual (1980).
Hughes Tool Co. at 2277, Moody's Industrial Manual (1980).
Hutton EF Group Inc. at 5493, Moody's Bank & Finance Manual (1983).
ICN Pharmaceuticals Inc. at 3045, Moody's Industrial Manual (1986).
Imagine Films Entertainment Corp. at 259, Moody's OTC Industrial Manual (1986).
Immunex Corp. at 584, Moody's OTC Industrial Manual (1990).
Imperial Oil Ltd at 2894, Moody's Industrial Manual (1980).
Imperial Oil Ltd at 557, Moody's International Manual (1981).
INA Corp. Penn at 4061, Moody's Bank & Finance Manual (1979).
Ingersoll R Co. at 1393, Moody's Industrial Manual (1981).
Intl Steel Co. at 1325, Moody's Industrial Manual (1989).
Intl Steel Co. at 948, Moody's Industrial Manual (1979).
InsilCo. Corp. at 1404, Moody's Industrial Manual (1981).
Integrated Resources Inc. at 3317, Moody's Bank & Finance Manual (1983).
Integrated Resources Inc. at 3661, Moody's Bank & Finance Manual (1986).
Intel Corp. at 1663, Moody's OTC Industrial Manual (1988).
Intel Corp. at 1682, Moody's OTC Industrial Manual (1983).
Intel Corp. at 1874, Moody's OTC Industrial Manual (1991).
Intel Corp. at 2065, Moody's OTC Industrial Manual (1989).
Intel Corp. at 2388, Moody's OTC Industrial Manual (1987).
Intel Corp. at 397, Moody's OTC Industrial Manual (1990).
InterCo. Inc. at 1616, Moody's Industrial Manual (1984).
Intermagnetics General Corp. at 1689, Moody's OTC Industrial Manual (1983).
International Game Technology at 2150, Moody's Industrial Manual (1988).
International Harvester Co. at 506, Moody's Industrial Manual (1984).
International Harvester Co. at 507, Moody's Industrial Manual (1985).
International Harvester Co. at 507, Moody's Industrial Manual (1985).
International Harvester Co. at 507, Moody's Industrial Manual (1985).
International Harvester Co. at 523, Moody's Industrial Manual (1983).
International Lease Corp. at 7034, Moody's Industrial Manual (1985).
International Lease Finance Corp. at 7034, Moody's Bank & Finance Manual (1985).
International Remote Imaging at 624, Moody's OTC Industrial Manual (1983).
International Telephone at 1419, Moody's Industrial Manual (1981).
International Telephone at 981, Moody's Industrial Manual (1978).
International Telephone at 981, Moody's Industrial Manual (1978).
Page 15 of 50
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Appendix “B”
Page 16 of 50
INVESTMENT DATA
517
518
519
520
521
522
523
524
525
526
527
528
529
530
531
532
533
534
535
536
537
538
539
540
541
542
543
544
545
546
547
548
549
550
551
552
553
554
555
556
557
558
559
560
International Thoroughbred Breeders at 2981, Moody's Industrial Manual (1985).
Interpace at 1788, Moody's Industrial Manual (1978).
Interpace Corp. at 1788, Moody's Industrial Manual (1978).
ITT Corp. at 1629, Moody's Industrial Manual (1984).
IU Corp. at 1002, Moody's Industrial Manual (1978).
James River Corp. of Virginia at 5152, Moody's Industrial Manual (1981).
James River Corp. of Virginia at 5603, Moody's Industrial Manual (1982).
Jewel Companies at 3751, Moody's Industrial Manual (1981).
Jhirmack Enterprises at 1100, Moody's OTC Industrial Manual (1980).
Jhirmack Enterprises at 962, Moody's OTC Industrial Manual (1979).
Johnson Controls at 5157, Moody's Industrial Manual (1981).
Katy Industries at 5624, Moody's Industrial Manual (1984).
Kidde Inc. at 5633, Moody's Industrial Manual (1984).
Kidde Inc. at 5728, Moody's Industrial Manual (1986).
Kinder Care Learning Centers at 1120, Moody's OTC Industrial Manual (1980).
Kinder Care Learning Centers at 2050, Moody's OTC Industrial Manual (1985).
Kinney System at 2717, Moody's OTC Industrial Manual (1983).
Koppers Co. Inc. at 3794, Moody's Industrial Manual (1981).
Kroger The Co. at 5639, Moody's Industrial Manual (1982).
Laidlaw Industries Inc. at 625, Moody's OTC Industrial Manual (1985).
Lear Siegler Inc. at 3848, Moody's Industrial Manual (1978).
Liberty National Corp. at 1493, Moody's Bank & Finance Manual (1981).
Lifemark Corp. at 5406, Moody's Industrial Manual (1982).
Lin Broadcasting Corp. at 2083, Moody's OTC Industrial Manual (1985).
Lincoln National Corp. at 2054, Moody's Bank & Finance Manual (1979).
Litton Industries Inc. at 4914, Moody's Industrial Manual (1980).
Lockheed Corp. at 5211, Moody's Industrial Manual (1981).
London Times Daily Stock Price Record (Feb. 17, 1981).
London Times Daily Stock Price Record (Feb. 17, 1981).
London Times Daily Stock Price Record (Feb. 18, 1981).
London Times Daily Stock Price Record (Feb. 18, 1981).
London Times Daily Stock Price Record (Feb. 19, 1981).
London Times Daily Stock Price Record (Feb. 19, 1981).
London Times Daily Stock Price Record (Feb. 20, 1981).
London Times Daily Stock Price Record (Feb. 20, 1981).
London Times Daily Stock Price Record (Feb. 21, 1981).
London Times Daily Stock Price Record (Feb. 21, 1981).
London Times Daily Stock Price Record (Feb. 25, 1981).
London Times Daily Stock Price Record (Feb. 25, 1981).
London Times Daily Stock Price Record (Feb. 26, 1981).
London Times Daily Stock Price Record (Feb. 26, 1981).
London Times Daily Stock Price Record (Feb. 27, 1981).
London Times Daily Stock Price Record (Feb. 27, 1981).
London Times Daily Stock Price Record (Feb. 28, 1981).
Page 16 of 50
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 85 of 179
Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 17 of 50
INVESTMENT DATA
561
562
563
564
565
566
567
568
569
570
571
572
573
574
575
576
577
578
579
580
581
582
583
584
585
586
587
588
589
590
591
592
593
594
595
596
597
598
599
600
601
602
603
604
London Times Daily Stock Price Record (Feb. 28, 1981).
London Times Daily Stock Price Record (Jan. 2, 1981).
London Times Daily Stock Price Record (Jan. 2, 1981).
London Times Daily Stock Price Record (Jan. 22, 1981).
London Times Daily Stock Price Record (Jan. 22, 1981).
London Times Daily Stock Price Record (Jan. 23, 1981).
London Times Daily Stock Price Record (Jan. 23, 1981).
London Times Daily Stock Price Record (Jan. 24, 1981).
London Times Daily Stock Price Record (Jan. 24, 1981).
London Times Daily Stock Price Record (Jan. 3, 1981).
London Times Daily Stock Price Record (Jan. 3, 1981).
London Times Daily Stock Price Record (Jan. 5, 1981).
London Times Daily Stock Price Record (Jan. 5, 1981).
London Times Daily Stock Price Record (Jan. 6, 1981).
London Times Daily Stock Price Record (Jan. 6, 1981).
London Times Daily Stock Price Record (Jan. 7, 1981).
London Times Daily Stock Price Record (Jan. 7, 1981).
London Times Daily Stock Price Record (Mar. 10, 1981).
London Times Daily Stock Price Record (Mar. 10, 1981).
London Times Daily Stock Price Record (Mar. 11, 1981).
London Times Daily Stock Price Record (Mar. 11, 1981).
London Times Daily Stock Price Record (Mar. 12, 1981).
London Times Daily Stock Price Record (Mar. 12, 1981).
London Times Daily Stock Price Record (Mar. 13, 1981).
London Times Daily Stock Price Record (Mar. 13, 1981).
London Times Daily Stock Price Record (Mar. 14, 1981).
London Times Daily Stock Price Record (Mar. 14, 1981).
London Times Daily Stock Price Record (Mar. 16, 1981).
London Times Daily Stock Price Record (Mar. 16, 1981).
London Times Daily Stock Price Record (Mar. 17, 1981).
London Times Daily Stock Price Record (Mar. 17, 1981).
London Times Daily Stock Price Record (Mar. 18, 1981).
London Times Daily Stock Price Record (Mar. 18, 1981).
London Times Daily Stock Price Record (Mar. 19, 1981).
London Times Daily Stock Price Record (Mar. 19, 1981).
London Times Daily Stock Price Record (Mar. 2, 1981).
London Times Daily Stock Price Record (Mar. 2, 1981).
London Times Daily Stock Price Record (Mar. 20, 1981).
London Times Daily Stock Price Record (Mar. 20, 1981).
London Times Daily Stock Price Record (Mar. 22, 1981).
London Times Daily Stock Price Record (Mar. 22, 1981).
London Times Daily Stock Price Record (Mar. 23, 1981).
London Times Daily Stock Price Record (Mar. 23, 1981).
London Times Daily Stock Price Record (Mar. 24, 1981).
Page 17 of 50
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 86 of 179
Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 18 of 50
INVESTMENT DATA
605
606
607
608
609
610
611
612
613
614
615
616
617
618
619
620
621
622
623
624
625
626
627
628
629
630
631
632
633
634
635
636
637
638
639
640
641
642
643
644
645
646
647
648
London Times Daily Stock Price Record (Mar. 24, 1981).
London Times Daily Stock Price Record (Mar. 25, 1981).
London Times Daily Stock Price Record (Mar. 25, 1981).
London Times Daily Stock Price Record (Mar. 26, 1981).
London Times Daily Stock Price Record (Mar. 26, 1981).
London Times Daily Stock Price Record (Mar. 27, 1981).
London Times Daily Stock Price Record (Mar. 27, 1981).
London Times Daily Stock Price Record (Mar. 28, 1981).
London Times Daily Stock Price Record (Mar. 28, 1981).
London Times Daily Stock Price Record (Mar. 3, 1981).
London Times Daily Stock Price Record (Mar. 3, 1981).
London Times Daily Stock Price Record (Mar. 4, 1981).
London Times Daily Stock Price Record (Mar. 4, 1981).
London Times Daily Stock Price Record (Mar. 5, 1981).
London Times Daily Stock Price Record (Mar. 5, 1981).
London Times Daily Stock Price Record (Mar. 6, 1981).
London Times Daily Stock Price Record (Mar. 6, 1981).
London Times Daily Stock Price Record (Mar. 7, 1981).
London Times Daily Stock Price Record (Mar. 7, 1981).
London Times Daily Stock Price Record (Mar. 9, 1981).
London Times Daily Stock Price Record (Mar. 9, 1981).
London Times Daily Stock Price Record (Nov. 13, 1979).
London Times Daily Stock Price Record (Nov. 13, 1979).
London Times Daily Stock Price Record (Nov. 14, 1979).
London Times Daily Stock Price Record (Nov. 14, 1979).
London Times Daily Stock Price Record (Nov. 15, 1979).
London Times Daily Stock Price Record (Nov. 15, 1979).
London Times Daily Stock Price Record (Nov. 16, 1979).
London Times Daily Stock Price Record (Nov. 16, 1979).
London Times Daily Stock Price Record (Nov. 17, 1979).
London Times Daily Stock Price Record (Nov. 17, 1979).
London Times Daily Stock Price Record (Nov. 18, 1979).
London Times Daily Stock Price Record (Nov. 18, 1979).
London Times Daily Stock Price Record (Nov. 19, 1979).
London Times Daily Stock Price Record (Nov. 19, 1979).
London Times Daily Stock Price Record (Nov. 20, 1979).
London Times Daily Stock Price Record (Nov. 20, 1979).
London Times Daily Stock Price Record (Nov. 21, 1979).
London Times Daily Stock Price Record (Nov. 21, 1979).
London Times Daily Stock Price Record (Nov. 23, 1979).
London Times Daily Stock Price Record (Nov. 23, 1979).
London Times Daily Stock Price Record (Nov. 24, 1979).
London Times Daily Stock Price Record (Nov. 24, 1979).
London Times Daily Stock Price Record (Nov. 26, 1979).
Page 18 of 50
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 87 of 179
Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 19 of 50
INVESTMENT DATA
649
650
651
652
653
654
655
656
657
658
659
660
661
662
663
664
665
666
667
668
669
670
671
672
673
674
675
676
677
678
679
680
681
682
683
684
685
686
687
688
689
690
691
692
London Times Daily Stock Price Record (Nov. 26, 1979).
London Times Daily Stock Price Record (Nov. 27, 1979).
London Times Daily Stock Price Record (Nov. 27, 1979).
London Times Daily Stock Price Record (Nov. 28, 1979).
London Times Daily Stock Price Record (Nov. 28, 1979).
London Times Daily Stock Price Record (Nov. 29, 1979).
London Times Daily Stock Price Record (Nov. 29, 1979).
London Times Daily Stock Price Record (Nov. 30, 1979).
London Times Daily Stock Price Record (Nov. 30, 1979).
London Times Daily Stock Price Record (Oct. 1979).
Lorimar at 5411, Moody's Industrial Manual (1984).
Lorimar Telepictures Corp. at 5514, Moody's Industrial Manual (1986).
Louisiana L & Offshore Exploration at 2576, Moody's Industrial Manual (1979).
LTV Corp. at 3828, Moody's Industrial Manual (1981).
LTV Corp. at 3828, Moody's Industrial Manual (1981).
Lucky Stores Inc. at 2586, Moody's Industrial Manual (1979).
Lundy Electronics & Systems at 6259, Moody's Industrial Manual (1985).
Macmillan Inc. at 4060, Moody's Industrial Manual (1987).
Macmillan Inc. at 4079, Moody's Industrial Manual (1985).
Magna Group Inc. at 1060, Moody's Bank & Finance Manual (1989).
Magna Group Inc. at 2127, Moody's Bank & Finance Manual (1990).
Mark Controls Corp. at 4941, Moody's Industrial Manual (1980).
Martin Marietta Corp. at 4004, Moody's Industrial Manual (1984).
Martin Marietta Corp. at 4103, Moody's Industrial Manual (1985).
Mattel Inc. at 3119, Moody's Industrial Manual (1982).
McDermott Inc. at 3173, Moody's Industrial Manual (1981).
McDermott Inc. at 3234, Moody's Industrial Manual (1990).
McDonnell Douglas Corp. at 4956, Moody's Industrial Manual (1980).
McGraw Hill Inc. at 2623, Moody's Industrial Manual (1978).
MCI Communications Corp. at 1047, Moody's OTC Industrial Manual (1979).
MCI Communications Corp. at 1098, Moody's OTC Industrial Manual (1978).
MCI Communications Corp. at 1181, Moody's OTC Industrial Manual (1980).
MCI Communications Corp. at 1576, Moody's OTC Industrial Manual (1981).
MCI Communications Corp. at 1576, Moody's OTC Industrial Manual (1982).
MCI Communications Corp. at 1792, Moody's OTC Industrial Manual (1983).
McKesson Corp. at 4030, Moody's Industrial Manual (1984).
McKesson Corp. at 5932, Moody's Industrial Manual (1990).
Mead Corp. at 3009, Moody's Industrial Manual (1980).
Medco Research Inc. at 2430, Moody's OTC Industrial Manual (1987).
Mercantile Shares Corp. at 1100, Moody's Bank & Finance Manual (1983).
Mercantile Texas Corp. at 311, Moody's Bank & Finance Manual (1979).
Mercantile Texas Corp. at 507, Moody's Bank & Finance Manual (1980).
Merrill Lynch at 2789, Moody's Bank & Finance Manual (1982).
Merrill Lynch at 3100, Moody's Bank & Finance Manual (1982).
Page 19 of 50
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 88 of 179
Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 20 of 50
INVESTMENT DATA
693
694
695
696
697
698
699
700
701
702
703
704
705
706
707
708
709
710
711
712
713
714
715
716
717
718
719
720
721
722
723
724
725
726
727
728
729
730
731
732
733
734
735
736
Merrill Lynch at 3335, Moody's Bank & Finance Manual (1985).
Merrill Lynch at 3420, Moody's Bank & Finance Manual (1986).
MGF Oil Corp. at 1060, Moody's OTC Industrial Manual (1979).
Missouri Pacific Corp. at 710, Moody's Transportation Manual (1980).
Modern Merchandising Inc. at 3945, Moody's Industrial Manual (1978).
Modern Merchandising Inc. at 3951, Moody's Industrial Manual (1979).
Monarch Capital Corp. at 5750, Moody's Bank & Finance Manual (1987).
Monsanto Co. at 2666, Moody's Industrial Manual (1978).
Monsanto Co. at 3688, Moody's Industrial Manual (1980).
Monsanto Co. at 4072, Moody's Industrial Manual (1982).
Monsanto Co. at 4073, Moody's Industrial Manual (1984).
Moran Bros Inc. at 1086, Moody's OTC Industrial Manual (1979).
Moran Bros Inc. at 1219, Moody's OTC Industrial Manual (1980).
Muse Air Corp. at 1437, Moody's Transportation Manual (1981).
National Can Corp. at 2701, Moody's Industrial Manual (1978).
National Can Corp. at 5002, Moody's Industrial Manual (1980).
National Medical Enterprises Inc. at 3966, Moody's Industrial Manual (1978).
National Medical Enterprises Inc. at 5985, Moody's Industrial Manual (1989).
Natomas Co. at 2720, Moody's Industrial Manual (1978).
Natomas Co. at 3028, Moody's Industrial Manual (1980).
Natomas Co. at 3028, Moody's Industrial Manual (1980).
NBD BanCorp. Inc. at 267, Moody's Bank & Finance Manual (1990).
New York Exchange Bonds at 1-34, Wall St. J. (Jun. 8, 1979).
New York Exchange Bonds at 20, Wall St. J. (Dec. 24, 1980).
New York Exchange Bonds at 20, Wall St. J. (Dec. 24, 1980).
New York Exchange Bonds at 20, Wall St. J. (Dec. 24, 1980).
New York Exchange Bonds at 20, Wall St. J. (Dec. 24, 1980).
New York Exchange Bonds at 21, Wall St. J. (Dec. 24, 1984).
New York Exchange Bonds at 22, Wall St. J. (Jun. 4, 1980).
New York Exchange Bonds at 24, Wall St. J. (Jan. 3, 1985).
New York Exchange Bonds at 24, Wall St. J. (Jul. 6, 1979).
New York Exchange Bonds at 24, Wall St. J. (Nov. 28, 1980).
New York Exchange Bonds at 26, Wall St. J. (Aug. 1, 1980).
New York Exchange Bonds at 26, Wall St. J. (Aug. 1, 1980).
New York Exchange Bonds at 26, Wall St. J. (Aug. 29, 1980).
New York Exchange Bonds at 26, Wall St. J. (Jan. 14, 1985).
New York Exchange Bonds at 26, Wall St. J. (Jan. 14, 1985).
New York Exchange Bonds at 26, Wall St. J. (Jun. 5, 1979).
New York Exchange Bonds at 26, Wall St. J. (Mar. 9, 1979).
New York Exchange Bonds at 27, Wall St. J. (Nov. 29, 1985).
New York Exchange Bonds at 28, Wall St. J. (Jan. 11, 1985).
New York Exchange Bonds at 28, Wall St. J. (Jan. 11, 1985).
New York Exchange Bonds at 28, Wall St. J. (Jul. 28, 1980).
New York Exchange Bonds at 29, Wall St. J. (Jan. 4, 1985).
Page 20 of 50
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 89 of 179
Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 21 of 50
INVESTMENT DATA
737
738
739
740
741
742
743
744
745
746
747
748
749
750
751
752
753
754
755
756
757
758
759
760
761
762
763
764
765
766
767
768
769
770
771
772
773
774
775
776
777
778
779
780
New York Exchange Bonds at 30, Wall St. J. (Aug. 3, 1979).
New York Exchange Bonds at 30, Wall St. J. (Jul. 25, 1980).
New York Exchange Bonds at 30, Wall St. J. (Jul. 9, 1979).
New York Exchange Bonds at 30, Wall St. J. (Jul. 9, 1979).
New York Exchange Bonds at 30, Wall St. J. (Jul. 9, 1979).
New York Exchange Bonds at 31, Wall St. J. (Aug. 30, 1979).
New York Exchange Bonds at 32, Wall St. J. (Apr. 6, 1979).
New York Exchange Bonds at 32, Wall St. J. (Apr. 6, 1979).
New York Exchange Bonds at 32, Wall St. J. (Jan. 18, 1985).
New York Exchange Bonds at 32, Wall St. J. (Jan. 25, 1985).
New York Exchange Bonds at 32, Wall St. J. (Jul. 23, 1982).
New York Exchange Bonds at 32, Wall St. J. (Jul. 23, 1982).
New York Exchange Bonds at 32, Wall St. J. (Jul. 23, 1982).
New York Exchange Bonds at 32, Wall St. J. (Jul. 23, 1982).
New York Exchange Bonds at 32, Wall St. J. (Nov. 23, 1979).
New York Exchange Bonds at 32, Wall St. J. (Nov. 23, 1979).
New York Exchange Bonds at 32, Wall St. J. (Nov. 23, 1979).
New York Exchange Bonds at 33, Wall St. J. (Aug. 21, 1987).
New York Exchange Bonds at 34, Wall St. J. (Jan. 21, 1985).
New York Exchange Bonds at 34, Wall St. J. (Jul. 27, 1981).
New York Exchange Bonds at 34, Wall St. J. (Jun. 4, 1979).
New York Exchange Bonds at 34, Wall St. J. (May. 4, 1979).
New York Exchange Bonds at 34, Wall St. J. (Oct. 13, 1980).
New York Exchange Bonds at 36, Wall St. J. (Aug. 20, 1980).
New York Exchange Bonds at 36, Wall St. J. (Dec. 23, 1980).
New York Exchange Bonds at 36, Wall St. J. (Jan. 18, 1979).
New York Exchange Bonds at 36, Wall St. J. (Jan. 18, 1979).
New York Exchange Bonds at 36, Wall St. J. (Jan. 7, 1985).
New York Exchange Bonds at 36, Wall St. J. (Jan. 9, 1986).
New York Exchange Bonds at 36, Wall St. J. (Jan. 9, 1986).
New York Exchange Bonds at 36, Wall St. J. (Jan. 9, 1986).
New York Exchange Bonds at 36, Wall St. J. (Jul. 19, 1979).
New York Exchange Bonds at 36, Wall St. J. (Jul. 31, 1980).
New York Exchange Bonds at 36, Wall St. J. (Jul. 31, 1980).
New York Exchange Bonds at 36, Wall St. J. (Jul. 31, 1980).
New York Exchange Bonds at 36, Wall St. J. (Jun. 27, 1979).
New York Exchange Bonds at 36, Wall St. J. (Jun. 3, 1985).
New York Exchange Bonds at 36, Wall St. J. (Jun. 3, 1985).
New York Exchange Bonds at 36, Wall St. J. (Jun. 3, 1985).
New York Exchange Bonds at 36, Wall St. J. (Jun. 9, 1986).
New York Exchange Bonds at 37, Wall St. J. (Jan. 19, 1987).
New York Exchange Bonds at 38, Wall St. J. (Aug. 5, 1983).
New York Exchange Bonds at 38, Wall St. J. (Jan. 12, 1981).
New York Exchange Bonds at 38, Wall St. J. (Jul. 22, 1982).
Page 21 of 50
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 90 of 179
Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 22 of 50
INVESTMENT DATA
781
782
783
784
785
786
787
788
789
790
791
792
793
794
795
796
797
798
799
800
801
802
803
804
805
806
807
808
809
810
811
812
813
814
815
816
817
818
819
820
821
822
823
824
New York Exchange Bonds at 38, Wall St. J. (Jul. 22, 1982).
New York Exchange Bonds at 38, Wall St. J. (Jul. 22, 1982).
New York Exchange Bonds at 38, Wall St. J. (Jun. 29, 1979).
New York Exchange Bonds at 38, Wall St. J. (Jun. 6, 1980).
New York Exchange Bonds at 38, Wall St. J. (Jun. 6, 1980).
New York Exchange Bonds at 38, Wall St. J. (Mar. 15, 1985).
New York Exchange Bonds at 38, Wall St. J. (Mar. 8, 1979).
New York Exchange Bonds at 40, Wall St. J. (Apr. 3, 1986).
New York Exchange Bonds at 40, Wall St. J. (Apr. 3, 1986).
New York Exchange Bonds at 40, Wall St. J. (Aug. 13, 1981).
New York Exchange Bonds at 40, Wall St. J. (Aug. 13, 1981).
New York Exchange Bonds at 40, Wall St. J. (Feb. 4, 1980).
New York Exchange Bonds at 40, Wall St. J. (Jan. 31, 1979).
New York Exchange Bonds at 40, Wall St. J. (Jun. 25, 1980).
New York Exchange Bonds at 40, Wall St. J. (Nov. 26, 1979).
New York Exchange Bonds at 40, Wall St. J. (Nov. 26, 1979).
New York Exchange Bonds at 40, Wall St. J. (Nov. 26, 1979).
New York Exchange Bonds at 41, Wall St. J. (Aug. 21, 1979).
New York Exchange Bonds at 41, Wall St. J. (Feb. 1, 1985).
New York Exchange Bonds at 42, Wall St. J. (Apr. 28, 1986).
New York Exchange Bonds at 42, Wall St. J. (Apr. 28, 1986).
New York Exchange Bonds at 42, Wall St. J. (Apr. 3, 1980).
New York Exchange Bonds at 42, Wall St. J. (Apr. 3, 1980).
New York Exchange Bonds at 42, Wall St. J. (Aug. 12, 1981).
New York Exchange Bonds at 42, Wall St. J. (Aug. 7, 1979).
New York Exchange Bonds at 42, Wall St. J. (Jan. 16, 1980).
New York Exchange Bonds at 42, Wall St. J. (Jul. 10, 1979).
New York Exchange Bonds at 42, Wall St. J. (Jul. 15, 1980).
New York Exchange Bonds at 42, Wall St. J. (Jul. 23, 1980).
New York Exchange Bonds at 42, Wall St. J. (Jun. 28, 1979).
New York Exchange Bonds at 42, Wall St. J. (Jun. 28, 1979).
New York Exchange Bonds at 42, Wall St. J. (Jun. 28, 1979).
New York Exchange Bonds at 42, Wall St. J. (Jun. 9, 1980).
New York Exchange Bonds at 42, Wall St. J. (Mar. 18, 1980).
New York Exchange Bonds at 42, Wall St. J. (Mar. 28, 1979).
New York Exchange Bonds at 42, Wall St. J. (May. 23, 1979).
New York Exchange Bonds at 42, Wall St. J. (May. 24, 1979).
New York Exchange Bonds at 42, Wall St. J. (May. 24, 1979).
New York Exchange Bonds at 42, Wall St. J. (May. 31, 1985).
New York Exchange Bonds at 42, Wall St. J. (May. 31, 1985).
New York Exchange Bonds at 42, Wall St. J. (Nov. 29, 1978).
New York Exchange Bonds at 43, Wall St. J. (Feb. 21, 1986).
New York Exchange Bonds at 43, Wall St. J. (Jun. 13, 1986).
New York Exchange Bonds at 44, (Oct. 26, 1978).
Page 22 of 50
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 91 of 179
Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 23 of 50
INVESTMENT DATA
825
826
827
828
829
830
831
832
833
834
835
836
837
838
839
840
841
842
843
844
845
846
847
848
849
850
851
852
853
854
855
856
857
858
859
860
861
862
863
864
865
866
867
868
New York Exchange Bonds at 44, Wall St. J. (Apr. 2, 1980).
New York Exchange Bonds at 44, Wall St. J. (Apr. 2, 1980).
New York Exchange Bonds at 44, Wall St. J. (Apr. 2, 1980).
New York Exchange Bonds at 44, Wall St. J. (Apr. 20, 1979).
New York Exchange Bonds at 44, Wall St. J. (Dec. 17, 1979).
New York Exchange Bonds at 44, Wall St. J. (Dec. 17, 1979).
New York Exchange Bonds at 44, Wall St. J. (Dec. 19, 1986).
New York Exchange Bonds at 44, Wall St. J. (Dec. 5, 1978).
New York Exchange Bonds at 44, Wall St. J. (Dec. 7, 1978).
New York Exchange Bonds at 44, Wall St. J. (Feb. 27, 1980).
New York Exchange Bonds at 44, Wall St. J. (Feb. 28, 1983).
New York Exchange Bonds at 44, Wall St. J. (Jan. 11, 1981).
New York Exchange Bonds at 44, Wall St. J. (Jan. 14, 1987).
New York Exchange Bonds at 44, Wall St. J. (Jan. 23, 1980).
New York Exchange Bonds at 44, Wall St. J. (Jan. 30, 1980).
New York Exchange Bonds at 44, Wall St. J. (Jan. 7, 1981).
New York Exchange Bonds at 44, Wall St. J. (Jan. 9, 1985).
New York Exchange Bonds at 44, Wall St. J. (Jan. 9, 1986).
New York Exchange Bonds at 44, Wall St. J. (Jul. 29, 1980).
New York Exchange Bonds at 44, Wall St. J. (Jun. 5, 1980).
New York Exchange Bonds at 44, Wall St. J. (Mar. 13, 1979).
New York Exchange Bonds at 44, Wall St. J. (Mar. 21, 1979).
New York Exchange Bonds at 44, Wall St. J. (Mar. 5, 1980).
New York Exchange Bonds at 44, Wall St. J. (May. 15, 1979).
New York Exchange Bonds at 44, Wall St. J. (May. 16, 1979).
New York Exchange Bonds at 44, Wall St. J. (May. 21, 1980).
New York Exchange Bonds at 44, Wall St. J. (May. 22, 1980).
New York Exchange Bonds at 44, Wall St. J. (May. 29, 1980).
New York Exchange Bonds at 44, Wall St. J. (May. 4, 1981).
New York Exchange Bonds at 44, Wall St. J. (May. 4, 1981).
New York Exchange Bonds at 44, Wall St. J. (May. 7, 1980).
New York Exchange Bonds at 44, Wall St. J. (May. 7, 1980).
New York Exchange Bonds at 44, Wall St. J. (May. 7, 1980).
New York Exchange Bonds at 44, Wall St. J. (May. 8, 1980).
New York Exchange Bonds at 44, Wall St. J. (Nov. 14, 1979).
New York Exchange Bonds at 44, Wall St. J. (Nov. 15, 1979).
New York Exchange Bonds at 44, Wall St. J. (Nov. 15, 1979).
New York Exchange Bonds at 44, Wall St. J. (Nov. 21, 1979).
New York Exchange Bonds at 44, Wall St. J. (Nov. 21, 1979).
New York Exchange Bonds at 44, Wall St. J. (Nov. 22, 1978).
New York Exchange Bonds at 44, Wall St. J. (Nov. 27, 1979).
New York Exchange Bonds at 44, Wall St. J. (Nov. 27, 1979).
New York Exchange Bonds at 44, Wall St. J. (Nov. 28, 1979).
New York Exchange Bonds at 44, Wall St. J. (Nov. 29, 1979).
Page 23 of 50
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 92 of 179
Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 24 of 50
INVESTMENT DATA
869
870
871
872
873
874
875
876
877
878
879
880
881
882
883
884
885
886
887
888
889
890
891
892
893
894
895
896
897
898
899
900
901
902
903
904
905
906
907
908
909
910
911
912
New York Exchange Bonds at 44, Wall St. J. (Nov. 6, 1978).
New York Exchange Bonds at 44, Wall St. J. (Nov. 7, 1978).
New York Exchange Bonds at 44, Wall St. J. (Nov. 8, 1979).
New York Exchange Bonds at 44, Wall St. J. (Oct. 2, 1979).
New York Exchange Bonds at 44, Wall St. J. (Oct. 22, 1979).
New York Exchange Bonds at 44, Wall St. J. (Oct. 3, 1979).
New York Exchange Bonds at 44, Wall St. J. (Sep. 11, 1979).
New York Exchange Bonds at 44, Wall St. J. (Sep. 11, 1980).
New York Exchange Bonds at 44, Wall St. J. (Sep. 19, 1979).
New York Exchange Bonds at 44, Wall St. J. (Sep. 20, 1979).
New York Exchange Bonds at 44, Wall St. J. (Sep. 20, 1979).
New York Exchange Bonds at 44, Wall St. J. (Sep. 26, 1979).
New York Exchange Bonds at 44, Wall St. J. (Sep. 26, 1979).
New York Exchange Bonds at 45, Wall St. J. (Feb. 13, 1987).
New York Exchange Bonds at 45, Wall St. J. (Mar. 9, 1987).
New York Exchange Bonds at 46, Wall St. J. (Aug. 19, 1981).
New York Exchange Bonds at 46, Wall St. J. (Aug. 6, 1981).
New York Exchange Bonds at 46, Wall St. J. (Feb. 11, 1982).
New York Exchange Bonds at 46, Wall St. J. (Feb. 11, 1982).
New York Exchange Bonds at 46, Wall St. J. (Jan. 16, 1985).
New York Exchange Bonds at 46, Wall St. J. (Jan. 17, 1985).
New York Exchange Bonds at 46, Wall St. J. (Jan. 31, 1985).
New York Exchange Bonds at 46, Wall St. J. (Jun. 24, 1987).
New York Exchange Bonds at 46, Wall St. J. (May. 21, 1987).
New York Exchange Bonds at 46, Wall St. J. (May. 28, 1981).
New York Exchange Bonds at 46, Wall St. J. (Oct. 27, 1980).
New York Exchange Bonds at 46, Wall St. J. (Oct. 27, 1980).
New York Exchange Bonds at 47, Wall St. J. (Dec. 22, 1986).
New York Exchange Bonds at 47, Wall St. J. (Dec. 22, 1986).
New York Exchange Bonds at 47, Wall St. J. (Feb. 17, 1982).
New York Exchange Bonds at 48, Wall St. J. (Aug. 20, 1981).
New York Exchange Bonds at 48, Wall St. J. (Feb. 17, 1982).
New York Exchange Bonds at 48, Wall St. J. (Feb. 3, 1982).
New York Exchange Bonds at 48, Wall St. J. (Feb. 4, 1982).
New York Exchange Bonds at 48, Wall St. J. (Feb. 4, 1982).
New York Exchange Bonds at 48, Wall St. J. (Jan. 24, 1985).
New York Exchange Bonds at 48, Wall St. J. (Jan. 28, 1981).
New York Exchange Bonds at 48, Wall St. J. (Jul. 10, 1985).
New York Exchange Bonds at 48, Wall St. J. (Oct. 15, 1980).
New York Exchange Bonds at 48, Wall St. J. (Sep. 24, 1980).
New York Exchange Bonds at 49, Wall St. J. (Jun. 27, 1986).
New York Exchange Bonds at 49, Wall St. J. (Jun. 27, 1986).
New York Exchange Bonds at 50, Wall St. J. (Jan. 28, 1985).
New York Exchange Bonds at 50, Wall St. J. (Jan. 8, 1985).
Page 24 of 50
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 93 of 179
Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 25 of 50
INVESTMENT DATA
913
914
915
916
917
918
919
920
921
922
923
924
925
926
927
928
929
930
931
932
933
934
935
936
937
938
939
940
941
942
943
944
945
946
947
948
949
950
951
952
953
954
955
956
New York Exchange Bonds at 50, Wall St. J. (Mar. 27, 1981).
New York Exchange Bonds at 50, Wall St. J. (May. 9, 1985).
New York Exchange Bonds at 50, Wall St. J. (Oct. 5, 1981).
New York Exchange Bonds at 50, Wall St. J. (Oct. 5, 1981).
New York Exchange Bonds at 50, Wall St. J. (Oct. 5, 1981).
New York Exchange Bonds at 50, Wall St. J. (Oct. 5, 1981).
New York Exchange Bonds at 50, Wall St. J. (Sep. 17, 1982).
New York Exchange Bonds at 52, Wall St. J. (Apr. 13, 1983).
New York Exchange Bonds at 52, Wall St. J. (Apr. 30, 1981).
New York Exchange Bonds at 52, Wall St. J. (Dec. 12, 1980).
New York Exchange Bonds at 52, Wall St. J. (Dec. 4, 1981).
New York Exchange Bonds at 52, Wall St. J. (Jan. 10, 1985).
New York Exchange Bonds at 52, Wall St. J. (Jan. 15, 1985).
New York Exchange Bonds at 52, Wall St. J. (Jan. 22, 1985).
New York Exchange Bonds at 52, Wall St. J. (Jan. 23, 1985).
New York Exchange Bonds at 52, Wall St. J. (Jan. 27, 1981).
New York Exchange Bonds at 52, Wall St. J. (Jan. 27, 1981).
New York Exchange Bonds at 52, Wall St. J. (Jan. 27, 1982).
New York Exchange Bonds at 52, Wall St. J. (Jan. 29, 1985).
New York Exchange Bonds at 52, Wall St. J. (Jan. 29, 1985).
New York Exchange Bonds at 52, Wall St. J. (Jun. 25, 1985).
New York Exchange Bonds at 52, Wall St. J. (Jun. 26, 1986).
New York Exchange Bonds at 52, Wall St. J. (Mar. 10, 1981).
New York Exchange Bonds at 52, Wall St. J. (Mar. 12, 1981).
New York Exchange Bonds at 52, Wall St. J. (Mar. 16, 1983).
New York Exchange Bonds at 52, Wall St. J. (Mar. 21, 1985).
New York Exchange Bonds at 52, Wall St. J. (May. 19, 1981).
New York Exchange Bonds at 52, Wall St. J. (Nov. 16, 1982).
New York Exchange Bonds at 52, Wall St. J. (Nov. 19, 1980).
New York Exchange Bonds at 52, Wall St. J. (Nov. 25, 1980).
New York Exchange Bonds at 52, Wall St. J. (Oct. 22, 1982).
New York Exchange Bonds at 52, Wall St. J. (Oct. 28, 1980).
New York Exchange Bonds at 52, Wall St. J. (Oct. 29, 1981).
New York Exchange Bonds at 52, Wall St. J. (Oct. 7, 1981).
New York Exchange Bonds at 52, Wall St. J. (Sep. 16, 1982).
New York Exchange Bonds at 54, Wall St. J. (Mar. 23, 1983).
New York Exchange Bonds at 54, Wall St. J. (Mar. 23, 1983).
New York Exchange Bonds at 55, Wall St. J. (Mar. 24, 1986).
New York Exchange Bonds at 56, Wall St. J. (Apr. 26, 1983).
New York Exchange Bonds at 56, Wall St. J. (Oct. 9, 1986).
New York Exchange Bonds at 6, Wall St. J. (Dec. 1, 1989).
New York Exchange Bonds at 63, Wall St. J. (Dec. 8, 1987).
New York Exchange Bonds at C14, Wall St. J. (Sep. 19, 1990).
New York Exchange Bonds at C16, Wall St. J. (Jul. 7, 1992).
Page 25 of 50
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 94 of 179
Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 26 of 50
INVESTMENT DATA
957
958
959
960
961
962
963
964
965
966
967
968
969
970
971
972
973
974
975
976
977
978
979
980
981
982
983
984
985
986
987
988
989
990
991
992
993
994
995
996
997
998
999
1000
New York Exchange Bonds, Wall St. J. (Apr. 29, 1988).
New York Exchange Bonds, Wall St. J. (Aug. 22, 1988).
New York Exchange Bonds, Wall St. J. (Aug. 23, 1988).
New York Exchange Bonds, Wall St. J. (Dec. 1, 1989).
New York Exchange Bonds, Wall St. J. (Feb. 10, 1988).
New York Exchange Bonds, Wall St. J. (Feb. 15, 1990).
New York Exchange Bonds, Wall St. J. (Feb. 27, 1989).
New York Exchange Bonds, Wall St. J. (Jun. 16, 1988).
New York Exchange Bonds, Wall St. J. (Jun. 7, 1989).
New York Exchange Bonds, Wall St. J. (Mar. 14, 1990).
New York Exchange Bonds, Wall St. J. (Mar. 24, 1983).
New York Exchange Bonds, Wall St. J. (Mar. 6, 1990).
New York Exchange Bonds, Wall St. J. (May. 23, 1990).
New York Exchange Bonds, Wall St. J. (Nov. 1, 1988).
New York Exchange Bonds, Wall St. J. (Nov. 1, 1988).
Newell Co. at 4197, Moody's Industrial Manual (1989).
Newmont Mining Corp. at 5021, Moody's Industrial Manual (1980).
NFC Corp. at 5023, Moody's Industrial Manual (1980).
NICo.R Inc. at 1304, Moody's Public Utility Manual (1979).
Northwest Energy Co. at 2960, Moody's Public Utility Manual (1981).
Northwest Industries Inc. at 2740, Moody's Industrial Manual (1978).
Norton Simon Inc. at 2754, Moody's Industrial Manual (1978).
Novell Inc. at 1746, Moody's Industrial Manual (1989).
NuCorp. Energy Inc. at 598, Moody's Industrial Manual (1981).
NWA Inc. at 1433, Moody's Transportation Manual (1986).
NYSE Daily Stock Price Record, Quarter 1 (1979).
NYSE Daily Stock Price Record, Quarter 1 (1980).
NYSE Daily Stock Price Record, Quarter 1 (1980).
NYSE Daily Stock Price Record, Quarter 1 (1981).
NYSE Daily Stock Price Record, Quarter 1 (1981).
NYSE Daily Stock Price Record, Quarter 1 (1982).
NYSE Daily Stock Price Record, Quarter 1 (1982).
NYSE Daily Stock Price Record, Quarter 1 (1982).
NYSE Daily Stock Price Record, Quarter 1 (1983).
NYSE Daily Stock Price Record, Quarter 1 (1984).
NYSE Daily Stock Price Record, Quarter 1 (1985).
NYSE Daily Stock Price Record, Quarter 1 (1985).
NYSE Daily Stock Price Record, Quarter 1 (1986).
NYSE Daily Stock Price Record, Quarter 1 (1987).
NYSE Daily Stock Price Record, Quarter 1 (1987).
NYSE Daily Stock Price Record, Quarter 1 (1988).
NYSE Daily Stock Price Record, Quarter 1 (1989).
NYSE Daily Stock Price Record, Quarter 1 (1990).
NYSE Daily Stock Price Record, Quarter 1 (1995).
Page 26 of 50
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 95 of 179
Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 27 of 50
INVESTMENT DATA
1001
1002
1003
1004
1005
1006
1007
1008
1009
1010
1011
1012
1013
1014
1015
1016
1017
1018
1019
1020
1021
1022
1023
1024
1025
1026
1027
1028
1029
1030
1031
1032
1033
1034
1035
1036
1037
1038
1039
1040
1041
1042
1043
1044
NYSE Daily Stock Price Record, Quarter 1 (2000).
NYSE Daily Stock Price Record, Quarter 2 (1979).
NYSE Daily Stock Price Record, Quarter 2 (1979).
NYSE Daily Stock Price Record, Quarter 2 (1980).
NYSE Daily Stock Price Record, Quarter 2 (1981).
NYSE Daily Stock Price Record, Quarter 2 (1982).
NYSE Daily Stock Price Record, Quarter 2 (1982).
NYSE Daily Stock Price Record, Quarter 2 (1983).
NYSE Daily Stock Price Record, Quarter 2 (1983).
NYSE Daily Stock Price Record, Quarter 2 (1984).
NYSE Daily Stock Price Record, Quarter 2 (1984).
NYSE Daily Stock Price Record, Quarter 2 (1985).
NYSE Daily Stock Price Record, Quarter 2 (1985).
NYSE Daily Stock Price Record, Quarter 2 (1986).
NYSE Daily Stock Price Record, Quarter 2 (1987).
NYSE Daily Stock Price Record, Quarter 2 (1988).
NYSE Daily Stock Price Record, Quarter 2 (1989).
NYSE Daily Stock Price Record, Quarter 2 (2007).
NYSE Daily Stock Price Record, Quarter 2.2 (1979).
NYSE Daily Stock Price Record, Quarter 3 (1979).
NYSE Daily Stock Price Record, Quarter 3 (1979).
NYSE Daily Stock Price Record, Quarter 3 (1980).
NYSE Daily Stock Price Record, Quarter 3 (1980).
NYSE Daily Stock Price Record, Quarter 3 (1981).
NYSE Daily Stock Price Record, Quarter 3 (1981).
NYSE Daily Stock Price Record, Quarter 3 (1982).
NYSE Daily Stock Price Record, Quarter 3 (1982).
NYSE Daily Stock Price Record, Quarter 3 (1983).
NYSE Daily Stock Price Record, Quarter 3 (1984).
NYSE Daily Stock Price Record, Quarter 3 (1985).
NYSE Daily Stock Price Record, Quarter 3 (1985).
NYSE Daily Stock Price Record, Quarter 3 (1986).
NYSE Daily Stock Price Record, Quarter 3 (1987).
NYSE Daily Stock Price Record, Quarter 3 (1988).
NYSE Daily Stock Price Record, Quarter 3 (1989).
NYSE Daily Stock Price Record, Quarter 4 (1978).
NYSE Daily Stock Price Record, Quarter 4 (1979).
NYSE Daily Stock Price Record, Quarter 4 (1979).
NYSE Daily Stock Price Record, Quarter 4 (1980).
NYSE Daily Stock Price Record, Quarter 4 (1981).
NYSE Daily Stock Price Record, Quarter 4 (1981).
NYSE Daily Stock Price Record, Quarter 4 (1982).
NYSE Daily Stock Price Record, Quarter 4 (1983).
NYSE Daily Stock Price Record, Quarter 4 (1983).
Page 27 of 50
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 96 of 179
Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 28 of 50
INVESTMENT DATA
1045
1046
1047
1048
1049
1050
1051
1052
1053
1054
1055
1056
1057
1058
1059
1060
1061
1062
1063
1064
1065
1066
1067
1068
1069
1070
1071
1072
1073
1074
1075
1076
1077
1078
1079
1080
1081
1082
1083
1084
1085
1086
1087
1088
NYSE Daily Stock Price Record, Quarter 4 (1984).
NYSE Daily Stock Price Record, Quarter 4 (1985).
NYSE Daily Stock Price Record, Quarter 4 (1985).
NYSE Daily Stock Price Record, Quarter 4 (1986).
NYSE Daily Stock Price Record, Quarter 4 (1986).
NYSE Daily Stock Price Record, Quarter 4 (1987).
NYSE Daily Stock Price Record, Quarter 4 (1988).
NYSE Daily Stock Price Record, Quarter 4 (1988).
NYSE Daily Stock Price Record, Quarter 4 (1989).
NYSE Daily Stock Price Record, Quarter 4 (1990).
OAK Industries Inc. at 4002, Moody's Industrial Manual (1979).
OAK Industries Inc. at 5037, Moody's Industrial Manual (1980).
Occidental Petroleum Corp. at 2759, Moody's Industrial Manual (1979).
Occidental Petroleum Corp. at 3773, Moody's Industrial Manual (1980).
Occidental Petroleum Corp. at 4192, Moody's Industrial Manual (1987).
Occidental Petroleum Corp. at 4232, Moody's Industrial Manual (1986).
Offshore Logistics Inc. at 2038, Moody's Transportation Manual (1980).
Ogden Corp. at 5039, Moody's Industrial Manual (1980).
Olin Corp. at 4241, Moody's Industrial Manual (1986).
OTC Daily Stock Price Record, Quarter 1 (1979).
OTC Daily Stock Price Record, Quarter 1 (1980).
OTC Daily Stock Price Record, Quarter 1 (1981).
OTC Daily Stock Price Record, Quarter 1 (1982).
OTC Daily Stock Price Record, Quarter 1 (1983).
OTC Daily Stock Price Record, Quarter 1 (1985).
OTC Daily Stock Price Record, Quarter 1 (1985).
OTC Daily Stock Price Record, Quarter 1 (1986).
OTC Daily Stock Price Record, Quarter 1 (1987).
OTC Daily Stock Price Record, Quarter 1 (1990).
OTC Daily Stock Price Record, Quarter 2 (1979).
OTC Daily Stock Price Record, Quarter 2 (1980).
OTC Daily Stock Price Record, Quarter 2 (1981).
OTC Daily Stock Price Record, Quarter 2 (1982).
OTC Daily Stock Price Record, Quarter 2 (1983).
OTC Daily Stock Price Record, Quarter 2 (1984).
OTC Daily Stock Price Record, Quarter 2 (1984).
OTC Daily Stock Price Record, Quarter 2 (1985).
OTC Daily Stock Price Record, Quarter 2 (1986).
OTC Daily Stock Price Record, Quarter 2.1 (1985).
OTC Daily Stock Price Record, Quarter 3 (1979).
OTC Daily Stock Price Record, Quarter 3 (1979).
OTC Daily Stock Price Record, Quarter 3 (1980).
OTC Daily Stock Price Record, Quarter 3 (1981).
OTC Daily Stock Price Record, Quarter 3 (1982).
Page 28 of 50
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 97 of 179
Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 29 of 50
INVESTMENT DATA
1089
1090
1091
1092
1093
1094
1095
1096
1097
1098
1099
1100
1101
1102
1103
1104
1105
1106
1107
1108
1109
1110
1111
1112
1113
1114
1115
1116
1117
1118
1119
1120
1121
1122
1123
1124
1125
1126
1127
1128
1129
1130
1131
1132
OTC Daily Stock Price Record, Quarter 3 (1983).
OTC Daily Stock Price Record, Quarter 3 (1985).
OTC Daily Stock Price Record, Quarter 3 (1986).
OTC Daily Stock Price Record, Quarter 3 (1987).
OTC Daily Stock Price Record, Quarter 3 (1989).
OTC Daily Stock Price Record, Quarter 3 (1993).
OTC Daily Stock Price Record, Quarter 4 (1978).
OTC Daily Stock Price Record, Quarter 4 (1979).
OTC Daily Stock Price Record, Quarter 4 (1979).
OTC Daily Stock Price Record, Quarter 4 (1980).
OTC Daily Stock Price Record, Quarter 4 (1981).
OTC Daily Stock Price Record, Quarter 4 (1982).
OTC Daily Stock Price Record, Quarter 4 (1983).
OTC Daily Stock Price Record, Quarter 4 (1985).
OTC Daily Stock Price Record, Quarter 4.1 (1979).
Owens Illinois Inc. at 5807, Moody's Industrial Manual (1984).
Papercraft Corp. at 5808, Moody's Industrial Manual (1982).
Pengo Industries at 5818, Moody's Industrial Manual (1981).
Pengo Industries Inc. at 5063, Moody's Industrial Manual (1980).
Pengo Industries Inc. at 5357, Moody's Industrial Manual (1981).
Pengo Industries Inc. at 5818, Moody's Industrial Manual (1982).
Pengo NV at 1639, Moody's International Manual (1982).
Pengo NV at 6068, Moody's Industrial Manual (1981).
Penn Central at 3246, Moody's Industrial Manual (1981).
Pennwalt Corp. at 4184, Moody's Industrial Manual (1984).
Pennzoil Co. at 2793, Moody's Industrial Manual (1979).
Pennzoil Co. at 3838, Moody's Industrial Manual (1980).
Pentair at 2291, Moody's OTC Industrial Manual (1984).
Pentair at 2291, Moody's OTC Industrial Manual (1985).
Pep Boys Manny Moe at 5927, Moody's Industrial Manual (1986).
PepsiCo. at 3845, Moody's Industrial Manual (1979).
Petrie Stores Corp. at 5929, Moody's Industrial Manual (1986).
Petroleum at 1070, Moody's Bank & Finance Manual (1978).
Petroleum North America, Moody's International Manual (1986).
Pfizer Inc. at 4226, Moody's Industrial Manual (1982).
Phelps Dodge Corp. at 5911, Moody's Industrial Manual (1988).
Phelps Dodge Corp. at 5932, Moody's Industrial Manual (1986).
Piedmont Aviation Inc. at 1031, Moody's Transportation Manual (1979).
Piedmont Aviation Inc. at 1301, Moody's Transportation Manual (1987).
Pitney Bowes Inc. at 3041, Moody's Industrial Manual (1980).
Pitney Bowes Inc. at 3265, Moody's Industrial Manual (1981).
Ply Gem Industries Inc. at 6290, Moody's Industrial Manual (1986).
Prime Co.mputer Inc. at 4741, Moody's Industrial Manual (1980).
Quaker State Oil Refining Corp. at 4305, Moody's Industrial Manual (1986).
Page 29 of 50
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 98 of 179
Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 30 of 50
INVESTMENT DATA
1133
1134
1135
1136
1137
1138
1139
1140
1141
1142
1143
1144
1145
1146
1147
1148
1149
1150
1151
1152
1153
1154
1155
1156
1157
1158
1159
1160
1161
1162
1163
1164
1165
1166
1167
1168
1169
1170
1171
1172
1173
1174
1175
1176
Ramada Inns Inc. at 2792, Moody's Bank & Finance Manual (1983).
Rapid American Corp. at 4076, Moody's Industrial Manual (1978).
RCA Corp. at 4106, Moody's Industrial Manual (1981).
RCA Corp. at 4326, Moody's Industrial Manual (1985).
Reading Bates at 5114, Moody's Industrial Manual (1980).
Reading Bates Offshore at 4081, Moody's Industrial Manual (1978).
Reliance Electric Co. at 2873, Moody's Industrial Manual (1978).
Reliance Group Inc. at 207, Moody's Bank & Finance Manual (1978).
Reliance Group Inc. at 2092, Moody's Bank & Finance Manual (1979).
Reliance Group Inc. at 2092, Moody's Bank & Finance Manual (1979).
Reliance Group Inc. at 2478, Moody's Bank & Finance Manual (1980).
Reliance Group Inc. at 2478, Moody's Bank & Finance Manual (1980).
Reliance Group Inc. at 2616, Moody's Bank & Finance Manual (1981).
Reserve Oil at 4091, Moody's Industrial Manual (1978).
Reserve Oil at 4097, Moody's Industrial Manual (1979).
Rexnord Inc. at 2892, Moody's Industrial Manual (1978).
Reynolds Metals Co. at 2910, Moody's Industrial Manual (1979).
Richmond Tank Car Co. at 5427, Moody's Industrial Manual (1981).
Richmond Tank Car Co. at 5911, Moody's Industrial Manual (1980).
Rio Gre Industries Inc. at 381, Moody's Transportation Manual (1978).
Rio Gre Industries Inc. at 80, Moody's Transportation Manual (1980).
RJ Reynolds Industries Inc. at 2896, Moody's Industrial Manual (1978).
RJ Reynolds Industries Inc. at 2896, Moody's Industrial Manual (1978).
RJ Reynolds Industries Inc. at 2896, Moody's Industrial Manual (1978).
Rockwell Corp. at 4104, Moody's Industrial Manual (1978).
Rockwell Corp. at 4110, Moody's Industrial Manual (1979).
Rockwell Corp. at 5135, Moody's Industrial Manual (1980).
Rockwell Corp. at 5907, Moody's Industrial Manual (1984).
Rohr Industries Inc. at 4157, Moody's Industrial Manual (1981).
Rohr Industries Inc. at 4298, Moody's Industrial Manual (1983).
Rohr Industries Inc. at 4327, Moody's Industrial Manual (1982).
Rowan Companies Inc. at 5944, Moody's Industrial Manual (1980).
Rowan Companies Inc. at 6125, Moody's Industrial Manual (1987).
Sabine Corp. at 4750, Moody's Industrial Manual (1980).
Santa Fe Industries Inc. at 415, Moody's Transportation Manual (1979).
Seagull Energy Corp. at 954, Moody's Transportation Manual (1989).
Seagull Energy Corp. at 956, Moody's Transportation Manual (1990).
Seiscomta Inc. at 1279, Moody's OTC Industrial Manual (1979).
Seiscomta Inc. at 4753, Moody's Industrial Manual (1980).
Seiscomta Inc. at 5004, Moody's Industrial Manual (1981).
Sensormatic Electronics Corp. at 653, Moody's OTC Industrial Manual (1981).
Sheller Globe Corp. at 5957, Moody's Industrial Manual (1983).
Sheller Globe Corp. at 6045, Moody's Industrial Manual (1986).
Society Corp. Ohio at 1278, Moody's Bank & Finance Manual (1979).
Page 30 of 50
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 99 of 179
Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 31 of 50
INVESTMENT DATA
1177
1178
1179
1180
1181
1182
1183
1184
1185
1186
1187
1188
1189
1190
1191
1192
1193
1194
1195
1196
1197
1198
1199
1200
1201
1202
1203
1204
1205
1206
1207
1208
1209
1210
1211
1212
1213
1214
1215
1216
1217
1218
1219
1220
Southern Airways Inc. at 1071, Moody's Industrial Manual (1977).
Southern Airways Inc. at 1072, Moody's Industrial Manual (1978).
Sparkman Energy Corp. at 5968, Moody's Industrial Manual (1982).
Sparkman Energy Corp. at 6210, Moody's Industrial Manual (1981).
Sperry R Corp. at 4185, Moody's Industrial Manual (1979).
Sperry R Corp. at 4188, Moody's Industrial Manual (1978).
Stard Logic Inc. at 6211, Moody's Industrial Manual (1981).
Storer Broadcasting Co. at 4211, Moody's Industrial Manual (1979).
Storer Broadcasting Co. at 4213, Moody's Industrial Manual (1978).
Storer Communications Inc. at 6071, Moody's Industrial Manual (1985).
Summit Energy Inc. at 5235, Moody's Industrial Manual (1980).
Summit Energy Inc. at 5530, Moody's Industrial Manual (1981).
Sun Microsystems Inc. at 1862, Moody's OTC Industrial Manual (1989).
Sun Microsystems Inc. at 2120, Moody's OTC Industrial Manual (1990).
Sunshine Mining Co. at 4761, Moody's Industrial Manual (1980).
Sunstrand Corp. at 863, Moody's Industrial Manual (1970).
Syntex Corp. at 1728, Moody's International Manual (1982).
TanneCo Corp. at 3143, Moody's Industrial Manual (1979).
TeleCommunications Network at 2312, Moody's OTC Industrial Manual (1988).
TeleCommunications Network Inc., Moody's Industrial Manual (1988).
Telepictures Corp. at 750, Moody's OTC Industrial Manual (1985).
TenneCo. Corp. at 3143, Moody's Industrial Manual (1979).
TenneCo. Inc. at 3130, Moody's Industrial Manual (1979).
Tesoro Petroleum Corp. at 4320, Moody's Industrial Manual (1981).
Texas Eastern Corp. at 3054, Moody's Public Utility Manual (1989).
Texas Gas Transmission Corp. at 1936, Moody's Public Utility Manual (1979).
Texas General Group Inc. at 1905, Moody's OTC Industrial Manual (1981).
Texasgulf Inc. at 4344, Moody's Industrial Manual (1981).
Textron Inc. at 3522, Moody's Industrial Manual (1987).
Textron Inc. at 3553, Moody's Industrial Manual (1985).
The Daily Telegraph (Nov. 3, 1979).
The Limited Inc. at 6162, Moody's Industrial Manual (1982).
Thermo Electron Corp. at 5588, Moody's Industrial Manual (1986).
Tie Communications Inc. at 6040, Moody's Industrial Manual (1982).
Time Inc. at 3623, Moody's Industrial Manual (1985).
Time Inc. at 4497, Moody's Industrial Manual (1982).
Todd Shipyards Corp. at 5574, Moody's Industrial Manual (1981).
Tomlinson Oil at 681, Moody's OTC Industrial Manual (1981).
Total Petroleum North America at 1015, Moody's International Manual (1984).
Towner Petroleum at 5579, Moody's Industrial Manual (1981).
Trane Co. at 6053, Moody's Industrial Manual (1982).
Trans World Airlines at 1074, Moody's Transportation Manual (1978).
Trans World Corp. at 1441, Moody's Transportation Manual (1982).
Trans World Corp. at 6062, Moody's Industrial Manual (1984).
Page 31 of 50
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 100 of 179
Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 32 of 50
INVESTMENT DATA
1221
1222
1223
1224
1225
1226
1227
1228
1229
1230
1231
1232
1233
1234
1235
1236
1237
1238
1239
1240
1241
1242
1243
1244
1245
1246
1247
1248
1249
1250
1251
1252
1253
1254
1255
1256
1257
1258
1259
1260
1261
1262
1263
1264
TransCo Companies at 3568, Moody's Public Utility Manual (1981).
TransContinental Oil Corp. at 5038, Moody's Industrial Manual (1981).
Transworld Corp. at 6062, Moody's Industrial Manual (1984).
Transworld Corp. at 6145, Moody's Industrial Manual (1986).
Travelers Corp. at 2501, Moody's Bank & Finance Manual (1980).
Travelers Corp. at 2541, Moody's Bank & Finance Manual (1981).
TRE Corp. at 5583, Moody's Industrial Manual (1981).
Triangle Industries at 4495, Moody's Industrial Manual (1986).
Triton Oil at 5287, Moody's Industrial Manual (1980).
TRW Inc. at 4425, Moody's Industrial Manual (1987).
TRW Inc. at 4499, Moody's Industrial Manual (1986).
TRW Inc. at 4518, Moody's Industrial Manual (1982).
Twentieth Century Fox at 4229, Moody's Industrial Manual (1980).
Union Pacific Corp. at 221, Moody's Transportation Manual (1980).
Union Pacific Corp. at 243, Moody's Transportation Manual (1983).
Unisys Corp. at 3484, Moody's Industrial Manual (1988).
United States Gypsum at 4557, Moody's Industrial Manual (1982).
United States Steel Corp. at 6280, Moody's Industrial Manual (1985).
United Technologies Corp. at 4434, Moody's Industrial Manual (1981).
United Technologies Corp. at 4513, Moody's Industrial Manual (1983).
United Technologies Corp. at 4537, Moody's Industrial Manual (1986).
United Technologies Corp. at 4574, Moody's Industrial Manual (1982).
US Air Inc. at 1336, Moody's Transportation Manual (1981).
USLIFE Corp. at 3410, Moody's Bank & Finance Manual (1985).
USX Corp. at 6254, Moody's Industrial Manual (1987).
UV Industries at 4294, Moody's Industrial Manual (1979).
UV Industries at 4297, Moody's Industrial Manual (1978).
Valero Energy Corp. at 4380, Moody's Industrial Manual (1989).
Viacom at 6123, Moody's Industrial Manual (1984).
Wal Mart Stores at 6209, Moody's Industrial Manual (1986).
Walgreen Co. at 3520, Moody's Industrial Manual (1982).
Walter Jim Corp. at 6193, Moody's Industrial Manual (1985).
Wang Laboratories at 5643, Moody's Industrial Manual (1981).
Wang Laboratories at 6115, Moody's Industrial Manual (1982).
Wang Laboratories at 6129, Moody's Industrial Manual (1983).
Warner Communications at 4325, Moody's Industrial Manual (1979).
Warner Communications at 6414, Moody's Industrial Manual (1989).
Warner Communications Inc. at 4328, Moody's Industrial Manual (1978).
Warner Communications Inc. at 5345, Moody's Industrial Manual (1980).
Western Air Lines at 1449, Moody's Transportation Manual (1986).
Western Union Corp. at 3748, Moody's Public Utility Manual (1981).
Western Union Corp. at 3789, Moody's Public Utility Manual (1982).
Westinghouse Electric Corp. at 4402, Moody's Industrial Manual (1989).
Wetterau Inc. at 2655, Moody's OTC Industrial Manual (1985).
Page 32 of 50
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Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 33 of 50
INVESTMENT DATA
1265
1266
1267
1268
1269
1270
Wheelabrator at 4636, Moody's Industrial Manual (1982).
White Consolidated Industries at 3337, Moody's Industrial Manual (1979).
Woolworth FW Co. at 3546, Moody's Industrial Manual (1985).
Woolworth FW Co. at 3642, Moody's Industrial Manual (1986).
Zenith National Insurance Corp. at 7327, Moody's Bank & Finance Manual (1985).
Zondervan Corp. at 1470, Moody's OTC Industrial Manual (1979).
DEPOSITIONS/UK INTERVIEW TRANSCRIPTS
1271
1272
1273
1274
1275
1276
1277
1278
1279
1280
1281
1282
1283
1284
1285
1286
1287
1288
1289
1290
1291
1292
1293
1294
1295
1296
1297
1298
1299
1300
1301
1302
1303
1304
Alistair George Deposition May 11, 2009.
Amber Wood Deposition June 10, 2009 & May 18, 2010.
Anthony Marshall Deposition June 25, 2010.
Arthur Friedman Deposition June 22, 2010, June 23, 2010, June 24, 2010, & June 29, 2010.
Ashok Chachra Deposition Oct. 08, 2010.
Belle Jones Deposition May 17, 2010.
Carl Shapiro Deposition Dec. 14, 2009 & Dec. 15, 2009.
Charles Klein Deposition Nov. 08, 2010.
Chris Dale Deposition July 08, 2009 & July 19, 2010.
Chris Pengelly Deposition May 06, 2009.
Christopher Cutler Deposition Jan. 21, 2010.
Colin Bond Deposition June 25, 2010.
David Katz Deposition Aug. 31, 2010 & Sept. 1, 2010.
David Steinmann Deposition Sept. 29, 2010.
Dylan Grice Deposition May 05, 2009.
Elliot Margolis Deposition Aug. 12, 2010.
Felicity Raven Deposition July 28, 2010.
Frank Avellino & Michael Bienes Deposition July 7, 1992.
Frank Avellino Deposition Sept. 30, 2010.
Fred Wilpon Deposition July 20, 2010.
Gilles Frachet Deposition May 11, 2009.
James Henchey Deposition June 18, 2010.
John Purcell Deposition June 25, 2010.
Julia Fenwick Deposition June 04, 2009 & May 19, 2010.
Leon Flax Deposition Aug. 06, 2009 & July 21, 2010.
Leon Gross Deposition Oct. 22, 2010.
Linda Sutton Howard Deposition Aug. 17, 2010.
Malcolm Stephenson Deposition June 05, 2009 & Aug. 18, 2010.
Marcus Hagnesten Deposition May 05, 2009.
Mark Hughes Deposition May 20, 2009.
Mark Peskin Deposition July 29, 2010 & July 30, 2010.
Matthew Byrom Deposition May 11, 2009.
Michael Bienes Deposition Oct. 05, 2010.
Michael Lieberbaum Deposition July 29, 2010, Aug. 5, 2010, & Oct. 18, 2010.
Page 33 of 50
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Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 34 of 50
DEPOSITIONS/UK INTERVIEW TRANSCRIPTS
1305
1306
1307
1308
1309
1310
1311
1312
1313
1314
1315
Peter Allen Deposition July 15, 2009 & July 28, 2010.
Peter Deadman Deposition May 06, 2009.
Peter Stamos Deposition Aug. 19, 2010.
Philip Toop Deposition June 08, 2009 & July 16, 2010.
Richard Karyo Deposition Sept. 22, 2010.
Rodney Yates Deposition Sept. 06, 2010.
Saul Katz Deposition Aug. 04, 2010.
Stanley Shapiro Deposition Sept. 30, 2010 & Oct. 1, 2010.
Stephen Raven Deposition July 14, 2009 & July 26, 2010.
Tim Vines Deposition May 12, 2009.
William Hui Deposition May 18, 2009 & May 18, 2010.
BEGINNING BATES
1316
1317
1318
1319
1320
1321
1322
1323
1324
1325
1326
1327
1328
1329
1330
1331
1332
1333
1334
1335
1336
1337
1338
1339
1340
1341
1342
1343
1344
17SH_02_OZ_00000001
17SH_03_OZ_00000001
17SH-OZ00000004
ABON_02_BR_00000001
ABON-BR00000004
ACOP_03_BR_00000001
ADAM_03_BR_00000001
AFELD_03_BR_00000001
AFOS-BR00000002
AGEO_02_BR_00000001
AGEO-BR00000002
AGRE_03_BR_00000001
AJOE_02_BR_00000001
AJOE_03_BR_00000001
AJOE-BR00000001
AKSSAA00000001
AKSSAB0000001
AKSSAC0000001
AKSSAD0000001
ALAN_03_BR_00000001
ALBASAA0000001
ALCO_03_BR_00000001
ALLM_02_BR_00000001
ALLM-BR00000003
ALON-BR00000001
AMAD_02_BR_00000001
AMAD_03_BR_00000001
AMAD-BR00000057
AMAD-BRa00018510
ENDING BATES
17SH_02_OZ_00000017
17SH_03_OZ_00000042
17SH-OZ00007819
ABON_02_BR_00007828
ABON-BR00098122
ACOP_03_BR_00001358
ADAM_03_BR_00000001
AFELD_03_BR_00001475
AFOS-BR00002376
AGEO_02_BR_00000023
AGEO-BR00000295
AGRE_03_BR_00000163
AJOE_02_BR_00000335
AJOE_03_BR_00000006
AJOE-BR00000133
AKSSAA0000020
AKSSAB0000071
AKSSAC0000027
AKSSAD0000573
ALAN_03_BR_00001740
ALBSAC0006359
ALCO_03_BR_00058754
ALLM_02_BR_00002795
ALLM-BR00018970
ALON-BR00018141
AMAD_02_BR_00003379
AMAD_03_BR_00000051
AMAD-BR30002151
AMAD-BRa00020372
Page 34 of 50
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Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 35 of 50
BEGINNING BATES
1345
1346
1347
1348
1349
1350
1351
1352
1353
1354
1355
1356
1357
1358
1359
1360
1361
1362
1363
1364
1365
1366
1367
1368
1369
1370
1371
1372
1373
1374
1375
1376
1377
1378
1379
1380
1381
1382
1383
1384
1385
1386
1387
1388
AMAD-BRb00018538
AMAD-BRc00018819
AMAD-BRd00018826
AMAD-BRf00000046
AMF00022564
AMUI_02_BR_00000001
AMUI-BR00000001
ARBS_03_BR_00000001
ARICH_03_BR_00000001
ARIG_03_BR_00000001
BACK_03_BR_00000001
BARSAA0006285
BARSAD0000001
BASE_02_BR_00000001
BASE-BR00000001
BATSAA0000001
BEN_03_BR_00000001
BGIM_03_BR_00000001
BING0000001
BLAR_03_BR_00000001
BMAD_02_BR_00000001
BMAD-BR00000029
BMAD-BR00018019
BMEDS_02_BR_00000001
BNYSAE0000010
BOASAA0001412
BOASAB0000001
BOASAC0000001
BOASAD0000001
BOASAE0000001
BOASAF0000001
BOASAG0000001
BOASAH0000001
BOASAI0000001
BOASAJ0000001
BOASAK0000001
BOASAL0000001
BOASAM0000001
BOASAN0000001
BOASAO0000001
BOASAP0000001
BOASAQ0000001
BOASAR0000001
BOASAS0000001
ENDING BATES
AMAD-BRb00018927
AMAD-BRc00018831
AMAD-BRd00020564
AMAD-BRf00001843
AMF00309518
AMUI_02_BR_00000330
AMUI-BR00000125
ARBS_03_BR_00000236
ARICH_03_BR_00000001
ARIG_03_BR_00000712
BACK_03_BR_00146188
BARSAA0019550
BARSAD0000037
BASE_02_BR_00000161
BASE-BR00000221
BATSAA0002893
BEN_03_BR_00027886
BGIM_03_BR_00022604
BING0000170
BLAR_03_BR_00000024
BMAD_02_BR_00001365
BMAD-BR00000198
BMAD-BR00021272
BMEDS_02_BR_00000066
BNYSAE0000244
BOASAA0004640
BOASAB0000043
BOASAC0000375
BOASAD0001281
BOASAE0003973
BOASAF0008605
BOASAG0000516
BOASAH0000565
BOASAI0002686
BOASAJ0000110
BOASAK0000381
BOASAL0007262
BOASAM0000001
BOASAN0004659
BOASAO0011649
BOASAP0007549
BOASAQ0001850
BOASAR0003427
BOASAS0000511
Page 35 of 50
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 104 of 179
Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 36 of 50
BEGINNING BATES
1389
1390
1391
1392
1393
1394
1395
1396
1397
1398
1399
1400
1401
1402
1403
1404
1405
1406
1407
1408
1409
1410
1411
1412
1413
1414
1415
1416
1417
1418
1419
1420
1421
1422
1423
1424
1425
1426
1427
1428
1429
1430
1431
1432
BOASAT0000001
BOASAU0000001
BOASAV0000001
BOASAW0000001
BOASAX0000001
BOASAY0000001
BOASAZ0000001
BOASBA0000001
BOASBB0000001
BOASBC0000001
BOASBD0000001
BOASBE0000001
BOASBF0000001
BOASBG0000001
BOASBH0000001
BOASBI0000001
BOASBJ0000001
BOASBK0000001
BOASBL00000001
BOASBM0000001
BOASBN0000001
BOASBO0000001
BOASBP0000001
BOASBQ0000001
BOASBR0000001
BROS_03_BR_00000001
BRU-ACd00001070
BRU-ACe00000013
BRU-ACf00000146
BRU-ACg00000001
BRU-ACh00000001
BRU-ACi00000001
BRU-ACj00000003
BRU-ACk00000001
BRU-BA00000001
BRU-BA00067990
BRU-BA00090451
BRU-BA00146033
BRU-BB00000001
BRU-BB00395666
BRU-BC00000001
BRU-BC00020880
BRU-BC00089866
BRU-BD00000005
ENDING BATES
BOASAT0000676
BOASAU0002044
BOASAV0003593
BOASAW0000486
BOASAX0003100
BOASAY0000552
BOASAZ0000839
BOASBA0000985
BOASBB0000152
BOASBC0000344
BOASBD0000024
BOASBE0002282
BOASBF0000383
BOASBG0001143
BOASBH0001590
BOASBI0000306
BOASBJ0000726
BOASBK0000708
BOASBL0008095
BOASBM0000380
BOASBN0005446
BOASBO0000619
BOASBP00000468
BOASBQ0043973
BOASBR0004648
BROS_03_BR_00000016
BRU-ACd00001384
BRU-ACe00018306
BRU-ACf00048062
BRU-ACg00052558
BRU-ACh00002412
BRU-ACi00015083
BRU-ACj00046521
BRU-ACk00002035
BRU-BA00042992
BRU-BA00090445
BRU-BA00146030
BRU-BA00157577
BRU-BB00395663
BRU-BB00405281
BRU-BC00020852
BRU-BC00084593
BRU-BC00116702
BRU-BD00063181
Page 36 of 50
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 105 of 179
Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 37 of 50
BEGINNING BATES
1433
1434
1435
1436
1437
1438
1439
1440
1441
1442
1443
1444
1445
1446
1447
1448
1449
1450
1451
1452
1453
1454
1455
1456
1457
1458
1459
1460
1461
1462
1463
1464
1465
1466
1467
1468
1469
1470
1471
1472
1473
1474
1475
1476
BRU-BDf00018782
BRU-BE00000001
BRU-BF00000001
BRU-BF00008810
BRU-BF00019784
BRU-BG00000001
BRU-BH00000001
BRU-BI00000009
BRU-BJ00000001
BRU-BK00000022
BRU-BL00000008
BRU-BM00000010
BRU-BM00416200
BRU-BM00416616
BRU-BM00416736
BRU-BM00450592
BRU-BM00451057
BRU-BM00451129
BRU-BM00451244
BRU-BM00452478
BRU-BM00452518
BRU-BM00453531
BRU-BM00457759
BRU-BN00000001
BRU-BN00000005
BRU-BO00000008
BRU-BO00000138
BRU-CSa00000005
BRU-CSd00000001
BRU-CSd00000001
BRU-CSd00000001_1
BRU-CSd00006266_1
BRU-CSe00000001
BRU-CSe00000001
BRU-CSe00009784
BRU-CSe00014357
BRU-CSe00016386
BRU-CSf00000002
BRU-CSg00002901
BRU-CSh00000001
BRU-CSh00004869
BRU-CSi00000001
BRU-CSj00000111
BRU-CSj00043299
ENDING BATES
BRU-BDf00018841
BRU-BE00287408
BRU-BF00008808
BRU-BF00017912
BRU-BF00023870
BRU-BG00421783
BRU-BH00231383
BRU-BI00697541
BRU-BJ00135816
BRU-BK00192206
BRU-BL00240603
BRU-BM00553040
BRU-BM00416401
BRU-BM00416631
BRU-BM00515344
BRU-BM00450594
BRU-BM00515981
BRU-BM00516700
BRU-BM00452381
BRU-M00009080
BRU-M00009612
BRU-BM00453545
BRU-M00009446
BRU-BN00000294
BRU-BN00000006
BRU-BO00000458
BRU-BO00000145
BRU-CSa00002368
BRU-CSd00007105
BRU-CSd00000264
BRU-CSd00006265_1
BRU-CSd00007105_1
BRU-CSe00037339
BRU-CSe00009783
BRU-CSe00014356
BRU-CSe00016385
BRU-CSe00037339
BRU-CSf00007134
BRU-CSg00007048
BRU-CSh00004162
BRU-CSh00004869
BRU-CSi00017461
BRU-CSj00042727
BRU-CSj00043317
Page 37 of 50
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 106 of 179
Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 38 of 50
BEGINNING BATES
1477
1478
1479
1480
1481
1482
1483
1484
1485
1486
1487
1488
1489
1490
1491
1492
1493
1494
1495
1496
1497
1498
1499
1500
1501
1502
1503
1504
1505
1506
1507
1508
1509
1510
1511
1512
1513
1514
1515
1516
1517
1518
1519
1520
BRU-CSj00044839
BRU-JTa00000129
BRU-JTa00000129
BRU-JTa00001984
BRU-JTa00032909
BRU-JTa00042085
BRU-JTc00000062
BRU-M00000001
BRU-M00000001
BRU-M00000295
BRU-M00000337
BRU-M00001299
BRU-M00001662
BRU-M00002011
BRU-M00002353
BRU-M00002405
BRU-M00002495
BRU-M00002828
BRU-M00002930
BRU-M00003122
BRU-M00003267
BRU-M00003466
BRU-M00003732
BRU-M00004739
BRU-M00004861
BRU-M00005230
BRU-M00006956
BRU-M00006966
BRU-M00007344
BRU-M00007478
BRU-M00007602
BRU-M00007785
BRU-M00009187
BRU-M00009509
BRU-M00077466
BRU-M00077799
BRU-M00077822
BRU-M00078074
BRU-M00078636
BRU-M00080375
BRUNA000000001
BRUNA000000001
BRUNA000471789
BRUNA000785619
ENDING BATES
BRU-CSj00136110
BRU-JTa00043760
BRU-JTa00001124
BRU-JTa00031195
BRU-JTa00041201
BRU-JTa00043760
BRU-JTc00565557
BRU-M00151662
BRU-M00080497
BRU-M00009278
BRU-M00000402
BRU-M00001375
BRU-M00002152
BRU-M00002015
BRU-M00078059
BRU-M00002417
BRU-M00002781
BRU-M00002838
BRU-M00002981
BRU-M00003141
BRU-M00003305
BRU-M00003475
BRU-M00005164
BRU-M00004802
BRU-M00085948
BRU-M00137609
BRU-M00006956
BRU-M00006967
BRU-M00007419
BRU-M00007542
BRU-M00007644
BRU-M00009536
BRU-M00009200
BRU-M00009511
BRU-M00077597
BRU-M00077803
BRU-M00077832
BRU-M00080327
BRU-M00078643
BRU-M00151662
BRUNA001783598
BRUNA001678132
BRUNA001234711
BRUNA001774328
Page 38 of 50
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 107 of 179
Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 39 of 50
BEGINNING BATES
1521
1522
1523
1524
1525
1526
1527
1528
1529
1530
1531
1532
1533
1534
1535
1536
1537
1538
1539
1540
1541
1542
1543
1544
1545
1546
1547
1548
1549
1550
1551
1552
1553
1554
1555
1556
1557
1558
1559
1560
1561
1562
1563
1564
BRUNA001235551
BRUNA001681971
BRUNA001755093
BRUNB000002436
BRUNB000002436
BRUNB000025563
BRUNB000178901
BRUNB000178901_1
BRUNB000443290
BRUNB000555356
BRUNB001053291
BRUNB001079752
BRUNC000003071
BRUNC000003071
BRUNC000216434
BRUNC000488340
BRUNC000656479
BRUNC000656680
BRUNC000714052
BRUNC000732116
BRUND000000001
BRUND000000001
BRUND000461266
BRUND000500017
BRUND000726703
BRUND000920061
BRUND000948157
BRUNE000003392
BRUNE000003392
BRUNE000054217
BRUNE000564971
BRUNE000657415
BRUNE000686966
BRUNE000692640
BRUNE000693795
BRUNF000000001
BRUNF000287142
BRUNG000000001
BRUNH000000001
BRUNH000009648
BRUNI000000001
BRUNI000000001
BRUNI000073813
BRUNI000073929
ENDING BATES
BRUNA001681913
BRUNA001755081
BRUNA001783598
BRUNB001185623
BRUNB000178900
BRUNB001068045
BRUNB000561371
BRUNB000178901_1
BRUNB001053248
BRUNB000605773
BRUNB001079751
BRUNB001185623
BRUNC000733655
BRUNC000670699
BRUNC000488337
BRUNC000656442
BRUNC000714051
BRUNC000730766
BRUNC000732115
BRUNC000733655
BRUND000966112
BRUND000461265
BRUND000724830
BRUND000939162
BRUND000920024
BRUND000948156
BRUND000966112
BRUNE000696324
BRUNE000564965
BRUNE000664514
BRUNE000657352
BRUNE000686964
BRUNE000692637
BRUNE000693794
BRUNE000696324
BRUNF000287086
BRUNF000476454
BRUNG000078751
BRUNH000183149
BRUNH000176068
BRUNI000099524
BRUNI000073810
BRUNI000099524
BRUNI000091906
Page 39 of 50
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 108 of 179
Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 40 of 50
BEGINNING BATES
1565
1566
1567
1568
1569
1570
1571
1572
1573
1574
1575
1576
1577
1578
1579
1580
1581
1582
1583
1584
1585
1586
1587
1588
1589
1590
1591
1592
1593
1594
1595
1596
1597
1598
1599
1600
1601
1602
1603
1604
1605
1606
1607
1608
BRUNJ000000001
BRUNJ000000001
BRUNJ000336176
BRUNJ000347844
BRUNJ000507938
BRUNK000000001
BRUNK000000001
BRUNK000034291
BRUNK000237390
BRUNK000441515
BRUNM000000001
BRUNM000083342
BRUNM000089046_1
BRUNM000235972
BRUNN000000001
BRUNN000000001
BRUNN000199144
BRUNN000282781
BRUNY000000001
BRUNY000000001
BRUNY000044285
BRUNY000243383
BRU-OZa00000002
BRU-OZa00000002
BRU-OZa00003640
BRU-STa00000191
BRU-STa00000191
BRU-STa00000880
BRU-STa00000940
BRU-STa00000941
BRU-STa00008422
BRU-STa00011187
BRU-STb00000058
BRU-STc00000029
BRU-STc00000029
BRU-STc00004390
BRU-STc00004634
BRU-STc00004695
BRU-STd00001714
BRU-STe00000001
BRU-STf00000001
BRU-STj00006355
BRU-STj00006355
BRU-STj00021311
ENDING BATES
BRUNJ000643685
BRUNJ000336174
BRUNJ000507904
BRUNJ000597727
BRUNJ000643685
BRUNK000573374
BRUNK000237334
BRUNK000568253
BRUNK000441454
BRUNK000573374
BRUNM000331542
BRUNM000083342
BRUNM000089046_1
BRUNM000235981
BRUNN000338324
BRUNN000281939
BRUNN000300110
BRUNN000338324
BRUNY000353313
BRUNY000243313
BRUNY000347062
BRUNY000353313
BRU-OZa00003780
BRU-OZa00003639
BRU-OZa00003780
BRU-STa00011157
BRU-STa00000879
BRU-STa00000880
BRU-STa00000940
BRU-STa00008421
BRU-STa00011157
BRU-STd00001207
BRU-STb00010250
BRU-STc00006855
BRU-STc00004317
BRU-STc00004398
BRU-STc00004692
BRU-STc00006855
BRU-STd00005237
BRU-STe00012696
BRU-STf00024977
BRU-STj00021312
BRU-STj00021310
BRU-STj00021312
Page 40 of 50
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 109 of 179
Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 41 of 50
BEGINNING BATES
1609
1610
1611
1612
1613
1614
1615
1616
1617
1618
1619
1620
1621
1622
1623
1624
1625
1626
1627
1628
1629
1630
1631
1632
1633
1634
1635
1636
1637
1638
1639
1640
1641
1642
1643
1644
1645
1646
1647
1648
1649
1650
1651
1652
BRU-STk00000710
BRU-STk00002164
BRU-STl00000001
BRU-STo00026264
BRU-STo00033273
BSCH_03_BR_00000001
BSHE_03_BR_00000001
BSTSAA0037217
BSTSAB0320274
BSTSAC0000002
BULCC_02_B_00000001
BULCC-BR00000002
CBLSAA0000001
CBOSAA0000001
CBUL_02_BR_00000001
CBUL-BR00000001
CDAL_02_BR_00000001
CDAL-BR00000003
CJOA_03_BR_00000001
CKUG_02_BR_00000001
CKUG_03_BR_00000001
CKUG-BR00000013
CKUG-BR00000013
CKUG-BR00672827
CLEO_03_BR_00000001
CMAR_03_BR_00000001
CRAD_03_BR_00000001
CRAL_03_BR_00000001
CSHI_03_BR_00000001
CSSSAA0001601
CTOM_03_BR_00000001
CUWA_03_BR_00000001
CWIE_02_BR_00000001
CWIE_03_BR_00000001
CWIE-BR00000006
DBER_02_BR_00000001
DBER-BR00000003
DBON_02_BR_00000001
DBON-BR00000003
DCON_02_BR_00000001
DCON-BR00000001
DDAN_03_BR_00000001
DERI_03_BR_00000001
DGRI_02_BR_00000001
ENDING BATES
BRU-STk00000771
BRU-STk00020040
BRU-STl00024249
BRU-STo00033023
BRU-STo00074290
BSCH_03_BR_00000439
BSHE_03_BR_00002558
BSTSAA0046408
BSTSAB0795234
BSTSAC0000574
BULCC_02_B_00000949
BULCC-BR00001579
CBLSAA0000177
CBOSAA0000340
CBUL_02_BR_00000012
CBUL-BR00000038
CDAL_02_BR_00000005
CDAL-BR00063052
CJOA_03_BR_00000022
CKUG_02_BR_00002254
CKUG_03_BR_00012381
CKUG-BR01179654
CKUG-BR00672826
CKUG-BR01179654
CLEO_03_BR_00000018
CMAR_03_BR_00000344
CRAD_03_BR_00000002
CRAL_03_BR_00000001
CSHI_03_BR_00000108
CSSSAA0003277
CTOM_03_BR_00000012
CUWA_03_BR_00000079
CWIE_02_BR_00000955
CWIE_03_BR_00000407
CWIE-BR00019711
DBER_02_BR_00002818
DBER-BR00051861
DBON_02_BR_00000890
DBON-BR00012378
DCON_02_BR_00005583
DCON-BR00000303
DDAN_03_BR_00000002
DERI_03_BR_00067627
DGRI_02_BR_00000070
Page 41 of 50
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 110 of 179
Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 42 of 50
BEGINNING BATES
1653
1654
1655
1656
1657
1658
1659
1660
1661
1662
1663
1664
1665
1666
1667
1668
1669
1670
1671
1672
1673
1674
1675
1676
1677
1678
1679
1680
1681
1682
1683
1684
1685
1686
1687
1688
1689
1690
1691
1692
1693
1694
1695
1696
DGRI-BR00000002
DKHA_02_BR_00000001
DKHA-BR00000002
DKUG_02_BR_00000001
DKUG_03_BR_00000001
DKUG-BR00000005
DMAG_02_BR_00000001
DMAG-BR00000007
DOWL0000001
DPEN_03_BR_00000001
DSR00000001
DTAR_03_BR_00000001
ECOT_02_BR_00000001
ECOT-BR00000001
ECOU_02_BR_00000001
ECOU-BR00000001
ECOU-BRf00000002
EDUA_03_BR_00000001
EFLO_02_BR_00000001
EFLO-BR00000002
EKAT_03_BR_00000001
ELAI_03_BR_00000001
ELIP_02_BR_00000001
ELIP-BR00000017
ELIP-BRa00000002
ELVI_03_BR_00000001
EREA_03_BR_00000001
FCCSAA0000001
FDIP_02_BR_00000001
FDIP_02-BR00000001
FDIP-BR00000001
FILI-BR00000001
FILI-BR00000238
FMAD_03_03_03_BR_00000001
FMRSAA0001062
FRISAA0000001
FRISAB0000001
FRISAC0000001
FSTE_03_BR_00000001
GARD0000001
GBRU_03_BR_00000001
GDUP_02_BR_00000001
GDUP-BR00000002
GFRA_02_BR_00000001
ENDING BATES
DGRI-BR00000262
DKHA_02_BR_00000029
DKHA-BR00000437
DKUG_02_BR_00001142
DKUG_03_BR_00000019
DKUG-BR00013943
DMAG_02_BR_00001799
DMAG-BR00000464
DOWL0001657
DPEN_03_BR_00000035
DSR00000748
DTAR_03_BR_00000164
ECOT_02_BR_00009698
ECOT-BR00028594
ECOU_02_BR_00001756
ECOU-BR00021422
ECOU-BRf00000039
EDUA_03_BR_00000062
EFLO_02_BR_00000004
EFLO-BR00022394
EKAT_03_BR_00000019
ELAI_03_BR_00000008
ELIP_02_BRa00002378
ELIP-BR00094469
ELIP-BRa00002371
ELVI_03_BR_00000001
EREA_03_BR_00000006
FCCSAA0012412
FDIP_02_BR_00003997
FDIP_02-BR00000041
FDIP-BR00003946
FILI-BR00001027
FILI-BR00000960
FMAD_03_BR_00055801
FMRSAA0116456
FRISAA0000008
FRISAB0035266
FRISAC0000001
FSTE_03_BR_00038877
GARD0000049
GBRU_03_BR_00002769
GDUP_02_BR_00000054
GDUP-BR00005367
GFRA_02_BR_00000003
Page 42 of 50
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 111 of 179
Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 43 of 50
BEGINNING BATES
1697
1698
1699
1700
1701
1702
1703
1704
1705
1706
1707
1708
1709
1710
1711
1712
1713
1714
1715
1716
1717
1718
1719
1720
1721
1722
1723
1724
1725
1726
1727
1728
1729
1730
1731
1732
1733
1734
1735
1736
1737
1738
1739
1740
GFRA-BR00000002
GJAS_03_BR_00000001
GKGL0000001
GLEN_03_BR_00000001
GLIZ_03_BR_00000001
GMAR_03_BR_00000001
GNAN_03_BR_00000001
GOLD0000001
GPER_03_BR_00000001
GROB_03_BR_00000001
GVIN_03_BR_00000001
HDAN_03_BR_00000001
HRON_00000001
HSBSAA0000663
HWN00000001
IBLSAA0000001
IBMVAA0000001
ICEL-BR00000001
ICOH_03_BR_00000001
IDEL_02_BR_00000001
IDEL_03_BR_00000001
IDEL-BR00000003
ILON-BR00000001
ILON-BR00000003
ILX_02_BR_00000001
ILX-BR00000001
ITLM_02_BR_00000001
ITLM-BR00000001
ITON_03_BR_00000001
IVYSAA0000302
IVYSAB0000743
IVYSAC0002074
IVYSAD0000004
JAJE_03_BR_00000001
JANT_03_BR_00000001
JASI0000001
JBON_02_BR_00000001
JBON-BR00000001
JCRU_02_BR_00000001
JCRU-BR00000001
JDUM_03_BR_00000001
JFEN_02_BR_00000001
JFEN-BR00000002
JFER_02_BR_00000001
ENDING BATES
GFRA-BR00013541
GJAS_03_BR_00000441
GKGL0000057
GLEN_03_BR_00067797
GLIZ_03_BR_00000014
GMAR_03_BR_00000035
GNAN_03_BR_00027037
GOLD0000267
GPER_03_BR_00000007
GROB_03_BR_00000001
GVIN_03_BR_00000010
HDAN_03_BR_00000016
HRON_00000018
HSBSAA0001545
HWN00003217
IBLSAA0007870
IBMVAA0000119
ICEL-BR00444412
ICOH_03_BR_00008560
IDEL_02_BR_00001136
IDEL_03_BR_00001368
IDEL-BR00003101
ILON-BR00000001
ILON-BR00000024
ILX_02_BR_00000010
ILX-BR00000230
ITLM_02_BR_00000003
ITLM-BR00000686
ITON_03_BR_00010088
IVYSAA0583665
IVYSAB0049068
IVYSAC0028790
IVYSAD0000070
JAJE_03_BR_00000030
JANT_03_BR_00000020
JASI0000080
JBON_02_BR_00002379
JBON-BR00014086
JCRU_02_BR_00003881
JCRU-BR00016977
JDUM_03_BR_00009833
JFEN_02_BR_00000007
JFEN-BR00001210
JFER_02_BR_00001318
Page 43 of 50
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 112 of 179
Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 44 of 50
BEGINNING BATES
1741
1742
1743
1744
1745
1746
1747
1748
1749
1750
1751
1752
1753
1754
1755
1756
1757
1758
1759
1760
1761
1762
1763
1764
1765
1766
1767
1768
1769
1770
1771
1772
1773
1774
1775
1776
1777
1778
1779
1780
1781
1782
1783
1784
JFER_03_BR_00000001
JFER-BR00000003
JHEN_02_BR_00000001
JHEN-BR00000002
JHSSAA0000001
JHSSAB0000001
JLAR_02_BR_00000001
JLAR-BR00000003
JLEN_03_BR_00000001
JNEW_02_BR_00000001
JNEW-BR00000002
JOHA_03_BR_00000001
JOHA-BR00000977
JPISAA0000011
JPMSAA0013051
JPMSAB0000001
JPMSAE0001247
JPMSAF0000001
JPMSAG0000002
JPMSAH0000001
JPMSAI0000001
JPMSBL0000012
JPMSBT0002332
JPMSCQ0000001
JPMSDM0000001
JPMTAA0000002
JPMTAC0000001
JPMTAD0000001
JRIC_03_BR_00000001
JROS_03_BR_00000001
KATT0000001
KFON-BR00000002
KFON-BRf00000049
KKAN_03_BR_00000001
KKIE_03_BR_00000001
KNISAA0000001
KRAS0000001
KWES_03_BR_00000001
LAND_03_BR_00000001
LARC-BR00488135
LAWA0000001
LAZAA0000001
LAZAA0000001
LAZAA0000160
ENDING BATES
JFER_03_BR_00000003
JFER-BR00008364
JHEN_02_BR_00000057
JHEN-BR00000201
JHSSAA0005432
JHSSAB0002180
JLAR_02_BR_00000974
JLAR-BR00005664
JLEN_03_BR_00001365
JNEW_02_BR_00000001
JNEW-BR00015173
JOHA_03_BR_00000002
JOHA-BR00000977
JPISAA0000084
JPMSAA0020079
JPMSAB0004570
JPMSAE0002669
JPMSAF0072931
JPMSAG0001912
JPMSAH0002873
JPMSAI0014006
JPMSBL0000419
JPMSBT0002343+C918
JPMSCQ0000028
JPMSDM0000009
JPMTAA0000331
JPMTAC0000064
JPMTAD0000282
JRIC_03_BR_00000002
JROS_03_BR_00003664
KATT2005253
KFON-BR00048818
KFON-BRf00017435
KKAN_03_BR_00001778
KKIE_03_BR_00000001
KNISAA0000732
KRAS0000190
KWES_03_BR_00009668
LAND_03_BR_00038153
LARC-BR00488136
LAWA0000138
LAZAA0004673
LAZAA0000045
LAZAA0004096
Page 44 of 50
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 113 of 179
Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 45 of 50
BEGINNING BATES
1785
1786
1787
1788
1789
1790
1791
1792
1793
1794
1795
1796
1797
1798
1799
1800
1801
1802
1803
1804
1805
1806
1807
1808
1809
1810
1811
1812
1813
1814
1815
1816
1817
1818
1819
1820
1821
1822
1823
1824
1825
1826
1827
1828
LAZAA0004101
LAZAA0004311
LAZA-BR00000001
LBRE_03_BR_00000001
LBUC_02_BR_00000001
LBUC-BR00000001
LBUL-BR00000001
LFLA_02_BR_00000001
LFLA-BR00000003
LINE-BR00000001
LITT0000001
MADTBA00303169
MADTBB01732636
MADTBB03342901
MADTEE00045777
MADTEE00115171
MADTNN00109620
MADTNN00126735
MADTSS00114387
MADTSS00114387
MADTSS00196027
MADTSS01380147
MADWAA00004137
MADWAA00010198
MAITAA0015875
MAITAD00000001
MBAC-BR00000001
MBYR_02_BR_00000001
MBYR-BR00000003
MCFSAA0000011
MDPTFF00000294
MDPTGG00000001
MDPTHH00000001
MDPTPP00017576
MDPTQQ00002368
MDPTSS00000001
MDPTTT00000001
MDPTVV00000001
MEBU_03_BR_00000001
MELSAA0000001
MELSAB0000001
MELSAB0000001
MESTAAC00000001
MESTAAE00000004
ENDING BATES
LAZAA0004286
LAZAA0004590
LAZA-BR00000542
LBRE_03_BR_00000018
LBUC_02_BR_00000005
LBUC-BR00000096
LBUL-BR00016651
LFLA_02_BR_00000032
LFLA-BR00006728
LINE-BR00000009
LITT0001416
MADTBA00303173
MADTBB03373053
MADTBB03343466
MADTEE00746251
MADTEE00726731
MADTNN00127389
MADTNN00126735
MADTSS01380186
MADTSS01327797
MADTSS00201174
MADTSS01380186
MADWAA01122084
MADWAA01125031
MAITAA0016436
MAITAD00000002
MBAC-BR00000001
MBYR_02_BR_00000008
MBYR-BR00000902
MCFSAA0000129
MDPTFF00000721
MDPTGG00000026
MDPTHH00000015
MDPTPP07693095
MDPTQQ00002834
MDPTSS00001688
MDPTTT00002748
MDPTVV00346036
MEBU_03_BR_00010743
MELSAA0000037
MELSAD0001659
MELSAB0000108
MESTAAC00000195
MESTAAE00049382
Page 45 of 50
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 114 of 179
Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 46 of 50
BEGINNING BATES
1829
1830
1831
1832
1833
1834
1835
1836
1837
1838
1839
1840
1841
1842
1843
1844
1845
1846
1847
1848
1849
1850
1851
1852
1853
1854
1855
1856
1857
1858
1859
1860
1861
1862
1863
1864
1865
1866
1867
1868
1869
1870
1871
1872
MESTAAF00000001
MESTAAG00000001
MESTAAH00000001
MESTAAK00000001
MF00000001
MF00000012
MFER_02_BR_00000001
MFER_03_BR_00000001
MFER-BR00000001
MGAV_02_BR_00000001
MGAV_03_BR_00000001
MGAV-BR00000023
MGRE_03_BR_00000001
MGUT_03_BR_00000001
MGUY_03_BR_00000001
MHAG-BR00000002
MHUG_02_BR_00000001
MHUG-BR00000002
MILL0000001
MKEV_03_BR_00000001
MLISAA0000001
MLSIAB0000001
MMAD_02_BR_00000001
MMAD_03_BR_00000001
MMAD-BR00000029
MMAD-BRf00000002
MMAN_02_BR_00000001
MMAN-BR00000001
MMAR_03_BR_00000001
MNEI_03_BR_00000001
MOTTAA00000922
MPAD_03_BR_00000001
MSYSAB0000100
MSYSAE0000468
MTRSAA0000002
MWPTAP000005673
NIBR_02_BR_00000001
NIBR-BR00000001
OCCSAA0000001
OCCSAB0000001
OCCSAC00000001
OJAM_03_BR_00000001
PALL_02_BR_00000001
PALL-BR00000001
ENDING BATES
MESTAAF00199972
MESTAAG00055161
MESTAAH00002034
MESTAAK00000005
MF00716212
MF00545003
MFER_02_BR_00000418
MFER_03_BR_00000009
MFER-BR00002668
MGAV_02_BR_00000790
MGAV_03_BR_00000143
MGAV-BR00007156
MGRE_03_BR_00000045
MGUT_03_BR_00001423
MGUY_03_BR_00005610
MHAG-BR00001534
MHUG_02_BR_00000040
MHUG-BR00000168
MILL0000147
MKEV_03_BR_00079978
MLISAA0000181
MLISAB0005212
MMAD_02_BR_00003337
MMAD_03_BR_00000367
MMAD-BR00035331
MMAD-BRf00022748
MMAN_02_BR_00000021
MMAN-BR00000010
MMAR_03_BR_00000023
MNEI_03_BR_00020661
MOTTAA00000922
MPAD_03_BR_00000575
MSYSAB0000446
MSYSAE0008121
MTSSAA0000095
MWPTAP00023613
NIBR_02_BR_00000003
NIBR-BR00000027
OCCSAA0003965
OCCSAB0000059
OCCSAC00003358
OJAM_03_BR_00000012
PALL_02_BR_00000001
PALL-BR00001163
Page 46 of 50
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 115 of 179
Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 47 of 50
BEGINNING BATES
1873
1874
1875
1876
1877
1878
1879
1880
1881
1882
1883
1884
1885
1886
1887
1888
1889
1890
1891
1892
1893
1894
1895
1896
1897
1898
1899
1900
1901
1902
1903
1904
1905
1906
1907
1908
1909
1910
1911
1912
1913
1914
1915
1916
PANL-BR00000001
PAOL_03_BR_00000001
PCISAA0000003
PDEA_02_BR_00000001
PDEA-BR00000002
PELE_03_BR_00000001
PIDJ0000001
PJASAA0000001
PJASAB0000001
PJASAC0000001
PJASAD0000001
PJASAE0000001
PJASAF0000001
PJASAG0000001
PJASAH0000001
PJASAH0000001
PJASAI0000001
PJASAJ0000001
PMAD_02_BR_00000001
PMAD_03_BR_00000001
PMAD-BR00000005
PMAT_03_BR_00000001
PROS0000001
PUBLIC0000001
PUBLIC0005382
PVIC_03_BR_00000001
PYEF_03_BR_00000001
RCAR_02_BR_00000001
RCAR_03_BR_00000001
RCAR-BR00000024
RCOLL_03_BR_00000001
RECY_02_BR_00000001
RECY-BR00000007
RENVAB0000001
RGUT_03_BR_00000001
RMAD_02_BR_00000001
RMAD-BR00000001
RMAS00000001
RSHA_03_BR_00000001
RSOB_03_BR_00000001
RYEH_03_BR_00000001
SAND_02_BR_00000001
SAND-BR00000001
SAND-BR00000001
ENDING BATES
PANL-BR00010862
PAOL_03_BR_00000068
PCISAA0000008
PDEA_02_BR_00000053
PDEA-BR00000307
PELE_03_BR_00000004
PIDJ0000127
PJASAA0000052
PJASAB0002542
PJASAC0001084
PJASAD0003954
PJASAE0001129
PJASAF0005311
PJASAG0001975
PJASAH0003988
PJASAI0000025
PJASAI0000025
PJASAJ0000009
PMAD_02_BR_00001714
PMAD_03_BR_00000009
PMAD-BR00034906
PMAT_03_BR_00000123
PROS0004812
PUBLIC0016681
PUBLIC0006357
PVIC_03_BR_00005737
PYEF_03_BR_00000001
RCAR_02_BR_00000459
RCAR_03_BR_00000047
RCAR-BR00001861
RCOLL_03_BR_00001236
RECY_02_BR_00000764
RECY-BR00007656
RENVAB0008159
RGUT_03_BR_00003791
RMAD_02_BR_00000287
RMAD-BR00000264
RMAS00000016
RSHA_03_BR_00000908
RSOB_03_BR_00000003
RYEH_03_BR_00000130
SAND_02_BR_00002193
SAND-BR00019351
SAND-BR00000582
Page 47 of 50
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 116 of 179
Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 48 of 50
BEGINNING BATES
1917
1918
1919
1920
1921
1922
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
1940
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
SAND-BR00000583
SCOL_02_BR_00000001
SCOLa-BR00000001
SCOLb-BR00000001
SCOL-BR00000002
SCOLc-BR00000164
SCON_02_BR_00000001
SCON-BR00000001
SDEC_03_BR_00000001
SECSAG0000185
SECSAH0000307
SECSAI0004777
SECSAV0007977
SECSBA0000029
SECSBF0000016
SECSBJ0005595
SECSBM0000041
SECSBP0007775
SECSBS0000001
SECSCC0000001
SECSCF0000001
SECSCR0000001
SECSDK0000014
SECSEE0000344
SECSFE0000001
SECSFF0000001
SEDI_03_BR_00000001
SFRI_03_BR_00000001
SHAN-BR00000002
SHEN_03_BR_00000001
SKUR_03_BR_00000001
SLYO-BR00002588
SMAD_02_BR_00000001
SMAD-BR00000004
SNOW0000001
SSMSAA0000001
SSMSAB0000001
SSMSAC0000001
SSMSAD0000001
SSMSAE0000001
SSMSAF0000001
SSMSAI0000001
SSMSAJ0000001
SSMSAK0000001
ENDING BATES
SAND-BR00019351
SCOL_02_BR_00000303
SCOLa-BR00004524
SCOLb-BR00004097
SCOL-BR00000482
SCOLc-BR00004657
SCON_02_BR_00000056
SCON-BR00000159
SDEC_03_BR_00002221
SECSAG0000188
SECSAH0002310
SECSAI0004858
SECSAV0009531
SECSBA0000054
SECSBF0002888
SECSBJ0015946
SECSBM0000042
SECSBP0019489
SECSBS0000072
SECSCC0000001
SECSCF0000001
SECSCR0000076
SECSDK0010270
SECSEE0000424
SECSFE0003415
SECSFF0000521
SEDI_03_BR_00000817
SFRI_03_BR_00004699
SHAN-BR00000392
SHEN_03_BR_00002583
SKUR_03_BR_00000029
SLYO-BR00008885
SMAD_02_BR_00004372
SMAD-BR20018565
SNOW0008898
SSMSAA2406204
SSMSAB0000149
SSMSAC0002625
SSMSAD0000034
SSMSAE0000091
SSMSAF0000147
SSMSAI0000448
SSMSAJ0000113
SSMSAK0000811
Page 48 of 50
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Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 49 of 50
BEGINNING BATES
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
SSMSAL0000001
SSMSAM0000001
SSMSAN0000001
SSTE_03_BR_00000001
SSUL_03_BR_00000001
STESAA0000212
STESAB0000001
STESAC0000001
STESAD0000001
STESAE0000001
STESAF0000001
STESAG0000001
STESAH0000001
STESAI0000001
STESAJ0000001
STESAK0000001
STESAL0000001
STESAM0000001
STESAN0000001
STESAO0000001
STESAP0000001
STESAQ0000001
STESAR0000001
STESAS0000001
STESAT0000001
STESAU0000001
STESAV0000001
STESAW0000001
STESAX0000001
STESAY0000001
STESAZ0000001
STESBA0000001
STESBB0000001
STESBC0000001
STESBD0000001
STESBE0000001
STESBF0000001
STESBG0000001
STESBH0000001
STESBI0000001
STESBJ0000001
STESBK0000001
STESBL0000001
TCHE_02_BR_00000001
ENDING BATES
SSMSAL0004430
SSMSAM0000081
SSMSAN0000009
SSTE_03_BR_00014755
SSUL_03_BR_00001145
STESAA0021745
STESAB0000356
STESAC0135989
STESAD0112642
STESAE0000035
STESAF0129907
STEAG0026078
STESAH0016146
STESAI0019504
STESAJ0010095
STESAK0004117
STESAL0074552
STESAM0000026
STESAN0000084
STESAO0003090
STESAP0000703
STESAQ0001893
STESAR0000599
STESAS0000626
STESAT0006234
STESAU0000896
STESAV0001516
STESAW0000911
STESAX0001088
STESAY0002956
STESAZ0045267
STESBA0000001
STESBB0000055
STESBC0002379
STESBD0003436
STESBE0020227
STESBF0000262
STESBG0001082
STESBH0000047
STESBI0013455
STESBJ0007496
STESBK0004190
STESBL0004606
TCHE_02-BR00000023
Page 49 of 50
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Expert Report of Bruce G. Dubinsky
Appendix “B”
Page 50 of 50
BEGINNING BATES
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
TCHE_03_BR_00000001
TCHE-BR00000018
TFUL-BR00000002
TLON-BR00000001
UBSSAA0000084
UKMSLLBE00000001
UKMSLLBE00000670
UKMSLLDI00000001
UKMSLLES00000001
UKMSLLWA00000001
UKSKO00000001
VHEN_03_BR_00000001
WACSAA0000010
WFCSAA0000049
WHIT0000001
WHUI_02_BR_00000001
WHUI-BR00000002
WILL0000001
WILM0000001
WJAC_02_BR_00000001
WJAC_03_BR_00000001
WJAC-BR00000002
WNA_03_BR_00000001
WSASAA0000024
XZHE_03_BR_00000001
YPEC_03_BR_00000001
YRIC_03_BR_00000001
ZBAR_03_BR_00000001
ENDING BATES
TCHE_03_BR_00010458
TCHE-BR01119716
TFUL-BR00007008
TLON-BR00000005
UBSSAA0000218
UKMSLLBE00006476
UKMSLLBE00006056
UKMSLLDI00002385
UKMSLLES00015421
UKMSLLWA00004397
UKSKO00000944
VHEN_03_BR_00000007
WACSAA0000637
WFCSAA0000107
WHIT0006148
WHUI_02_BR_00000003
WHUI-BR00025375
WILL0000335
WILM0009824
WJAC_02_BR_00000062
WJAC_03_BR_00000001
WJAC-BR00000331
WNA_03_BR_00001700
WSASAA0000082
XZHE_03_BR_00004965
YPEC_03_BR_00005631
YRIC_03_BR_00000005
ZBAR_03_BR_00001054
SQL QUERIES
2033
2034
2035
2036
2037
Microsoft SQL Server Query File: Complaints Analysis MASTER_Backdated_Trades_08252011.sql
Microsoft SQL Server Query File: Complaints Analysis MASTER_Holiday_Trades_08252011.sql
Microsoft SQL Server Query File: Complaints Analysis MASTER_OptionsAnalysis_ALL_08252011.sql
Microsoft SQL Server Query File: Complaints Analysis MASTER_Out_of_Range_Trades_08252011.sql
Microsoft SQL Server Query File: Complaints Analysis MASTER_Weekend_Trades_08252011.sql
Page 50 of 50
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APPENDIX C
VALUATION REPORT
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House 5 Common
Equity Valuation
As of December 11, 2002
November 22, 2011
Case 1:11-cv-03605-JSR Document 107-2
Contents
Filed 01/26/12 Page 121 of 179
01
Executive Summary
3
02
Defined Terms
7
03
Sources of Information
11
04
House 5 Description and Developments
13
05
Contemporaneous 2002 Industry Developments
17
06
General Economic Overview
21
07
Valuation Approaches
24
08
Selection of Discount Rate
Equity Cost of Capital
28
29
09
Income Approach
DCF Method
Free Cash Flows
33
34
37
10
Comparable Company Method
Market Approach
Application of the Comparable Company Method
49
50
50
11
Findings
Valuation Findings
56
57
12
Valuation Exhibits
58
13
Appendix
Comparable Transaction Method
59
60
November 22, 2011
2
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Expert Report of Bruce G. Dubinsky
Exhibit C
Section 01
Executive Summary
November 22, 2011
3
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Expert Report of Bruce G. Dubinsky
Exhibit C
Summary of Scope
The Fair Market Value of a 100 percent interest in the common equity of
the broker-dealer business (“House 5”) of Bernard L. Madoff Investment
Securities LLC (“BLMIS”), on a marketable, controlling interest basis, as of
December 11, 2002 (the “Valuation Date”) was determined.
Definition of Fair Market Value
For purposes of this Report, the definition of fair market value (“Fair Market
Value”) is the price at which property would change hands between a
willing buyer and a willing seller, neither being under any compulsion to
1
buy or to sell, and both having reasonable knowledge of relevant facts. In
estimating Fair Market Value, it is assumed House 5’s existing business is
ongoing.
Disclaimers and Concluding Remarks
Valuation reports may contain estimates of future financial performance,
based on reasonable expectations at a particular point in time but such
information, estimates, or opinions are not offered as predictions or as
assurances that a particular level of income or profit will be achieved, that
events will occur, or that a particular price will be offered or accepted.
Actual results achieved during the period covered by the prospective
financial analyses will vary from those described in this Report, and the
variations may be material.
The work performed did not include the performance of an audit, review, or
examination (as defined by the American Institute of Certified Public
Accountants) of any of the historical or prospective financial information
used, or other information obtained in the course of the investigation, and,
therefore, no opinion is expressed with regard to the same. Further, the
valuation did not include any investigation of the titles to, or any liens
against House 5 property.
1
Estate Tax Regs., Sec. 20.2031-1(b); Rev. Rul. 59-60, 1959-1 C.B. 237.
November 22, 2011
4
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Expert Report of Bruce G. Dubinsky
Exhibit C
2
Findings
Based on the analyses herein, the estimate of the Fair Market Value of 100
percent of the equity of House 5, on a marketable, controlling interest
3
basis, is $450 million, as of the Valuation Date. The following table
summarizes the findings:
Indicated Fair
Valuation Approach
Market Value
($ in millions)
Income Approach
Comparable Company Method
Concluded Fair Market Value (rounded)
$460
420
4
$450
Since the valuation conclusion in this report is based on the premise of
value that House 5 is a going concern, any evidence to the contrary would
have a significant negative impact on the valuation. The use of Fair
Market Value as a valuation standard is premised upon both participants to
the hypothetical transaction having full disclosure of all the relevant facts,
known or knowable as of the Valuation Date, for the valuation to be
reliable. The analysis included herein has been performed assuming that
the information presented in the regulatory financial reports is correct with
minimal adjustments required beyond the specific adjustments made and
outlined herein (see definition of Adjusted). Evidence exists which
indicates House 5 revenues were artificially enhanced via the transfer of
5
customer monies from House 17 which had the effect of significantly
overstating the reported revenues. Accordingly, adjustments have been
made to as-reported historical FOCUS report data to remove these
revenues. Further, since House 5 revenues were propped up by customer
monies from House 17, it calls into question House 5’s ability to fund its
2
A calculation of the implied value of the United Kingdom-based entity Madoff Securities
International Limited (“MSIL”) was performed by multiplying MSIL’s y/e 2002 book value of
$46.5 million by the implied House 5 EV/BV multiples of 1.5x and 1.4x, averaging the
implied values resulting in an implied value of $68.4 million. MSIL’s BV was converted from
GBP to USD using the spot exchange rate as of December 11, 2002 of 1.5699 USD/GBP.
3
Since the valuation conclusion in this report is based on the premise of value that House 5
is a going concern, any evidence to the contrary would have a significant negative impact
on the valuation. Further, there is evidence that House 5 was artificially supported by
millions of dollars of Other People’s Money from the IA Business.
4
Id.
5
House 17 is the investment advisory business of BLMIS. During the investigation it was
discovered that a significant percentage of the revenue accounted for in the FOCUS
reports for House 5 was derived from Other People’s Money being transferred to House 5
via (1) House 17 directly, (2) House 17 to a third party brokerage account, or (3) House 17
to MSIL (See Table 10 of the Dubinsky expert report dated November 22, 2011 for more
details).
November 22, 2011
5
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Expert Report of Bruce G. Dubinsky
Exhibit C
own operations, and, therefore, calls into question its ability to operate as a
going concern.
November 22, 2011
6
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Exhibit C
Section 02
Defined Terms
November 22, 2011
7
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Expert Report of Bruce G. Dubinsky
Exhibit C
Defined Terms
The following is a non-exhaustive list of defined terms used throughout this
Report:
FOCUS report data – refers to the Financial and Operational Combined
Uniform Single (“FOCUS”) electronic data files including historical quarterly
financial statements for BLMIS from 1Q 1983 through 3Q 2008.
Adjusted – the word “Adjusted,” where capitalized in this Report, refers to
adjustments made to the as-reported FOCUS report data for 2000, 2001
and 2002. These adjustments were made to eliminate from revenues
transfers of money from House 17, as shown in Table 10 of the Dubinsky
expert report dated November 22, 2011, which did not support a legitimate
business purpose. Additionally, the FOCUS report data was adjusted to
eliminate employee expenses that were included for House 17 employees
and any resulting adjustments that are required to the assets, liabilities,
and equity accounts due to the changes in revenues and expenses.
Leverage Ratio – refers to the ratio of total assets to total equity on a book
value basis.
Cash Ratio – refers to the ratio of non-restricted cash to total assets.
Trading Assets – refers to the securities and spot commodities owned at
market value line item from FOCUS report data.
Trading Liabilities – refers to the securities sold, not yet repurchased at
market value line item from FOCUS report data.
Short Ratio – refers to the ratio of Trading Liabilities, divided by Trading
Assets on a book value basis.
Trading Revenue – refers to the sum of the following FOCUS report data
line items:

Gains or losses on firm securities trading accounts – from market
making in over-the-counter equity securities;

Gains or losses on firm securities trading accounts – from market
making in options on a national securities exchange;

Gains or losses on firm securities trading accounts – from trading
in debt securities;

Gains or losses on firm securities trading accounts – from all other
trading; and

Other revenue related to securities business.
November 22, 2011
8
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Expert Report of Bruce G. Dubinsky
Exhibit C
Turnover – refers, in this Report, to the ratio of Total Revenue, divided by
Trading Assets, with Trading Assets stated on a book value basis.
Sustainable Growth Rate – refers, in this Report, to the ratio of return on
assets, divided by the Short Ratio, and represents the implied rate of
growth in Trading Assets that could be sustained by the operations, as
forecast
Pre-Compensation Operating Expense – refers to all operating expense,
other than compensation expenses.
Pre-Comp Operating Income – refers to Total Revenue, minus PreCompensation Operating Expenses.
Comp Expense – refers to clerical and administrative employees'
expenses line item from FOCUS report data.
Payout Ratio – refers to the ratio of Comp Expense to Pre-Compensation
Operating Income.
Debt – refers to bank loans payable line item from FOCUS report data for
historical periods and the debt amount in pro forma 2002 and the
Projection Period, stated on a book value basis.
Equity Value (“EV”) – refers to the market value of a company’s common
equity, calculated as the share price as of the day prior to the Valuation
Date, times the share count on the cover of the most recently-filed SEC
filing on Form 10-Q as of the Valuation Date, times a factor of 140 percent,
6
to reflect an estimated control premium and valuation on a controlling
interest basis.
Book Value (“BV”) – refers to the balance sheet carrying amount of
common equity as of the Valuation Date.
Tangible Book Value (“TBV”) – refers to the balance sheet carrying amount
of common equity, less intangible assets, as of the Valuation Date.
Revenue – refers to LTM revenue available as of the Valuation Date.
Cash Earnings – refers to LTM net income, plus LTM amortization
expense as of the Valuation Date.
6
The premium paid above the market price of the target company’s stock prior to a
transaction’s announcement date will generally include consideration for the value of
control and may also include synergy value in a controlling interest transaction.
November 22, 2011
9
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Expert Report of Bruce G. Dubinsky
Exhibit C
Return on Equity (“ROE”) – refers to the calculation of LTM net income,
divided by BV.
Concluded Comparable Companies – refers to Knight Capital Group, Inc.
and LaBranche & Co. Inc.
November 22, 2011
10
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Expert Report of Bruce G. Dubinsky
Exhibit C
Section 03
Sources of Information
November 22, 2011
11
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Expert Report of Bruce G. Dubinsky
Exhibit C
In the course of the analyses, financial and other information, made
available to or requested in electronic format from Baker as well as
information available in the public domain or purchased databases was
considered. The following is a partial listing of the information sources
which were considered in the analysis:

Audited Financial Statements of BLMIS;

FOCUS Reports;

FOCUS report data;

House 17 revenue calculations (see Table 10 in the Dubinsky
expert report dated November 22, 2011);

Salomon Smith Barney Equity Research, Brokers & Asset
Managers, February 21, 2002 (the “Salomon Report”);

Deutsche Bank Equity Research, Brokers & Asset Managers,
August 2002 (the “Deutsche Bank Report”);

U.S. Securities Exchange Commission, Regulatory and
Compliance Issues in a Decimalized Environment, June 8, 2001;

U.S. Securities Exchange Commission, Testimony Concerning the
Effects of Decimalization on the Securities Markets, May 24, 2001;

Standard & Poor’s, Industry Survey: Investment Services, October
31, 2002 (the “S&P Report”);

Securities Industry Association Research Reports, Bottom
Formation: Securities Industry Update, November 29, 2002;

2002 Mergerstat Yearbook;

The Capital IQ, SNL Financial (“SNL”), Federal Reserve and
Bloomberg on-line financial databases; and

Securities and Exchange Commission (“SEC”) filings, including
annual reports on Form 10-K, and quarterly reports on Form 10-Q.
November 22, 2011
12
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Expert Report of Bruce G. Dubinsky
Exhibit C
Section 04
House 5 Description
and Developments
November 22, 2011
13
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Expert Report of Bruce G. Dubinsky
Exhibit C
7
House 5 Description and Developments
House 5 operated as a securities broker-dealer registered with the U.S.
Securities and Exchange Commission in the United States. It provided
executions for broker-dealers, banks, and financial institutions, and was a
member of the National Association of Securities Dealers, Inc. House 5
commenced operations in 1960 and was headquartered in New York, NY.
House 5 was an international market maker. The firm provided executions
for broker-dealers, banks, and financial institutions since its inception.
House 5’s customers included securities firms and banks. The firm was a
market maker in S&P 500 stocks, US convertible bonds, preferred stocks,
warrants, units, and rights. As-reported FOCUS report data indicated that
market making generated approximately 45 percent of revenue in 2001
and 35 percent of revenue in 2002.
In addition to market making, House 5 acted as a proprietary trader on its
own account. According to as-reported FOCUS report data, proprietary
trading generated approximately 48 percent of revenue in 2001 and 59
percent in 2002.
Other revenue generated approximately 7 percent of revenue in 2001 and
6 percent of revenue in 2002.
8
Recent Financial Overview
For purpose of this Report, unless otherwise noted, all financial information
is presented as of and for the year ending (“y/e”) December 31, based on
FOCUS report data.
Based on the unadjusted FOCUS reports, which are known to be incorrect,
House 5’s BV at the y/e 2002 was $440 million, up from $413 million at the
y/e 2001, representing growth due to earnings. Net capital information
was made available as of the end of the fiscal quarters, and is presented
below based on net capital at the fiscal year ended (“fye”) October 31. Net
capital at fye 2002 was $351 million, or 80 percent of BV. The following
table illustrates the amount of equity and net capital at fye 2001 and 2002:
7
All financial data referenced in this section is based on as-reported FOCUS report data,
and, therefore, does not reflect any adjustments to remove the historical impact of House
17 revenue.
8
Since the valuation conclusion in this report is based on the premise of value that House 5
is a going concern, any evidence to the contrary would have a significant negative impact
on the valuation. Further, there is evidence that House 5 was artificially supported by
millions of dollars of Other People’s Money from the IA Business.
November 22, 2011
14
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Expert Report of Bruce G. Dubinsky
Exhibit C
Equity Type
9
Total Ownership Equity
Net Capital
Net Capital Margin (%)
FYE October 31,
2001
2002
($ in millions)
$400
311
77.7%
$438
351
80.1%
Change
(%)
9.5
12.8
2.4
Total Trading Revenue for the y/e 2002 approximated $106 million, a
decline of 37 percent from the prior year, due to declines in all revenue
types as indicated in the following table:
Revenue
10
y/e 2001
y/e 2002
($ in millions)
Market Making
Proprietary Trading
Other Revenue
Trading Revenue
Change
(%)
$ 76
81
12
$ 36
63
6
(52)
(22)
(48)
$169
$106
(37)
Non-Compensation Operating Expenses, including commissions, clearing
fees, communications, occupancy costs, regulatory fees and other
expenses related to trading on exchanges, equated to 41 percent and 53
percent of Trading Revenue for the y/e 2001 and 2002, respectively. The
same measure averaged 49 percent of Trading Revenue for the ten years
ended 2002.
Comp Expense equated to a 53 percent and 46 percent Payout Ratio for
the y/e 2001 and 2002, respectively. The Payout Ratio averaged 38
percent over the ten years ended 2002.
Profit after tax was 17 percent and 16 percent for the y/e 2001 and 2002,
respectively. While House 5 had always operated as a pass-through entity
for income tax purposes, for purposes of this Report, income taxes were
imputed, consistent with valuation approaches as of the Valuation Date, for
each year presented.
As a result of the improper use of Other People’s Money, the following
adjustments are required to recast the above FOCUS report financial
information.
9
Since the valuation conclusion in this report is based on the premise of value that House 5
is a going concern, any evidence to the contrary would have a significant negative impact
on the valuation. Further, there is evidence that House 5 was artificially supported by
millions of dollars of Other People’s Money from the IA Business.
10
Id.
November 22, 2011
15
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Expert Report of Bruce G. Dubinsky
Exhibit C
11
Adjustment
y/e 2000
y/e 2001
Total
($ in millions)
House 17 Revenue
(76)
(72)
(148)
House 17 Expenses
Comp Expense
Occupancy
(7)
(1)
(8)
(1)
(15)
(1)
(68)
(64)
(132)
Pretax Income
As-Reported
y/e 2001
Adjustments
Adjusted
($ in millions)
Cash
Trading Assets
Other Assets
141
428
214
(51)
(137)
(63)
91
291
151
Total Assets
783
(251)
533
Debt
Trading Liabilities
Other Liabilities
Total Liabilities
329
42
370
(105)
(13)
(118)
224
28
252
Book Value of Equity
Total Liabilities and Equity
413
783
(132)
(251)
281
533
11
Since the valuation conclusion in this report is based on the premise of value that House 5
is a going concern, any evidence to the contrary would have a significant negative impact
on the valuation. Further, there is evidence that House 5 was artificially supported by
millions of dollars of Other People’s Money from the IA Business.
November 22, 2011
16
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Expert Report of Bruce G. Dubinsky
Exhibit C
Section 05
Contemporaneous
2002 Industry
Developments
November 22, 2011
17
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Expert Report of Bruce G. Dubinsky
Exhibit C
12
Current Industry Developments
Market spreads in U.S. equity trading decreased in the years leading up to
2002. Average relative spreads on the National Association of Securities
Dealers Automated Quotation or “NASDAQ” exchange decreased
dramatically due to overall over-the-counter (“OTC”) trading spreads
decreasing by 90 percent over past ten years ending June 2002. The New
York Stock Exchange (“NYSE”) also saw trading spreads compressing,
narrowing 37 percent between December 2000 and March 2001. The
compression of trading spreads increased capital intensity for brokerdealers, resulting in consolidation in registered broker-dealer industry,
leaving the 25 largest NYSE firms controlling 79 percent of capital and 75
percent of revenue as of December 1999.
Both exchanges not only saw market spreads decrease, but quote sizes as
well. Quote sizes decreased 60 percent and 68 percent on the NYSE and
NASDAQ, respectively as of May 2001. Smaller trades at smaller spreads
led to significantly less revenue per trade and lower profitability. However,
this was partially offset by an increase in trading frequency.
Most of these trends can be explained by the decimalization of the NYSE,
which began in 2000.
Trading volume increases, pricing spread
decreases, increased competitiveness and the elimination of price
disparities with international markets were also attributed to this
conversion.
Trading volume increased dramatically in the years approaching the
Valuation Date. From 1997 to 1999, daily on-line trading volume increased
400 percent overall, and increased from 7 percent to 16 percent on all
equity trades. Despite low spreads and quote sizes, industry revenue was
estimated to grow by 5 percent in 2003 due to the large increase in trading
volume. A key reason was primarily due to the internet, allowing more
people to invest and trade daily. Furthermore, the capabilities of the
internet caused elimination of informational advantages of professional
money managers.
In the broker-dealer industry, mark to market accounting of assets made
and continues to make EV/BV multiple valuations the norm. Earnings are
12
Adapted from various sources: Salomon Smith Barney Equity Research, Brokers & Asset
Manager, February 21, 2002; Deutsche Bank Equity Research, Brokers & Asset Managers,
August 2002; U.S. Securities Exchange Commission, Regulatory and Compliance Issues
in a Decimalized Environment, June 8, 2001; U.S. Securities Exchange Commission,
Testimony Concerning the Effects of Decimalization on the Securities Markets, May 24,
2011; Standard & Poor’s, Industry Survey: Investment Services, October 31, 2002; and
Securities Industry Association Research Reports, Bottom Formation: Securities Industry
Update, November 29, 2002.
November 22, 2011
18
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Expert Report of Bruce G. Dubinsky
Exhibit C
typically volatile, making price-to-earnings valuation ratios less reliable. As
of the date of the Deutsche Bank Report, EV/BV valuations were in line
with the historical range 1.5x - 2.5x, with the group trading, on average, at
13
1.95x as of the date of the source material referenced above.
14
Financial Market Commentary
As of the Valuation Date, year-to-date stock market indicators were
broadly negative with the Dow Jones Industrial Average (“DJIA”), S&P 500,
and NASDAQ 100 (“NDX”) down 14 percent, 21 percent, and 37 percent,
respectively. Furthermore, the VIX volatility index was up 12 percent yearover-year. Compared to the 52-week high, the DJIA was down 19 percent,
the S&P 500 was down 23 percent, and the NDX was down 38 percent.
Compared to the 52-week low, the DJIA was up 18 percent, the S&P 500
was up 16 percent, and the NDX was up 65 percent.
Third quarter 2002 domestic securities industry profits were more than
slashed in half to $0.9 billion from the second quarter’s $2 billion, which
was already down one-third from the first quarter’s $3 billion. Fourth
quarter profits were estimated at $2.0 billion for a full-year 2002 total of
$7.9 billion, a seven-year low. While all revenue lines were down across
the board in 3Q 2000 versus 2Q 2000, so too were every expense line,
except for interest and floor costs. Securities industry layoffs had reached
10 percent of the workforce, worse than in the post-1987 environment, and
in aggregate terms, at least 75,100 in the United States alone, double the
post-1987 job losses.
Most, if not all, securities firms were focusing more intensely on core
competencies and getting back to Wall Street’s business basics –
improving customer satisfactions and operational efficiency – in hopes of
ensuring an eventual long-term recovery of both margins and ROEs. With
hopes of another major bull market unlikely before late 2003 or 2004, firms
were expected to continue to reduce controllable expenses, at least
sufficiently to offset largely non-controllable items, such as benefit costs
per employee, which were still rising at double-digit annual rates.
One positive trend that emerged in 2002 was the end of the decades-long
decline in average commission revenue earned by securities firms on each
“ticket”. Average per-ticket commissions flattened out in the third quarter
13
The “group” referenced in the Deutsche Bank Report refers to the Independent Brokers
(Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley) and
the trading multiples were calculated using stock price data as of August 19, 2002 and
financial metrics as of 2Q 2002.
14
Adapted from Securities Industry Association Research Reports, Bottom Formation:
Securities Industry Update, November 29, 2002.
November 22, 2011
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Exhibit C
as the industry adjusted to the advent of decimal pricing and of
compensation based on spreads.
Deep discounting practices also
subsided, allowing some restoration of “pricing power”.
Another positive trend was higher clearing revenues, reflecting higher fees
charged on still strong volume in secondary markets. A third trend, was
higher fees earned for financial advisory services provided to customers
engaging in corporate restructuring, mergers and acquisitions and
leverage buyouts, all types of activity that were expected to rise as
economic activity slowed and uncertainty remained high in 4Q 2002.
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Exhibit C
Section 06
General Economic
Overview
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Exhibit C
15
Introduction
As part of the analysis, consideration was given to the general economic
outlook as of the Valuation Date and its potential impact on House 5. An
assessment of the general economy can often identify underlying causes
for fluctuations in the financial and operating performance of a company.
This overview of the general economic outlook is based on an examination
of various economic analyses and the consensus forecasts of Blue Chip
Economic Indicators (the “Consensus”).
Economic Growth
Following another month of discouraging reports, Consensus forecasts of
U.S. economic growth for the final quarter of 2002 and for 2003 declined.
The forecast annual real gross domestic product (“GDP”) growth dropped
back to 2.3 percent for 2002, losing the 0.1 of a percentage point gained
last month, and forecasts for 2003 were lowered another 0.2 of a
percentage point to 2.8 percent. The Consensus estimates that real GDP
growth in Q3 was 3.1 percent, based on strong truck and vehicle sales;
however, this was half a percentage point below the prior month’s
estimates. The forecast for growth in Q4 fell even further to 1.6 percent,
down 0.6 of a percentage point from last month’s numbers, while
expectations for Q1 of 2003 dropped from 3.4 percent in September to 2.7
percent in November 2002. The only forecast left unchanged from the
prior month was for real GDP growth in Q2 of 2003, remaining at 3.3
percent. Current-dollar (nominal) GDP expectations slipped to 3.5 percent
in 2002 and to 4.5 percent in 2003, compared to 2.6 percent in 2001.
A significant decline in vehicle sales in September led to the first drop in
personal consumption expenditures (“PCE”) since November 2001, and
car and light truck sales continued to decline slightly in October. In
addition, reports indicated that the manufacturing sector was weakening at
the end of Q3. In September, total industrial production fell 0.1 percent
and manufacturing output dropped 0.3 percent, which led to a decline in
capacity utilization for the second straight month. Many sectors at the time
had a large amount of excess capacity, which led to a poor outlook for
growth in capital spending.
In October, the Institute of Supply
Management’s index of activity in the factory sector fell to 48.5, the lowest
level of the year. The average workweek, manufacturing workweek, and
aggregate hours worked index also declined in October.
15
The General Economic Overview section is based off resources including: Blue Chip
Economic Indicators, November 10, 2002; Standard & Poor’s Trends & Projections,
November 14, 2002; and Federal Reserve Statistical Release, H.10, Foreign Exchange
Rates, November 18, 2002.
November 22, 2011
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Exhibit C
Consumption and Investment
Based on strong vehicle sales during the first two months of Q3, the
Consensus maintained its estimate of PCE growth in the third quarter at a
rate of 4.2 percent, following the slight growth of 1.8 percent in Q2. For
Q4, however, forecasts fell to just 1.1 percent, the weakest quarterly
performance since the early 1990s. For 2002 as a whole, the panel
expected PCE to grow 3.1 percent, whereas the forecast for calendar year
2003 declined to 2.6 percent.
The Consensus predicted new housing starts would total 1.67 million units
in 2002 and 1.61 million units in 2003, compared to 1.60 million units in
2001. Total vehicle sales were expected to number 16.8 million units in
2002 and 16.5 million units in 2003, compared to 17.5 million units in 2001.
Nonresidential investment was expected to decline by 5.5 percent in 2002
and to grow 4.0 percent in 2003 after declining 5.2 percent during 2001.
Inflation and Unemployment
The expectation of slower than predicted GDP growth in 2003 was also
reflected in Consensus forecasts for inflation and unemployment. The
Consensus maintained its prediction of an increase in the Consumer Price
Index (“CPI”) of 1.6 percent in 2002, but lowered its prediction further to
2.2 percent in 2003, following a high of 2.5 percent in July. The chainedGDP price index, meanwhile, was expected to rise 1.2 percent in 2002 and
1.6 percent in 2003, after increasing 2.4 percent in 2001.
Unemployment was expected to peak in Q2 of 2003 and reach an average
of 5.8 percent during both 2002 and 2003, compared to 4.8 percent in
2001.
Interest Rate Environment
On November 12, 2002, Fed funds were trading at 1.25 percent, threemonth T-bills at 1.19 percent, and ten-year T-notes at 3.85 percent, while
the dollar was trading at 120 yen and $1.01/euro. At its last meeting on
November 6, 2002, the Federal Open Market Committee (“FOMC”)
lowered the Fed funds rate to 1.25 percent and the discount rate to 0.75
percent.
November 22, 2011
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Exhibit C
Section 07
Valuation Approaches
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Exhibit C
In estimating the Fair Market Value of a 100 percent interest in the
common equity of House 5, as of the Valuation Date, the Income Approach
and the Market Approach were considered.
Income Approach
The Income Approach is a valuation technique that provides an estimation
of the Fair Market Value of an asset or a business based on the cash flows
that an asset or a business can be expected to generate over its remaining
useful life. The Income Approach begins with an estimation of the annual
cash flows a hypothetical buyer would expect the subject asset or business
to generate over a discrete projection period. The estimated cash flows for
each of the years in the discrete projection period are then converted to
their present value equivalent using a rate of return appropriate for the risk
of achieving the projected cash flows. The present value of the estimated
cash flows are then added to the present value equivalent of the residual
value of the asset (if any) or the business at the end of the discrete
projection period to arrive at an estimate of Fair Market Value.
Market Approach
The Market Approach is a valuation technique that provides an estimation
of Fair Market Value based on market prices in actual transactions and on
asking prices for assets or businesses. The valuation process is a
comparison and correlation between the subject asset or business and
other similar assets or businesses. Considerations such as time and
condition of sale and terms of agreements are analyzed for comparable
assets or businesses and are adjusted to arrive at an estimation of the Fair
Market Value of the subject asset or business.
Comparable Company Method. The Comparable Company Method
indicates the Fair Market Value of a business by comparing it to publiclytraded companies in similar lines of business. The conditions and
prospects of companies in similar lines of business depend on common
factors such as overall demand for their products and services. An
analysis of the market multiples of companies engaged in similar
businesses yields insight into investor perceptions and, therefore, the
value of the subject company.
After identifying and selecting the guideline publicly-traded companies,
their business and financial profiles are analyzed for relative similarity.
Considerations for factors such as size, growth, profitability, risk, and
return on investment are also analyzed and compared to the comparable
businesses. Once these differences and similarities are assessed, the EV
multiples (i.e., EV / BV, EV / Cash Earnings and EV / Revenue) of the
publicly-traded companies are calculated. These EV multiples are then
applied to the subject company’s operating results, adjusted for special
November 22, 2011
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Exhibit C
and nonrecurring items, to estimate the Fair Market Value of the subject
company’s equity on a marketable, minority value. A control premium is
then applied to this value to calculate the indicated Fair Market Value of
the equity on a marketable, controlling basis.
Comparable Transaction Method. One variation of the Market Approach
includes estimating the Fair Market Value of a business based on
exchange prices in actual transactions and on asking prices for controlling
interests in public or private companies currently offered for sale. The
process essentially involves comparison and correlation of the subject
company with other similar companies. Adjustments for differences in
factors described earlier (i.e., size, growth, profitability, risk, and return on
investment) are also considered.
In selecting comparable transactions, several merger and acquisition
databases and financial publications are searched in which transactions
are disclosed to gather information about the prices paid for similar
businesses under similar circumstances. The acquisitions are relevant
indicators of an actual market participant’s perception of Fair Market Value,
and, therefore, are a useful valuation indicator. Based on a review of
selected financial databases of companies in the industry, transactions are
identified and selected.
In general, many transactions that would be relevant are either private, in
which case sufficient information is not usually made available to the
public, or deemed immaterial to the overall operations of larger companies
that are parties to the transaction. If the transaction is deemed immaterial,
the SEC does not require disclosure of information about the market
transaction.
The Income Approach and Market Approach are used as the methods to
estimate the Fair Market Value of a 100 percent interest in the common
equity of House 5, as explained below. While a number of publicly-traded
companies and market transactions involving companies providing
services with some similarity to those of House 5 were identified, ultimately
a set of two companies, referred to as the Concluded Comparable
Companies, were utilized in estimating the Fair Market Value of a 100
percent interest in the common equity of House 5, as of the Valuation Date
under the Market Approach. The Comparable Transactions Method under
the Market Approach was deemed to be of limited applicability, due mostly
to the target companies being more tilted toward retail brokerage activities
(whereas House 5 dealt exclusively with institutions in its market making
activities and had a significant portion of its Trading Revenue derived from
proprietary trading activities). As a result, the Comparable Transaction
November 22, 2011
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Exhibit C
Method was used to generally corroborate the results using the Income
Approach and Comparable Company Method.
Discount for Lack of Marketability
The holder of a non-marketable investment is subject to the risk that the
investment’s value will decline before the investment can be sold to
another investor in a private transaction. Conversely, the holder of an
investment that is identical but for the fact that there exists an active public
market is not subject to the same lack of marketability risk. Therefore, the
holder of the non-marketable investment will have a higher required rate of
return on the investment than the holder of the marketable investment.
Consequently, the holder of the non-marketable investment will generally
sell to the hypothetical willing buyer at a discount to the marketable
investment. The factors that affect the size of the discount for lack of
marketability fall into two general categories: (1) factors that affect the
duration of the holding period necessary to locate a buyer and negotiate a
sale, and (2) factors that affect the degree of risk faced per unit of time
during this holding period. Risk per unit of time is expressed as the
volatility of an investment’s total return (i.e., both dividends and capital
appreciation), or the propensity for an investment’s actual return to differ
from its expected return. Numerous factors are typically assessed in
analyzing an equity investment’s marketability.
November 22, 2011
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Exhibit C
Section 08
Selection of Discount
Rate
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Exhibit C
Equity Cost of
Capital
16
The equity cost of capital was calculated to be 16.5 percent (see Exhibit
2.C). This rate was applied to the equity cash flows expected to be
generated by House 5 over the projection period and the terminal value at
the end of the projection period to calculate the present value of both.
Generally, the selection of a rate of return applicable to the valuation of a
business is based on the required rates of return on the full complement of
capital securities, including debt, preferred and common equity capital.
Since House 5 and market participants are primarily financed with equity
capital, and because the leveraged business model projections consider
the financing cost on leverage directly in estimating net income after taxes,
the equity cost of capital is computed using the Capital Asset Pricing
Model (“CAPM”), as is described in more detail below.
CAPM
The rate of return on common equity capital was estimated using the
CAPM. CAPM has been empirically tested and is widely accepted for the
17
purpose of estimating a company’s required return on equity capital.
In
applying the CAPM, the rate of return on common equity is estimated as
the current or normalized risk-free rate of return on long-term U.S.
Government bonds as of the Valuation Date, plus a market risk premium
expected over the risk-free rate of return, multiplied by the “beta” for the
stock. Beta is defined as a risk measure that reflects the sensitivity of a
company’s stock price to the movements of the stock market as a whole.
Additional risk premiums, if applicable, may also be included in the
calculation of the required return on common equity using the CAPM
approach, such as a size-based premium and a company-specific risk
premium, as described below.
The CAPM rate of return on equity capital is calculated using the formula:
Ke
=
Rf + B * ERP + Ssp + Alpha
Ke
=
Rate of return on equity capital;
Rf
=
Risk free rate of return;
B
=
Beta or systematic risk for this type of equity investment;
ERP
=
Equity risk premium: The expected return on a broad portfolio of
stocks in the market (Rm) less the risk free rate (Rf);
where:
16
17
Since the valuation conclusion in this report is based on the premise of value that House 5
is a going concern, any evidence to the contrary would have a significant negative impact
on the valuation. Further, there is evidence that House 5 was artificially supported by
millions of dollars of Other People’s Money from the IA Business.
Investments, W.F.Sharpe, Prentice Hall: Englewood Cliffs, New Jersey (1985).
November 22, 2011
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Exhibit C
Ssp
=
The small company premium adjustment to the cost
of equity due to the size of the subject company;
Alpha
=
Adjustment to the cost of equity due to
characteristics specific to the subject company.
Risk Free Rate of Return
The selected risk-free rate of return was the long-term local bond yield-tomaturity as of market close on December 10, 2002. The projections for
House 5 were denominated in USD and thus the 20-year U.S. Treasury
Bond was selected. The yield on the 20-year Treasury bond was 5.02
percent as of the Valuation Date.
Beta
Beta is a statistical measure of the volatility of the price of a specific stock
relative to the movement of a general group. Generally, beta is considered
to be indicative of the market’s perception of the relative risk of the specific
stock. Practical application of the CAPM is dependent upon the ability to
identify publicly-traded companies that have similar risk characteristics as
the company, to derive a meaningful measure of beta that would apply to
the company.
Betas reported in public sources are typically “leveraged,” meaning that
they incorporate the added risk to a common equity investor due to the
leveraged capital structure of the company. To derive a beta applicable to
the equity investor in a business, the reported levered betas for publicly
traded companies considered as comparable to the business must first be
unlevered to estimate the beta risk to the equity investment as if 100
percent equity financed, and then re-levered at an assumed normalized
market participant amount of debt in the capital structure. The un-levering
and re-levering process is intended to normalize for any comparable
companies that might have a materially different capital structure, and,
therefore, levered beta, than that of the average comparable company.
The market participant unlevered beta of 1.46 was re-levered based on a
capital structure of 88 percent equity and 12 percent debt, consistent with
the weighted average capital structure of the concluded comparable
company set, resulting in a re-levered beta of 1.58.
Equity Risk Premium
Practical application of CAPM also relies on an estimate of the Equity Risk
Premium. Since the expectations of the average investor are not directly
observable, the Equity Risk Premium must be inferred using one of several
methods.
One approach is to use premiums that investors have
historically earned over and above the returns on long-term government
bonds. The premium obtained using the historical approach is sensitive to
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Exhibit C
the time period over which one calculates the average. Depending on the
time period chosen, the historical approach yields an average premium of
5 to 8 percent. Another approach is to incorporate expected rates of return
obtained from analysts who follow the stock market. Again, this approach
will lead to differing estimates depending upon the source
An Equity Risk Premium of 6 percent was applied, based on the Long18
19
Horizon Equity Risk Premium of 7.42 percent and adjusted 1.5 percent
for survivorship bias.
Premium for Small Size
The CAPM rate of return is usually adjusted by a premium, which reflects
the extra risk of an investment in a small company. This premium is
derived from historical differences in returns between small companies and
large companies, using data published by Morningstar. This adjustment is
deemed applicable because the analysis behind the estimation of the
Equity Risk Premium was based on large-capitalization stocks, and,
therefore, would provide an indication only of the Equity Risk Premium
applicable to an equity investment in a large capitalization stock. Since
House 5 would not be considered a large-capitalization stock if publicly
traded, a small stock premium was applied, based on the size of House 5,
20
th
of 1.94 percent.
This premium is based on the “8 decile” from a
21
commonly-referenced Ibbotson Associates study.
Alpha
The Alpha risk premium represents the additional return required by an
investor due to risks that are unique to House 5, which typically relate to
differences between House 5 and the comparable company set. In the
analysis, an alpha adjustment was not applied to House 5 because the
valuation methodology was applied to financial projections which were
assembled according to the assumption that a market participant buyer of
House 5 would increase the leverage of the company to a level that is
more consistent with that of the market participants as of the Valuation
Date. Therefore, the specific attributes of House 5 are replaced with those
of a market participant in the application of the Income Approach, and,
therefore, an Alpha premium was not applied.
18
Long-Horizon Equity Risk Premium based on the Market Total Return of the S&P 500
Index. Ibbotson Associates: Stocks, Bonds, Bills, & Inflation, 2002 Yearbook.
19
Copeland, Koller, and Murrin, 2000, Valuation: Measuring and Managing the Value of
Companies.
20
Since the valuation conclusion in this report is based on the premise of value that House 5
is a going concern, any evidence to the contrary would have a significant negative impact
on the valuation. Further, there is evidence that House 5 was artificially supported by
millions of dollars of Other People’s Money from the IA Business.
21
Ibbotson Associates: Stocks, Bonds, Bills, & Inflation, 2002 Yearbook.
November 22, 2011
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Exhibit C
Concluded Equity Cost of Capital
By substituting the appropriate factors in the CAPM as discussed above,
the common equity rate of return applicable to an investment in the equity
of House 5, as of the Valuation Date, was estimated to be approximately
22
16.5 percent, as summarized below:
22
CAPM Input
Input
Risk-free rate (Rf)
Beta (B)
Equity Risk Premium (ERP)
Small Stock Premium (Ssp)
Alpha (A)
Equity Cost of Capital (rounded)
5.02%
1.58
6.00%
1.94%
0.00%
16.5%
Since the valuation conclusion in this report is based on the premise of value that House 5
is a going concern, any evidence to the contrary would have a significant negative impact
on the valuation. Further, there is evidence that House 5 was artificially supported by
millions of dollars of Other People’s Money from the IA Business.
November 22, 2011
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Exhibit C
Section 09
Income Approach
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Exhibit C
The future cash flows of House 5 were estimated to assist with the
calculation of the Fair Market Value of a 100 percent interest in the
common equity of House 5 under the DCF Method.
DCF Method
Application of the DCF Method
Forecast Financial Information (“FFI”) was derived based on understanding
the nature of the business of House 5, the reported historical financial
performance as reported in the FOCUS reports, Adjusted FOCUS report
data, and the attributes of the market participants. FFI was estimated for
the calendar years ending December 31, 2003 through 2007 (the
“Projection Period”).
The following tables illustrate the adjustments made to the as-reported
financial data to eliminate House 17 revenues, certain employee and other
costs associated with House 17 and the resulting effects on the assets,
liabilities and equity accounts:
23
Adjustment
y/e 2000
y/e 2001
Total
($ in millions)
House 17 Revenue
(76)
(72)
(148)
House 17 Expenses
Comp Expense
Occupancy
(7)
(1)
(8)
(1)
(15)
(1)
(68)
(64)
(132)
Pretax Income
As-Reported
y/e 2001
Adjustments
Adjusted
($ in millions)
Cash
Trading Assets
Other Assets
141
428
214
(51)
(137)
(63)
91
291
151
Total Assets
783
(251)
533
Debt
Trading Liabilities
Other Liabilities
Total Liabilities
329
42
370
(105)
(13)
(118)
224
28
252
Book Value of Equity
Total Liabilities and Equity
413
783
(132)
(251)
281
533
23
Since the valuation conclusion in this report is based on the premise of value that House 5
is a going concern, any evidence to the contrary would have a significant negative impact
on the valuation. Further, there is evidence that House 5 was artificially supported by
millions of dollars of Other People’s Money from the IA Business.
November 22, 2011
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Exhibit C
Consequently, FFI was based on the (i) Adjusted FOCUS report data, and
(ii) an assumed re-capitalization of the Adjusted FOCUS report data based
on market participant assumptions. The following steps were generally
employed to derive Adjusted FOCUS report data, and estimate quarterly
financial statements on a pro forma basis for the y/e 2002:
1) Subtracted House 17 revenues of $75.6 million, $72.4 million, and
$60.5 million for the y/e 2000, 2001, and 2002, respectively from
the as-reported Total Revenue;
2) Made historical expense adjustments to remove House 17-related
expenses from as-reported Pre-Compensation Operating
Expenses and Comp Expense;
3) Re-calculated the y/e 2000, 2001, and 2002 BV based on the
adjustments to back out House 17 revenue and expenses;
4) Computed Adjusted Turnover on a quarterly basis for the y/e 2002
(see Exhibit 2.B);
5) Re-calculated as-reported assets and liabilities for the y/e 2000,
2001 and 2002 based on as-reported common-size ratios of BV,
multiplied by the Adjusted BV;
6) Re-leveraged the business as of the y/e 2001, based on
comparable company operating levels using a Leverage Ratio of
3.17 and a Cash Ratio of 8 percent;
7) Prepared pro forma 2002 quarterly financial statements as if the
business had been operated according to market participant
assumptions for the y/e 2002, and, excluding the estimable impact
of removing House 17 revenue and expenses for the y/e 2000,
2001 and 2002;
8) Prepared pro forma Total Revenues that would be have been
24
achieved by House 5 during 2002 by applying Adjusted Turnover
to the pro forma level of Trading Assets;
9) Computed average historical Company margins and Comp
Expense achieved during periods when House 5’s Leverage Ratio
was in-line with current market participant levels for application to
pro forma revenue streams;
10) Calculated pro forma earnings before interest and taxes (“EBIT”)
based on the above assumptions;
11) Computed interest expense related to incremental debt used to
leverage the business to market participant levels, and subtracted
24
Adjusted Turnover as calculated in Exhibit 2.B.
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Exhibit C
forecast interest expense to arrive at earnings before taxes
(“EBT”);
12) Calculated income taxes based on effective tax rates of the
Concluded Comparable Companies and subtracted those taxes
from EBT to arrive at after tax income;
13) Used pro forma quarterly after tax income to calculate the increase
in Trading Assets and Trading Liabilities that would be consistent
with the operations;
14) Calculated end of quarter balance sheets based on
aforementioned growth in Trading Assets and Trading Liabilities
and commensurate growth in other assets and liabilities; and
15) Summed the quarterly income statements to estimate a pro forma
income statement for the y/e 2002, which also forms the basis for
LTM financials applied in the Market Approach.
Following the estimation of pro forma y/e 2002 financial statements, the
following procedures were used to arrive at FFI for the Projection Period
and to estimate the Fair Market Value of a 100 percent interest in the
common equity of House 5 under the DCF Method:
16) Forecast Trading Asset growth for the Projection Period based on
third-party research articles and reports, and also based on the
Sustainable Growth Rate;
17) Estimated Total Revenue by applying Adjusted Turnover to
average Trading Assets during each forecast year;
18) Computed forecast Pre-Compensation Operating Expense levels
by growing expense line items either at the rate of growth in
Trading Assets or the rate of growth due to inflation, or by applying
the historical average expense ratio relative to Total Revenue, and
subtracted the Pre-Compensation Operating Expense from Total
Revenue to calculate Pre-Comp Operating Income;
25
19) Forecast Comp Expense based on the historical average Payout
ratio of 33 percent, which is below-average compared to the
Payout ratio of comparable companies, and subtracted Comp
Expense to calculate EBIT;
25
Historical average expense ratio was calculated as the average ratio during historical years
where the Leverage Ratio ranged from 3.0 to 4.0.
November 22, 2011
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Expert Report of Bruce G. Dubinsky
Exhibit C
20) Calculated interest expense based on the average forecast Debt
26
balance, times an implied interest rate of 3.75 percent, and
subtracted interest expense from EBIT to calculate EBT;
21) Calculated income taxes based on effective tax rates of the
Concluded Comparable Companies and subtracted those taxes
from EBT to arrive at after tax income;
22) Calculated operating cash flow by summing after tax income with
the net investment in non-cash assets and non-debt liabilities;
23) Calculated annual free cash flows to equity generated by House 5
during the Projection Period based on the assumption that Debt
would remain at the y/e 2002 pro forma levels in all future periods;
24) Annual free cash flow to equity, if positive, was assumed to be
distributed at the end of the calendar year and was discounted
accordingly at the equity cost of capital of 16.5 percent and
summed to arrive at the present value of free cash flows during the
Projection Period;
25) Estimated the terminal value of the business beyond the Projection
Period based on the application of an EV / BV multiple as of the
December 31, 2007; and
26) Combined the present values of the aforementioned Projection
Period cash flows, and the terminal value.
Free Cash
Flows
27
Recapitalization
Based on a comparison to market participants, House 5 was operating at a
below-average Leverage Ratio. For purposes of this analysis, it was
presumed that House 5’s business was otherwise run in a similar manner
to the market participants in terms of inter-period leverage and balance
sheet common size metrics. The calculated Leverage Ratio for House 5
as of y/e 2002 was 1.55, as compared to a weighted average ratio of 3.17
for the Concluded Comparable Companies. Additionally, House 5’s
28
Adjusted non-restricted cash balance at y/e 2002 was $106.9 million, or a
26
Calculated as Prime Rate, minus 0.50 percent, as of the Valuation Date, which is
consistent with the implied historical average pricing of House 5’s Debt relative to the
prevailing Prime Rate.
27
The calculated weighted average Leverage Ratio and Cash Ratio are based on results of
the Concluded Comparable Companies, as well as three other similar, but significantly
smaller companies, which were excluded from the Concluded Comparable Companies due
to size.
28
Since the valuation conclusion in this report is based on the premise of value that House 5
is a going concern, any evidence to the contrary would have a significant negative impact
on the valuation. Further, there is evidence that House 5 was artificially supported by
millions of dollars of Other People’s Money from the IA Business.
November 22, 2011
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Expert Report of Bruce G. Dubinsky
Exhibit C
Cash Ratio of 27 percent (vs. 8 percent for the Concluded Comparable
Companies) as of the Valuation Date. The following charts illustrate that
House 5 operated with a higher Leverage Ratio in the past and that the
Concluded Comparable Companies, as of the Valuation Date, operated
with a higher Leverage Ratio than that of House 5:
House 5 Leverage Ratio
4.5x
4.0x
3.5x
3.0x
2.5x
2.0x
1.5x
1.0x
0.5x
0.0x
1991
(a)
29
1992
1993
1994
1995
1996
1997
1998
1999
2000 (a)
2001 (a)
2002 (a)
Adjusted, as defined in this Report.29
Since the valuation conclusion in this report is based on the premise of value that House 5
is a going concern, any evidence to the contrary would have a significant negative impact
on the valuation. Further, there is evidence that House 5 was artificially supported by
millions of dollars of Other People’s Money from the IA Business.
November 22, 2011
38
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Expert Report of Bruce G. Dubinsky
Exhibit C
LTM Average Leverage Ratio: House 5 vs. Concluded Comparable Companies
4.5x
4.0x
3.5x
3.0x
2.5x
LaBranche
Knight Capital
2.0x
House5
1.5x
1.0x
0.5x
0.0x
4Q98
(a)
1Q99
2Q99
3Q99
4Q99
1Q00
(a)
2Q00
(a)
3Q00
(a)
4Q00
(a)
1Q01
(a)
2Q01
(a)
3Q01
(a)
4Q01
(a)
1Q02
(a)
2Q02
(a)
3Q02
(a)
Adjusted, as defined in this Report.30
31
As seen in the above chart, as recently as 1998, House 5 had operated
with a Leverage Ratio in excess of the Concluded Comparable
Companies, which suggests that House 5 could operate at the Concluded
Comparable Companies’ average Leverage Ratio as of the Valuation Date.
The following chart illustrates the historical Cash Ratio of House 5, based
on as-reported FOCUS report data through 1999 and based on Adjusted
FOCUS report data thereafter:
30
31
Since the valuation conclusion in this report is based on the premise of value that House 5
is a going concern, any evidence to the contrary would have a significant negative impact
on the valuation. Further, there is evidence that House 5 was artificially supported by
millions of dollars of Other People’s Money from the IA Business.
Charts were compiled using data from Capital IQ and SEC filings for LaBranche and Knight
Capital, and using as-reported FOCUS report data.
November 22, 2011
39
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Expert Report of Bruce G. Dubinsky
Exhibit C
House 5 Cash Ratio
30%
25%
20%
15%
10%
5%
0%
1991
(a)
1992
1993
1994
1995
1996
1997
1998
1999
2000 (a)
2001 (a)
2002 (a)
Adjusted, as defined in this Report.32
The above chart illustrates that the Cash Ratio was materially above
historical levels, which suggests a lower level of investment relative to
House 5 historical operations. The excessive Cash Ratio was interpreted
to indicate the business held excess cash as of the Valuation Date.
Based on the presumption that a market participant buyer would
recapitalize House 5 and operate it with a Leverage Ratio that is more
consistent with industry norms, as indicated by the Concluded Comparable
Companies, the Adjusted financials for the y/e 2002 were re-cast as if
House 5 operated with a 3.17 Leverage Ratio and an 8 percent Cash Ratio
at the beginning of 2002. Leverage was re-cast based on the premise that
the Adjusted BV as of the y/e 2001 of $280.9 million could support $890.4
million of total assets, an increase of approximately $357.7 million versus
Adjusted total assets. An approximate $377.1 million increase in Trading
Assets would be funded by $235.3 million of Debt, $122.4 million of
Trading Liabilities, and $19.4 million of excess cash.
32
Since the valuation conclusion in this report is based on the premise of value that House 5
is a going concern, any evidence to the contrary would have a significant negative impact
on the valuation. Further, there is evidence that House 5 was artificially supported by
millions of dollars of Other People’s Money from the IA Business.
November 22, 2011
40
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Expert Report of Bruce G. Dubinsky
Exhibit C
33
Balance Sheet Item
y/e 2001
Adjusted
Pro Forma
Change
($ in millions)
Cash
Trading Assets
Trading Liabilities
Debt
90.6
291.3
223.5
0
71.2
668.4
345.9
235.3
-19.4
+377.1
+122.4
+235.3
Total Revenue
Pro forma 2002 Total Revenue of approximately $99.1 million was
calculated based on the pro forma balance sheet items illustrated in the
above tables; the Total Revenue was forecast on a quarterly basis, based
on Adjusted Turnover being multiplied by the leveraged Trading Asset
balance.
Total Revenue was forecast on a quarterly basis in 2003 using quarterly
2002 Adjusted Turnover expressed on average assets, multiplied by
average Trading Assets during the quarter.
The following table summarizes pro forma 2002 and forecast 2003
quarterly Total Revenue and Trading Assets:
34
Financial Metric
Q1
Q2
Q3
Q4
y/e
($ in millions)
2002 Total Revenue
2003 Total Revenue
% Change
26.0
27.4
5
23.2
24.4
5
22.3
23.5
5
27.5
28.9
5
99.1
104.2
5
2002 Trading Assets
2003 Trading Assets
% Change
678.9
712.8
5
687.3
721.7
5
695.2
730.0
5
706.7
742.1
5
706.7
742.1
5
33
34
Since the valuation conclusion in this report is based on the premise of value that House 5
is a going concern, any evidence to the contrary would have a significant negative impact
on the valuation. Further, there is evidence that House 5 was artificially supported by
millions of dollars of Other People’s Money from the IA Business.
Id.
November 22, 2011
41
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Expert Report of Bruce G. Dubinsky
Exhibit C
Trading Assets were forecast during the Projection Period according to
growth rates noted in research reports and observations from historical
financials of House 5. The following table illustrates the Trading Asset
growth rates during the Projection Period:
35
Financial Metric
2003
2004 - 2007
(in percent)
Trading Assets
Total Revenue
5
5
36
5
5
Pre-Compensation Operating Expense
Broker-dealer and other investment industry businesses generally
determine compensation payments to employees based on a targeted
Payout Ratio. Thus, Pre-Compensation Operating Expense was identified
from the FOCUS report data and was forecast based on either (i) the
growth rate in Trading Assets, (ii) the growth rate due to inflation, or (iii) as
a percentage of Total Revenue. The following points summarize the PreComp Operating Expenses and the basis for their projections:
35
36

Commissions and clearance paid to all other brokers and
clearance paid to non-brokers expenses were grown at the same
rate as Trading Assets.

Communications, promotional costs, and regulatory fees and
expenses were grown by forecast inflation rates of 2.9 percent for
first three years, 2.6 percent in year four and 2.4 percent in year
37
five and beyond.

Occupancy and equipment costs were forecast based on
38
contractual payments for all future years. A reduction was made
to adjust for occupancy costs related to other activities of BLMIS
outside of House 5. This adjustment approximated 19 percent of
39
forecast occupancy and equipment costs before adjustment.
Since the valuation conclusion in this report is based on the premise of value that House 5
is a going concern, any evidence to the contrary would have a significant negative impact
on the valuation. Further, there is evidence that House 5 was artificially supported by
millions of dollars of Other People’s Money from the IA Business.
Projection Period Trading Asset growth was based on the Sustainable Growth Rate, and,
therefore, represents the amount of growth that would be supportable by the operations of
House 5 as forecast.
37
Source: DRI-WEFA.
38
Contractual payments were based on the disclosure in the fiscal year 2002 audited
financial statements.
39
Based on 2008/09 floor plan information made available, and is calculated based on the
percent of total workstations for all occupied floors relating to House 17.
November 22, 2011
42
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Expert Report of Bruce G. Dubinsky
Exhibit C

Other Expenses includes fees paid to exchanges on commission
revenue. Such expenses were forecast at 21 percent of Total
40
Revenue.
41
Pre-Comp Operating Income and Comp Expense
The above Pre-Compensation Operating Expense was subtracted to
calculate Pre-Comp Operating Income during the Projection Period. Comp
42
Expense was then calculated to equate to a 33 percent Payout Ratio.
Similar to occupancy and equipment costs, an adjustment was made to
remove headcount costs associated with other activities of BLMIS deemed
to be outside of House 5. The adjustment approximated 15 percent of
43
Comp Expense as calculated above.
The following table summarizes Projection Period Pre-Comp Operating
Income, Comp Expense, EBIT and margin:
44
Financial Metric
2003
2004
Pre-Comp
Operating Income
Comp Expense
Adjustment
Net Compensation
$58.5
EBIT
EBIT Margin (%)
2005
2006
2007
$61.7
$64.8
$68.3
$72.0
19.4
-2.9
16.5
20.5
-3.1
17.4
21.5
-3.2
18.3
22.7
-3.4
19.3
23.9
-3.6
20.3
$42.0
$44.3
$46.5
$49.0
$51.7
40
41
41
41
41
($ in millions)
Interest Expense
Interest expense was applied to the average Debt balance, which was
presumed to be a fixed level of debt throughout the Projection Period. The
40
Represents the average other expense ratio of Total Revenue during historical periods
when the Leverage Ratio ranged from 3.0 to 4.0.
41
The Payout Ratio is an aggregate expense amount based on historical performance as
well as a review of market participants. No consideration was given to the compensation of
any individual employee of BLMIS nor was any consideration given to the reasonableness
of the amount paid to any individual employee based on the services that the individual
provided.
42
Represents the average Payout Ratio during the historical periods when Leverage ratio
ranged from 3.0 to 4.0.
43
Based on 2008/09 floor plan and seating charts and representing the 2002 Comp Expense
associated with House 17.
44
Since the valuation conclusion in this report is based on the premise of value that House 5
is a going concern, any evidence to the contrary would have a significant negative impact
on the valuation. Further, there is evidence that House 5 was artificially supported by
millions of dollars of Other People’s Money from the IA Business.
November 22, 2011
43
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Expert Report of Bruce G. Dubinsky
Exhibit C
level of Debt was determined to be approximately $235.3 million, based on
the amount of financing required to fund the increase in Trading Assets to
obtain a market participant Leverage Ratio, while considering the funding
provided from other sources (an increase in Trading Liabilities and use of
excess cash). The rate of interest applied in the Projection Period was
45
3.75 percent, which is consistent with implied pricing during historical
periods when House 5 carried bank debt. The interest expense applied
during the Projection Period was $8.8 million per year, and was subtracted
from EBIT to calculate EBT.
Depreciation and Amortization
Non-cash expenses related to depreciation and amortization were not
available in the FOCUS report data made available, but were identified in
BLMIS audited financial statements. However, as is typically the case with
financial services businesses, depreciation, amortization and capital
expenditures are not material expenses or expenditure items and,
therefore, for the purpose of estimating FFI, it was assumed that
depreciation (a non-cash expense) would be 100 percent offset by capital
expenditures, and accordingly, no specific adjustment is made to FFI.
Taxes
Cash income taxes were calculated based on taxable income and were
deducted from EBT to estimate after-tax income. While House 5’s
ownership structure was an LLC, and, therefore, no taxes were paid at the
entity level, due to the fact that standard valuation practice would impute
taxes in this situation, and that comparable companies are C-Corporations
which pay income taxes, it was determined that the estimated Fair Market
Value of a 100 percent interest in the common equity of House 5 should
assume a willing buyer that is subject to a market participant tax rate. An
average effective tax rate of 40 percent was calculated using available
data from the Concluded Comparable Companies and calculated income
taxes on this basis, which were subtracted from EBT to calculate after tax
income.
After Tax Income and Free Cash Flow
After tax income was presumed as a proxy for cash basis income given the
presumption that non-cash expenses were immaterial.
Given the
presumption of immaterial non-cash adjustments to after tax income,
operating cash flow was calculated as after tax income, minus investment
45
An analysis of historical financial statement data from FOCUS reports indicated that
interest expense, divided by average bank debt resulted in a rate of interest that was, on
average, 50 basis points (“bps”) or 0.5 percent, below the prevailing average Prime Rate
during the relevant year. The prevailing Prime Rate, taken from the Federal Reserve H15
release, as of the Valuation Date was 4.25 percent.
November 22, 2011
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Expert Report of Bruce G. Dubinsky
Exhibit C
in non-cash assets (primarily Trading Assets), plus increase in non-debt
liabilities (primarily Trading Liabilities).
The following is a listing of non-cash assets, as obtained from reading
FOCUS report data files made available, and a description of growth
assumptions applied in the FFI over the Projection Period:

Receivables from brokers or dealers and clearing organizations –
grown based on Trading Asset growth rates;

Securities and spot commodities owned, at market value (Trading
Assets) – grown assuming 100 percent reinvestment of earnings
during pro forma 2002 and based on market participant growth
rates for the Projection Period;

Memberships in exchanges – no growth is forecast on the basis
that these investments would be held at cost;

Fixed assets – no growth is forecast on the basis that depreciation
and capital expenditures would offset;

Other assets – grown based on Trading Asset growth rates.
The following is a listing of non-debt liabilities, as obtained from reading
FOCUS report data files made available, and a description of growth
assumptions applied in the FFI over the Projection Period:

Payable to brokers or dealers and clearing organizations – grown
based on Trading Asset growth rates;

Securities sold, not yet repurchased at market value (Trading
46
Liabilities) – forecast based on 52 percent of Trading Assets;

Accounts payable and accrued liabilities – grown based on
Trading Asset growth rates.
The investment in non-cash assets (see list above) represents a cash
outflow, and the increase in non-debt liabilities represents effectively a
cash inflow and the two are netted in the calculation of net investment.
The following table summarizes after tax income, the elements of net
investment, and Free Cash Flow applied in pro forma 2002, which illustrate
the assumption made that after tax income is 100 percent reinvested in the
business through expansion of Trading Assets and Trading Liabilities:
46
Represents the average Short Ratio calculated during periods where the Leverage Ratio
ranged 3.0 to 4.0.
November 22, 2011
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Expert Report of Bruce G. Dubinsky
Exhibit C
47
Pro Forma 2002
Financial Metric (Cash Impact)
Q1
Q2
Q3
Q4
y/e
($ in millions)
After tax income
Increase in Non-cash Assets
Increase in Non-debt Liabilities
Net Change in Debt
Free Cash Flow to Equity
5.0
-10.5
5.4
0.0
4.1
-8.5
4.4
0.0
3.8
-7.9
4.1
0.0
5.6
-11.5
6.0
0.0
18.5
-38.3
19.8
0.0
.0
.0
.0
.0
.0
The following table illustrates after tax income, the elements of net
investment, and Free Cash Flow as forecast for the Projection Period:
Financial Metric (Cash Impact)
2003
2004
2005
2006
2007
($ in millions)
After tax income
Increase in Non-cash Assets
Increase in Non-debt Liabilities
Net Change in Debt
19.9
-42.1
19.7
0.0
21.3
-39.9
18.7
0.0
22.6
-42.7
20.0
0.0
24.1
-45.5
21.3
0.0
25.7
-48.6
22.7
0.0
Free Cash Flow to Equity
-2.5
0.0
-0.1
-0.1
-0.2
As illustrated in the tables above, pro forma 2002 after tax income is
assumed to be reinvested in the business to grow the balance sheet, and,
it is assumed that, with the exception of 2003, balance sheet expansion
reflects growth slightly in excess of earnings, with the shortfall being
funded by the cash balance.
48
Free Cash Flow to Equity
As illustrated above, Free Cash Flow to Equity (“Free Cash Flow”) was
estimated at approximately -$2.5 million in 2003, and ranges from -$0.2
million to $0.0 million for 2004 to 2007. These annual Free Cash Flows, if
positive, are assumed to be distributed to equity investors at the end of
each year. If negative, Free Cash Flows are presumed to be absorbed by
the cash balance. The Free Cash Flows are then discounted to their
respective present values at the equity cost of capital of 16.5 percent and
summed to calculate the sum of present value of Free Cash Flows. The
sum of present value of Free Cash Flows was zero.
47
48
Since the valuation conclusion in this report is based on the premise of value that House 5
is a going concern, any evidence to the contrary would have a significant negative impact
on the valuation. Further, there is evidence that House 5 was artificially supported by
millions of dollars of Other People’s Money from the IA Business.
Id.
November 22, 2011
46
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Expert Report of Bruce G. Dubinsky
Exhibit C
49
Terminal Value
The terminal value of House 5, as of the y/e 2007 was computed by
applying the selected terminal EV / BV multiple of 2.4x to the forecast y/e
2007 BV of $413 million, resulting in a terminal value as of the y/e 2007 of
$991 million. The terminal value was then discounted to its present value
based on the equity cost of capital of 16.5 percent to $458 million, which
represents the amount an investor would pay for the rights to the cash
flows of the business for years subsequent to the Projection Period.
The selected multiple of 2.4x was based on the following calculation:
Industry average multiple x (1 + control premium) x Relative Factor
The industry average multiple was calculated as the midpoint of the range
of the Concluded Comparable Companies of 1.9x, which is also consistent
with the midpoint of expected EV / BV multiples as indicated in the
50
Deutsche Bank Report, of 2.0x. The control premium applied was 40
percent, which represents the average control premium from recentlycompleted merger transactions in the “Brokerage, Investment & Mgmt.
51
Consulting” industry from 1999 to 2001. Additionally, a “Relative Factor”
was applied to reflect primarily the difference in size between House 5 and
the size of the industry comparable companies referred to in the Deutsche
Bank Report and the Concluded Comparable Companies. The Relative
Factor applied is 90 percent, and was calculated as the ratio of the
concluded EV, divided by the EV based on a discount rate that does not
include a small stock premium.
Results of the Income Approach
The estimated Fair Market Value of a 100 percent interest in the common
equity of House 5 was then calculated as the sum of the present value of
Free Cash Flows of zero and the present value of the terminal value of
$458 million. Based on the Income Approach as described above and as
detailed in Exhibit 2, the Fair Market Value of a 100 percent interest in the
common equity of House 5, on a marketable, controlling interest basis was
estimated to be $460 million. Since the valuation conclusion in this report
is based on the premise of value that House 5 is a going concern, any
49
Since the valuation conclusion in this report is based on the premise of value that House 5
is a going concern, any evidence to the contrary would have a significant negative impact
on the valuation. Further, there is evidence that House 5 was artificially supported by
millions of dollars of Other People’s Money from the IA Business.
50
The Deutsche Bank Report indicates an expected trading range of 1.5 - 2.5 times BV,
which was corroborated by the S&P Report which stated a range of 1.6 - 2.6.
51
2002 Mergerstat Yearbook industry premiums for “Brokerage, Investment & Mgmt.
Consulting” industry.
November 22, 2011
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Expert Report of Bruce G. Dubinsky
Exhibit C
evidence to the contrary would have a significant negative impact on the
valuation. Further, there is evidence that House 5 was artificially
supported by millions of dollars of Other People’s Money from the IA
Business.
November 22, 2011
48
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Expert Report of Bruce G. Dubinsky
Exhibit C
Section 10
Comparable Company
Method
November 22, 2011
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Expert Report of Bruce G. Dubinsky
Exhibit C
Market
Approach
Application of
the
Comparable
Company
Method
The Market Approach indicates the EV, as defined in this Report, based on
a comparison of the company to comparable firms in similar lines of
business that are publicly traded or which are part of a public or private
transaction. This methodology presumes that the comparable companies
or the subject company are not tainted by fraud or other improprieties
which would render the comparison invalid. This approach can be
implemented through the Comparable Company Method and/or the
Comparable Transaction Method. The Comparable Company Method was
used in our determination of Fair Market Value and the Comparable
Transaction Method was used to corroborate the results of the Income
Approach and the Comparable Company Method.
Comparable Company Method
The Comparable Company Method indicates the value of a business by
comparing it to publicly traded companies in the same or similar lines of
business. The conditions and prospects of companies in similar lines of
business depend on common factors such as overall demand for their
products and services. An analysis of the market multiples of companies
engaged in the same or similar businesses yields insight into investor
perceptions and, therefore, the value of the company.
Publicly-traded companies are selected and their financial profiles are
analyzed relative to the business. Considerations for factors such as size,
prices, growth, profitability, risk, and return on investment, etc. are also
analyzed and compared to the comparable businesses. Once these
differences and similarities are determined and proper adjustments are
made, price or EV multiples of the publicly traded companies are
calculated. These EV multiples are then applied to the operating results
attributable to the company to estimate the EV of the company.
Determination of Concluded Comparable Companies
An initial screen of companies using Capital IQ’s financial database was
run to identify relevant comparable companies. Four filters were applied to
narrow the database of companies. Filtering for publicly-traded companies
returned 61,181 companies. The list was narrowed to include companies
with a primary industry classification of “Security Brokers,” resulting in 188
companies. The next two filters identified companies with stocks trading
as of December 10, 2002; this returned 102 companies. Finally, the list
was filtered for companies geographically in the United States, narrowing
the list to 10 companies.
To corroborate the list of comparable companies, the SNL database was
searched to identify publicly-traded broker-dealers as of December 10,
November 22, 2011
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Expert Report of Bruce G. Dubinsky
Exhibit C
2002. To do so, the component companies of several SNL indexes were
reviewed including: SNL U.S. National Broker-Dealer (7 companies), SNL
U.S. Regional Broker-Dealer (14 companies), and SNL U.S. Institutional
Broker-Dealer (24 companies).
The industry lists were then cross-referenced from equity analyst research
reports. From the Solomon Report, the Large-Cap Brokers, Mid-Cap
Broker, and Exchanges & Market Intermediaries companies were used.
Online Brokers were excluded, which had fundamentally different business
models. From the Deutsche Bank Report, the Independent Brokers,
Universal Banks, and Regional Brokers companies were used.
To make the preliminary list of comparable companies as expansive as
possible, proxy filings of the direct market making competitors were
searched.
Once a list of potential comparable companies was formed, the list was
narrowed by reading income statements to identify companies with similar
line items and comparable revenue mixes (i.e. at least 75 percent of
revenue from brokerage commissions and trading revenue). Additionally,
due to the absence of beta estimates for certain companies, such
companies were eliminated.
The list of companies is as follows:

Merriman Holdings, Inc.

LaBranche & Co. Inc.

Paulson Capital Corp.

Investors Capital Holdings, Ltd.

BGC Financial Group, Inc.

Instinet Group Incorporate

Investment Technology Group Inc.

Jesup & Lamont, Inc.

Westech Capital Corp.

Detwiler Fenton Group, Inc.

Dupont Direct Financial Holdings, Inc.

AB Watley Group Inc.

First Montauk Financial Corp.

Knight Capital Group Inc.
November 22, 2011
51
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 171 of 179
Expert Report of Bruce G. Dubinsky
Exhibit C

Progressive Asset Management, Inc.

Soundview Technology Group, Inc.

National Holdings Corp.

Millennium Healthcare, Inc.

BGC Partners, Inc.

Siebert Financial Corp.

Brandt, Inc.

Ladenburg Thalmann Financial Services Inc.
Furthermore, common-size income statements were calculated based on
data from Capital IQ to determine the percentage of total revenue that
related specifically to Capital IQ’s “trading revenue.” Since essentially 100
percent of House 5 revenue related to trading activity, it was determined
that the Concluded Comparable Companies should include only those
companies which generated at least 75 percent of revenues from trading
and had a significant amount of revenue (measure of size, of at least $50
million) during the LTM period. The group of companies meeting these
final criteria includes the following:

Knight Capital Group Inc.; and

LaBranche & Co Inc.
52
Concluded Comparable Companies:
Knight Trading Group, Inc., a Delaware corporation, and its subsidiaries
operate in two business segments: wholesale securities market-making
and asset management. It was the leading wholesale equities market
maker in The NASDAQ Stock Market and the Nasdaq Intermarket in the
U.S., and, during the two years prior to the Valuation Date, it had
established majority-owned wholesale equity market-making operations in
Europe and Japan. The company also operated a leading listed options
market-making business and a professional options execution business in
the U.S. Through its Deephaven Capital Management LLC subsidiary, it
also operated an asset management business for institutions and high net
worth individuals.
LaBranche & Co Inc. was a holding company that was the sole member of
LaBranche & Co. LLC and owned all the outstanding stock of LaBranche
Financial Services, Inc. ("LFSI"). Founded in 1924, LaBranche & Co. LLC
52
The descriptions were taken from SEC filings of the Concluded Comparable Companies as
of the Valuation Date.
November 22, 2011
52
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 172 of 179
Expert Report of Bruce G. Dubinsky
Exhibit C
was one of the oldest and largest specialist firms on the New York Stock
Exchange. It also acted as a specialist in stocks and options on the
American Stock Exchange. Its LFSI subsidiary was a clearing broker for
customers of introducing brokers and provides direct access floor
brokerage services to institutional customers, securities clearing and other
related services to individual and institutional clients, including traders,
professional investors and broker-dealers. In addition, LFSI also provided
front-end order execution, analysis and reporting solutions for the
wholesale securities dealer market. As of December 31, 2001, its former
subsidiaries Henderson Brothers, Inc. and Internet Trading Technologies,
Inc. were merged with and into its ROBB PECK McCOOEY Clearing
Corporation subsidiary. RPM Clearing Corporation changed its name to
LFSI in January 2002 and was a registered broker-dealer and NYSE
member firm as of the Valuation Date.
Application of the Market Approach
Once the Concluded Comparable Companies were established, valuation
multiples were computed. Valuation multiples are ratios of EV to the
operating results of a company, where EV is calculated on a marketable,
controlling interest basis, reflecting a control premium. The EV for each
company was calculated as the product of the closing stock price as of the
day prior to the Valuation Date and the share count on the cover of the
most recent quarterly report as of the Valuation Date, plus a premium of 40
53
percent.
Multiples were then calculated for EV to BV, Revenue, and
Cash Earnings. The following points illustrate the multiples calculated for
the Concluded Comparable Companies, and how those multiples were
applied to House 5 financials to estimate Fair Market Value as of the
Valuation Date:

53
EV / BV

The average multiple for the Concluded Comparable
Companies, which included a control premium of 40 percent,
was approximately 1.9x with a range of multiples of 1.2x to
2.5x. It was presumed that a relative adjustment of 90 percent
is warranted to account for the smaller size of House 5 relative
to the Concluded Comparable Companies.
No other
adjustments were included in the EV / BV multiple applied
since it is presumed the pro forma ROE of House 5 would
approximate that of the Concluded Comparable Companies.

A range of multiples of 1.1x to 2.3x was applied to the pro
The control premium of 40 percent is based on an analysis of recent comparable
transactions occurring during the three years preceding the Valuation Date.
November 22, 2011
53
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 173 of 179
Expert Report of Bruce G. Dubinsky
Exhibit C
54
forma y/e 2002 BV of $299.4 million to arrive at a range of
Fair Market Value of a 100 percent interest in the common
equity of House 5 of approximately $329 to $677 million.


EV / Cash Earnings

The average multiple for the Concluded Comparable
Companies, which included a control premium of 40 percent,
was 26.9x. It was presumed that a relative adjustment of 90
percent is warranted to account for the smaller size of House 5
relative to the Concluded Comparable Companies. No other
adjustments were included in the EV / Cash Earnings multiple
applied since it is presumed the pro forma growth of House 5
would approximate that of the Concluded Comparable
Companies.

A multiple of 24.2x was applied to House 5’s pro forma Cash
55
Earnings of $18.5 million to arrive at an estimate of the
indicated Fair Market Value of a 100 percent interest in the
common equity of House 5 of approximately $448 million.
EV / Revenue
 The average multiple for the Concluded Comparable
Companies, which included a control premium of 40 percent,
was approximately 3.6x with a range of multiples of 1.7x to
5.5x. It was presumed that a relative adjustment of 90 percent
is warranted to account for the smaller size of House 5 relative
to the Concluded Comparable Companies.
No other
adjustments were included in the EV / Revenue multiple
applied since it is presumed the pro forma profit margin and
growth of House 5 would approximate that of the Concluded
Comparable Companies.

A range of multiples of 1.5x to 4.9x was applied to House 5’s
56
pro forma 2002 Revenue of $99.1 million to arrive at a range
of Fair Market Value of a 100 percent interest in the common
equity of House 5 of approximately $152 to $490 million.
54
Since the valuation conclusion in this report is based on the premise of value that House 5
is a going concern, any evidence to the contrary would have a significant negative impact
on the valuation. Further, there is evidence that House 5 was artificially supported by
millions of dollars of Other People’s Money from the IA Business.
55
Since the valuation conclusion in this report is based on the premise of value that House 5
is a going concern, any evidence to the contrary would have a significant negative impact
on the valuation. Further, there is evidence that House 5 was artificially supported by
millions of dollars of Other People’s Money from the IA Business.
56
Id.
November 22, 2011
54
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 174 of 179
Expert Report of Bruce G. Dubinsky
Exhibit C
Results of the Comparable Company Method
Based on the Comparable Company Method as described above, the
indicated Fair Market Value of a 100 percent interest in the common equity
of House 5 on a marketable, controlling interest basis was estimated to be
$420 million, as of the Valuation Date. Since the valuation conclusion in
this report is based on the premise of value that House 5 is a going
concern, any evidence to the contrary would have a significant negative
impact on the valuation. Further, there is evidence that House 5 was
artificially supported by millions of dollars of Other People’s Money from
the IA Business. This concluded value is based on the average of the
range of results indicated by application of the BV, Cash Earnings and
Revenue multiples as calculated using the Concluded Comparable
Companies’ valuations and financial metrics.
Refer to Exhibits 3 and 3.A for the details of the Comparable Company
Method.
November 22, 2011
55
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 175 of 179
Expert Report of Bruce G. Dubinsky
Exhibit C
Section 11
Findings
November 22, 2011
56
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 176 of 179
Expert Report of Bruce G. Dubinsky
Exhibit C
Valuation
Findings
57
Findings
Based on the analyses herein, the estimated Fair Market Value of 100
percent of the equity of House 5, on a marketable, controlling interest
basis, is $450 million, as of the Valuation Date. Since the valuation
conclusion in this report is based on the premise of value that House 5 is a
going concern, any evidence to the contrary would have a significant
negative impact on the valuation. Further, there is evidence that House 5
was artificially supported by millions of dollars of Other People’s Money
from the IA Business. The following table summarizes the valuation
findings:
Indicated Fair
Market Value
Valuation Approach
($ in millions)
Income Approach
Comparable Company Method
Concluded Fair Market Value (rounded)
$460
420
58
$450
A discount for lack of marketability was considered as part of the
determination of the Concluded Fair Market Value of a 100 percent equity
interest on a controlling basis in House Five. As a privately held company
with limited interim cash flow a discount for lack of marketability would
generally be required. Moreover, given the existence of fraud and the fact
that House 5 was artificially supported by millions of dollars of Other
People’s Money from the IA Business, a discount for marketability could be
large and could approach 100 percent.
In the interest of being
conservative and generally presenting the valuation in the light most
favorable to demonstrating solvency, no lack of marketability discount was
applied for purposes of determining the Concluded Fair Market Value
above.
57
A calculation of the implied value of MSIL was performed by multiplying MSIL’s y/e 2002
book value of $46.5 million by the implied House 5 EV/BV multiples of 1.5x and 1.4x,
averaging the implied values resulting in an implied value of $68.4 million. MSIL’s BV was
converted from GBP to USD using the spot exchange rate as of December 11, 2002 of
1.5699 USD/GBP.
58
Since the valuation conclusion in this report is based on the premise of value that House 5
is a going concern, any evidence to the contrary would have a significant negative impact
on the valuation. Further, there is evidence that House 5 was artificially supported by
millions of dollars of Other People’s Money from the IA Business.
November 22, 2011
57
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 177 of 179
Expert Report of Bruce G. Dubinsky
Exhibit C
Section 12
Valuation Exhibits
November 22, 2011
58
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 178 of 179
HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
SUMMARY OF VALUES
(USD in millions)
Exhibit 1
Notes
Indicated
Value
Implied
EV/BV
Exhibit
(4)
Income Approach
(1)
$460
1.5X
Exhibit 2
Market Approach (EV/TBV or EV/BV)
(2)
420
1.4X
Exhibit 3.A
Concluded Value (rounded)
(3)
$450
1.5X
Notes:
(1) Adjusted Capitalization DCF Approach based on recapitalization of House 5 in 2002 to reflect a Leverage Ratio of Concluded
Comparable Companies and is assumed to reflect a controlling interest value. Assumed a Leverage Ratio of 3.17 and 8%
Cash Ratio. Indicated value is the middle of the Adjusted Capitalization DCF range.
(2) Based on the range of values indicated by applying the price-to-tangible book value of the two Concluded Comparable
Companies. Indicated value is the median. Based on minority interest basis trading market values, plus a control premium of
40%.
(3) Average of the indicated values from the Adjusted Capitalization Discounted Cash Flow and Concluded Comps methods.
Rounded to the nearest $50 million.
(4) Implied multiple of tangible book value.
* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report.
Accordingly, this schedule must be considered in conjunction with those assumptions and should not be read on a stand-alone basis.
DUFF & PHELPS
Exhibits, Page 1 of 15
E
Case 1:11-cv-03605-JSR Document 107-2
Filed 01/26/12 Page 179 of 179
HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
INCOME APPROACH: RECAPITALIZATION
(USD in millions)
Exhibit 2
Notes
INCOME STATEMENT
Reported Revenue
Revenue Adjustments
Total Revenue, As Adjusted
(3)
(4)
% Growth
Expenses
Commissions and clearance paid to all other brokers
Clearance paid to non-brokers
Communications
Occupancy and equipment costs
Adjustment for advisor occupancy
Promotional costs
Data processing costs
Regulatory fees and expenses
Other expenses
(5)
(5)
(5)
(6)
(6)
(7)
(7)
(7)
(8)
Total Operating Expenses before Compensation
% of Revenue
Pre-Comp Operating Income
Clerical and administrative employees' expenses
Adjustment to market participant headcount reduction
(9)
(10)
Comp % of Pre-Comp Operating Income (before adjustment)
% of Revenue
2003
Projected year ending 12/31
2004
2005
2006
2007
209.8
-75.6
134.2
169.1
-72.4
96.7
106.0
-60.5
45.5
99.1
104.2
109.1
114.1
119.4
125.1
-18%
-28%
-53%
2%
5%
5%
5%
5%
5%
30.6
4.1
8.6
2.9
-.5
.2
.6
6.5
69.2
13.8
2.6
5.6
3.3
-.6
.1
.8
4.4
39.2
4.8
2.9
6.8
3.9
-.7
.1
.7
4.8
31.8
4.8
2.9
6.8
3.9
-.7
.1
.7
4.8
20.5
5.1
3.1
7.0
3.9
-.7
.1
.7
5.0
21.6
5.3
3.2
7.2
3.9
-.7
.1
.7
5.1
22.6
5.5
3.4
7.4
3.9
-.7
.1
.8
5.3
23.6
5.8
3.5
7.6
3.9
-.7
.1
.8
5.4
24.7
6.1
3.7
7.8
3.9
-.7
.1
.8
5.5
25.9
122.0
69.2
55.1
43.9
45.7
47.5
49.3
51.1
53.1
91%
72%
121%
44%
44%
43%
43%
43%
42%
12.2
27.5
-9.6
55.2
58.5
61.7
64.8
68.3
72.0
45.8
-6.9
52.3
-7.8
23.1
-3.5
18.3
-2.7
19.4
-2.9
20.5
-3.1
21.5
-3.2
22.7
-3.4
23.9
-3.6
-240%
-26.7
-16.9
-29.2
39.6
42.0
44.3
46.5
49.0
51.7
-20%
-17%
-64%
40%
40%
41%
41%
41%
41%
.5
.0
.0
8.8
8.8
8.8
8.8
8.8
8.8
-27.2
-16.9
-29.3
30.8
33.2
35.4
37.7
40.2
42.9
(12)
-10.9
-6.8
-11.7
12.3
13.3
14.2
15.1
16.1
17.1
(13)
-16.3
-10.2
-17.6
18.5
19.9
21.3
22.6
24.1
25.7
-12%
-11%
-39%
19%
19%
19%
20%
20%
21%
(11)
Income before income taxes (EBT)
After Tax Income
Pro Forma (2)
Beg.
2002
190%
EBIT Margin
Tax Expense @ 40%
Adj.
376%
Operating Income (EBIT)
Interest expense
Historical year ending 12/31 (1)
2000
2001
2002
33%
33%
33%
33%
33%
33%
See the footnotes, which are deemed an integral part of this exhibit, on Pages 6 and 7.
* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report. Accordingly, this schedule must be considered in
conjunction with those assumptions and should not be read on a stand-alone basis.
DUFF & PHELPS
Exhibits, Page 2 of 15
Case 1:11-cv-03605-JSR Document 107-3
Filed 01/26/12 Page 1 of 20
EXHIBIT 1
(Part 3 of 3)
Case 1:11-cv-03605-JSR Document 107-3
Filed 01/26/12 Page 2 of 20
HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
INCOME APPROACH: RECAPITALIZATION
(USD in millions)
Exhibit 2
Notes
BALANCE SHEET
Assets
Cash
Regulatory cash
Receivable from brokers or dealers and clearing
Securities and spot commodities owned, at market value
Memberships in exchanges
PP&E, net
Other Assets
Total Assets
Liabilities
Bank loans payable
Payables to broker-dealers or clearing organizations
Securities sold not yet purchased at market value
Accounts payable and accrued liabilities
Total Liabilities
Ownership Equity
Beginning Equity
Plus: New Equity
Plus: Income
Plus: Adjustment for taxes not paid
Less: Distributions
Total Ownership Equity (Year End)
Total Liabilities and Ownership Equity
(15)
(16)
(16)
(16)
(17)
(18)
(19)
(20)
(21)
Historical year ending 12/31 (1)
2000
2001
2002
Adj.
(14)
Pro Forma (2)
Beg.
2002
(14)
2003
Projected year ending 12/31
2004
2005
2006
2007
38.1
.1
160.5
312.9
2.3
7.8
3.4
525.1
90.6
.1
133.5
291.3
2.3
12.7
2.3
532.7
106.9
.0
72.9
194.8
2.3
10.5
2.1
389.5
-19.4
.0
.0
377.1
.0
.0
.0
357.7
71.2
.1
133.5
668.4
2.3
12.7
2.3
890.4
71.2
.1
133.5
706.7
2.3
12.7
2.3
928.7
68.7
.1
140.2
742.1
2.3
12.7
2.4
968.3
68.7
.1
146.5
775.5
2.3
12.7
2.5
1,008.2
68.6
.1
153.3
811.4
2.3
12.7
2.6
1,050.8
68.5
.1
160.5
849.6
2.3
12.7
2.7
1,096.2
68.3
.1
168.2
890.3
2.3
12.7
2.8
1,144.7
.0
4.5
233.7
29.1
267.3
.0
1.3
223.5
27.0
251.8
.0
1.3
133.6
3.0
137.9
235.3
.0
122.4
.0
357.7
235.3
1.3
345.9
27.0
609.5
235.3
1.3
365.8
27.0
629.3
235.3
1.4
384.1
28.3
649.0
235.3
1.5
401.4
29.6
667.7
235.3
1.5
419.9
31.0
687.7
235.3
1.6
439.7
32.4
709.0
235.3
1.7
460.8
34.0
731.7
285.0
280.9
-16.3
-10.9
.0
257.8
257.8
40.0
-10.2
-6.8
.0
280.9
-17.6
-11.7
.0
251.6
.0
280.9
.0
.0
.0
.0
280.9
280.9
.0
18.5
.0
.0
299.4
299.4
.0
19.9
.0
.0
319.3
319.3
.0
21.3
.0
.0
340.5
340.5
.0
22.6
.0
.0
363.1
363.1
.0
24.1
.0
.0
387.3
387.3
.0
25.7
.0
.0
413.0
525.1
532.7
389.5
357.7
890.4
928.7
968.3
1,008.2
1,050.8
1,096.2
1,144.7
See the footnotes, which are deemed an integral part of this exhibit, on Pages 6 and 7.
* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report. Accordingly, this schedule must be considered in
conjunction with those assumptions and should not be read on a stand-alone basis.
DUFF & PHELPS
Exhibits, Page 3 of 15
Case 1:11-cv-03605-JSR Document 107-3
Filed 01/26/12 Page 3 of 20
HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
INCOME APPROACH: RECAPITALIZATION
(USD in millions)
Exhibit 2
Notes
CASH FLOW SUMMARY
Chg in cash (Non-cash assets)
Chg in cash (Non-interest bearing Liabilities)
Net change in non-cash A&L
Plus: Profit After Tax
Plus: Unpaid Taxes
Operating Cash Flow
Change in Debt
Equity Capital Raise
Equity Distribution
Financing Cash Flow
(22)
(20)
(17)
(21)
Total Change in Cash
Historical year ending 12/31 (1)
2000
2001
2002
Adj.
Pro Forma (2)
Beg.
2002
2003
Projected year ending 12/31
2004
2005
2006
2007
53.7
-53.6
.1
45.0
-15.5
29.5
159.5
-113.9
45.6
-377.1
122.4
-254.7
-38.3
19.8
-18.5
-42.1
19.7
-22.4
-39.9
18.7
-21.2
-42.7
20.0
-22.7
-45.5
21.3
-24.2
-48.6
22.7
-25.9
-16.3
-10.9
-27.1
-10.2
-6.8
12.5
-17.6
-11.7
16.3
.0
.0
-254.7
18.5
.0
.0
19.9
21.3
22.6
24.1
25.7
-2.5
.0
-.1
-.1
-.2
.0
.0
.0
40.0
.0
.0
235.3
.0
40.0
.0
235.3
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
-27.1
52.5
16.3
-19.4
.0
-2.5
.0
-.1
-.1
-.2
VALUATION - Discounted Cash Flow Approach
Interim Cash Flows (Distributions)
Partial Period Adjustment
End-of-Year Convention
Present Value Factor @ 16.5%
(21)
.0
.0
.0
.0
.0
.0
(23)
0.056
0.056
0.992
1.000
1.056
0.851
1.000
2.056
0.731
1.000
3.056
0.627
1.000
4.056
0.538
1.000
5.056
0.462
.0
.0
.0
.0
.0
.0
Present Value of Interim Cash Flows
Terminal Value
Projected Book Value 2007
P/Book Multiple (Average Projected ROE)
Terminal Value
Timing of terminal cash flow
Present Value Factor @ 16.5%
PV of Terminal Value
Plus: Sum of Present Value of Distributions
(24)
(23)
413
2.4
991
6.4%
Terminal Value Multiple
5.056
0.462
458
Total Equity Value
460
Equivalent Price / Book multiple
1.5X
460.0
1.9
2.4
2.9
13.5%
16.5%
19.5%
410
360
320
520
460
400
630
550
490
Implied L-T Growth Rate
n/a
13.5%
16.5%
19.5%
1.9
7%
9%
11%
2.4
8%
10%
12%
2.9
9%
11%
14%
See the footnotes, which are deemed an integral part of this exhibit, on Pages 6 and 7.
* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report. Accordingly, this schedule must be considered in
conjunction with those assumptions and should not be read on a stand-alone basis.
DUFF & PHELPS
Exhibits, Page 4 of 15
Case 1:11-cv-03605-JSR Document 107-3
Filed 01/26/12 Page 4 of 20
HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
INCOME APPROACH: RECAPITALIZATION
(USD in millions)
Exhibit 2
Notes
Historical year ending 12/31 (1)
2000
2001
2002
Adj.
Pro Forma (2)
Beg.
2002
2003
Projected year ending 12/31
2004
2005
2006
2007
KEY RATIOS
% Change (YOY)
Trading Assets
Trading Liabilities
Total Revenue
EBIT
Total Assets
Total Liabilities
Total Equity
Inflation estimate
Margins & Expenses
Compensation % of Pre-comp Profit
Other expenses/ Revenue
Operating Margin
Ratios & Average Balances
Avg. Trading Assets
Avg. Equity
Avg. Trading Liabilities
Short Ratio
Cash Ratio
Turnover
Net Margin
Asset Turnover
Leverage Ratio
Return on Assets
Return on Equity
Avg. Short Ratio
Pre-Tax Financing Cost
After-Tax Financing Cost
Operating Earnings Leverage
(4)
(7)
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
-7%
-4%
-28%
-37%
1%
-6%
9%
n/a
-33%
-40%
-53%
73%
-27%
-45%
-10%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
143%
64%
2%
-335%
74%
150%
7%
n/a
5%
5%
5%
6%
4%
3%
7%
2.9%
5%
5%
5%
5%
4%
3%
7%
2.9%
5%
5%
5%
5%
4%
3%
7%
2.9%
5%
5%
5%
5%
4%
3%
7%
2.6%
5%
5%
5%
5%
4%
3%
7%
2.4%
(9)
(8)
(25)
376%
52%
-20%
190%
41%
-17%
-240%
70%
-64%
n/a
n/a
n/a
n/a
n/a
n/a
33%
21%
40%
33%
21%
40%
33%
21%
41%
33%
21%
41%
33%
21%
41%
33%
21%
41%
Adjusted Data
302.1
243.1
269.4
266.2
228.6
178.6
77%
69%
17%
27%
32%
19%
-11%
-39%
18%
9.9%
1.9X
1.5X
-2%
-4%
-4%
-7%
76%
73%
0%
0%
0%
0%
532%
n/a
n/a
n/a
n/a
32%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
52%
8%
n/a
n/a
n/a
3.2X
n/a
n/a
n/a
n/a
n/a
n/a
687
290
356
52%
8%
14%
19%
11%
3.1X
2%
6%
52%
1%
1%
n/a
724
309
375
52%
7%
14%
19%
11%
3.0X
2%
6%
52%
1%
1%
118%
759
330
393
52%
7%
14%
19%
11%
3.0X
2%
6%
52%
1%
1%
121%
793
352
411
52%
7%
14%
20%
11%
2.9X
2%
6%
52%
1%
1%
112%
830
375
430
52%
6%
14%
20%
11%
2.8X
2%
6%
52%
1%
1%
113%
870
400
450
52%
6%
14%
21%
11%
2.8X
2%
6%
52%
1%
1%
114%
As-Reported
(26)
(27)
(28)
(29)
(30)
(31)
(32)
(33)
(34)
419.1
307.9
301.0
75%
7%
n/a
-12%
24%
2.0X
-3%
-6%
72%
0%
0%
n/a
See the footnotes, which are deemed an integral part of this exhibit, on Pages 6 and 7.
* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report. Accordingly, this schedule must be considered in
conjunction with those assumptions and should not be read on a stand-alone basis.
DUFF & PHELPS
Exhibits, Page 5 of 15
Case 1:11-cv-03605-JSR Document 107-3
HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
INCOME APPROACH: RECAPITALIZATION
(USD in millions)
Filed 01/26/12 Page 5 of 20
Exhibit 2
NOTES:
(1) Historical results were adjusted for the removal of revenue and expenses related to House 17, whereby such adjustments flow directly to the Total Equity line. All assets and liabilities
are re-cast from as-reported FOCUS report data based on Adjusted BV and as-reported common-size ratios expressed as a percent of Total Equity.
(2) Pro Forma adjustments were made to the ending 2001 balance sheet to illustrate the impact of a market participant re-levering of the business. The pro forma adjustments include (a)
the use of excess cash to increase Trading Assets, and (b) expansion of Trading Assets so as to produce a Leverage Ratio equal to the weighted average level for market participants,
or 3.17, using a combination of Trading Liabilities and Debt. The pro forma 2002 revenue is projected quarterly, based on the actual historical Turnover and therefore presumes that
net investment in Trading Assets and Trading Liabilities in the amount of net earnings generated during a quarter is made at the end of the quarter.
(3) Revenue Adjustments reflect reported revenue deemed attributable to House 17 operations. See Table 10 in the Dubinsky expert report dated November 22, 2011.
(4) Pro Forma 2002 revenue projection is based on adjusted 2002 quarterly Turnover. Prospective revenue growth is based on the assumption that Trading Assets would grow 5% in
2003, based on Securities Industry Association estimates. The growth rate from 2004-2007 is based on the Sustainable Growth Rate of the business.
(5) Expenses forecast to increase with Trading Assets.
(6) Occupancy and equipment costs reflects the total expense for both House 5 and House 17. Adjustment for advisory reduces the expense by 19%. The adjustment is based the
percentage of work stations on the 17th floor, out of the total work stations for the 17th, 18th, and 19th floors. The work station count was determined using the December 2008 and
January 2009 floor plans.
(7) Expense forecast to increase with annual inflation of 2.4% - 2.9%, as estimated by DFI-WEFA, Inc.
(8) Other Expenses includes fees paid to exchanges on commission revenue. Forecast expense is based on the historical average measure of other expense as a % of revenue
(approximately 21%) during periods where the Leverage Ratio ranged from 3.0 - 4.0.
(9) Forecast to reflect a constant Payout Ratio based on actual experience during historical periods where the Leverage Ratio ranged from 3.0 - 4.0.
(10) Clerical and administrative employees' expenses reflects total compensation for both House 5 and House 17, projected based on recent levels of compensation expense as a % of precompensation income. Adjustment to market participant headcount reduces the expense by 15%. The adjustment is based on the percent of total compensation attributed to House 17
employees; the House 17 employees were identified by cross-referencing the 2008 payroll data with the December 2008 and January 2009 floor plans.
(11) Interest expense on Debt after recapitalization at the Prime Rate of 4.25% less 50 bps, based on the average spread of House 5 historical implied interest rate versus the Prime Rate.
(12) Median effective tax rate of the Concluded Comparable Companies.
(13) Historical earnings figures were adjusted to reflect after-tax earnings at the effective tax rate of the Concluded Comparable Companies.
* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report. Accordingly, this schedule must be considered in
conjunction with those assumptions and should not be read on a stand-alone basis.
DUFF & PHELPS
Exhibits, Page 6 of 15
Case 1:11-cv-03605-JSR Document 107-3
HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
INCOME APPROACH: RECAPITALIZATION
(USD in millions)
Filed 01/26/12 Page 6 of 20
Exhibit 2
NOTES:
(14) Recapitalization is deemed to occur at the beginning of 2002, whereby the Cash Ratio is reduced to 8%, and Debt is issued and Trading Liabilities are grown to fund Trading Asset
purchases such that the Leverage Ratio is approximately equal to Concluded Comparable Companies' Leverage Ratio of 3.17. No cash is distributed directly as a result of the
recapitalization.
(15) Cash is projected as beginning of period cash, plus net cash flows after consideration for distributions to equity investors.
(16) PP&E is assumed to remain fixed at the Valuation Date level, and thus it is assumed that depreciation is equal to capital expenditure during the projection period. Memberships in
exchanges and Other Assets presumed not to require any adjustment.
(17) Projected Debt reflects the recapitalization Debt and is presumed to be carried at the pro forma 2002 balance in all future years to maintain leverage above actual 2002 levels.
(18) Forecast as a percentage of average Trading Assets based on actual experience during historical periods when the Leverage Ratio ranged 3.0 - 4.0.
(19) New Equity in 2001 reflects cash flows resulting from the business form transition from sole proprietorship to LLC.
(20) An adjustment is made to historical periods to add back entity-level taxes to ensure the historical balance sheets balance.
(21) Distributions are projected to be made to equity investors in the amount of any positive free cash flows from 2003 onward.
(22) Represents the net investment in Trading Assets and Liabilities during the period, in addition to projected growth in other asset and liability balances.
(23) The present value factor is based on the discount rate and assumes that any distributions of positive free cash flow generated during the year are made at the end of the calendar year.
(24) The selected multiple represents the average of the range of P/BV multiples of the Concluded Comparable Companies observed in industry reports, adjusted by a control premium of
40%. A 10% discount was applied to account for House 5's smaller size.
(25) EBIT/ Total revenue.
(26) Profit After Taxes/ Total Revenue.
(27) Total Revenue/ Average Total Assets.
(28) Average Total Assets/ Average Total Equity.
(29) Profit After Taxes/ Average Total Assets.
(30) Profit After Taxes/ Average Total Equity.
(31) Average Trading Liabilities/ Average Trading Assets.
(32) (Interest Expense)/ Avg. Total Liabilities.
(33) [(Interest Expense)/ Avg. Total Liabilities] * (1 - effective tax rate).
(34) % Change in EBIT/ % Change in Total Revenue.
* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report. Accordingly, this schedule must be considered in
conjunction with those assumptions and should not be read on a stand-alone basis.
DUFF & PHELPS
Exhibits, Page 7 of 15
Case 1:11-cv-03605-JSR Document 107-3
Filed 01/26/12 Page 7 of 20
HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
LEVERAGE AND PRO FORMA FINANCIALS
(USD in millions)
Mkt Cap
Current Capital IQ Name
Dupont Direct Financial Holdings, Inc.
Crown Financial Holdings, Inc
Knight Capital Group Inc.
LaBranche & Co. Inc.
INTL FCStone Inc.
Totals & Weighted Average
Exhibit 2.A
Book
Value
Assets
Cash
(1)
(1)
(1)
Leverage Equity %
Ratio
of Assets
Cash
Ratio
(1)
2.7
2.8
667.9
1,617.2
5.2
2.0
4.9
765.0
900.7
3.9
4.6
13.0
3,337.5
1,949.0
14.7
0.8
1.6
340.0
100.1
2.0
2.25x
2.66x
4.36x
2.16x
3.74x
44%
38%
23%
46%
27%
17%
12%
10%
5%
14%
2,295.9
1,676.6
5,318.8
444.5
3.17x
32%
8%
See the footnotes, which are deemed an integral part of this exhibit, on Page 9.
* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report.
Accordingly, this schedule must be considered in conjunction with those assumptions and should not be read on a stand-alone basis.
DUFF & PHELPS
Exhibits, Page 8 of 15
Case 1:11-cv-03605-JSR Document 107-3
Filed 01/26/12 Page 8 of 20
HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
LEVERAGE AND PRO FORMA FINANCIALS
(USD in millions)
Notes:
Total Assets
Cash
Trading Assets
Book Value
Debt
Trading Liabilities
Leverage Ratio
Short Ratio
Total Revenue
Turnover
12/31/01
Adjusted
532.7
(3)
Exhibit 2.A
Re-Cap
Change
(2)
01/01/02
1Q02
Pro Forma
2Q02
3Q02
Pro Forma
2002
4Q02
357.7
890.4
900.9
909.3
917.2
928.7
928.7
90.6
291.3
280.9
(19.4)
377.1
71.2
668.4
280.9
71.2
678.9
285.9
71.2
687.3
290.0
71.2
695.2
293.8
71.2
706.7
299.4
71.2
706.7
299.4
223.5
1.90x
77%
235.3
122.4
235.3
345.9
3.17x
52%
235.3
351.4
3.15x
52%
235.3
355.7
3.14x
52%
235.3
359.8
3.12x
52%
235.3
365.8
3.10x
52%
235.3
365.8
3.10x
52%
26.0
3.9%
23.2
3.4%
22.3
3.3%
27.5
4.0%
99.1
14.4%
Notes:
(1) As of the last available date prior to the Valuation Date. Leverage Ratio is calculated as Total Assets / Book Value.
(2) The hypothetical adjustments required to (a) swap cash for Trading Assets to effect a reduction in the cash balance to
levels closer to market participant levels, while avoiding future debt raises in the projection period, and (b) adjust to market
participant leverage by issuing Debt and growing Trading Liabilities.
(3) The adjusted Cash Ratio was set equal to 8%.
* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report.
Accordingly, this schedule must be considered in conjunction with those assumptions and should not be read on a stand-alone basis.
DUFF & PHELPS
Exhibits, Page 9 of 15
Case 1:11-cv-03605-JSR Document 107-3
Filed 01/26/12 Page 9 of 20
HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
ASSET TURNOVER ADJUSTMENT
(USD in millions)
Exhibit 2.B
TURNOVER RATIO ADJUSTMENT (1)
a.
b.
c.
d.
Total Revenue
Beginning Trading Assets
Ending Trading Assets
Average Trading Assets
Turnover Ratio (a ÷ d)
Proportion (Adjusted/ Reported)
As Reported (1)
e. Total Revenue
f. Beginning Trading Assets
g. Turnover Ratio (e ÷ f)
h. Proportion
Adjusted Turnover (g * h)
2002 Financial Results
As
Reported (2)
Adjusted (3)
106.0
45.5
428.3
291.3
340.7
194.8
384.5
243.1
27.6%
Variance
-60.5
-137.0
-145.9
-141.4
18.7%
42.8%
68%
2002 Quarterly Results
Q1
Q2
Q3
Q4
24.6
428.3
5.7%
24.1
478.3
5.0%
24.5
512.8
4.8%
32.8
563.5
5.8%
68%
68%
68%
68%
3.9%
3.4%
3.3%
4.0%
Notes:
(1) Calculations were made to approximate Adjusted Turnover, giving rise to the impact of removing House 17 revenue from as-reported
FOCUS report data.
(2) 2002 historical results as presented in FOCUS reports.
(3) Adjusted Total Revenue and Trading Asset balances reflect House 5 financial results excluding revenue deemed attributable to House 17
from 2000 to 2002.
* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report.
Accordingly, this schedule must be considered in conjunction with those assumptions and should not be read on a stand-alone basis.
DUFF & PHELPS
Exhibits, Page 10 of 15
Case 1:11-cv-03605-JSR Document 107-3
Filed 01/26/12 Page 10 of 20
HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
ESTIMATION OF THE EQUITY COST OF CAPITAL
(USD in millions)
Exhibit 2.C
Assumptions
Source:
Risk-free Rate
Equity Risk Premium
Small Stock Premium
Effective Tax Rate
Beta
Rf =
Rp =
Ssp =
t =
B =
5.02%
6.00%
1.94%
40.0%
1.58
(1)
20 Year Treasury CMT Yield (Federal Reserve)
Ibbotson 2002 SBBI Valuation Yearbook (rounded)
Ibbotson 2002 SBBI Valuation Yearbook (8th Decile)
Market Participant Tax Rate
Industry Average
Comparable Company Analysis
Barra
US Beta
(2)
Non-Trust
Financing
Preferred
Debt (D) Equity (Pref.)
(3)
1 Knight Capital Group Inc.
1.86
-
2 LaBranche & Co. Inc.
1.46
261.0
Weighted Average
Stock
Price as of
12/10/2002
(4)
Common
Shares
Outstanding
Market
Value of
Equity (E)
Total
Capital
Common
Equity /
Capital
Preferred
Equity /
Capital
Debt /
Capital
Tax
Rate
Unlevered
Beta
(in millions)
61.1
5.65
118.22
667.9
667.9
100.0%
0.0%
0.0%
28.7%
1.86
27.18
59.50
1,617.2
1,939.3
83.4%
3.2%
13.5%
49.3%
1.30
87.6%
2.3%
10.0%
1.57
Relevered Beta Analysis
1.46
Relevering Calculations
Beta (Unlevered)
Industry D / E Ratio (5)
Industry Pref. / E Ratio (5)
Tax Rate (6)
1.46
0.14
0.00
40.0%
Beta (Relevered)
1.58
Equity Cost of Capital - Capital Asset Pricing Model
Required Return on Equity Capital
Concluded Value (rounded to the nearest 50 basis points)
Unlevered Beta = Beta (Observed) / [1 + D/E ( 1 - t ) + Pref./E]
Relevered Beta = Unlevered Beta * [ 1 + D/E ( 1 - t ) + Pref./E]
Rate of Return
16.5%
x
Weighting
100.0%
Equity Cost of Capital
=
16.5%
16.5%
See the footnotes, which are deemed an integral part of this exhibit, on Page 12.
* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report. Accordingly, this schedule must be considered in conjunction with those
assumptions and should not be read on a stand-alone basis.
DUFF & PHELPS
Exhibits, Page 11 of 15
Case 1:11-cv-03605-JSR Document 107-3
HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
ESTIMATION OF THE EQUITY COST OF CAPITAL
(USD in millions)
Filed 01/26/12 Page 11 of 20
Exhibit 2.C
Notes:
(1) Ibbotson 2002 SBBI Yearbook, as of December 31, 2001. The Equity Risk Premium is based on the S&P 500 Market Total Return of 12.65 percent and long-horizon risk free rate of 5.23
percent, adjusted by 1.5 percent for survivorship bias. Copeland, Koller, and Murrin (2000) recommend a downward adjustment of 1.5 to 2 percent for survivorship bias in the S&P 500
Index, using arithmetic mean estimates.
(2) The predicted beta, calculated against the universe represented by the S&P 500 Index. Betas as of November 30, 2002, provided by BARRA.
(3) Debt includes long-term interest-bearing liabilities deemed to be financing debt, including subordinated debt and debentures, all at carrying value. Long-term liabilities include liabilities
maturing more than five years following the date of the latest debt footnote, typically in the annual report for the most recent completed fiscal year prior to the Valuation Date.
(4) Includes all other preferred equity, at carrying value.
(5) Based on a review of historic capitalization of the comparable companies, it was determined that preferred equity is not part of the normalized capital structure of a market participant.
(6) Tax rate is consistent with the effective tax rates of market participants.
(7) Concluded cost of equity is on the basis that cash flows are net of interest expense on any applicable financing debt.
* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report. Accordingly, this schedule must be considered in conjunction with those
assumptions and should not be read on a stand-alone basis.
DUFF & PHELPS
Exhibits, Page 12 of 15
Case 1:11-cv-03605-JSR Document 107-3
Filed 01/26/12 Page 12 of 20
HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
MARKET APPROACH: COMPARABLE COMPANY METHOD
(USD in millions)
Exhibit 3
Financial Data (1)
LTM as of
Equity
Value (EV)
Book
Value
(BV)
Tangible
BV
LTM
LTM
(TBV) Revenue Earnings
Valuation Multiples
Return LTM Profit
on BV
Margin
EV /
TBV
EV /
EV /
Revenue Earnings
(2)
Concluded Comparable Companies
LaBranche & Co. Inc.
Knight Capital Group Inc.
CONCLUDED COMP SET
Average Value
Median Value
9/30/2002
9/30/2002
2,264.1
935.1
900.7
765.0
(80.3)
714.9
412.1
547.6
84.2
(26.2)
9.3%
N/M
20.4%
N/M
excl.
1.3x
5.5x
1.7x
26.9x
excl.
832.8
832.8
317.3
317.3
479.9
479.9
29.0
29.0
9.3%
9.3%
20.4%
20.4%
1.3x
1.3x
3.6x
3.6x
26.9x
26.9x
Notes:
(1) Financial data as provided by Capital IQ. LTM income statement figures or actual balance sheet figures are as of the most recent filing date prior to the Valuation Date.
(2) EV is based on the closing share price on the day before the Valuation Date, multiplied by the share count on the most recently-issued regulatory filing prior
to the Valuation Date and includes a control premium of 40%.
* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report. Accordingly, this schedule must be considered in conjunction with those
assumptions and should not be read on a stand-alone basis.
DUFF & PHELPS
Exhibits, Page 13 of 15
Case 1:11-cv-03605-JSR Document 107-3
Filed 01/26/12 Page 13 of 20
HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
MARKET APPROACH: COMPARABLE COMPANY METHOD
(USD in millions)
Exhibit 3.A
Concluded Comparable Companies
LaBranche & Co. Inc.
Knight Capital Group Inc.
Average Value
Median Value
Financial Multiple
EV / BV
EV /
BV
EV /
TBV
EV /
Revenue
EV /
Earnings
2.5x
1.2x
excl.
1.3x
5.5x
1.7x
26.9x
excl.
1.9x
1.9x
1.3x
1.3x
3.6x
3.6x
26.9x
26.9x
Financial
Data
Relative
Factor
Selected
Multiple Range
Indicated
EV Range
(1)
(2)
(3)
(4)
299.4
90%
1.1 x
-
2.3 x
329
EV / Revenue
99.1
90%
1.5 x
-
4.9 x
152
490
EV / LTM Earnings
18.5
90%
24.2 x
-
24.2 x
448
448
Indicated Equity Value Range (controlling, marketable basis)
(5)
Indicated Equity Value Range (controlling, marketable basis)
-
677
310
-
538
310
-
538
See footnotes, which are deemed an integral part of this exhibit, on Page 15.
* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report. Accordingly, this schedule must be considered in
conjunction with those assumptions and should not be read on a stand-alone basis.
DUFF & PHELPS
Exhibits, Page 14 of 15
Case 1:11-cv-03605-JSR Document 107-3
HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
MARKET APPROACH: COMPARABLE COMPANY METHOD
(USD in millions)
Filed 01/26/12 Page 14 of 20
Exhibit 3.A
Notes:
(1)
House 5 financials for the year ending 12/31/2002. BV and TBV are equivalent. Revenue and Earnings are pro forma as if the recapitalization was in
effect for the entire year of 2002.
(2)
The Relative Factor is based on the relevant size of the Company as compared to the Concluded Comparable Companies. Otherwise, it is presumed
that the EV/BV multiple reflects the adjustments made to House 5 pro forma ROE, the EV/Revenue presumes a similar pro forma net margin of House 5
relative to that of the Concluded Comparable Companies, and the EV/LTM Earnings presumes House 5 projected earnings growth rate is in-line with
that of the Concluded Comparable Companies.
(3)
The selected range includes a control premium and is based on the range of multiples of Knight Capital Group, Inc. and LaBranche & Co. Inc., which
were deemed to be the closest comparable companies in the analysis, given their similar size, concentration of revenue mix toward trading activities,
business focus relating to market making in the case of Knight, and acting as a specialist in the case of LaBranche.
(4)
Indicated EV range is calculated as the Selected Multiple Range x Financial Data.
(5)
Calculated based on the average of the results indicated from the EV/BV, EV/Revenue and EV/LTM Earnings. Rounded to the nearest $1 million.
* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report. Accordingly, this schedule must be considered in
conjunction with those assumptions and should not be read on a stand-alone basis.
DUFF & PHELPS
Exhibits, Page 15 of 15
Case 1:11-cv-03605-JSR Document 107-3
Filed 01/26/12 Page 15 of 20
Expert Report of Bruce G. Dubinsky
Exhibit C
Section 13
Appendix
November 22, 2011
59
Case 1:11-cv-03605-JSR Document 107-3
Filed 01/26/12 Page 16 of 20
Expert Report of Bruce G. Dubinsky
Exhibit C
Comparable
Transaction
Method
The Market Approach, Comparable Transaction Method was considered,
but ultimately not relied upon in the estimate of Fair Market Value due to
the limited comparability of the indentified transaction targets to House 5.
The targets were mostly retail brokerage firms, whereas House 5 focused
on institutional markets, and on its proprietary trading activities.
Transaction multiples were calculated from merger transactions in the
relevant industry group by accessing the Capital IQ transactions database.
The time frame considered spanned the two years leading up to and
including the Valuation Date.
Determination of Comparable Transactions
In selecting comparable transactions, the Capital IQ database and financial
publications in which transactions are disclosed were searched, to gather
information about the prices paid for similar businesses under similar
circumstances. The acquisitions are relevant indicators of an actual
market participant’s perception of Fair Market Value, and, therefore, can
be useful valuation indicators. Based on the research and accessing of
the Capital IQ database and a review of SEC filings of the companies in
the industry, 13 potential comparable transactions were identified.
The following is the list of 13 transaction identified (target company /
acquiring company):

Harrisdirect LLC/Harris Financial Corporation

Consors Discount-Broker AG/Cortal Consors S.A.

Hoenig Group Inc./Investment Technology Group Inc. (NYSE:ITG)

Beeson Gregory Group plc/Evolution Group plc (LSE:EVG)

Dempsey & Company LLC/ETrade Financial Corporation

Tucker Anthony Sutro/Royal Bank of Canada

Morgan Keegan Inc./Regions Financial Corporation

Datek Online Holdings Corp./Ameritrade Holding Corporation

Dain Rauscher Corp./Royal Bank of Canada

H.D. Vest Inc./Wells Fargo & Company

Advest Group Inc./MONY Group Inc.

JWGenesis Financial Corp./First Union Corporation

Spear, Leeds & Kellogg LP/Goldman Sachs Inc.
The 13 transaction targets would, for the most part, most closely be
classified as retail trading businesses, and hence most transactions are
not directly representative of House 5. Spear, Leeds & Kellogg LP, while a
November 22, 2011
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Case 1:11-cv-03605-JSR Document 107-3
Filed 01/26/12 Page 17 of 20
Expert Report of Bruce G. Dubinsky
Exhibit C
comparable business, was not publicly traded and closed more than two
years prior to the Valuation Date. As a result of the aforementioned
issues, the results of the Comparable Transaction Method are used mainly
to corroborate the results of the Income Approach and Comparable
Company Method.
Application of the Comparable Transaction Method
Once the comparable transaction set was established, transaction
multiples were computed. Transaction multiples are ratios of equity value
to the operating results of a company. The EV for each target company
was taken from the Capital IQ transaction database. Multiples were
calculated for EV to BV, Revenue, and Earnings to the extent those
financial metrics were available for the target companies. The following
points illustrate the multiples calculated for the comparable transaction set,
and how those multiples were applied to House 5 financials to estimate
Fair Market Value as of the Valuation Date:

EV / BV

The average multiple for the transaction targets, which
included a control premium, was approximately 3.6x, with a
range of multiples of 1.4x to 11x.

The selected multiple of 1.6x was applied to the pro forma y/e
59
2002 BV of $299.1 million to arrive at a Fair Market Value of
a 100 percent interest in the common equity of House 5 of
$467 million. The selected multiple is based on the low-end of
the range, due to below-average ROE of House 5 compared to
the target firms.
Results of the Comparable Transaction Method
Based on the Comparable Transaction Method as described above, an
indicated Fair Market Value of a 100 percent interest in the common equity
of House 5 on a marketable, controlling interest basis was $470 million,
as of the Valuation Date. Since the valuation conclusion in this report is
based on the premise of value that House 5 is a going concern, any
evidence to the contrary would have a significant negative impact on the
valuation. Further, there is evidence that House 5 was artificially
supported by millions of dollars of Other People’s Money from the IA
59
Since the valuation conclusion in this report is based on the premise of value that House 5
is a going concern, any evidence to the contrary would have a significant negative impact
on the valuation. Further, there is evidence that House 5 was artificially supported by
millions of dollars of Other People’s Money from the IA Business.
November 22, 2011
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Case 1:11-cv-03605-JSR Document 107-3
Filed 01/26/12 Page 18 of 20
Expert Report of Bruce G. Dubinsky
Exhibit C
Business. This concluded value is based on the time-weighted average
EV / BV multiple of the target set.
See Appendix 1 for detailed calculations.
November 22, 2011
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Case 1:11-cv-03605-JSR Document 107-3
Filed 01/26/12 Page 19 of 20
HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
MARKET APPROACH: COMPARABLE TRANSACTION METHOD
(USD in millions)
Appendix 1
Trailing Financial Data (3)
Deals Closed By 12/11/2002
Target / Buyer
Notes:
Harrisdirect LLC/Harris Financial Corporation
Consors Discount-Broker AG/Cortal Consors S.A.
Hoenig Group Inc./Investment Technology Group Inc. (NYSE:ITG)
Beeson Gregory Group plc/Evolution Group plc (LSE:EVG)
Dempsey & Company LLC/ETrade Financial Corporation
Tucker Anthony Sutro/Royal Bank of Canada
Morgan Keegan Inc./Regions Financial Corporation
Datek Online Holdings Corp./Ameritrade Holding Corporation
Dain Rauscher Corp./Royal Bank of Canada
H.D. Vest Inc./Wells Fargo & Company
Advest Group Inc./MONY Group Inc.
JWGenesis Financial Corp./First Union Corporation
Spear, Leeds & Kellogg LP/Goldman Sachs Inc.
Average Value
Median Value
Time-Weighted Average Value
Selected EV / BV Multiple
BV
(5)
(6)
Indicated Fair Market Value (controlling, marketable) (rounded)
Closing
Date
2/4/02
4/29/02
9/3/02
7/11/02
10/1/01
10/31/01
3/30/01
9/9/02
1/10/01
7/2/01
1/31/01
1/2/01
10/31/00
Implied
Total Equity
Value (EV)
(1)
520.0
431.8
105.4
61.8
178.2
625.0
789.2
989.2
1469.7
114.1
311.8
102.7
5512.6
1-week
Transaction
Premium
(2)
N/A
N/A
N/A
N/A
N/A
-12.0%
49.0%
N/A
24.0%
N/A
9.6%
1.6%
N/A
14.4%
9.6%
9.2%
Total
Assets
252.7
1774.6
98.6
42.6
52.6
717.7
2057.5
0.0
2814.6
50.1
1970.6
95.9
25345.4
BV
178.7
314.6
52.0
39.6
16.2
347.8
267.4
316.9
469.0
11.4
147.2
64.7
1501.7
Return
on
BV
LTM
Profit
Margin
EV /
BV
-15.3
N/A
-123.5
N/A
1.9
3.7%
-5.7
N/A
40.9 251.9%
22.8
6.6%
47.3 17.7%
21.6
6.8%
87.2 18.6%
1.6 13.6%
18.9 12.9%
13.3 20.5%
971.4 64.7%
N/A
N/A
1.8%
N/A
26.7%
3.5%
10.6%
7.4%
8.0%
0.8%
5.4%
8.1%
49.9%
2.9X
1.4X
2.0X
1.6X
11.0X
1.8X
3.0X
3.1X
3.1X
10.0X
2.1X
1.6X
3.7X
1.8X
2.3X
1.0X
4.0X
1.2X
1.0X
1.8X
3.4X
1.3X
0.6X
0.9X
0.6X
2.8X
N/A
N/A
55.0 x
N/A
4.4 x
27.4 x
16.7 x
45.8 x
16.8 x
73.5 x
16.5 x
7.7 x
5.7 x
41.7%
15.7%
24.9%
12.2%
7.7%
5.1%
3.6X
2.9X
3.4X
1.7X
1.3X
2.0X
26.9X
16.8X
23.7X
LTM
LTM
Revenue Earnings
289.8
189.3
103.6
15.4
152.9
654.7
444.7
291.8
1091.4
195.6
347.8
165.1
1945.5
Transaction Multiples (4)
EV /
EV /
Revenue Earnings
1.6X
299
470
Notes:
(1) Implied Total Equity Value (TEV), plus other consideration paid to non-common shareholders.
(2) Calculated as (offer price - target stock price 1-week prior to offer date) / target stock price 1-week prior to offer date.
(3) Financial information for comparable transaction target companies from SEC Filings, Published Transaction Overviews and Capital IQ.
(4) Multiples are based on implied EV at the announcement date of the transaction.
(5) Time-weighted average places more weight on recent transactions to reflect the most current market dynamics in the calculation of multiples. The calculated multiples exclude those transactions where
the price paid was less than TBV on the view that the discount is likely due to significant negative fair value adjustments to tangible net assets of the target.
(6) The selected multiple is at the low end of the range, due to below-average ROE of House 5 compared to target firms.
* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report. Accordingly, this schedule must be considered in conjunction with those assumptions and should not be read on a stand-alone
basis.
DUFF & PHELPS
Appendix, Page 1 of 1
Case 1:11-cv-03605-JSR Document 107-3
Filed 01/26/12 Page 20 of 20
Expert Report of Bruce G. Dubinsky
Exhibit C
November 22, 2011
63