June 25, 2007

Delaware Court Recognizes that Investment Banking Analysts Are Extremely Bright and Extremely Overworked

A member sent over these extracts from In re Lear Corporation Shareholders Litigation (page 29-30):

“In their complaint the plaintiffs purport to set forth a Denny’s buffet of disclosure claims…. The first disclosure claim the plaintiffs press involves the failure of the proxy statement to disclose one of the various DCF models run by JPMorgan during its work leading up to its issuance of a fairness opinion…the proxy statement informs shareholders that the more optimistic assessment based on the [disclosed] July 2006 Plan figures resulted in a range of values between $35.90 and $45.50 per share, a range that was materially higher than the $28.59 to $38.41 span contained in the undisclosed model.

But the plaintiffs quibble because the proxy statement fails to disclose a DCF model prepared by a JP Morgan analyst early in the morning on February 1. That model used modestly more aggressive assumptions than those that formed the basis for the DCF model used in JPMorgan’s final fairness presentation. Although this model was simply the first of eight drafts circulated before a final presentation was given to the Lear board later that day, the plaintiffs say that the omission of this iteration is material….

From the record before me, it appears that the proxy statement fairly discloses the Lear management’s best estimate of the corporation’s future cash flows and the DCF model using those estimates that JPMorgan believed to be most reliable. The only evidence in the record about the iteration the plaintiffs say should be disclosed suggests that it was just one of many cases being prepared in Sinatra time by a no-doubt extremely-bright, extremely-overworked young analyst, who was charged with providing input to the senior bankers. As the plaintiffs admitted, they did not undertake in depositions to demonstrate the reliability of this iteration, much less that it somehow represented JPMorgan’s actual best effort at valuing Lear’s future cash flows.” I added the emphasis…