Deposition of Steven Grenadier, Ph.D. — Case 1:21-md-02989-CMA (Document 585-5)
Summary
Exhibit 38 to Document 585 in Case 1:21-md-02989-CMA (Document 585-5), entered on the FLSD docket June 30, 2023: the 216-page transcript of the deposition of Steven Grenadier, Ph.D., in In re January 2021 Short Squeeze Trading Litigation, No. 1:21-MD-2989-CMA, taken on behalf of the Plaintiffs by remote Zoom proceedings from Menlo Park, California on Wednesday, April 19, 2023. Laurence M. Rosen of The Rosen Law Firm examines Grenadier, with Antony L. Ryan and Charlotte Lepic of Cravath appearing for Defendants, on Grenadier's work as a Stanford business school professor and senior advisor to Cornerstone Research and on the reports of Professor Fischel. Exhibits 175 through 179 include the Corrected Expert Report of 02/24/23, the Rebuttal Expert Report of 03/28/23 and works by Fama and Shleifer, and an errata sheet closes the transcript.
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“Deposition of Steven Grenadier, Ph.D. — Case 1:21-md-02989-CMA (Document 585-5).”
Original at archive.org. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/2023-06-30-covid-era-misc-d2b9c3a8-1/
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Case 1:21-md-02989-CMA Document 585-5 Entered on FLSD Docket 06/30/2023 Page 1 of
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EXHIBIT
38
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1 IN THE UNITED STATES DISTRICT COURT
2 FOR THE SOUTHERN DISTRICT OF FLORIDA
3
4
5 IN RE JANUARY 2021 SHORT
SQUEEZE TRADING LITIGATION No. 1:21-MD-2989-CMA
6 ____________________________/
7
8
9
10
11
12 DEPOSITION OF STEVEN GRENADIER, PH.D.
13 Remote Zoom Proceedings
14 Menlo Park, California
15 Wednesday, April 19, 2023
16
17
18
19
20
21
22
23 REPORTED BY:
24 LESLIE ROCKWOOD ROSAS, RPR, CSR 3462
25
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1 IN THE UNITED STATES DISTRICT COURT
2 FOR THE SOUTHERN DISTRICT OF FLORIDA
3
4
5 IN RE JANUARY 2021 SHORT
SQUEEZE TRADING LITIGATION No. 1:21-MD-2989-CMA
6 ____________________________/
7
8
9
10
11 Deposition of STEVEN GRENADIER, PH.D., taken on
12 behalf of the Plaintiffs, Remote Zoom Proceedings from
13 Menlo Park, California, beginning at 9:05 a.m. Pacific
14 Daylight Time and ending at 4:11 p.m. Pacific Daylight
15 Time, on Wednesday, April 19, 2023, before
16 Leslie Rockwood Rosas, RPR, Certified Shorthand Reporter
17 No. 3462.
18
19
20
21
22
23
24
25
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1 APPEARANCES:
2
3 FOR THE PLAINTIFFS:
4 THE ROSEN LAW FIRM
5 BY: LAURENCE M. ROSEN, ESQ.
6 275 Madison Avenue, 40th Floor
7 New York, New York 10016
8 (866) 767-3653
9 lrosen@rosenlegal.com
10
11
12 FOR THE DEFENDANTS:
13 CRAVATH SWAYNE & MOORE LLP
14 BY: ANTONY L. RYAN, ESQ.
15 CHARLOTTE LEPIC, ESQ.
16 825 Eighth Avenue
17 New York, New York 10019-7475
18 (212) 474-1296 (Mr. Ryan)
19 (212) 474-1325 (Ms. Lepic)
20 aryan@cravath.com
21 clepic@cravath.com
22
23 Also Present:
24 Nicholas Lin, Robinhood
25
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1 I N D E X
2
3
4 Wednesday, April 19, 2023
5
6 WITNESS EXAMINATION
7
8 STEVEN GRENADIER, PH.D.
9
10 BY MR. ROSEN 6
11
12
13
14
15 QUESTIONS WITNESS INSTRUCTED NOT TO ANSWER
16 (None)
17
18
19
20
21
22
23
24
25
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1 DEPOSITION EXHIBITS
2 STEVEN GRENADIER, PH.D.
3 NUMBER DESCRIPTION IDENTIFIED
4 Exhibit 175 Corrected Expert Report of 6
5 Professor Steven Grenadier,
6 02/24/23
7 Exhibit 176 Rebuttal Expert Report of 6
8 Professor Steven Grenadier,
9 03/28/23
10 Exhibit 177 Court Order 42
11 Exhibit 178 Efficient Capital Markets: II, 85
12 by Eugene F. Fama
13 Exhibit 179 Inefficient Markets, by Andrei 93
14 Shleifer
15
16
17 PREVIOUSLY MARKED EXHIBIT REFERRED TO HEREIN:
18 EXHIBIT NO. PAGE
19 Exhibit 117 101
20
21
22
23
24
25
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1 Menlo Park, California; Wednesday, April 19, 2023
2 9:05 a.m. Pacific Daylight Time
3 PROCEEDINGS
4
5 --oOo--
6 (Exhibit 175, Corrected Expert Report of
7 Professor Steven Grenadier, 02/24/23, was marked
8 for identification by counsel electronically.)
9 (Exhibit 176, Rebuttal Expert Report of
10 Professor Steven Grenadier, 03/28/23, was marked
11 for identification by counsel electronically.)
12
13 STEVEN GRENADIER, PH.D.,
14 having been first duly sworn, was examined
15 and testified as follows:
16
17 THE WITNESS: I do.
18 THE REPORTER: Thank you, sir.
19 You may proceed, Counsel.
20
21 EXAMINATION
22 BY MR. ROSEN:
23 Q. Good morning, Professor Grenadier. How are you
24 doing?
25 A. Very well. Thank you.
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1 Q. All right. So let's see, where are you now?
2 A. I'm in Menlo Park, which is right near Stanford
3 University.
4 Q. All right. And what office are you with?
5 A. This is Cornerstone Silicon Valley office.
6 Q. All right. Is anybody with you now?
7 A. Just the -- just the two Cravath attorneys.
8 Q. Two Cravath attorneys are with you?
9 A. Yes.
10 Q. Okay. Let's see.
11 So you're a professor at Stanford; is that
12 right?
13 A. Pardon me?
14 Q. You're in the business school?
15 A. Yes, I am.
16 Q. Okay. And I'm going to introduce exhibit --
17 well, we've already introduced Exhibit 175 and 176. The
18 first is your opening expert report which was corrected
19 for some typo, I think, and then -- so I have the
20 corrected version. And then there's a rebuttal report
21 which is Exhibit 176.
22 Could you just identify them and tell me if
23 those are your reports.
24 A. Sure. Just give me a moment. I'm going to -- I
25 see them on my screen. I just have to download them.
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1 Okay, I have them.
2 Q. All right. Okay.
3 So now in addition to being a professor at
4 Stanford, you've also had some outside professional
5 activities related to finance; is that right?
6 A. Yes.
7 Q. Okay. And it shows here you're a director of
8 E*TRADE funds; is that right?
9 A. That is correct, yes.
10 Q. And what -- what did E*TRADE funds do?
11 A. Sure. So E*TRADE, the brokerage firm -- I don't
12 know if they still do, but for a while salvaged their own
13 proprietary fund family, and I was an outside trustee for
14 that fund family.
15 So it grew from maybe two to approximately ten
16 mutual funds, and then at one point, they shut them down.
17 Q. I see. And what was your role as a trustee of
18 the funds?
19 A. So I was an outside trustee, and there were also
20 inside trustees. And the outside trustee is a -- my
21 understanding, was a fiduciary area looking after the
22 investors in the underlying funds.
23 Q. Okay. And do you know approximately how many
24 funds they had?
25 A. I think it grew to about ten.
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1 Q. And do they have specific strategies, those
2 funds?
3 A. They were -- it's all -- as I can recall, all of
4 them were index funds. And so it was a mixture of
5 different types, but your sort of classic stock, bond,
6 international, that kind of index fund.
7 Q. So an index fund, does that mean -- were they
8 equally weighted or if they valuated the index funds?
9 How does that work?
10 A. Most index funds are market valuated.
11 Q. So an index fund that's market valuated would
12 purchase and maintain a portfolio of an equal weight of
13 every fund, every stock in that portfolio; is that how it
14 works?
15 A. So it would not be like that. So a classic
16 example -- and I'm sure we had one of them -- would be an
17 S&P 500 fund --
18 Q. Uh-huh.
19 A. -- which is approximately the 500 largest by
20 market value US stocks. And what you would do to manage
21 a fund like that would buy each of them in their market
22 value proportions. So, for example, today you would put
23 much more in Apple than you would do in some other one
24 like Walmart or something like that.
25 And then it's actually because they're market
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1 weighted, they're relatively easy to maintain because you
2 can essentially buy and hold them. They float. So as
3 Apple goes up, and you hold the same number of shares, it
4 moves up with Apple's market cap.
5 So valuated indices are generally quite easy o
6 maintain and low cost to index because you don't really
7 have to really do much. You just buy in the right
8 proportions, and then they essentially move in proportion
9 over time.
10 Q. Okay. And what if suddenly you had a hundred
11 million dollar of new investment to the fund; would you
12 then buy the same proportion of the portfolio that you
13 already have with that hundred million, then?
14 A. Yes. They would get their pro-rata share of
15 that pie. And so everybody in the fund would have the
16 same fractional weights in the underlying stocks, and
17 then as new money comes in, they just get another slice
18 of that pie.
19 Q. All right. And it says here that you also
20 worked as a director of Nicholas-Applegate Institutional
21 Funds; is that right?
22 A. That is.
23 Q. And what was your role there?
24 A. Sure.
25 It was again as an outside trustee, and
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1 Nicholas-Applegate was, as it says, institutional funds.
2 It was different than E*TRADE funds in that the
3 underlying owners were essentially institutional
4 investors, not retail investors.
5 And that -- I don't remember exactly. It's been
6 a while. Nicholas-Applegate funds had a mixture of
7 mostly active funds, and they were much more hedge fund
8 like. So they may have even involved some amount of
9 shorting in them.
10 Q. I see.
11 Is Nicholas-Applegate still in business?
12 A. Ha-ha. I think so. They -- but I haven't
13 followed them in like years. They were -- my
14 understanding when -- at least when I was there, they
15 were a -- they were subsidiary of Allianz. I believe
16 it's a larger international bank, and that -- that was my
17 recollection. I don't know if that's still true, though.
18 Q. And what about AQR Funds; what was your role
19 there?
20 A. Sure. It's the same thing.
21 So AQR is mostly known as a hedge fund, but they
22 started mutual fund family, and when they started the
23 mutual fund family, I was one of their outside directors.
24 And I did that for around five years or so.
25 Q. And what type of investing did AQR do?
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1 A. So it was hedge fund like. So there were some
2 unusual funds in there. So there was one relatively
3 small fund that actually I would call hedge fund in the
4 sense that they did things like merger arbitrage and
5 stuff like that, which is unusual for a mutual fund.
6 They had some more conventional funds that were
7 international. They even had a fund when I was there
8 that was a momentum fund.
9 So they were -- I don't know. They don't fit
10 neatly into active versus passive. They're somewhere in
11 between. And like I say, I left there --
12 Q. Passive would be E*TRADE, for example?
13 A. Correct.
14 Q. I see. Okay.
15 All right. Okay. It says you're a senior
16 advisor to Cornerstone. What does it mean to be a senior
17 advisor to Cornerstone Research?
18 A. So I don't know specifically what that -- what
19 that means in general. In my circumstance, I have a
20 relationship with Cornerstone where I do my expert
21 witness -- my expert witness work mostly exclusively with
22 them.
23 So when I have -- help on a case such as this
24 one, I work with Cornerstone, and because I work
25 exclusively with Cornerstone, I have a contract that has,
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1 you know, some additional terms because of that.
2 Q. Some additional terms?
3 A. Yeah.
4 Q. What do you mean by "some additional terms"?
5 A. So normally when I work with -- in the old days,
6 when I'd work with a litigation consultant, it would be
7 on a per-deal basis. You know, there would be some split
8 and understanding of who I bill. You know, very basic
9 stuff.
10 When I work with Cornerstone, I have a contract
11 that will say exactly how much of their revenues, as it's
12 defined in the contract, that I would get a percentage
13 of.
14 Q. So Cornerstone would bill the client for this
15 case, and you would just get a cut out of that?
16 A. Yes. You said it correctly. I just was
17 self-correcting. When I said a percentage of revenues,
18 obviously no revenues that I had no dealings with. So
19 you put it correctly.
20 If I'm working on a case with them, I will bill
21 my hours, and Cornerstone bills their hours, and subject
22 to some sort of description of what hours I have a
23 fraction of, that's the case. I get a fraction of their
24 hours on the case.
25 Q. Okay. All right.
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1 You're familiar with Professor Fischel; is that
2 right?
3 A. Yeah. I am.
4 Q. You know he -- he produced two reports in this
5 matter?
6 A. I do.
7 Q. Have you had a chance to read those reports?
8 A. Yes.
9 Q. And when did you -- did you read a draft of the
10 reports before they were finished?
11 A. I did not.
12 Q. Do you consider Professor Fischel to be an
13 economist?
14 A. Yes.
15 Q. Now your reports have very similar narratives
16 and conclusions, and I'm just wondering whether you had
17 an opportunity to discuss with Professor Fischel the case
18 prior to drafting your respective reports?
19 A. I did not.
20 Q. Have you ever represented a plaintiff,
21 plaintiffs, in a securities class action?
22 A. Yes, I believe so.
23 Q. Okay. Can you tell me which case that was?
24 A. So my recollection is there were many. Let me
25 see if I can think of some here. One was -- this was a
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1 long time ago. It was -- so one of my very first cases
2 was on a class action. I'm trying to think. What's
3 the -- I forget. It's like the largest German telecom
4 funds -- telecom firm, and it was a class action against
5 them. I'm just forgetting. Most people would know the
6 name. It's not coming to me.
7 I believe I did some life insurance companies,
8 several of them that I worked for the plaintiffs in a
9 class action suit for.
10 Q. Were those securities, though, or was that like
11 more of a consumer contract type of case?
12 A. I don't recall. It's -- I did -- I wouldn't
13 have known the distinction. I assume that the one with
14 the German telecom was a securities one. And there were
15 others. You know, when I first started as an expert, I
16 think I predominantly worked for plaintiffs.
17 Q. And why did you stop? They weren't paying you
18 enough?
19 A. It was all the -- I charge the same. I enjoyed
20 working with those attorneys, too. But I started getting
21 asked more often by defense sides. Of course, from my
22 standpoint, a lot -- some of my cases, they're not class
23 action, and I can't really distinguish is one a
24 traditional -- you know, they're banks on both sides. So
25 I don't see the normal distinction that others may see.
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1 Q. So let's talk about Robinhood. You're familiar
2 with the defendant in this case, Robinhood Markets?
3 A. Yes.
4 Q. Okay. And how do they -- do you know how they
5 make money?
6 A. I have a vague understanding, but I'm certainly
7 not an expert in their business.
8 Q. Are you aware that they derive a material
9 portion of their revenue from selling their clients'
10 order flow to market makers?
11 A. That's my general understanding, yes.
12 Q. Do you know why market makers would pay to have
13 that order flow?
14 A. I have a general understanding. It involves
15 things such as they can make money just on the
16 transactions themselves. It's possible that there are
17 other benefits of understanding order flow, but that's
18 really all I know about that.
19 Q. So is it possible that the order flow contains
20 valuable information for Citadel?
21 A. It is possible.
22 (Discussion off the record.)
23 THE REPORTER: Excuse me, Counsel. Can we go
24 off the record, please.
25 MR. ROSEN: Sure.
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1 (Discussion off the record.)
2 MR. RYAN: If there's anybody listening in,
3 could they please identify themselves on the record. I
4 was unaware that anybody was listening in.
5 MR. ROSEN: I'm not sure anyone is, but I know
6 there's other people in my office who have a link and may
7 or may not log in to listen at some point. But they're
8 not making appearances, but they're just going to listen.
9 So I don't know.
10 But it sounds like nobody's -- nobody's there at
11 the moment.
12 All right. Let's go forward.
13 Q. So you read the Complaint in this action,
14 Professor Grenadier; is that right?
15 A. I did.
16 Q. All right. And what do you understand the
17 allegations of misconduct are against Robinhood and its
18 subsidiaries?
19 A. So I'm -- I'm looking at the first exhibit that
20 you shared with me, my original report, and it's
21 paragraph 7 where it starts. Let me go to paragraph 11,
22 please.
23 And I say -- this is, of course, my
24 understanding -- "Plaintiffs allege that the share prices
25 of the affected stocks" -- that's nine stocks that are
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1 named -- plummeted because of Robinhood's unexplained
2 decision to prohibit all share purchases."
3 And so my understanding is in paragraph 11 --
4 and it does show up in more detail below, but it's my
5 understanding that there are these restrictions on
6 purchases during this class week, and in 2021, that
7 plaintiffs allege caused the prices of these stocks to
8 fall during that week.
9 Q. And did you -- you're aware that the Securities
10 and Exchange Commission issued a report about the what
11 they called the meme stock market events, something like
12 that; right? Are you aware of that SEC report?
13 MR. RYAN: I apologize. Objection to form. It
14 was an SEC staff report.
15 THE WITNESS: So I cite a report from the SEC
16 talking about this matter, which had explicit emphasis
17 on -- yeah. So I do mention that in my report, and I am
18 familiar with that report.
19 Q. BY MR. ROSEN: Yes. It's titled "Staff Report
20 on Equity and Options Market Structure Conditions in
21 Early 2021."
22 A. Correct.
23 Q. All right. Okay.
24 So you read that report?
25 A. I have.
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1 Q. And in issuing your two expert reports in this
2 matter, did you assume the truth of the findings in the
3 SEC report?
4 MR. RYAN: Objection to form.
5 THE WITNESS: I have not thought about it that
6 way. If you're -- you're welcome to ask me specific
7 questions. There are so many things mentioned in that
8 report. I certainly did not assume all of them as facts
9 in the sense a lot of the report -- my view of reading it
10 was it was some things reporting, some things
11 hypothesizing about. I didn't view it as a normal like
12 statement of facts. So I've never thought of it in the
13 way you're characterizing it.
14 Q. BY MR. ROSEN: Now did anyone at Cornerstone
15 Research participate in preparing either of your reports?
16 A. Yes. Cornerstone, which obviously is a group of
17 individuals, assisted me in the preparation of my
18 reports.
19 Q. And do you know about how many people over there
20 helped?
21 A. So I never know exactly because there's people
22 that move in and out, and also, there's always people
23 behind the scenes, generally more junior people. So I
24 don't know.
25 But I would guess in terms of regular contact,
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1 it might have been something like six or so individuals.
2 Q. And what function did they perform in your
3 report for you?
4 A. Sure.
5 So this would be no different than my other
6 cases. It's a matter of -- so one of the -- one of the
7 things that they did for me in this case, which is very
8 typical, is in terms of under my instruction, doing
9 things with data. I know that's very generic. But for
10 example, collecting data. For example, in this case,
11 running regressions, as I describe how to do that.
12 Doing -- basically acting as a professor would call a
13 research assistant. And so helping me draft my report,
14 which means commenting on my draft, me commenting on
15 their updates, proofreading, that kind of stuff.
16 So it's generally like one would consider a
17 research assistant, but not for an academic paper, but
18 for a report of this kind.
19 Q. And approximately how many hours have you spent
20 so far working on these two reports or this Robinhood
21 matter in total, you personally?
22 A. Yes.
23 So I never -- you asked approximately, which
24 makes it very fair because I never really know. But I
25 think between the two, I think something like 150, maybe
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1 200 hours between all this, and I'm maybe including also
2 prep.
3 Q. And do you know how many hours the research
4 staff at Cornerstone who assisted you spent to date?
5 A. I don't.
6 Q. What is your definition of a meme stock?
7 A. It's obviously a term of art, and it really
8 shows up in this case. It's not something that's
9 generic. And it's a general mention of the stocks that
10 are named in this case. GameStop is obviously -- I would
11 view as the quintessential one. But it's stocks that had
12 lots of social media discussion during this time.
13 Q. During this time?
14 A. Yeah, during the time of this case. So, for
15 example, you know, January 2021 would be sort of a big
16 period.
17 Q. Okay. Is there a joke element to meme stocks?
18 A. I'm not aware of that.
19 Q. Okay. Have you ever purchased equity
20 securities?
21 A. I have.
22 Q. Do you have one or more investment strategies
23 that you've implemented in the past in purchasing equity
24 securities?
25 A. Investment strategy broadly defined, yes.
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1 Q. And what type of investment strategies have you
2 used in the past?
3 A. So I am basically an index person. So I have a
4 very well-diversified portfolio, and I mean diversified
5 across countries, asset classes, all that kind of stuff.
6 So I'm very much -- very diversified. I would say I --
7 my only -- only idiosyncratic nature is I'm probably
8 less risk -- more risk averse than the average person so
9 I generally keep a higher component of my money in low
10 risk fixed income than -- than most people do.
11 Q. Like corporate fixed income or government fixed
12 income?
13 A. Generally government fixed income. So of that,
14 of course, is for tax reasons, I hold a lot of California
15 municipal bonds, but I also own a lot of relatively
16 short-term treasury bonds.
17 Q. Do you -- do you ever trade on momentum?
18 A. I do not.
19 Q. Do you ever make short-term trades in equities?
20 A. I never have.
21 Q. What is the fundamental value of a stock?
22 A. So generally, so that's -- that's not a -- that
23 term can be defined different ways by different people.
24 Let me try to give you my best understanding of a sort of
25 umbrella meaning to that.
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1 Fundamental value of a stock is the present
2 value of all future cash flows that you will receive by
3 holding stock.
4 Now that might sound sort of definitional, but
5 it's actually a very important concept. We hold
6 stocks -- they're not like widgets. We hold stocks for a
7 particular reason, and that's because we want earnings
8 from them. We want cash flows from them.
9 And so given that basic idea, anything that
10 determines those underlying cash flows is what we would
11 consider a fundamental value. So, for example, type of
12 things that influence those future earnings would be
13 expectation -- excuse me, cash flows, would be
14 expectations of things like revenues, profits,
15 competition, and of course, underlying riskiness.
16 So it's these company-specific characteristics
17 that would drive a fundamental value as opposed to
18 non-fundamental things such as frenzies and bubbles and
19 madness of crowds, that kind of stuff.
20 Q. Is there -- do you know how to derive the
21 fundamental value of a stock?
22 A. Unfortunately, there is no one fundamental value
23 of a stock. We try our best to get a good estimate of
24 it, but it's -- it's a -- something we try to approach.
25 But I don't believe there is a known fundamental value.
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1 In a metaphysical sense, maybe there is one that's known
2 to some sort of deity, but in general, all we can do is
3 estimate it.
4 So I've never thought that there is a
5 fundamental value that I can grab onto, but we try very
6 hard to estimate it.
7 Q. You've done damages analyses in securities class
8 actions before; is that right?
9 A. Yes.
10 Q. All right. Now have you ever used the term
11 "true value" in connection with a securities class action
12 damages analysis?
13 A. I don't know. It's possible. It's not the type
14 of term that falls right out of my lips. So it's
15 possible. It's not the normal term I use, but it is
16 possible I've used that in some report.
17 Q. Okay. So, you know, in the typical Section
18 10(b) securities class actions, you know, stock drop
19 case, how would you measure per-share damages? What's
20 the simple calculation you would typically use to
21 measure?
22 A. So generally in most of these cases, there's
23 something I would call conceptual, which is the
24 difference between an actual value at a time, you know,
25 in the real world, versus a but-for value, which is a
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1 value -- I'm not using it in a legal sense, but sort of a
2 logical economic sense, the value that you imagine would
3 have been in place at that time had the circumstances
4 been different.
5 So a classic example would be there's a
6 statement at a point in time, earnings equals ten, in the
7 but-for world is what if the market thought earnings was
8 eight. And you would try to figure out what the but-for
9 price would be had earnings been announced as eight. And
10 it would be the difference of those two at a point in
11 time.
12 Q. So in trying to do the damages analysis, you're
13 not trying to find out what the true value is absent the
14 fraudulent statement, but it's you're trying to get the
15 but-for value, but for the fraudulent -- allegedly
16 fraudulent statement of value?
17 A. So let me answer that again with the caveat I'm
18 not quite sure -- excuse me -- what "true value" may
19 mean, but I am trying -- I would be trying to figure out
20 in that but-for world what the stock price would have
21 been had circumstances been different.
22 So it sounds similar to true value. I just
23 wouldn't normally use that term. You're trying to figure
24 out, as best you can as an economist, what the stock
25 price would have been had, in my hypothetical, earnings
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1 been announced at $8 versus $10. You were trying to
2 figure out as best you can what the stock would have
3 traded for in that but-for world.
4 Q. And is it -- is it necessarily true there the
5 but-for value is equal to its fundamental value?
6 MR. RYAN: Objection to form.
7 THE WITNESS: So, again, I don't normally think
8 of the fundamental value there. I don't know. I would
9 normally think of it -- I think the best way I convey it
10 is the but-for price would have been an economist's best
11 estimate of what the price would have been in the actual
12 world had the circumstance -- circumstances had been what
13 is described in the but-for world, what the price would
14 have been in that world.
15 Q. BY MR. ROSEN: Do you have any sense of what
16 portion of the volume of trading on the NYSE and NASDAQ
17 that is represented by investors who buy primarily based
18 on their view of the fundamental value?
19 A. I don't know the answer to that question.
20 Q. Okay. So, well, you know, is it true that
21 there's a quite a lot of people or there are many people
22 who -- who are considered -- who consider themselves
23 value investors or value investing is sort of a strategy,
24 an investment strategy that people use, some people use.
25 Is that fair?
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1 A. It is fair. But I would add that what one
2 person called a value investor is very different than
3 others. I -- I teach a class that's primarily on value
4 investing. And even people who are real-world value
5 investors, they have very different views of what value
6 investing is. It's sort of a constant shock to me.
7 But value investing as a term is used all the
8 time among certain kinds of investors.
9 Q. Have you ever heard of the investment strategy
10 called technical analysis?
11 A. I have.
12 Q. And what do you understand that to be?
13 A. So, again, with the caveat that that's a very
14 broad term, technical analysis is -- technical analysis
15 is generally used by investors who focus more on what I
16 would call trends and timing issues.
17 So an example of a technical analysis put to
18 work would be somebody who believes in what you asked me
19 earlier about momentum. They may believe over certain
20 time horizons stocks that went up are more likely to go
21 up again.
22 There are also technical analysts who do the
23 exact opposite, and they try to find stocks that moved up
24 recently, and they think they're going to go back down.
25 So for any sort of drawing I could do on a
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1 chalkboard of a price path of a stock, I could find
2 analysts that see all different -- technical analysts
3 that see all sort of things. But in general, technical
4 analysis is focused on trends and pattern spotting.
5 Q. And are there -- are there investment funds that
6 use technical analysis as an investment strategy?
7 A. I'm sure there are.
8 Q. What about high-frequency trading? Could --
9 what exactly is this?
10 A. Sure.
11 It -- a lot of high-frequency trading would fit
12 into technical analysis. So high-frequency trading, very
13 generally, is doing some sort of pattern recognition, but
14 as the name implies, over very short frequencies,
15 sometimes fractions of a second.
16 And generally nowadays, they're computer driven,
17 and the competition in that world has gotten down to who
18 has the fastest connection to the trading platform. And
19 so they compete over large amounts of investments in some
20 sort of wire or wireless technology to trade as fast as
21 possible, seeking profits from very short-term trading
22 patterns.
23 Q. Now I've heard the term "program trading" in the
24 past. Is that -- is that a broader -- is -- is
25 high-frequency trading a subset of program trading?
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1 A. I would say so because they're both often --
2 obviously for high frequency, they're computer generated,
3 there's not an individual that's thinking in split
4 seconds. They're both computer driven.
5 But there's a large body of trading that's
6 program trading that's very different. So an example
7 might be a strategy that uses a computer to formulate
8 hedges.
9 So an institution might use computer trading
10 that would invest in an equity that the computer figured
11 out how to get an insurance like put option on it at the
12 same time to get rid of some of downside.
13 And that's not necessarily the same thing as
14 high-frequency trading.
15 Q. And earlier the term "momentum trading," I don't
16 know if I mentioned it or you mentioned it. Could you
17 explain what "momentum trading" is?
18 A. Sure.
19 Let's just be generic for the moment and just
20 say there is a horizon, which could be a week or a month
21 or a day. And momentum generally believes that what we
22 call there is positive auto-correlation. That is a rise
23 in a security's price over a particular period of time is
24 more highly to be followed by a subsequent rise.
25 So that's a particular pattern, and momentum
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1 traders sometimes believe there are such patterns over
2 these split seconds that we previously spoke about. But
3 they also believe that it may also be true over longer
4 periods like weeks or months.
5 I am not aware of a momentum trader that
6 believes they last for many years. In fact, generally
7 people believe the opposite over longer periods of time.
8 Q. What about the investment strategy called trend
9 following? Is that separate from momentum trading?
10 A. I would put -- so that's not a term that I use.
11 I would view trend following as a -- as an analogous term
12 for technical analysis.
13 Q. Okay. So what about "swing trading"? Do you
14 know what "swing trading" is?
15 A. I don't.
16 Q. How about the investment strategy called "moving
17 average crossover"?
18 A. I know what a moving average is. That's sort of
19 a -- you know, if you have a list of data, you can
20 calculate an average, and then every day that data shifts
21 forward another day, and you can calculate another
22 average. And you can track those averages over time.
23 That's all -- I know what a moving average is.
24 The strategy you're talking about conveys that it uses
25 the moving average, which sounds like technical analysis,
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1 but I do not know that particular strategy you mentioned.
2 Q. Okay. And you mentioned index investing.
3 That's another separate strategy; is that correct?
4 A. I would say so. In my view, yes, it is.
5 Q. And what about growth investing? Is that
6 separate from value investing?
7 A. It is. With the same caveat. Some people say
8 growth investing sounds just like someone else's value.
9 But in general, growth investing is what it sounds like.
10 You're trying to find stocks that are going to grow
11 faster than others in the future.
12 Q. What about socially responsible investing; is
13 that a separate investment strategy?
14 A. So I would mostly say yes. I'm not 100 percent
15 sure I would call it wholly an investment strategy. It
16 could also be a more broad strategy of what people view
17 as something that's good for society as opposed to what's
18 good for their portfolio. They get enmeshed.
19 But social investment strategy is a strategy
20 where investors take into account things other than
21 financial values, and you can come up with your own list
22 of what they're looking at, but it could be whatever they
23 think is good for society, they may take that as an
24 attribute and something that makes them want to invest
25 more in it.
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1 Q. What about the investment strategy called
2 "events-driven investing"? Have you heard that term?
3 A. I believe so.
4 Q. And that's, for example, mergers or investing
5 when a merger is announced? Is that an example of
6 events?
7 A. That would be my understanding. There's a hedge
8 fund strategy that they will call events driven, and
9 sometimes it's things that are even broader in a macro
10 context. Like I think of a George Soros as doing this
11 kind of thing. About sort of like large events dealing
12 with monetary policy and things like that. So I'm
13 familiar with events, not just corporate events, but also
14 macro events, too.
15 Q. Now we -- your -- your -- your report mentions,
16 it uses the term "short squeeze," and you understand what
17 that -- you have a general idea of what a short squeeze
18 is supposed to be; right?
19 A. I think that you put it correctly. I have a
20 general idea. It's a bit of a term of art. As I think I
21 convey in my report, the definitions vary, but we all
22 agree on some basic principles of a short squeeze.
23 Q. Do you -- do you think it would be fair to
24 characterize investing because you believe there is a
25 short squeeze to be a form of event-driven investing?
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1 A. I -- I don't really have a good answer to that
2 because I don't use the phrase "event-driven investing."
3 I don't disagree with it. It's just -- it's not a phrase
4 I would normally use so I'm not sure how to answer that
5 one.
6 Q. Is that because the term "event driven" is so --
7 is very vague?
8 A. I wouldn't even go that far. I would just
9 simply say event-driven investing isn't the kind of term
10 I normally do. So I don't really want to venture out and
11 offer an opinion on a phrase that I normally don't do.
12 Part of it's vagueness, but it's vagueness in my
13 own mind. It's possible there are traders on Wall Street
14 who would say, "I know exactly what you mean by that."
15 But "event driven" to me is a very broad term. So I'm
16 not really sure how I would convey that.
17 Q. What about "contrarian investing"? Is that a
18 type of investment strategy that people use?
19 A. Yes, it is.
20 Q. And how does that work?
21 A. So --
22 Q. Or not work?
23 A. Sure.
24 As a general principle, a contrarian does what
25 it sounds like. They try to make investments that are
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1 currently out of favor with the idea that they think that
2 things will turn around.
3 So I would view a contrarian strategy as being
4 somewhat the opposite as a momentum trader.
5 Q. All right. So there are nine stocks that are
6 the subject of this litigation that are listed in the
7 Complaint. I'll name a couple of them. AMC, GameStop,
8 Koss, Bed Bath & Beyond, Blackberry, et cetera.
9 You're familiar with those nine stocks; right?
10 A. I am.
11 Q. I'll just -- I'll just use the term "nine
12 affected stocks" or the nine stocks if that is -- and if
13 you don't understand my use of the term, let me know, but
14 I'll -- rather than list all nine.
15 So do you -- is it your opinion that those nine
16 stocks were overvalued as of close of trading on
17 January 27, 2021?
18 A. So that is not part of my opinion. It's
19 related -- the question is obviously related to my
20 opinion that as of that period of time, I don't believe
21 they traded in efficient markets. That's my opinion.
22 Now whether they were above or below some sort
23 of value, I didn't form an opinion on that. I -- my
24 opinion was whatever their value was, it wasn't tethered
25 to value-relevant information.
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1 THE REPORTER: Excuse me. Nicholas Lin is
2 asking to join the deposition.
3 MR. RYAN: Yes, he is with Robinhood. He's an
4 inhouse lawyer at Robinhood.
5 (Nicholas Lin enters deposition room.)
6 THE REPORTER: Thank you.
7 MR. RYAN: Thank you.
8 THE REPORTER: You can continue, Counsel.
9 Q. BY MR. ROSEN: Professor Grenadier, would you
10 agree that price is typically the best estimate of value
11 for publicly traded stock?
12 A. I'm sorry, I actually didn't hear the -- I
13 didn't quite hear the end of your sentence. I don't hear
14 everything crystal clear. I hear everything pretty
15 darned good, but I didn't get that one.
16 MR. ROSEN: Let me close my window because it
17 could be noise from the outside.
18 Q. Would you agree that typically price is the best
19 estimate of value for publicly traded stocks?
20 A. So in the context -- if I believe for these
21 stocks, they are traded in an efficient market, which is
22 often the case, then yes, I would agree with you.
23 Q. Okay. And for stocks that are not traded in an
24 efficient market, what is the best estimate of value if
25 not price?
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1 A. Then that's an almost impossible question to
2 answer. Because if you can't rely on the price as the
3 best estimate of value, in an efficient market, we're
4 left to individual calculations. So I don't know what
5 more I can say is investors would have to use other
6 resources to value them, not necessarily silly resources,
7 but sometimes very sophisticated resources to value them.
8 In some grand scheme of things, the people with the best
9 information and the best methods would probably come up
10 with the best estimate of -- of, you know, true value or
11 whatever you want to call it of a security, but there's
12 no one thing that we would all rely on.
13 Q. And you didn't perform any tests to try to
14 estimate the value of any of these nine affected stocks
15 either in the pre-class period or the class period?
16 A. Let me make sure I understand your question.
17 So in terms of did I do any tests to try to
18 value? Can you -- can you give me an example of what you
19 might mean?
20 Q. Well, I don't know. Did you do a discounted
21 cash flow analysis of any of the nine stocks?
22 A. I did not.
23 Q. Did you perform any other analyses in an effort
24 to try to determine what their fundamental value was at
25 any time during the pre-class or class period?
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1 A. I did not. My focus was on the prices
2 themselves, or more importantly, the movements of the
3 prices themselves of the -- I think you call the affected
4 stocks, and what was the value relevant information that
5 was conveyed at those times. That, of course, was the
6 substance of my report.
7 Q. Can you -- do you recall what the specific
8 restrictions were that Robinhood imposed on these nine
9 stocks on January 28th, 2021?
10 A. So I'm happy to answer that with a general
11 conveyance of that information. Of course, there was a
12 table with my specific understanding about literally
13 which stocks, which time of day.
14 But my understanding is they changed over time,
15 but there are these so-called PCO restrictions from
16 Robinhood.
17 Quick question: My understanding is you said
18 Robinhood restrictions; is that correct, in your
19 question?
20 Q. Yeah, yeah. I was just asking about Robinhood.
21 A. That was my recollection, but before I went on
22 and on, I wanted to make sure.
23 Yes. And those restrictions are essentially
24 sell only, no buy. And then over time, they changed.
25 But in general they weakened to things such as limits on
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1 how much you could buy rather than zero. And they moved
2 over time.
3 Q. And there were also some restrictions on -- I
4 think, on options or did they not have -- or they can --
5 they cancelled purchase orders of stocks; right?
6 MR. RYAN: Objection to form.
7 Q. BY MR. ROSEN: Also?
8 A. I don't recall that. It's possible I read that.
9 I was focused mostly upon the restrictions on purchases
10 of equities. So whether it was zero or some small
11 positive number. Also, my understanding is there were
12 some margin requirements that were changing, too.
13 Q. And do you know -- could you tell me why
14 Robinhood submitted those restrictions, the purchase
15 restrictions?
16 A. Did you say why Robinhood like used those
17 purchase restrictions; is that your question?
18 Q. Yeah, why they implemented those restrictions.
19 A. Sure.
20 So my understanding is that Robinhood did this
21 because of regulatory requirements about sort of their
22 own margin that they had put down on these stocks which
23 had high VARs. And so they were very expensive for
24 Robinhood the post these amounts, and these were the
25 stocks -- generally the ones that are at issue in this
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1 case are ones with the very highest VARs.
2 Q. Now there were also some restrictions on options
3 trading. Now I know interactive brokers, for example,
4 had some restrictions in options trading on the 28th; is
5 that right?
6 A. I don't remember.
7 Q. Uh-huh. Do you have any opinion as to whether
8 restrictions on options trading would affect the prices
9 of the nine stocks?
10 A. I -- I can't answer that. I have not been -- I
11 have not looked into that in this case. It's a fair
12 question, but it's not something that I was asked to look
13 at so I really can't answer that question.
14 Q. Now the Complaint also alleges that Robinhood
15 cancelled buy orders that it already had placed.
16 Do you have any opinion as to whether
17 cancellation of buy orders already placed would affect
18 the value of stock, the nine stocks?
19 A. So I do to the extent that what I say in my
20 report is in terms of the sort of behavior, that in an
21 efficient market, restrictions on a subset of retail
22 investors should not impact the stock price.
23 Q. Do you have any empirical evidence to back up
24 that opinion?
25 A. I would say I would base this on fundamental
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1 principles of finance and economics and belief in
2 investors' profit motive to arbitrage away simple
3 profits.
4 Q. So it's a theoretical opinion?
5 MR. RYAN: Objection to form.
6 Q. BY MR. ROSEN: It's an opinion based on theory
7 rather than empirical evidence?
8 A. So I would argue no. There is ample empirical
9 evidence of those principles I just said, and that is
10 clear and obvious public kinds of arbitrage opportunities
11 don't last for long. We would all -- if it was obvious
12 that somebody could say, I am going to institute
13 something that impacts a small segment of retail
14 investors," and hypothetically assume for a moment's time
15 that impacted the price, say it lowered price, that is
16 low-hanging fruit. And investors would see that, and it
17 would not last very long at all. They would rush to
18 arbitrage that and purchase it if it was at too low a
19 price.
20 And there's -- just to finish up. Sorry.
21 There's a lot of empirical evidence that such arbitrage
22 opportunities, to the extent they ever exist, are much --
23 are very fleeting.
24 Q. So is it your opinion that the restrictions
25 imposed by Robinhood had no impact on the price of the
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1 nine affected stocks in any way?
2 A. I don't have -- I don't have that opinion either
3 way. There is -- I don't form an opinion in my reports
4 about causation. I have an opinion that I talk about
5 that there is not an efficient market in these nine
6 at-issue securities during the period of time that I
7 analyzed, which is one week prior to the class period and
8 the class period itself.
9 I also related to your question do say -- and
10 I'll be slightly repetitive because I said this a moment
11 ago -- that if we believe that the stocks traded in an
12 efficient market during the class period, then it is
13 fundamentally inconsistent with that assumption to
14 believe that a restriction on a subset of retail
15 investors would cause the price to change.
16 So that's my opinion, but I don't vary from that
17 and assume what could happen in an inefficient market and
18 what caused the price to decline. I -- I was not asked
19 to do that in these reports.
20 Q. Okay. Have you ever heard the term, quote,
21 assumption of reliance on an efficient market free of
22 manipulation, unquote?
23 A. I believe I have, yes.
24 Q. It's -- it's in the Court's opinion as an
25 element of one of the plaintiff's claims that is the
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1 10(b) claim?
2 A. I -- that's my recollection. It may even show
3 up in one of by reports, probably as a quote or
4 reflection of that.
5 Q. And what is your understanding of what that
6 means, that term?
7 A. Can you assist me by isolating that term again
8 for me?
9 Q. Assumption of reliance on an efficient market
10 free of manipulation. I can show you the Court opinion
11 if it helps.
12 A. Sure. I might even be able to find it in my
13 report.
14 Q. It's page 38 of the Court opinion.
15 A. Is that something you're sharing with me.
16 MR. ROSEN: I could. Hang on a second. Give me
17 one second. I don't think I've introduced it before so
18 it will be Exhibit 177.
19 (Exhibit 177, Court Order, was marked for
20 identification by counsel electronically.)
21 Q. BY MR. ROSEN: Okay. So if you go -- you should
22 be able to see it now. It's in Exhibit Share.
23 A. I do.
24 Q. Go to page 38. 38, second paragraph. The
25 Court's -- the elements of a market manipulation claim in
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1 element number 3.
2 A. Sorry, I was absorbed with downloading it. So
3 can you give me the -- where --
4 Q. It's page 38.
5 A. Okay.
6 Q. Second paragraph in three.
7 A. Is that the paragraph that begins with "to
8 assert"? Yes.
9 Q. Yes. It's item number 3.
10 A. Like I said, I was absorbed downloading it so
11 that's why I missed that. Give me one second to just
12 sort of review that.
13 Q. No problem.
14 A. Okay. And just to be clear -- I'm sorry --
15 "caused by reliance on an assumption of an efficient
16 market free of manipulation." That's the phrase at issue
17 in your question?
18 Q. Yes.
19 A. Okay.
20 Q. And what do you understand that to mean?
21 A. Sure.
22 So obviously, I'm going to be careful about
23 legal terms. I'll do my best as an economist. As a
24 common phraseology meaning, it also has a legal term. So
25 I'm not going to be an expert on what "reliance" means.
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1 And also, "manipulation" has both, too. So I'm not going
2 to be an expert of defining what act would constitute
3 legal manipulation. So with those caveats, let me do my
4 best to answer your question.
5 So an efficient market has an -- obviously a
6 strong meaning in economics. So the assumption of an
7 efficient markets and reliance -- I'm going to just --
8 for purpose of my answer, I'm going to talk about
9 reliance not as my understanding as a legal term. So
10 reliance will be sort of something that you believe to be
11 true as an individual or class of individuals.
12 So in the assumption of an efficient market. So
13 in my report I define what economists define as an
14 efficient market. But broadly speaking, an efficient
15 market is where prices of securities react quickly and
16 fully to new value-relevant information.
17 And then the last part of this phrase is "free
18 of manipulation." So generally speaking, in sort of an
19 economist meaning, I would view a manipulation as
20 something that would make a market that is efficient not
21 efficient.
22 So it would mean that if a market had
23 manipulation that was effective in impacting the stock
24 prices, then that price would no longer be under the
25 definition of an efficient market that I just defined.
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1 Q. Are you offering any opinion in this case as to
2 whether plaintiffs' class are entitled to an assumption
3 of reliance on an efficient market free of manipulation?
4 MR. RYAN: Objection to form.
5 THE WITNESS: So that is not part of my report.
6 My report focuses, among some other things, on whether as
7 an economist I believe that these nine affected stocks
8 traded in an efficient market during the week prior to
9 the class period and the week of the class period.
10 So it was I viewed my role and my opinion as
11 focusing on whether I believed those stocks in reality
12 traded in an efficient market or not. And it's my
13 opinion that they did not during that time period.
14 Q. BY MR. ROSEN: All right. Now you've heard the
15 term "reliance on the integrity of the market price in a
16 efficient market"?
17 A. I have seen that before.
18 Q. That's part of the -- well, in my -- my view,
19 it's part of the -- part of the market presumption of
20 reliance in the securities class actions -- in the
21 typical security class action misrepresentation case;
22 right?
23 So do you -- in your -- in your view, what does
24 it mean for an investor to make their investment
25 decisions by relying on the integrity of the market price
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1 in an efficient market?
2 MR. RYAN: Objection to form.
3 THE WITNESS: So I'm going to answer that as I
4 always say as an economist, because I do understand some
5 of that phrase, in particular, reliance involves a legal
6 concept, and I don't think anyone's interested in
7 Professor Grenadier's legal concept understanding.
8 When I -- I am certainly well aware of cases
9 where there's fraud on the market, legal construct behind
10 it. And my role in those cases, just like in this case,
11 is to come up with an economist's opinion about whether
12 or not the market was efficient or not during a
13 particular time period.
14 So just to be clear in my answer to your
15 question, all that I am offering here in my reports is my
16 opinion about whether or not I believe these nine stocks
17 traded in an efficient market during those time periods.
18 That's my contribution to it.
19 Then my understanding is the trier of fact can
20 use that to formulate her opinion. But it's I don't go
21 beyond that and make any legal ramifications on that.
22 I'm simply acting as an economist to give my opinion, in
23 this case, that these nine stocks did not trade in
24 efficient markets during that two-week period.
25 Q. BY MR. ROSEN: Now do you understand there to be
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1 a difference between an assumption of reliance on an
2 efficient market free of manipulation --
3 THE REPORTER: Excuse me. Can you repeat,
4 Counsel? You cut out there at the end.
5 Q. BY MR. ROSEN: -- as the Court wrote in page 38
6 of his opinion and the term "a reliance on the integrity
7 of the market price in an efficient market"?
8 MR. RYAN: Objection. Calls for a legal
9 conclusion.
10 THE WITNESS: Are you -- are you quoting from
11 page 38, Mr. Rosen?
12 MR. ROSEN: The first one, I was quoting from
13 page 38, you know. Well, we can go back to it, if I can
14 find it here. "Reliance on an assumption of an efficient
15 market free of manipulation."
16 THE WITNESS: Yes, that's still on my screen.
17 Q. BY MR. ROSEN: All right. So you don't have an
18 opinion or an understanding one way whether it's the same
19 or different from reliance on the integrity of the market
20 price?
21 MR. RYAN: Same objection.
22 THE WITNESS: Yeah. That sounds like a legal
23 opinion. I don't. I'm an expert on what an efficient
24 market is, and that's my opinion. I am not an expert on
25 reliance and things like that.
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1 So I don't want to -- I don't want to offer
2 opinions that are outside my field of expertise, which is
3 financial economics.
4 Q. BY MR. ROSEN: All right. So in your rebuttal
5 report -- see if I can find it. It's paragraph 28.
6 A. Approximately what page?
7 Q. It would be page 11 of the PDF, page 9 of the
8 report itself on the lower right.
9 A. Perfect.
10 Q. Paragraph 28. This is the March 28th rebuttal
11 report you issued.
12 A. Okay. Is that the paragraph that begins with
13 the word "furthermore"?
14 Q. Yes.
15 A. Okay.
16 Q. So there's a sentence in there that says,
17 "Therefore, during the proposed class period to the
18 extent that putative class members were aware of
19 Robinhood's restrictions and what plaintiffs allege were
20 'artificially distorted' prices, they would have
21 transacted based on their own individual information or
22 preferences without trusting the integrity of the market
23 prices."
24 A. Yes.
25 Q. So I'm going to ask you some questions about
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1 that sentence.
2 What do you mean when you say "they would have
3 transacted based on their own individual information or
4 preferences? What does it mean to have -- to be
5 transacting based on one's own individual information or
6 preferences?
7 A. Sure. I will most certainly answer that.
8 I'm just going to read that. While you were
9 talking, I did not read the sentence. I'm just going to
10 read that now.
11 Q. Go ahead.
12 A. And if for some reason I forget, just prod me to
13 answer your actual question.
14 Okay. So to answer that, it's important to read
15 earlier on in 28. Because I am saying that if we suppose
16 something, then the markets would be inefficient.
17 So in context to your question, I am now
18 assuming that the markets were not efficient during this
19 period. And when the markets are not efficient, then an
20 earlier question you asked me, what is -- in an efficient
21 market, I said the best estimate of a stock price's value
22 is the stock price's value.
23 In fact, the best estimate of a stock price's
24 value one minute from now in an efficient market is
25 essentially -- is a stock value.
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1 When we leave the assumption of an efficient
2 market, which is what I'm getting at in this paragraph
3 here, then as I said earlier, all bets are off. And in
4 fact, what investors will make their beliefs -- will form
5 their beliefs for what to do, whether to buy or sell or
6 hold, it's going to be subject to their own personal
7 preferences and knowledge.
8 And I know that sounds vague, but that's what
9 happens. If you can't take the current stock price as
10 its best estimate of its value, then all bets are off,
11 and I don't know what you're going to do and you don't
12 know what I'm going to do because we have different
13 beliefs, we have different liquidity preference and the
14 like.
15 And basically what I'm saying here is if there
16 are not efficient markets, then investors will make their
17 decisions like buying and selling and holding on
18 idiosyncratic rationale.
19 Q. Well, don't they do that, anyway, even in an
20 efficient market? Why does it change -- why does their
21 decision making change when the market becomes
22 inefficient?
23 A. Sure.
24 The major issue is the -- while investors in an
25 efficient market will make buy and sell decisions based
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1 on some idiosyncratic understandings, it's way more
2 involved in an inefficient market.
3 So what I mean is: In an efficient market, you
4 may have liquidity preference and the like, but it's
5 still going to be based on an understanding that the
6 current value is the true value.
7 On the other hand, when markets are not
8 efficient, not only are you making decisions based on
9 liquidity and preferences, but you're making decisions
10 based on what you think the value is divorced from what
11 you're seeing in the stock market page.
12 It's way more involved and much more complicated
13 to figure out what an investor would do in an inefficient
14 market. Because they have nothing to base their
15 valuation decisions on that's publicly available. What
16 they have to do as an investor is essentially do
17 something that you asked me to do earlier: Did you value
18 the stock?
19 And I said how?
20 And you said maybe an MPV analysis or maybe I'm
21 a momentum trader. I don't know, but that's the kind of
22 things investors would do.
23 Just to be very clear on this, without an
24 efficient market, any decisions that I make that embodies
25 a view of the value of the stock compared to its price,
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1 without efficiency, I need some model. And it could be
2 MPV, it could be momentum, it could be mean reversion. I
3 don't know, but every investor is going to have to have
4 some sort of model, and that is vastly more complicated
5 than in a world where everybody would agree that the best
6 estimate of the value is today's stock price.
7 Q. Well, what about fear? What about investors'
8 fear if they think there's an inefficient market or if
9 there is an inefficient market and -- and they don't have
10 a basis to value the stock all the sudden. Wouldn't that
11 fear enter into their analysis trading decision?
12 MR. RYAN: Objection to form.
13 THE WITNESS: So in your -- in your -- your
14 question, were you assuming an inefficient market?
15 Q. BY MR. ROSEN: Yeah.
16 A. So let me rephrase it to make sure I understand,
17 that you're asking me in inefficient market, would an
18 investor's degree of fear influence their trading?
19 Q. You said "inefficient market"?
20 A. Correct.
21 Q. Yeah, yeah, that was my question.
22 A. Sure.
23 So in an inefficient market, a investor's fear
24 certainly could influence their trading behavior. And
25 fear I would put into the general category of
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1 preferences.
2 Q. And could -- and let's say in an efficient
3 market, couldn't fear also play a role in their
4 preferences? How would it differ in an efficient market,
5 in an efficient market?
6 A. Sure.
7 So preferences would influence an investor's
8 behavior also in an efficient market, but that would be
9 entirely separate from any concern the investor has over
10 the difference between the market price of the stock and
11 what they think its value was.
12 And so all of that kind of calculus becomes much
13 more meaningful and complicated in an inefficient market.
14 Because, for example, in your question, the amount of
15 fear you have is going to be a function of how much faith
16 you have on the market value being a fair value.
17 If you don't have any faith in the market value
18 being a fair value, your fear would be manifested much
19 more highly.
20 Q. Okay. So let's -- in paragraph 28 in your
21 rebuttal report, there's another sentence that begins --
22 I think it's the last sentence, that begins, "As a
23 financial economist, I am not aware of a class-wide
24 approach to determine which putative class members
25 believe that prices were efficient when transacting in
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1 the at-issue stocks and which believed the prices were
2 artificially distorted without asking each putative class
3 member individually."
4 What -- what is your definition of "artificially
5 distorted"?
6 A. So I believe when I used that phrase I was
7 quoting from earlier in the paragraph. So in the -- so
8 because remember here the premise here is an assumption,
9 not my opinion. In other words, what I'm saying is like
10 a "what if" or a hypothetical, as you might call it.
11 If plaintiffs were able to show that the alleged
12 manipulation, these trading restrictions that you asked
13 me earlier about, resulted in artificially distorted
14 stock prices and inefficient markets.
15 So what I mean by that, artificially distorted
16 would be prices that deviated from their efficient market
17 values.
18 Q. Okay. Does somebody -- does a class member or
19 investor have to consciously believe that they're trading
20 in an efficient market to be permitted to rely on the
21 integrity of the market price?
22 MR. RYAN: Objection. Calls for a legal
23 conclusion.
24 THE WITNESS: I don't know the answer to your
25 question. Because in particular, it uses the word
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1 "reliance," and in my understanding, that's a legal term.
2 Q. BY MR. ROSEN: Well, that last sentence in
3 paragraph 28 says, "I'm not aware of a class-wide
4 approach to determine which putative class members
5 believed that prices were efficient when transacting the
6 at-issue stocks."
7 I'm just wondering why that's important to your
8 opinion or important enough to make that statement.
9 A. Sorry, I don't quite understand your question.
10 Q. Well, the sentence you wrote in that report
11 says, "I am not aware of a class-wide approach to
12 determine which putative class members believed that
13 prices were efficient."
14 Why is it important or even relevant that a
15 class member believe that prices were efficient?
16 A. So it certainly could be important if we have a
17 world where the markets are not efficient, and
18 Dr. Werner, for example, is coming up with an approach to
19 estimating but-for stock prices.
20 So hypothetically, if he was trying to estimate
21 what a stock price of GameStop would be in a world
22 without these trade restrictions, but with trade
23 restrictions of E*TRADE, for example, he would have to
24 come up with the market value in such a world. We talked
25 about that earlier.
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1 Trying to come up with a market value in a world
2 where some investors believe in efficient market and some
3 investors don't believe in efficient market is quite a
4 complicated endeavor.
5 You would have to -- to come up with that
6 but-for stock price, look at the interactions of those
7 subsets of investors, and in particular, for the subset
8 that do not believe in efficient market, try to ascertain
9 what they used to motivate their trading restrictions,
10 which would, of course, involve their estimate of what
11 the value of the stock would be.
12 MR. ROSEN: We've been going about an hour and a
13 half. Do you guys want to take a break, a short break?
14 MR. RYAN: Sure. Makes sense.
15 MR. ROSEN: So you guys are all on Pacific time;
16 is that right?
17 THE REPORTER: Off the record, Counsel?
18 MR. ROSEN: Yeah, go off the record.
19 (Recess.)
20 Q. BY MR. ROSEN: So prior to the break, we were
21 looking at paragraph 28, that last sentence of your
22 rebuttal report, and I want to focus on that a little bit
23 more, you know, particularly the clause that says, "I am
24 not aware of a class-wide approach to determine which
25 putative class members believe that prices were efficient
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1 when transacting the at-issue stocks."
2 Is it your opinion, Professor Grenadier, that if
3 somebody believed the prices were distorted by the
4 restrictions, the purchase restrictions, that means
5 they're not allowed -- that means that they knew the
6 market was not efficient?
7 A. So was your question if somebody -- actually,
8 maybe it's more efficient if you just ask it again for
9 me, please. The last part of your question.
10 Q. Is it your opinion that if -- if an investor
11 during the class period believed that the prices were
12 distorted because of the purchase restrictions on the
13 nine affected stocks, that means they knew the market for
14 the stocks was not efficient at that time?
15 A. So I want to distinguish between my
16 determination of what's an efficient market and what
17 might be in a investor's head. So I'm not contending
18 that an individual investor literally uses the phrase
19 "efficient" versus "non-efficient."
20 What I'm saying is if an investor believed that
21 there was an artificial distortion, meaning that the
22 price of the stock was not that which would be an
23 efficient market, where prices are tethered to
24 value-relevant information, if that investor no longer
25 believed that the market price was not the best estimate
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1 of its value, then they would be trading in a world where
2 it was not an efficient market.
3 As an economist, I would say if an investor
4 trades in a world that's not an efficient market, as I
5 said earlier, all bets are off. They will make their
6 decisions based on some belief of what value is versus
7 what price is.
8 Q. Well, what about an investor that's engaged in
9 program trading or high-frequency trading. Suppose that
10 investor has no -- I mean, these programs, I assume these
11 programs aren't reading the news, necessarily, and
12 learning about Robinhood's restrictions.
13 I mean, would a stock sale that was implemented
14 because of a programmed trade, would such an investor be
15 aware of distorted prices?
16 MR. RYAN: Objection to form.
17 THE WITNESS: So the nature of the kind of
18 investments that I'm talking about in this case are very
19 different than what you would think about with people who
20 use computer programs to trade over tick-by-tick prices.
21 So those are not even essentially statistically
22 distinguishable.
23 So, for example, the firms that trade intraday
24 tick by tick are trying to make money on very small basic
25 points. So that's -- it's not something that I'm even
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1 picking up in this.
2 So I understand the nature of your question, but
3 that's -- that's a very different world that these
4 high-frequency traders are trading not on dollar
5 differences but like penny differences. And I'm not --
6 that's like nothing I'm talking about in this case. I'm
7 talking about, you know, meaningful differences in
8 values.
9 So when stock prices move, for example, on costs
10 and they move up a thousand percent in a week, that's a
11 world that's totally disconnected from what your question
12 is talking about.
13 So I'm not really concerning myself with
14 microfractions of a dollar. I'm talking about what
15 happens in a market that's no longer efficient in a
16 world, as in this case, where prices, for example, in the
17 week prior to the class period, went up by GameStop by
18 something like 700 percent. It's just orders of
19 magnitude difference.
20 So my answer is I don't even think about that
21 tick-by-tick kind of trading. I'm talking about these
22 sort of 700 percent, thousand percent price rises.
23 Q. BY MR. ROSEN: Well, okay. What about two
24 retail investors. Three -- let's say there's three types
25 of retail investors. One retail investor never reads the
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1 news, doesn't go to social media, lives in his own little
2 world.
3 Another retail investor is addicted to social
4 media and the news and The Wall Street Journal and
5 financial media, and that investor believes the prices
6 were distorted.
7 And then the third investor also has equal
8 access to news media, looks at Reddit nonstop, looks at
9 The Wall Street Journal, all the financial news media,
10 but that investor doesn't necessarily take a view as to
11 whether the prices are distorted. Maybe that investor's
12 just confused, unsure, doesn't really take a position.
13 So the first person who's completely ignorant of
14 anything other than what he looks at when he sees the
15 price, just sees that the price has changed, but doesn't
16 know -- have any view as to why or how or what. When
17 that person transacts and sells, would that person
18 presumably believe that the prices were efficient when
19 transacting?
20 MR. RYAN: Objection to form.
21 Q. BY MR. ROSEN: Or would have no reason to
22 believe otherwise, at least?
23 A. So in a normal circumstance, it doesn't matter.
24 What I mean is, in a normal circumstance, we mostly think
25 of stock markets as efficient. And so in most markets
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1 that I believe are efficient, there are undoubtedly
2 traders that do all sorts of things. But that doesn't
3 impact the price. And the reason it doesn't is because
4 we have institutional investors and arbitrageurs --
5 excuse me -- who ensure that the market price is tethered
6 to value-relevant information. And so the actions of
7 individual traders that are a small section of the market
8 generally don't matter.
9 And so in an efficient market, I never believe
10 that every investor is this super-intelligent person that
11 just floats with the market. All sorts of investors
12 exist in the real world in efficient markets.
13 What the point of my paragraph 28 in my opinion
14 is, in a world, which is what I believe is the case for
15 these two weeks for these nine stocks, the markets were
16 no longer tethered to value-relevant information.
17 That's a very special world. It's the normal
18 one, but it's the one that I truly believe existed at
19 that time for this set of stocks. That's where it does
20 matter.
21 And the reason is because for those three
22 investors that you talked about, I can imagine them
23 having different reactions to what happened after, for
24 example, costs went up a thousand percent in a week.
25 One of them may decide that that's a trend and
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1 will buy; another may believe that it's overvalued and
2 would sell. That is because they no longer -- these
3 investors now matter because the arbitrageurs aren't
4 making sure that the price is connected to value-relevant
5 information.
6 So your question is relevant to me only in the
7 notion of a market that's inefficient. And my point is,
8 basically from your question is that I would care about
9 the distinction between those three investors only in
10 an -- in, I-N, an efficient market.
11 Q. You've used the term "noise trader" in your
12 report in paragraph 109 in your opening report. Could
13 you define the term "noise trader"?
14 A. Sure.
15 I'll just be quick. I'm just going to go to
16 that paragraph, and then I have an answer for you. Can
17 you tell me the page on the PDF for that?
18 Q. Oh, wow. It may take me a second to figure it
19 out. Paragraph 109.
20 A. I think I found it. So it looks like it says
21 56. My eyes are bad. But it looks like it. 54.
22 MR. RYAN: This is in your opening or your
23 rebuttal report, Steve?
24 THE WITNESS: Opening.
25 Q. BY MR. ROSEN: So that's paragraph -- it's page
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1 51 of your opening report; right?
2 A. 54.
3 MR. ROSEN: Yeah, 54 of the PDF.
4 THE WITNESS: Yes. We're on the same wavelength
5 here.
6 So I do remember -- your question was asking me
7 what a noise trader is?
8 Q. BY MR. ROSEN: Yes.
9 A. Sure.
10 So a noise trader, there is an academic
11 literature that calls some investors noise traders. And
12 I'm referring to that, not some sort of real-world
13 connotation. And in this literature, a noise trader is
14 an investor who trades on what we would call -- makes
15 decisions based on non-value-related information.
16 So it's generally undefined, but it could be
17 something idiosyncratic, like a need for liquidity. Like
18 they get divorced or they're fired or something like
19 that, that causes them to trade.
20 But in general, it's something that motivates a
21 noise trader to trade is not related to the value -- the
22 underlying value of the company. So that's what "noise
23 trader" is.
24 Generally, in that older literature -- so this
25 is a 1990 paper, and most of that noise trader
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1 literature, noise traders, information that causes them
2 to trade is what we call sort of idiosyncratic, meaning
3 that it's not correlated across investors so that if you
4 and I were noise traders, you may have an unexpected
5 shock that makes you want to buy a week ago, but that's
6 not correlated with mine. Mine might have an unexpected
7 shock to sell two weeks from now.
8 But in both of our cases as noise traders, it's
9 something unrelated to fundamentals or things that drive
10 the earnings of stocks. So that's what a noise trader
11 is.
12 Q. Well, what about somebody, an investor who goes
13 to the supermarket, and he buys some Naked juice, and he
14 really likes the taste and says, "Wow, what a great
15 product, I'm going to buy this stock," based on his
16 belief that it's a nice product, that he likes the juice.
17 Would that be a noise trader trade?
18 A. I think -- so it depends, but I would say yes.
19 And keep in mind this is, you know, similar to questions
20 you've asked me earlier, I don't doubt there are
21 investors like this all over the place.
22 The question is in an efficient market, this
23 doesn't matter. It doesn't affect the stock price. As
24 you can imagine intuitively, that investor that you just
25 mentioned is not going to dissuade Warren Buffet from
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1 taking advantage of a mispricing. But in this
2 literature, they combine noise traders with frictions.
3 So this literature is based on the type of
4 person that you had mentioned before, if there is enough
5 of them, and there's frictions that prevent Warren Buffet
6 and arbitrageurs from being able to take advantage of
7 arbitrage opportunities, then you have impacts on prices.
8 So it's combination of significant noise trader
9 activity with frictions. Frictions that I talk about in
10 my report on lending fees and high short interest, those
11 are the things in the literature that can impact prices.
12 Q. Now are all retail investors noise traders?
13 A. I don't believe so.
14 Q. Do you have any sense of what percentage of
15 retail investors are noise traders?
16 A. I don't.
17 Q. Are the investors who were on Reddit or Wall
18 Street Bets, B-E-T-S, Wall Street Bets, were they noise
19 traders?
20 A. So I haven't come to that opinion. My
21 understanding is there are many individuals chatting
22 about these kinds of stocks, and they're all types, and
23 some may be what you consider a noise trader and some may
24 be considered what you wouldn't believe is a noise
25 trader.
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1 Q. Is it true that a noise trader is price
2 insensitive or insensitive to the price of the stock?
3 A. I don't believe that's necessarily the case.
4 Q. Is it fair to say that the vast majority of
5 Robinhood's customers are retail traders, small guys?
6 A. I'm sorry, you said Robinhood in your question.
7 Q. Yes. Yes.
8 A. That's my understanding.
9 Q. Now you also discuss in your report
10 institutional investors. Could you give some examples of
11 institutional investors?
12 A. Sure.
13 Hedge funds, active mutual funds, passive mutual
14 funds, but I'm more thinking about active mutual funds.
15 Some of the portfolio managers for pension funds and the
16 like. Investors who are making active decisions with
17 lots of resources and capital and well-informed traders
18 and the like.
19 So those would be examples. Generally, I'm
20 anything about hedge funds and professional investors.
21 Q. Are arbitrageurs also institutional investors?
22 A. My understanding is yes, usually.
23 Q. And are they a subset of institutional
24 investors?
25 A. It's a term of art, but I would say yes.
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1 Q. And how would you describe their role as a
2 subset of the institutional investor base?
3 A. Sure.
4 An arbitrageur is generally focused on
5 deviations of values from values tethered to
6 value-related information. So they're looking for price
7 deviations based on nonfundamental information. So I
8 mean, the classic example would be that if there was a
9 general -- this is a hypothetical -- a general agreement
10 that arbitrageurs believe that the stock price's value
11 should be a hundred dollars.
12 And then for some idiosyncratic reason, the
13 price falls to 90. And idiosyncratic meaning had nothing
14 to do with the underlying firms -- the underlying firm.
15 So they would see that $10 sitting there, and they would
16 buy it up because they know it's going to go back to ten
17 at some point.
18 So they're essentially looking around the
19 market, scouring the market for pricing deviations that
20 are not based on rational value-relevant information.
21 And they make their decisions based on that, either
22 buying it or selling it to take advantage of that.
23 Now arbitrageurs don't necessarily always make
24 the money that very instant, but they have confidence
25 that in the fullness of time, they will make that money.
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1 Q. Are they always right?
2 A. They are not.
3 Q. Could two different arbitrageurs disagree
4 fundamentally on the value of a particular security?
5 A. So, yes, that's true. The question is how
6 obvious an arbitrage is. So if an arbitrage was very
7 subtle, then I think that would fit the nature of your
8 question. But if an arbitrage is a very obvious one, so
9 a classic example would be you have gold traded in
10 New York and London, the same gold, and it trades at
11 different prices. Subject to transaction costs, that's
12 an obvious arbitrage, and they would not disagree on
13 that. That's the cleanest example.
14 As we go away from that, they become less
15 obvious arbitrages. So I would never use the argument of
16 this $100 versus $90, avoid it very quickly for the case
17 of a very subtle arbitrage. That's not my belief.
18 But for very obvious arbitrages, where prices
19 deviate from rational values for no obvious reason other
20 than some sort of idiosyncratic event, those are obvious
21 arbitrages that don't last very long in an efficient
22 market.
23 Q. Can institutions be noise traders?
24 A. They can. Generally, there's a belief that
25 noise traders don't last very long in some sort of
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1 Darwinian sense in the investment world. It's a very
2 competitive world. And people can succeed or fail based
3 on luck in the short run.
4 But there's a general belief that financial
5 markets are very competitive. And if you are trading
6 based on whims and irrational thoughts, generally you're
7 not going to last in the long run.
8 And that's what most people believe. It doesn't
9 mean that you can't be successful in the short run. It's
10 just we don't think that's sustainable.
11 Q. Do noise traders' actions or trades offset each
12 other in the market?
13 A. So the noise traders that you're asking about,
14 as I said, comes from an academic literature, and the
15 answer is it depends on the model. So broadly speaking,
16 that the earlier models of noise traders, like the 1990
17 one that I cite in paragraph 109, those I would say could
18 offset because they're uncorrelated. Depends on how many
19 there are and their fraction of the market.
20 There are more modern models, like a paper I
21 cited from Lasse Pedersen from around 2022, where they
22 assume something more akin to what I would call
23 coordinated what I would call noise traders. So
24 investors who trade on sort of non-value-related
25 information. But en masse, together, sort of what the
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1 press and analysts thought was happening with the meme
2 stocks.
3 That would be non-offsetting noise trader
4 behavior, which is a relatively new phenomenon that they
5 can coordinate this way through social media. So it's a
6 new area. In that case, the answer to your question
7 would be no. These kinds of noise traders may not offset
8 it. They may reinforce each other.
9 Q. Paragraph 110 uses the term "destabilizing
10 speculation of noise traders."
11 Is it your opinion that retail traders or noise
12 traders destabilize the market?
13 A. So no, not necessarily. And to sort of re-say
14 something I said earlier is that in a normal functioning
15 what I would call as an economist efficient market, noise
16 traders don't matter.
17 So as I said, you can name a stock, and I could
18 analyze it and say, "As of today, I believe it trades in
19 an efficient market."
20 And then you ask me, "Do you think there are
21 people doing your scenario about Naked Juice?"
22 And I'd say yes.
23 You'd say, "Are there people trading on looking
24 at moving averages?"
25 Yes.
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1 Does it matter?
2 No.
3 Because in a normal functioning efficient
4 market, if any of that affected the stock price,
5 arbitrageurs would swoop in and correct those prices.
6 So in this research literature that I'm talking
7 about, they are looking at markets that have some sort of
8 friction that prevents them from being efficient markets.
9 And just to be clear, what paragraph 110 is
10 laying out is -- I find as an academic very interesting,
11 is that there's this -- a movement in the literature to
12 talk about traditional noise traders that you
13 characterized pretty well about sort of what I would call
14 uncorrelated to this modern literature where they are
15 correlated. And I think the big word here is
16 "coordination."
17 So in traditional noise traders, these sort of
18 idiosyncratic, hard-to-explain, random movement of retail
19 investors are essentially one off and idiosyncratic. But
20 in this modern world, if they can coordinate. And
21 coordination are not really simple in the real world.
22 It's hard for you and I to coordinate. But if we have
23 social media, there is the potential coordination.
24 And that's what the Lasse Pedersen paper is
25 getting at, and people believe -- some people believe in
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1 the case at hand that these investors basing their trades
2 on idiosyncratic information are now working together and
3 trading similarly. That can move prices much more than
4 if it was idiosyncratic.
5 Q. Some of the literature -- and I don't know if
6 your report mentions this -- they use the term "stubborn
7 investors" in this context of noise traders.
8 And is it your opinion that stubborn investors
9 are irrational?
10 A. So that phrase does come out of, I believe, this
11 2022 paper from Lasse Pedersen. He was a student of mine
12 like 25 years ago.
13 So he uses that phrase. If you're asking me
14 about stubborn investors, that's a -- that's a
15 theoretical model there. Stubborn investors are ones who
16 have what we call priors. These are sort of initial
17 beliefs that only change those beliefs under lots of
18 pressure, lots of new information.
19 Now in the real world, there are investors whose
20 opinions are more difficult to change. I would never
21 unilaterally call them rational or irrational. It really
22 depends on the circumstances.
23 Q. So in paragraph 112, sums up, it says, "Academic
24 studies have documented that constraints on arbitrageurs
25 imposed by 'noisy' retail traders can inhibit competitive
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1 trading activity among investors and lead to departures
2 from market efficiency for a temporary period."
3 Is it your opinion that that is what happened
4 here in the -- in this case for these nine stocks?
5 A. So I haven't formed that opinion. Let me be
6 clear. My opinion on these nine stocks or one of my
7 opinions is that they did not trade in efficient markets
8 during this two-week period that I laid out in my report.
9 One week prior to the class period and the class period
10 itself.
11 What I'm -- and so that's my opinion. What I'm
12 saying here is that while I generally believe that
13 efficient markets are normal and typical, there are
14 periods where they're not. And what I'm summarizing in
15 this section of my report is there is academic literature
16 on this that says, well, how could you have arbitrageurs
17 who are trying hard to make money and still not have
18 efficient markets?
19 And as I said earlier, you mentioned some what I
20 would call sort of noise investor traders, and my
21 response was in an efficient market, it doesn't matter.
22 And so this literature asks and answers a very
23 interesting question. It says you have these noisy
24 traders, and you have arbitrageurs, and normally the
25 noise traders don't affect it.
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1 And what this literature does is isolate what
2 frictions can exist in theory but also in practice on
3 these institutional investors that can at least
4 temporarily prevent them from what I would call policing
5 the market and restoring equilibrium.
6 And the examples are, for example, if these
7 noise traders, for example, are -- become a larger or
8 more importantly coordinated segment of the market. If
9 they're coordinated and could potentially have a price
10 impact that's lasting, then it induces a lot of risk on
11 investors.
12 And so, for example, if temporarily through
13 coordination retail investors are noise traders -- not
14 all retail investors are noise traders -- could proper up
15 the price temporarily, and you're an arbitrageur who
16 wants to correct that for your own profit motives by
17 shorting it, in a normal efficient market, the price
18 would go back down and all would be done.
19 But now suppose that there were frictions. And
20 this is not true in every market, but in a particular
21 market a friction could be suppose the lending fees are
22 relatively high on these stocks. Suppose the amount of
23 short selling at the time was relatively high. Suppose
24 that through coordination there is a risk that while the
25 price may fall in the future, in the short run, it may
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1 continue to rise and these arbitrageurs may hit margin
2 calls.
3 All of these sort of frictions that I'm talking
4 about are ones that could prevent these arbitrageurs from
5 returning the market quickly to an efficient market.
6 So just to summarize, my point here is that
7 there's an academic literature that address this very
8 interesting conundrum. You have noise traders that can
9 temporarily change the stock price from their efficient
10 values and arbitrageurs, who we normally think in
11 efficient markets will police this market and return them
12 quickly to efficient.
13 Why -- how is it possible that they may not in
14 all cases? And the answer is friction. And those were
15 examples of the frictions I'm talking about.
16 Q. Now you said the noise traders could temporarily
17 change the price of the stocks. How lasting an effect
18 could noise traders have on the stock price?
19 A. So as an empirical matter, in the most case,
20 it's very short. And so my answer is very related to my
21 previous one, is that if there aren't large frictions
22 that prevent these arbitrageurs from making like easy
23 money, it won't last long.
24 So just to preface this, keep in mind that I'm
25 not someone who is so looking for perfection in the
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1 efficient markets that says there is never an impact of
2 noise traders in an efficient market on the price. I
3 believe that to the extent they do exist, it's unusual
4 and they're fleeting.
5 And so the idea is that these investors can
6 influence the price, but without friction it doesn't last
7 for very long. And, you know, empirically, it would be a
8 matter of an hour or less. It would be very quick.
9 Because it -- keep in mind like all of this is
10 not because these arbitrageurs are trying to save the
11 world or trying to save the integrity of the markets.
12 Maybe they like that. I am just basing it on competition
13 and people trying to make easy money when they can.
14 Q. Well, you said the effect, the noise trader
15 effect is an hour or less. But what about in the case of
16 this Robinhood thing, where stock prices were going up
17 throughout January, and I believe your report said there
18 was coordinated trading for some period of time. I mean,
19 I think it was at least a week.
20 How long did you say there was coordinated
21 trading going on?
22 A. So I don't opine on that. I certainly cite
23 other sources. So, for example, the Franklin Allen paper
24 has some tables that look at the amount of, for example,
25 Reddit and social media conversations about these meme
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1 stocks, and they were, to my understanding growing
2 rapidly around one week prior to the class period. There
3 is discussion in the literature that there was some of
4 this even before that, but it seemed to heat up about one
5 week, around the 21st, I guess, of January 2021.
6 Q. So from January 1st until 27th or -8th is maybe
7 six days, maybe, I don't know, four, five, six trading
8 days. So those noise traders, if you will -- I mean, if
9 it's true that those noise traders are what caused the
10 stock price to go up, the effect lasted at least a week;
11 right?
12 A. So let me put it in my own words and, of course,
13 you can reask the question if I -- if you have more
14 questions.
15 So number one is you may have said January 1st,
16 but you probably said January 21st.
17 Q. I meant January 21st.
18 A. Yeah. And I don't mean that to pick on you.
19 Like my hearing of you is like 90 percent. I don't think
20 there's anything we can do about it, and so I will always
21 ask that just to be sure.
22 So it is my opinion during that, I believe, five
23 trading days, in my opinion, these stocks were not
24 efficient, and I don't opine on why that's the case. But
25 to the extent that others, including academics, opine
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1 that at least part of this was due to coordinated
2 trading, we have something that is unusual.
3 So as I said earlier, in an efficient market,
4 even I believe that prices can deviate from efficiency
5 for a short period of time, but normally it's not very
6 long lasting, and I said like an hour.
7 And this is very different here, and it is
8 unusual to have markets become inefficient or what I
9 would say, obviously inefficient, for relatively long
10 period of time, like two weeks in this case.
11 That's why academics are writing papers on this
12 and that's why analysts were talking about this. It is
13 unusual, and it's also related to the questions you were
14 asking previously about the academic literature.
15 There is an analogy here between what we
16 normally think about retail investors and their trading
17 being essentially uncorrelated across them, and having an
18 impact, but not necessarily a lasting impact.
19 In a world where retail investors can
20 coordinate -- and by the way, this would be true for
21 institutional investors coordinating, too. But when
22 investors can coordinate, it seems to be the case,
23 obviously, that these price impacts could be more
24 sustained.
25 It's sort of a new world we're in; right? So
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1 normally, like I said, it's hard to coordinate across
2 people. Because we have all different motives and
3 incentives and there's lags between how we talk about
4 things. But if there's a modern means that investors can
5 coordinate, then this is a new world here, and it's
6 possible in that new world where retail investors can
7 coordinate, it seems quite possible that these can last
8 longer than traditionally they have.
9 Q. Did you say you don't have an opinion as to what
10 caused the prices of the nine affected stocks to increase
11 during that period of time in January?
12 A. Yes. To be clear, I do have an opinion during
13 that week that I believe you're referring to, the week
14 prior to the class period, that the prices of those nine
15 stocks were not trading in -- those stocks were not
16 trading in efficient markets.
17 And then I point out what other commentators,
18 like academics, stock analysts, and the media posit was
19 causal, and I mention that.
20 But I have not come to an opinion which one or
21 what combination of things such as short squeezes,
22 attempted short squeezes, or retail coordinated trading
23 caused it. I don't have an opinion on that. I'm just
24 pointing out that to put it in context, this is what
25 other people are saying.
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1 Q. Now comes the fun part.
2 Do you believe that markets are efficient?
3 MR. RYAN: Objection to form.
4 THE WITNESS: That's quite hard to answer
5 because you didn't say markets, you didn't say -- that's
6 quite vague. I'm happy to answer that question, but do I
7 think all markets are efficient at all moments in time?
8 Q. BY MR. ROSEN: Fair enough.
9 Do you think stocks traded on the New York Stock
10 Exchange and the NASDAQ are generally efficient?
11 A. So yes, I think most of the time stocks that are
12 traded on organized exchanges meet the sort of standard
13 weak form notion of market efficiency. Yes, that's the
14 normal case.
15 Obviously, I don't believe it's always true, but
16 that's my general presumption before I start
17 investigating the facts of it. But yes, generally I do
18 believe markets are efficient for most traded stock.
19 Q. So you're adhering to the efficient market
20 hypothesis?
21 A. So I believe the efficient market hypothesis is
22 most of the time empirically true, and I am very careful
23 when I -- when I teach my students that this is not
24 religion where you believe "yes" or "no." It's a range.
25 And I put myself in the category that markets are close
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1 to the line of efficiency than they are close to the line
2 of what we normally think of inefficient markets.
3 And in particular for most traded securities,
4 because as I said earlier that there are arbitrageurs out
5 there who are in it for themselves to make money, they
6 are the enforcement mechanism to make markets typically
7 efficient.
8 Q. So you've read -- I don't know -- many if not
9 all of Professor Fama's papers on the subject; is that
10 correct?
11 A. You know, he's an outlier. He's written so many
12 papers, I don't know if I could even say most of. But I
13 have certainly read most of his famous papers, and I have
14 met him on many occasions.
15 Q. Is there anything specific about his definition
16 of the efficient market hypothesis that you disagree
17 with?
18 A. No. That being said, he's -- in his papers and
19 speeches has come up with different versions of it, and
20 it depends on the context. But I can't recall -- I mean,
21 I'm pretty sure I cite him in my report. I believe
22 Dr. Werner probably cites him in his report. In general,
23 he's quite an authority on the theory of efficient
24 markets.
25 Q. So in paragraph 13 of your opening report --
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1 A. Did you say -- did you say my original report?
2 Q. Yeah, opening. I said opening report.
3 A. Got it. I just missed that word. Okay.
4 Q. So that would be page 8 of the PDF, page 5 of
5 the report, paragraph 13, you cite -- I think it's
6 footnote 21, this Fama article from 1970 on efficient
7 capital markets.
8 And you say, "Widely accepted definition of
9 efficient market is one in which prices always fully
10 reflect available information." And you took that from
11 the 1970 Fama article listed there in footnote 21.
12 A. Yeah. This is his sort of famous original paper
13 on market efficiency. He has sort of a synopsis and a
14 summary of more recent evidence in like a 1991 paper.
15 But yes, this is the classic original Fama market
16 efficiency academic article.
17 Q. Next sentence says, "In an efficient market
18 prices should rapidly and fully adjust to incorporate new
19 value-relevant information."
20 Now you don't cite any authority for that
21 sentence, and it differs from the prior sentence only in
22 the sense that it uses the term "value relevant" rather
23 than simply "available information."
24 Where do you draw the modifier value relevant
25 from for that sentence?
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1 A. Sure.
2 I draw this from a large academic literature
3 when they get more specific about what they mean by
4 "available information." And they're talking about
5 things that are related to the value of the firm itself.
6 I believe Dr. Werner in his opening report also
7 mentions quotes that talk about things like earnings,
8 companies, things like that, just so that the reader of
9 this report understands that when I say "fully reflect
10 available information," I'm not talking about prices
11 reflecting sun spot activity. I'm not talking about
12 stock price of IBM reflecting the temperature in Alaska.
13 I'm talking about the stock prices of IBM reflecting
14 market public information about IBM itself. Things that
15 are value relevant.
16 So people who talk about efficient markets, when
17 they talk about information, they're referring to
18 information that's relevant to the valuing the present
19 value of future cash flows of the stock.
20 Q. Is that -- if -- if the price has to or should,
21 I should say, if the price should incorporate all
22 value-relevant information, would that also mean that the
23 stock price is fundamentally efficient?
24 A. So that's -- fundamentally efficient, there's
25 nothing silly about that expression, but it's -- it's not
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1 a normal definition of market efficiency. So what I mean
2 is in typical finance textbooks, academic articles, and I
3 guess I would say I've been at Stanford long enough I've
4 probably been in thousands of finance seminars over the
5 years now. When we talk about market efficiency, we say
6 "market efficiency," and we don't break it down by
7 fundamental and something nonfundamental.
8 To the extent somebody -- if I saw an article in
9 a legitimate academic journal or in a seminar from a --
10 from a relatively famous finance professor, and they said
11 "fundamental market efficiency," I would assume they're
12 talking about market efficiency just like my definition
13 you just mentioned, the Fama definition.
14 Q. Right. So would that -- well, if you're saying
15 that the efficient market hypothesis assumes all
16 value-relevant information, meaning all -- all
17 information that could affect stock -- all cash flows
18 related to the stock in the future, that's -- I mean, if
19 you're looking at the net present value of future cash
20 flows, that's essentially a fundamental value; right?
21 A. I think that's fair to say. So I'm not going to
22 make a big deal about what fundamental value means. It's
23 essentially the present value, the expected present value
24 of future cash flows.
25 It's in the nature of bringing fundamental into
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1 efficiency. That was what I was talking about is that
2 it's not a normal term that academics use and they say,
3 "Let's have a discussion about fundamental market
4 efficiency." They just don't say that.
5 They'll say market efficiency. And it implies
6 what I'm saying here is market efficiency in the academic
7 or financial literature means what I say it means. It
8 means that the prices reflect they will change fully,
9 quickly to new value-relevant information.
10 I just think that's ubiquitous. And I'm just
11 being very careful about that. But I don't think there's
12 a sort of a common academic vernacular that would call
13 that fundamental efficiency. We just mean market
14 efficiency.
15 MR. ROSEN: I'm going to show you -- I'm going
16 to introduce as an exhibit, if I can figure out how to do
17 this, an article from -- I think it's 1991.
18 This is going to be Exhibit 178. It is -- it is
19 an article by Professor Fama. In a moment, you should be
20 able to see it.
21 (Exhibit 178, Efficient Capital Markets: II, by
22 Eugene F. Fama, was marked for identification by
23 counsel electronically.)
24 Q. BY MR. ROSEN: I think you cited it in one of
25 your -- probably in your rebuttal report. Take a look at
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1 it and tell me if you've read it before and you're
2 familiar with it.
3 A. I'm still in the process of downloading it.
4 Okay. So I have it downloaded. I'm sorry, when
5 I download it, it takes up all my concentration. You
6 referred me somewhere in the article or you asked me --
7 Q. Oh, start with the first page. I'm not going to
8 delve too deep into it.
9 A. Okay. Do you mind if I look at the first page
10 for a second?
11 Q. Yeah, look at the first couple of pages.
12 A. All right.
13 Q. Actually, look at whatever you feel you need to.
14 A. Yes.
15 Okay.
16 Q. All right. So in this paper -- this is from
17 doctor -- Professor Eugene Fama, and he sort of updates
18 his views on research and market efficiencies.
19 Is that a fair --
20 A. Yeah.
21 Q. -- view? Okay.
22 So it starts out, the second paragraph, he says,
23 "I take the market efficiency hypothesis to be the simple
24 statement that securities prices fully reflect all
25 available information." Right?
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1 He doesn't -- well, okay. So earlier you said
2 economists in the know don't modify it with fundamental
3 value or fundamental -- okay. Fair enough.
4 And then he says, "A weaker and economically
5 more sensible version of the efficiency hypothesis says
6 that prices reflect information to the point where the
7 marginal benefits of acting on information (the profits
8 to be made) do not exceed the marginal costs."
9 Is that statement true? I mean, is that his
10 updated view, that second sentence I just read?
11 A. Yes. And I -- so I think this is a great --
12 great statement. It's very -- from an academic
13 standpoint and also connected to the stuff we spoke about
14 earlier, it's really a great framing of this here, is
15 that -- let me first put this in context. Because he
16 cites this paper by Grossman and Stiglitz, two very
17 famous economists. And they initially point out a
18 conundrum or puzzle. If you believe that stock prices
19 are absolutely perfectly on value, then why would there
20 anybody doing any what we would call fundamental research
21 to create the value.
22 If everybody just stared at the stock price and
23 said it was correct, then nobody would be doing any
24 research. So it unwinds; right? So we all agree with
25 that one.
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1 So what Grossman and Stiglitz were saying in a
2 sort of a very mathematical way, but a very common sense
3 way, obviously there has to be some incentive out there
4 for investors -- some investors to be doing fundamental
5 research to create the efficiency in the first place.
6 And so we agree that there has to be some
7 benefits of being a professional investor or else none of
8 us would be.
9 That being said, we also believed -- to put this
10 in context -- there's a lot of competition out there. So
11 that yes, professional investors have to have some
12 ability to make money. If it was too much and there's
13 free entry into this industry, it would push that down.
14 So we believe that markets are not what we would
15 call absolutely perfectly efficient at every point in
16 time or else there would be no incentive to be an
17 arbitrageur. So he's putting that out there.
18 And then when he says here about the marginal
19 benefit and the marginal cost of being what I would call
20 being a professional investors, that's what I was getting
21 at earlier, is that we generally believe that -- that the
22 marginal benefits, the sort of arbitrage opportunities
23 out there, they can't be trivial to trigger arbitrageurs
24 to enter and fix the price. But to the extent that it's
25 greater than the transaction cost, they will do so. I
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1 think that's sort of noncontroversial.
2 And like a big point that the academic
3 literature is making to explain why you might see these
4 sort of deviations like in the case at hand is if those
5 marginal costs are high.
6 So it just as an intuitive matter is that we
7 might believe that there are these arbitraged
8 opportunities out there, and we say why aren't
9 arbitrageurs fixing this?
10 And the answer that Fama is getting at here is
11 that if for some reason their marginal costs are high.
12 And that's why I go through the list. What could
13 possibly be a marginal cost that would be high at a point
14 in time for an institutional investor? And that would be
15 examples that we cite in this case.
16 If there is coordinated retail trading activity
17 that props up the price making short selling very risky.
18 If it's lending fees. Anything that's sort of a marginal
19 cost increase, that's what he's getting at there.
20 And he's saying -- I believe Fama is saying in
21 most markets these aren't that big a deal, but don't call
22 me, you know, taking this too strongly. There's always
23 going to be, you know, a little bit of deviation from
24 market values and true values, and it's driven by this
25 marginal cost. And I agree with that.
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1 I'm just saying in the case at hand, these
2 marginal costs may be very high.
3 Q. The other -- so I guess to shortcut this, in
4 this paper he admits that -- or acknowledges that there
5 has been research by others in the field that shows that
6 stock prices, future stock returns are predictable from
7 past returns; is that right?
8 A. So I don't recall -- so academics call these
9 anomalies, which is -- I'm not saying that's like the
10 greatest term, but I forget -- I can glance through this
11 paper -- if he lists some of these anomalies. But this
12 is back, you know, over 20 years ago, and the list of
13 anomalies has changed.
14 But there is a belief that there are some sort
15 of observable variables that may predict future returns
16 more than just by chance, and he may be listing those,
17 yes.
18 Q. Yeah. I think on page -- well, it's page 3 of
19 the document, page 1577 and 78, 79, he goes into some of
20 the studies? French and Roll and --
21 A. Yes.
22 Q. How there's -- you call them anomalies, but
23 there are, I guess, positive auto-correlation and other
24 instances where you can predict future returns from past
25 returns.
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1 So but that doesn't necessarily change his view
2 on the efficiency of markets; is that right?
3 A. So that's true. And I just wanted to say
4 briefly about these what I call anomalies, but like the
5 example he gives is the January effect, which I haven't
6 looked at it in years. And the reason why I'll give you
7 in a second is the reason is if you buy stocks almost at
8 random, at the end of the calendar year and then sell
9 them at the beginning of the year, you make abnormal
10 returns.
11 It was a sort of belief about investors taking
12 advantage of tax losses. Like there's nothing unusual
13 about these stocks, but they sell at the end of the year
14 because if they have losses, they want to realize them by
15 the end of the tax year, and then they buy them back.
16 So there was this January effect. That was a
17 typical story. There was other things like that. There
18 was a day-of-the-week effect. I forget if Monday was the
19 best day. These things basically aren't around, anymore.
20 So I think Fama was well aware of the fact that
21 there are these what I call anomalies, but empirical
22 studies that demonstrate some of these effects, but I'm
23 sure he's aware that these things probably, if they are
24 true, go away, and they do.
25 And I find it -- because I've been in finance
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1 long enough now that I actually find it mildly amusing
2 how anomalies or predictabilities that were very famous
3 when I became a professor are gone.
4 So for the longest time, there was this value
5 effect. Like AQR made its fortune on this, is that there
6 was belief that low PE stocks would outperform. And to
7 some extent, they did for decades, and then over the last
8 few decades, it's been the exact opposite.
9 And so I think Fama's aware, and I'm sure he's
10 certainly aware today, that whatever is the nominally at
11 one point in time seems to go away and new anomalies
12 emerge, which makes people like me think that these kinds
13 of obvious anomalies are really just what we might may
14 call data mining.
15 If you look -- if I gave you thousands of months
16 of data on thousands of stocks in the past and asked you
17 to find some weird stuff, not in any silly sense. I'm
18 just saying find stuff that sort of repeats itself, you
19 would find it.
20 And you could run almost any statistical test on
21 it, and you'd say, wow, this seems real. And the
22 ultimate test, of course, is does it actually work ten
23 years from now.
24 And for most of the part of things that he talks
25 about here, they don't last.
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1 Q. But you said AQR made some money for a while;
2 isn't that right?
3 A. They did. They made a lot of money. And I
4 think they're doing really well now again. But there was
5 a period of time, if you read the press reports on them,
6 is, wow, these guys are -- everything they're doing is
7 wrong. Because the quintessential non-value stock would
8 be something like Facebook and Google. And that's where
9 most of the returns in the last two decades have been in
10 those two stocks. So it makes that value approach not
11 look so good, even though the value approach for many
12 decades earlier did look good.
13 So my point is I'm not saying anything good
14 about or bad about any of these anomalies. It's just
15 that I think Fama realizes that -- then and now, that you
16 can always find some trading strategy that worked in the
17 past, but that doesn't necessarily prove that markets are
18 inefficient.
19 Q. Now you cite a book by Andrei Shleifer. Is
20 that -- am I pronouncing his name right?
21 A. Yes, exactly.
22 MR. ROSEN: And I'm going to introduce this book
23 for the record.
24 (Exhibit 179, Inefficient Markets, by Andrei
25 Shleifer, was marked for identification by
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1 counsel electronically.)
2 MR. ROSEN: It's Exhibit 179 now. It's going to
3 take a moment to download.
4 THE WITNESS: Okay. I have it on my screen.
5 Q. BY MR. ROSEN: Before I ask you questions about,
6 is it Professor Shleifer? I don't know.
7 A. Yeah, he's a very famous Harvard economics
8 professor.
9 Q. Before I ask you questions about Professor
10 Shleifer, I just remembered there's a couple questions I
11 wanted to ask you generally --
12 A. Okay.
13 Q. -- about the market.
14 So who or what is the best arbiter of a stock's
15 fundamental value?
16 A. So you asked me this earlier in some sense. In
17 an efficient market, the price. In a market that's not
18 efficient, that's very hard to answer. We all are going
19 to have different opinions. Even sophisticated investors
20 will have different opinions.
21 Q. Have you ever heard of the term "price
22 discovery"?
23 A. Yes.
24 Q. What does that mean?
25 A. So it really is contextually dependent, but it's
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1 a process of obtaining inferred prices from observing
2 prices. So let me give you an example.
3 So an example would be if I am trying to figure
4 out -- this is not quite a price, but it's very
5 similar -- if I want to figure out what the market thinks
6 the volatility of Apple stock's going to be over the next
7 month. Okay? A very useful way of doing that is to be
8 observing options trading on Apple. And since there is
9 very good empirical support that the value of options is
10 related to a formula called Black-Scholes, you
11 essentially reverse engineer it.
12 It's actually a simple concept, but it's -- it's
13 amazingly -- it's amazing that we actually can do that.
14 So you can look at the stock market -- sorry -- the
15 option price on Apple and from that trading price, back
16 out what the market is inferring Apple's volatility is
17 over the future.
18 So that's an example of what we call -- even
19 though it's not a market price, it's a price discovery.
20 It's essentially using market prices to learn what's in
21 the market's mind.
22 So obviously, in the most rudimentary
23 application of this, in an efficient market -- it's
24 almost definitional -- the -- you can infer the value of
25 Apple stock from observing its market price because
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1 that's -- the market price is the best forecast of its
2 true price. Or another way of saying it it's the best
3 forecast of its price in the next few moments.
4 Q. Now I put that book in front of you, the
5 Professor Shleifer's book, because in part you cited it
6 in paragraph 64 of your opening report. And --
7 A. I also -- since my page is there, on page 5 I
8 cite it there, too, but that's fine.
9 Q. Oh, yeah. And in paragraph 64, somewhere in
10 there you say you -- ah, yes, it's towards the bottom of
11 page 29 of the PDF. It says, "As summarized in a
12 prominent finance textbook examining potential deviations
13 from efficiency in financial markets, 'Since the
14 securities price must be equal to its value, prices
15 should not move without any news about the value of the
16 security. That is, prices should not react to changes in
17 demand or supply of the security that are not accompanied
18 by news about its fundamental value.'"
19 So that comes from Professor Shleifer's book?
20 A. Correct.
21 Q. Okay. Now does -- now that -- and that's also
22 an inference from work on the -- you know, surrounding
23 the efficient market hypothesis. That's not actually
24 part of the efficient market hypothesis, is it?
25 MR. RYAN: Objection to form.
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1 THE WITNESS: So it really -- so we're --
2 obviously I'm talking about the academic context of
3 efficient market hypothesis. It -- so the efficient
4 market hypothesis, as you've probably seen, is described
5 in more than one way. I have citations in my report.
6 Dr. Werner has citations in his report. They're all very
7 similar.
8 I would say this is more of an implication of
9 the efficient market hypothesis typically as opposed to a
10 definition. So I would not have necessarily disagreement
11 if this was part of the definition of an efficient
12 market, that it doesn't move based on -- it doesn't move
13 significantly in the face of non-value-relevant
14 information.
15 Q. BY MR. ROSEN: But for example, let's say, I --
16 I could identify a hundred days during a year when
17 General Motors' stock moved statistically significantly
18 without there being value-relevant news.
19 Would you say that means General Motors stock is
20 not traded in an efficient market?
21 A. So let me -- because you gave me a hypothetical.
22 I'm not picking on you. But that's -- if it's -- if
23 it -- if a stock moved significantly a hundred days,
24 that's almost half of the trading days of the year.
25 So I would be shocked if half of the trading --
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1 every other day a stock moved by a statistically
2 significant amount. Because in the fullness of time,
3 statistical significance means that it should happen one
4 out of 20 times.
5 So just on the face of it, if you told me a
6 stock had statistically significant moves on half of the
7 trading days, I would ask, one, is there something wrong
8 with your model, and two, I think there is something
9 fishy going on here.
10 Q. Okay.
11 A. Again, I'm not picking on you, but it --
12 Q. I'll give you a better -- you make a fair point,
13 and I miss -- I misspoke. I didn't frame my question
14 properly.
15 So suppose there are trading days when the stock
16 price moves a statistically significant amount, but only
17 half of them are associated with value-relevant news. So
18 50 percent of the time is moving in response to
19 value-relevant news, and half the time, it's not.
20 Does that mean the market for the stock is
21 inefficient?
22 MR. RYAN: Objection to the hypothetical.
23 THE WITNESS: So let me -- let me try to put it
24 this way. There is no what we would call sort of
25 bright-line rule that tells you exactly the fraction of
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1 days where the stock moves by a statistically significant
2 amount that should be accompanied by value-relevant
3 information. Obviously, it should typically be the case.
4 To answer that question, one has to also apply
5 common economic sense. And so I would never say, for
6 example, that if a stock moved by on a day a
7 statistically significant amount, and I could not discern
8 on that one day value-relevant information, then I would
9 say I can tell you in my opinion I'm confident that it
10 doesn't trade in an efficient market.
11 However, I certainly don't do that in this case.
12 And just, you know, not to belabor the point what I'm
13 looking at in this case is I'm not going to rely on that
14 bright-line rule. I'm looking at nine stocks that have
15 not just unusual -- let's just do the week before the
16 class period -- not just unusual increases, but historic
17 increases.
18 Like it's fair to say I'll show you numbers that
19 they're like one out of a million movements. The highest
20 movement of any stock that day. The highest movement in
21 any -- their whole trading history.
22 And so I'm not talking about a 5 percent
23 statistical significance. I'm talking about stocks that
24 move up 800 percent in a week, 100 percent in a day. In
25 the absence of value-relevant information, for that one
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1 day, I can say the stock on that day doesn't trade in
2 efficient markets. And when they're correlated across
3 stocks over a period of a week, I can say that more
4 strongly.
5 So it really depend on the context. And this is
6 a case where we see something that's -- I don't know what
7 to say. It's so unusual. I'm not faced with cases very
8 much where a stock like Koss goes up by a thousand
9 percent in a week. I'm not faced with cases where
10 something like GameStop goes something -- I'm sorry --
11 like 700 percent in a week.
12 And so I'm not such a stickler on efficient
13 markets that I say, oh, on one day GameStop didn't have
14 value -- potential value-relevant information and it went
15 up; therefore, it's not efficient. I would never do
16 that.
17 What I'm saying is when I look at all the facts
18 together here, and I'm conveying that to GameStop moving
19 up 700 percent in a week, and I'm looking at the
20 information that was conveyed to the market on those
21 days, and I don't see anything even marginally close to
22 being a value-relevant explanation for that.
23 I'm trying really hard to find it. If I found
24 some information that said, GameStop -- you know, we now
25 expect its earnings to go up by 50 -- 50 times in the
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1 next five years, that would help me. But I'm not finding
2 anything like that. And that's why I can be so confident
3 in my opinion that these stocks are not trading in an
4 efficient market during this period of time.
5 Q. BY MR. ROSEN: So I introduced an Exhibit Number
6 117 previously, and I'd like to -- I don't know how to
7 show it to you without having to remark it.
8 A. Can I ask you -- I deleted -- I didn't keep one
9 of them up. But can you tell me which one it is, which
10 article?
11 Q. This is a Richard Roll article from The Journal
12 of Finance from 1987 which I had introduced in Professor
13 Fischel's deposition. And I wonder if I could --
14 MR. RYAN: What we can do, I think, Larry, is we
15 can go back to the different folder, which is the Daniel
16 Fischel deposition folder.
17 MR. ROSEN: Yeah, that's where I am. I'm
18 reviewing to figure out.
19 MR. RYAN: And then it says Marked Exhibits, and
20 then we can go to 117. So I'm pulling up the --
21 THE WITNESS: I do have the article in front of
22 me if --
23 MR. RYAN: Yeah, I'm just pulling it up.
24 MR. ROSEN: I just didn't know how to put it
25 up -- put it up on Professor Grenadier's screen.
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1 THE WITNESS: I'm good.
2 Q. BY MR. ROSEN: Anyway, I assume you've seen this
3 article by Richard Roll in The Journal of Finance, 1987,
4 which is Exhibit 117?
5 A. I do remember seeing this as a grad student.
6 It's like the orange juice paper. Very interesting.
7 Q. Among other things.
8 So I find this article interesting because I
9 think -- I think his finding is that only like maybe --
10 so there's -- I think it starts with the premises there
11 are three things that could affect, you know, cause and
12 effect and impact stock price. One is market factors,
13 the other is an industry factor, and the third is
14 idiosyncratic firm-specific factor.
15 Am I getting that right?
16 A. So I don't recall that. Let me just say that
17 that -- factorization is not just implicit, but explicit
18 when I do what I call a regression study. I have a -- I
19 decompose a return of a stock into market movements,
20 industry movement, and what I would call firm-specific
21 movement, and what you said is consistent with that.
22 That's sort of a way of conceptualizing information.
23 Q. Okay. All right.
24 Now you may need a few minutes to answer this
25 question, but do you disagree with the proposition that
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1 Professor Roll found that only about 30 percent of
2 statistically significant stock price movements were
3 caused by these -- by one of these three factors?
4 MR. RYAN: Objection to form.
5 THE WITNESS: So I don't recall if he uses the
6 word "cause." If he did -- that's -- I have like --
7 Q. BY MR. ROSEN: Shall we say "associated with"?
8 A. I have -- so Richard Roll, I have a lot of
9 respect for. He's written some very famous papers. He
10 actually was a real rocket scientist. He actually worked
11 on rockets. And so hopefully, I didn't use the word
12 "causation."
13 This is a statistical phenomenon. I don't know
14 exactly how you would -- I don't think I personally in
15 this day and age would translate these sort of fractions
16 as to even implying anything causal. Not that he is.
17 I'm not -- I don't understand what we learn
18 other than empirical. There's an empirical phenomenon.
19 Let me put it this way. What we do nowadays is
20 we do decompose stock returns -- and I think these must
21 be futures, but I'm making an analog to stocks -- that
22 they move according to those three factors.
23 And the third factor, which we call company
24 specific, depending upon the stock, may have a very large
25 what we call standard error. Just think about there's
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1 lots of volatility on that third component.
2 There's nothing weird about that. And in
3 particular, companies -- and then I'll finish the analogy
4 in a second -- that have -- that are very sort of product
5 or field specific or industry specific and not
6 diversified could have very high idiosyncratic
7 volatility.
8 So in the old days, GE -- so GE is a very
9 different company now -- GE was basically like a mutual
10 fund. And I would bet because of all their subs that the
11 idiosyncratic component of GE stock was relatively small.
12 Then if you look at something like an orange
13 juice future, where it's just product specific, it would
14 not surprise me today to see that it has a very large
15 residual standard error.
16 So I personally am not sure how much you can
17 infer from that other than orange juice stocks, orange
18 juice futures have a lot of company-specific information
19 or product-specific information.
20 Q. I don't know if this is the orange juice paper,
21 actually.
22 A. I'm sorry. Excuse me.
23 Q. I think that may be a different paper. But if
24 I'm not mistaken, I just didn't -- I mean, unless you're
25 stating it better than I did, but I'm pretty sure this is
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1 not the orange juice paper. Let me see. Because I think
2 Shleifer -- Shleifer -- Shleifer, he does talk about that
3 paper, but I don't know if this is the same one.
4 A. I think you're right so thank you for pointing
5 that out.
6 Q. And I think this is just dealing with stock
7 returns.
8 A. So looking at the abstract, he does seem to be
9 talking about what I said earlier, just the residual
10 standard error being relatively high.
11 Q. Yeah. No, I'm not disagreeing with that. I'm
12 not disagreeing with that. He's looking at stock price
13 returns if you look at the charts.
14 But I guess what I really want to get -- as we
15 say, get down to brass tacks. I'm not sure what that
16 means. Maybe if you're a carpet installer, you know what
17 it means.
18 But what -- I mean, your sense, is there some
19 range, in your mind, is there some range of the
20 percentage of statistically significant stock price
21 movements that should be explained by value-relevant
22 information, like between 20 and 80 percent, or I don't
23 know, something, some minimum?
24 A. So I view this as a similar question you asked
25 earlier, and I don't have a number of that. It's a fair
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1 question, but it doesn't -- I don't have an answer
2 because it really depends on magnitudes. And that's why
3 I was talking about the case at hand.
4 In another case, if you had, for example, a
5 stock price that went up by 5 percent, and let's suppose
6 that was on one day. And let's suppose that was
7 statistically significant, meaning that on average, that
8 price return or higher only occurs on less than one out
9 of 20 trading days. And then I looked at that day and I
10 could not find any evidence of value-relative
11 information. And maybe that was true for a third of the
12 days.
13 I don't know. There is no statistical test for
14 that that's in academic journals. So that would be
15 tricky. And that's why I point out, and I know it's not
16 a -- it's just a very obvious point when I approach the
17 case at hand here, is that we're not talking about
18 5 percent. We're talking about unexplainably rare
19 events. And that's why I have so much confidence here.
20 If the facts were different in this case, this
21 would be a very hard job to be able to look at these
22 residual statistically significant returns and map them
23 onto the absence of value-relevant information. It
24 becomes an easy job in this case because of the extreme
25 magnitudes of the returns and the extreme lack of
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1 value-relevant information coming out.
2 So that's why I can do that. Your question is,
3 is there a rule of thumb for this? There isn't. It
4 really depends on the facts at hand.
5 Q. Now Professor Shleifer wrote this book which I
6 put in front of you as Exhibit -- Exhibit 179. It's
7 titled "Inefficient Markets: An Introduction to
8 Behavioral Finance."
9 Have you -- did you read the whole book at one
10 point in time?
11 A. No.
12 Q. Really? I won't tell him. Don't worry.
13 A. He was one of my professors when I was a Ph.D.
14 student, too.
15 Q. I think I read this once. I don't remember it
16 too well.
17 But so, generally, what is behavioral economics?
18 A. Sure.
19 So behavioral economics is a field of study
20 where they look at -- there's a host of them -- sort of
21 what they believe is empirical or laboratory-tested
22 individual behavior categories.
23 So, for example, individuals have shown a
24 psychological effect of sort of not admitting mistakes
25 sort of kind of different types of biases.
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1 Q. Kahneman, Professor Kahneman would -- has a
2 number of articles on that concept. Is that what you're
3 referring to?
4 A. Precisely. So there's -- there's two
5 components. One is a list of these sort of behavioral
6 regularities that people like Tversky and Kahneman find
7 and describing them. Like there's just so many
8 classic -- and they're all really fascinating, you know.
9 And then there is a question about whether those
10 types of observable behavioral biases manifest themselves
11 in markets. And I'm being broadly in markets.
12 Then in terms of behavioral finance, there's a
13 question of how those behavioral biases, to the extent
14 they exist, manifest themselves in finance.
15 So, for example, one of the papers I cite -- I'm
16 forgetting -- oh, by Terry Odean, he has a stream of
17 papers on behavioral biases manifesting themselves in
18 trading behavior.
19 So like one example he does is he looks at --
20 this is a -- in answer to your question, this is a
21 classic behavioral finance paper -- of he looks at
22 trading activity of men versus women in what is now known
23 as Schwab, Charles Schwab data. And he shows that men
24 trade way more often than women, and after fees have
25 lower returns. And he attributes this to overconfidence.
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1 So that's a classic example of behavioral
2 finance. So that's an area of it.
3 Now the area of that try to then move that over
4 and try to explain pricing is much more controversial and
5 not as powerful simply because of you and I may be biased
6 and like to buy stocks that start with the letter B, but
7 that doesn't mean we're going to impact prices.
8 So the literature about behavioral biases is
9 pretty strong and influential in explaining mistakes that
10 people make, like selling their winners and hanging onto
11 their losers. That's a behavioral bias that we observe.
12 That's a mistake. It has tax consequences.
13 That's different than behavioral literature
14 explaining what happens to stock prices. Not that it
15 doesn't exist. It's just sort of two strands in the
16 literature.
17 Q. And what is the premise of this particular book,
18 Professor Shleifer Inefficient Markets?
19 A. It's an overview, a broad overview for the sort
20 of the maybe un -- you know, undergraduate or graduate
21 student in behavioral finance.
22 Q. And isn't the premise that the efficient market
23 hypothesis is not 100 percent correct all the time; that
24 there are inefficiencies present in the market for many
25 stocks?
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1 MR. RYAN: Objection to form.
2 THE WITNESS: So I don't -- that was not my
3 reading of it. I think he's exploring those issues. I'm
4 not sure he comes to the conclusion that many stocks are
5 trading in inefficient markets.
6 But the story of recognizing that market stocks
7 may trade in inefficient markets in some cases is
8 ubiquitous. It's been around -- it was -- I noticed it
9 in the Roll paper you showed me. He called it occasional
10 frenzy. That sounds like inefficient market.
11 So yes. I just don't know -- you're asking a
12 legitimate question. I don't know if I would
13 characterize Shleifer's book as saying that markets are
14 generally efficient.
15 Q. BY MR. ROSEN: Well, I didn't say that his --
16 the premises that the markets are in -- for these stocks
17 are inefficient markets, but there are inefficiencies
18 present in the market at times.
19 Is that not two different things? Can a market
20 be generally efficient but there be an inefficiency
21 present for -- that doesn't really affect its -- the
22 efficiency of it much but still be present?
23 MR. RYAN: Objection to form.
24 THE WITNESS: So we've talked about this
25 earlier. So I never foreclose the possibility that in a
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1 generally efficient market, that there can be temporary
2 instances of prices deviating -- deviating and moving
3 based on non-value-relevant news. But they're very
4 temporary and small.
5 And the reason I'm saying that is that of course
6 life is complicated and the world's are not perfect
7 according to any paradigm, but it's notion of
8 arbitrageurs seeking easy money that prevents those
9 things in general from being large and significant. That
10 is the general view of most finance professors.
11 Not that markets are always at every point in
12 time perfectly efficient. There would be a minority of
13 finance professors. But the belief that those things
14 could be large and lasting is very rare.
15 Again, I wouldn't belabor but be very brief, is
16 that while we might -- it wouldn't shock me for a stock
17 to move for some non-value relevant reason at a point in
18 time. But it would shock me if it was a thousand percent
19 return over a whole week with no new news. That -- that
20 would shock me.
21 So I don't -- I never want to be accused of
22 being a stickler and saying that markets are very
23 efficient at every trading second.
24 Q. BY MR. ROSEN: Now is a stock necessarily
25 inefficient or its market inefficient if its price
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1 responds to information that is not necessarily value
2 relevant but price relevant?
3 MR. RYAN: Objection to form.
4 THE WITNESS: I'm not sure what you mean by
5 "price relevant."
6 Q. BY MR. ROSEN: Okay. I'll -- maybe I'm assuming
7 something, and I'll -- I'll start from the beginning,
8 then.
9 So let's go to say -- let's look at Dr. --
10 Professor Shleifer's book. Let's look at some of the
11 stuff he talks about, some of his -- some of the papers.
12 He mentions a number of papers. Let's say go to page 17
13 of his book.
14 So, for example, in the middle of that page,
15 there's a -- he cites the De Bondt -- I'm not pronouncing
16 that correctly, probably -- and Thaler's 1985 article or
17 study comparing the performance of two groups of
18 companies' extreme losers and extreme winners. And it
19 shows that for quite some period of time, if you, you
20 know, are selecting stocks that had been losers for a
21 while, they'll end up becoming winners and you'll make
22 above average return.
23 And some -- and conversely, if you sold short a
24 selection -- a winner portfolio, you'd get -- you'd
25 actually also do well because a winner portfolio went
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1 down. So he has that graph, for example.
2 So that would be an example of an investment
3 strategy that is successful for a period -- long period
4 of time. It doesn't necessarily mean that stock -- those
5 stocks are inefficient, but it's still possible to have a
6 successful -- a successful strategy that's not based on
7 fundamental value; right?
8 MR. RYAN: Objection to form.
9 THE WITNESS: So I do remember reading this
10 paper, the De Bondt and Thaler. You pronounced it
11 correctly.
12 So the -- the basic -- my basic recollection of
13 this, it shows that over I think a three-year period, if
14 you buy the worst-performing stock over the previous
15 three years and short the ones that had the highest
16 returns, you would on net make what you would consider
17 above-average returns.
18 So that's -- that's interesting. And we would
19 call that -- sometimes we call that mean a version.
20 Earlier you asked about momentum. It's the exact
21 opposite.
22 This is an old paper. My understanding over
23 time is that not that this phenomenon didn't exist, but
24 we don't normally cite as much anymore for various
25 reasons. One is this effect seems to have gone away. So
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1 it would be in this sort of anomaly that was just data
2 mining. I'm not imputing their motives, but it just
3 doesn't exist.
4 Also, when you get into three-year returns, and
5 also, a lot of these winners and losers are the most
6 idiosyncratic highest volatility stocks and also the
7 hardest to trade. Because a lot of them make up --
8 they're sort of like small cap stocks, that this is
9 really not as implementable as they made it sound.
10 If you take into account the transaction costs
11 and also the standard errors of this, it really is on the
12 borderline of even being statistically significant. Even
13 though the magnitude looks big.
14 But the longer the horizon for these kinds of --
15 this sort of pre -- the mean version effect really
16 doesn't really satisfy statistical significance.
17 So this paper is interesting, and it was very
18 early on in this, but it's not really cited much any more
19 in terms of something that's real.
20 So I'm not saying there aren't -- what you're
21 talking about here is similar to stuff we talked about
22 earlier when I mentioned weekend effect, January effect,
23 day of the week effect, and this is sort of winners
24 versus losers or meaner version. There's a host of
25 these.
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1 What becomes the one that's predictive now is
2 going to be different than the ones that are predicted in
3 five years.
4 So I never know what to make of these studies.
5 Most finance professors view them as interesting
6 anecdotes, and in this case, a very well done one, but
7 not something that we would use to prove or disprove the
8 efficient markets we're talking about.
9 Q. BY MR. ROSEN: Well, is it possible that they
10 don't last that long because once professional traders
11 learn about them, they implement them, and then the
12 competition drives down the returns from them?
13 A. It is possible. And I would call that a version
14 of what I talked about earlier about arbitrageurs in
15 efficient markets. So it's certainly the case that there
16 is probably -- at this moment in time, there's some
17 exploitable phenomenon that exists that we're not aware
18 of, and if an academic finds it and publishes it and it's
19 new, it's not going to last long.
20 And question is always are there these
21 unpublished phenomenon, anomalies that exist that we
22 don't know about or traders know about.
23 I don't know the answer, but I suspect that
24 there's a reason why hedge funds hire people not just
25 finance Ph.D.s, but physics Ph.D.s and computer science
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1 Ph.D.s, that are scouring the world for stuff just like
2 this that's not published.
3 But your story about these being self-defeating
4 I agree with.
5 MR. RYAN: So we've been going, Larry, for about
6 an hour and 40 minutes.
7 MR. ROSEN: Oh, do you guys want to take lunch?
8 THE REPORTER: Off the record, Counsel?
9 MR. ROSEN: Okay. Off the record.
10 (Recess.)
11 THE REPORTER: Back on the record.
12 Q. BY MR. ROSEN: Professor Grenadier, can you go
13 back to that Andrew Shleifer article or, I'm sorry, book
14 that I had marked as an exhibit previously.
15 A. I have it.
16 Q. I wanted to address one other issue.
17 So if you go to page 20 of the book, page 29 of
18 the PDF, the first full paragraph in the middle of the
19 page, it begins, "Finally," with the basic proposition
20 that stock prices do not react to non-information.
21 A. Yeah.
22 Q. Just take a quick look at that paragraph and
23 I'll ask you about it.
24 A. Okay.
25 Q. So Professor Shleifer mentions a few different
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1 events for this proposition that stock prices actually do
2 react to things that are not value-relevant information.
3 And so he has -- he has three -- he mentions three
4 examples.
5 One is the crash of -- the stock market crash of
6 1987. I think they call Black Monday, October 19, 1987,
7 where the market drops 22.6 percent, the largest one-day
8 drop in history, without any apparent news.
9 And so that was one example he gave; right?
10 MR. RYAN: Objection to form.
11 Q. BY MR. ROSEN: And then he gives another
12 example, there's, I guess, a paper by Cutler 1991, where
13 he examines the 50 largest one-day stock price movements
14 in the US after World War 2 and found that many of them
15 came on days of no major announcements.
16 So how -- I mean, that seems to rebut your --
17 your earlier statement that stock prices did not react to
18 non-information; does it not?
19 A. I don't believe it does. But let me talk about
20 the cite that I know more about, and that is the 1987
21 crash.
22 So at one point -- it's been while -- I used to
23 teach about this to my students. I believe it was a
24 Richard Roll paper that discussed this, and it's a clever
25 paper and comes to a conclusion like this, is that a lot
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1 of people in retrospect viewed that there was some very
2 important information on that day, but it was unusual
3 because it was a -- an issue with market-wide
4 illiquidity.
5 And what I mean was there was lots of trading on
6 that day, and what we learned is some markets that we
7 thought, like the US market, we thought was able to
8 accomplish very large amount of trades in a short period
9 of time if needed, and they couldn't. It literally is a
10 technical matter, the US market could not keep up with
11 the number of trades.
12 And that's an important information because it's
13 information about the ability to trade stocks in the US,
14 and that was new information.
15 There was also new information in that time
16 about I believe in a House Committee in the US Congress
17 was going to do some sort of anti-takeover litigation.
18 That was news. So there was news.
19 I just think that some people didn't believe
20 that that news was important enough on an international
21 scale, but I think in retrospect, a lot of us believe
22 that something that's going to impact the US market is
23 highly likely to impact other markets.
24 So if, for example, it was a surprise to the
25 market that you were going to a Court -- curtail
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1 takeovers, in general that's considered a bad thing for
2 markets because most takeovers are value increasing. Not
3 all of them. And if you take away from the economy the
4 ability to do those value-increasing transactions on a
5 long-term basis, that could have large economic
6 ramifications.
7 So it is not my opinion that the 1987 crash was
8 without value-relevant news. There was a lot of
9 value-relevant news. And I don't believe that there's a
10 strong consensus with that statement there that Professor
11 Shleifer lists. I think a lot of us believe that there
12 was important and large value-relevant news preceding
13 that crash.
14 Q. BY MR. ROSEN: What about the Cutler paper? Are
15 you familiar with that or?
16 A. Just vaguely. I -- I read that probably around
17 1991 so that's a long time ago. And my recollection is
18 that dealt with the overall market, the whole stock
19 market, not stock by stock. It's a little different kind
20 of issue.
21 But I -- I have not revisited that in a long
22 time so I just don't have a strong recollection of that
23 one.
24 Q. Okay. Now he also on the next page, page 21, he
25 mentions the phenomenon of what happens to a stock when
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1 it gets included in the S&P 500 index. And looks like
2 it's accompanied by a 3.5 percent on average
3 permanence -- permanence price -- I'm sorry -- permanent
4 abnormal return. It's page 22. There's a graph.
5 So my question -- well, take a second and just
6 take a look at that. I don't want to make you answer a
7 question if you haven't read -- read that. I just want
8 to make sure.
9 Are you familiar with that -- that phenomenon?
10 A. Yeah, that's a -- that's an Andrei Shleifer
11 paper. The author of this book wrote this paper that I
12 believe he's citing here.
13 Q. Yeah, I see. Shleifer 1986.
14 And it says, "These increases are relatively
15 permanent and have become larger as the relative share of
16 the market-held index funds has increased."
17 So do you have any fundamental disagreement with
18 that research about the S&P 500?
19 A. So I'm familiar with that paper. I'm not an
20 expert in that paper, but two points I'll make. One is I
21 don't believe it's without controversy that being added
22 to the S&P 500 index is without information.
23 There is -- my understanding is, at least at
24 that time, there's discretion of which stocks the S&P may
25 allow in.
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1 I mean, there was some issue recently, I
2 believe, when Tesla wasn't added, even though technically
3 they were one of the largest 500 stocks. They have some
4 discretion in there.
5 And so it's not clear that the inclusion in the
6 S&P 500 is a purely mechanical thing. It could be based
7 on other types of information.
8 So I've certainly heard finance professors argue
9 that this -- they don't agree that it has no information
10 content.
11 And the other thing I'll say is: I have no idea
12 if this is a persistent thing today, but I have to say in
13 my answer that a three-percent increase in a price is a
14 very different phenomenon than a thousand percent
15 increase in price.
16 And so I may not be shocked if you'd come up
17 with examples of something going up by 3 percent that's
18 it's hard to nail --
19 Q. Three and a half. Three and a half.
20 A. Three and a half. Thank you. A three and a
21 half percent increase without obvious value-relevant
22 information is very different than a thousand percent.
23 And I just -- I just think that can't be lost in
24 this case. I do not want to be characterized as a straw
25 man that would say three and a half percent unexplained
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1 increase is powerful evidence of a lack of efficiency.
2 That would be a straw man and a caricature that I don't
3 think would be fair to say to me.
4 I'm opining in this case about these stocks for
5 a two-week period. I'm not saying over the life of these
6 stocks. I'm not saying all stocks.
7 I'm saying this is a very monumental and
8 unexpected phenomenon, and as I wrote in my report,
9 there's three ways of making this clear. One is for most
10 of them, it was either the highest increase during this
11 week they've ever had in their history, if not first,
12 maybe second; it was among the very highest of all stock
13 movement like one, two, three, and four, of any stock
14 traded in an organized exchange in the US during the
15 time. And if you go through a 20-year history and try to
16 randomly select portfolios that perform like these meme
17 stocks, it is a one our of a million event.
18 So I just want to make clear: I am not arguing
19 against this graph that there's a three and a half
20 percent puzzle. I don't try to explain every three and a
21 half percent puzzle in the world.
22 I wish I could because this is very interesting,
23 but a three and a half percent puzzle is a very tricky
24 one. But a thousand percent puzzle over one week is more
25 than tricky; it's impossible to explain with a rationale
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1 efficient market argument.
2 Q. Well, Professor Shleifer -- Shleifer refers to I
3 believe something called a demand shock. And he says
4 that he suggests that these price increases are resulting
5 from increase in demand.
6 Is that right?
7 A. That's -- that's my understanding of his
8 explanation.
9 Q. Are you familiar with any other academic
10 research that talks about demand shocks causing price
11 changes in securities?
12 A. So I have some recollection of some papers
13 finding examples of this. But the reason -- I bet this
14 paper has many, many cites. And why do I think this
15 paper, this Shleifer paper on this demand effect, has so
16 many cites?
17 Because A, it's a very obvious thing that we all
18 knew anyway, or B, it's a very rare event that's
19 fascinating. And it's B.
20 So, yes, there probably are other papers that
21 talk about demand shocks having a price impact.
22 Hypothetically, someone could have something that is
23 added to the Wilshire 5000 and showing no noticeable
24 effect. That's possible.
25 But if this was the normal state of affairs, why
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1 would anybody cite or care about this paper? The reason
2 this paper is shown to us and the reason it's cited so
3 many times is it's essentially the exact opposite. Its
4 whatever it's called, that proves the rule. It's the
5 exception that proves the rule.
6 It's an unusual thing that I -- that we have a
7 hard time explaining, but not it's ubiquitous or else it
8 wouldn't be a very interesting paper.
9 If every time there was some sort of demand
10 shock, like a restriction on demand or an increase in
11 demand that exogenous, and we saw this, why would anybody
12 care about this paper?
13 It's a very unusual phenomenon, and as I said,
14 the -- we were talking about a -- you were careful about
15 saying a three and a half percent, a three and a half
16 percent, that is surprising to finance academics and
17 that's why we're taking about it.
18 Instead of saying a three and a half percent, it
19 said a thousand percent, this would be the most cited
20 paper in history if this was normal.
21 Q. I mean, couldn't that sharp price increase in
22 these nine affected stocks be caused by a demand
23 increasing the demand for the stocks by the retail
24 investors or whoever else was interested in purchasing
25 the stocks?
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1 A. So as I -- as I said earlier, even if I said
2 hypothetically that was true, I don't know. As I said
3 earlier, I'm not as ascribing causation to the price
4 run-up.
5 But just for argument's sake, suppose due to
6 this increase in demand by retail investors, and in
7 this -- in this hypothetical that I'm offering, it's not
8 based on anything that's dealing with cash flow. It's
9 based on something, but not based on forecasts of cash
10 flows.
11 If it did increase, and it was not based on
12 forecasts of cash flows, then this price would be above
13 its efficient value and arbitrageurs would swoop in and
14 short it.
15 And the fact that we did not see that is
16 consistent with the type of evidence that people offer,
17 and to some extent, I offered some empirical evidence on
18 this, that there were frictions to shorting during this
19 period of time. In particular, there was very high short
20 interest in some of these stocks, and there was very high
21 borrowing and lending fees on these stocks.
22 So the fact that if demand pressure unrelated to
23 value-related information caused the stock price to go
24 up, which I'm not contending. But if it did, then this
25 would be the classic examples for arbitrageurs to come in
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1 and profit from this and short it.
2 And the fact that we don't see evidence of the
3 price going back down based on some arbitrage activity
4 makes me suspicious that there are impediments to
5 shorting during this time, and I document some of that.
6 Q. Well, I mean, certainly there were a lot of
7 people going short on these stocks during this time
8 frame; right?
9 MR. RYAN: Objection to form.
10 THE WITNESS: So I don't know, as I sit here,
11 how many people were shorting it. I do know that there
12 was very high short interest. Could be by one or two
13 institutions or many. I literally do not know. But some
14 of these stocks, of course, did have very high short
15 interest. I think GameStop at some point had more than
16 100 percent short interest.
17 Q. BY MR. ROSEN: Yes. So -- so if a stock's got
18 123 percent short interest, doesn't that mean that's
19 there's no impediment to shorting the stock?
20 A. I think if you asked the people who were
21 shorting it and asked them if they had an impediment to
22 shorting this stock, they would say yes.
23 Q. How much more than 123 percent do you want to go
24 for short interest?
25 A. I have no desire to go above or below that.
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1 What I'm saying is there was obviously pressure on these
2 people who were shorting it. One was it was getting
3 expensive to short it because there were so many shorting
4 it.
5 The fact that many were shorting it, all that
6 tells me is that there were many bearish investors. I
7 don't know what else to glean from that. The people who
8 were shorting it were bearish.
9 And the fact that there were at this time the
10 transaction costs of shorting, and importantly, to the
11 extent that others say that there was coordinated retail
12 trading activity pushing up the price, that puts margin
13 pressure on those short, making -- on those shorts,
14 making their position very risky.
15 Q. Well, yeah. I mean, investing's risky.
16 A. Investing is risky. Trying to undo some sort of
17 phenomenon, which I don't know the cause of, that causes
18 cost to go up 1000 percent in one week, is a very unusual
19 amount of risk.
20 So, yes, investing is risky, but -- and I see
21 risk all the time. I don't see what I see in this
22 current case, often at all. As I said, it's a
23 one-of-a-million phenomenon.
24 So I don't know that I've seen anything quite
25 like this, of nine stocks often talked about in the same
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1 sort of social media circles moving up unprecedented
2 amount in a period of one week with some of them having
3 very large short interest.
4 I'm just saying facts as I understand that.
5 These are very unusual facts. And I can't think of any
6 analogous discussion that you and I have had today that
7 is anything remotely resembling this.
8 That's why, again, I don't easily claim a stock
9 trade in a market that's not efficient. I don't do that
10 easily. It's the facts of this case.
11 If it was a normal case, I wouldn't be so cold.
12 Just the facts in this case, as you know, are
13 unbelievably unusual. And that's why I can say with such
14 confidence that that one week run-up is not tethered to
15 value-relevant information.
16 Q. Okay. You've made that point, and you know, I'm
17 asking about this because I'm interested in understanding
18 a couple of things. One is why an increase in demand for
19 a stock, for whatever reason, whether it be
20 value-relevant information or simply investor sentiment
21 should necessarily mean that a stock is not being priced
22 in a reasonable fashion, that it's not a fair price, a
23 fair market value price, where buyers and sellers are
24 satisfied that this is a fair price if they want to
25 transact that.
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1 MR. RYAN: Objection to form.
2 THE WITNESS: So it's important when I answer
3 this question to be clear on what motivated a demand
4 increase. So if counter to what I believe your
5 assumption was in your question, that a demand increase
6 for stock X, because the market perceived that there was
7 information, value-relevant news that dividends would --
8 or earnings would be permanently increased for this firm,
9 that would increase demand, and that would increase
10 price.
11 There's nothing unusual about it whatsoever.
12 That makes sense. Because there's nothing for an
13 arbitrageur to take away because that price increase was
14 connected and driven by value-relevant information.
15 There was no money machine there. It moved up for good
16 reason, good value-relevant information reason.
17 Alternatively, as I said, the converse would be
18 the demand went up for something that was not value
19 relevant. Let's just say it went up because they were in
20 a happy mood that day. The price goes up, and it has
21 nothing to do with future dividends.
22 That price has increased for no rational
23 value-relevant reason. That's when arbitrageurs come in
24 and would short it in this case. Because they know that
25 that price is not a price that investors are going to
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1 live with because it's a money machine. It's too good.
2 It means that -- it's too high and that
3 investors are going to be getting lower yield on those
4 stocks and not be happy with it in the long run and the
5 price will go down.
6 So prices that move because of demand that is
7 unrelated to anything to do with the fundamentals of the
8 stock, value-relevant information, are going to be
9 arbitraged away.
10 And yes, demand went up. But if demand goes up
11 for reasons unrelated to the future cash flows of the
12 stock, those will be arbitraged away.
13 So I'm not saying demand doesn't matter. I'm
14 saying if demand goes up or goes down based on
15 non-value-relevant information, then in an efficient
16 market, that should have no impact on the price.
17 Q. BY MR. ROSEN: You say it should not have an
18 impact?
19 A. Yeah.
20 Q. Theoretically.
21 A. Well, it should not theoretically have an impact
22 on the price. And unless we believe that there are all
23 these fantastic arbitrage opportunities as an empirical
24 matter that are just sitting there, then I also would say
25 as an empirical matter, these easy pickings aren't
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1 available that long.
2 Q. So put options on these nine stocks. During the
3 pre-class period, was there any limit to the number of
4 put options that could be written on these nine stocks?
5 A. I haven't looked into that. I have not -- I'm
6 not aware of reading a limit on the put options. I just
7 don't know the answer to your question.
8 Q. And I think the SEC report said there was quite
9 a bit of options activity on these stocks.
10 Are put options a close substitute for going --
11 selling short to these nine affected stocks?
12 A. They -- a put option onto itself does have
13 similarities with shorts. Because in both cases as the
14 underlying stock price falls, the values go up. Shorting
15 value goes up as the stock price falls and a put option
16 goes up as the stock price falls. So they have that
17 similarity.
18 Q. So if somebody, an arbitrageur who wanted to
19 make a short position but was finding it hard to borrow
20 the stock for whatever reason, not available or borrowing
21 costs were high, they could have bought a put option and
22 arbitraged away these what you believe to be the rational
23 prices.
24 Am I putting words in your mouth when I say
25 rational price?
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1 A. I don't use that phrase. I know what you mean
2 by it. I try not to use that phrase I just say whether
3 it's an efficient market or inefficient market.
4 Q. So couldn't arbitrageurs who were unable or
5 unwilling to pay the cost of selling -- going short,
6 could they have just bought put options and constructed
7 an equivalent portfolio to arbitrage away these perceived
8 inefficiencies?
9 A. So it is my understanding that an alternative to
10 shorting can be purchase a put option. It's also the
11 case that in typical times when there are high costs of
12 shorting, there can also be high cost of going in put
13 options. And what would I mean by that? There could be
14 very large bid-ask spreads for put options.
15 I haven't looked into this here, but typically
16 it's the case that put options themselves at times can be
17 illiquid and there could be high bid-ask spreads. There
18 could be all sorts of reasons why put options are not
19 without frictions, also.
20 Q. Now there was an interview with Mr. Peterffy. I
21 can't recall his first name. The guy who owns
22 Interactive Brokers.
23 Do you familiar with him?
24 A. I don't recall his name.
25 Q. His name is Peterffy, and he was -- he was
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1 interviewed, I believe, on CNBC. In fact, I think --
2 anyway, he -- he went so far as to say that he thought
3 that because there were so many call options written on
4 GameStop on the 26th and 27th, he thought that because
5 those call options were in the money and people were
6 going to have to buy shares to cover the call options
7 they had written, that if those restrictions hadn't been
8 put into place, the price of GameStop would have gone
9 over a thousand because people would have had to -- there
10 would have been additional demand in the market for those
11 shares.
12 And does -- does that -- if that were true,
13 would that mean the stock for GameStop was inefficient
14 because the price was rising based on that demand?
15 MR. RYAN: Objection to form.
16 THE WITNESS: So I'm a finance professor and a
17 finance expert, but I could not put all that together in
18 my mind in real time to be able to understand it. I was
19 not blaming you. It's a relatively complicated example.
20 That would be kind of one, it would helpful if we go
21 really slow or you put it on the screen, but that had a
22 lot of moving parts.
23 Q. BY MR. ROSEN: I would have to replay -- I guess
24 I could get this at a break, but the essence of it is
25 that Peterffy, who runs Interactive Brokers, he's, you
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1 know, I don't know, the guy's worth 25 billion or
2 something. So he's obviously smarter than me. I won't
3 say he's smarter than you. But he knows the markets;
4 right? He runs -- he runs a pretty successful brokerage
5 firm.
6 And his belief is that there were many call
7 options written, and the number of call options that were
8 written meant that there was going to be tremendous
9 demand for these GameStop shares and that those -- price
10 of the GameStop shares would have risen over a thousand
11 had those restrictions on the 28th not be put into place
12 because people would have had to purchase -- the people
13 who wrote the options would have to purchase those
14 shares, and that was one of the causes for the increase
15 in price for the -- based on the demand -- the demand
16 by -- for the shares by those call options.
17 So the question -- the question is: If that
18 were true, would that necessarily mean the market was
19 inefficient simply because the demand resulting from the
20 call options caused the stock price increase?
21 MR. RYAN: Objection to form.
22 THE WITNESS: So the connection between call
23 options and the underlying stocks is sort of a well-known
24 topic area. And more than just a call, but if you look
25 at calls and puts in the underlying stock at the same
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1 time, there's a -- there's a well-known concept called
2 put-call parity that exists. It's not the same thing as
3 talking about market efficiency, but it's very close.
4 And so I haven't -- I don't know exactly what to
5 make of his explanation or description, but I do know
6 that people have looked at GameStop and others during
7 this time and noted deviations from put-call parity, that
8 is, normally there's a very close formula that connects
9 stock price and its option prices. Because if it
10 deviates from that, there would be an arbitrage
11 opportunity.
12 So a lot of times in the real world when you
13 test this, it's not perfect, but it's really good.
14 I believe one of the studies that noticed
15 oddness in the valuation of options relative to the stock
16 price at this time was one of the papers cited by
17 Dr. Werner in his rebuttal report. It was a working
18 paper from a few years ago. I think one of the authors
19 was Jones.
20 And if you look at that paper, it discusses
21 anomalous behavior in the volatility of options, which
22 is -- we talked about earlier, the function of the price
23 of options.
24 So, again, I haven't looked into this, but it
25 would not shock me during a time in which I would say
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1 markets were wildly inefficient and at the same time
2 would see prices deviating from put-call parity.
3 Also, by the way, the Franklin Allen paper, as a
4 test of market efficiency, does something similar to the
5 quote you're talking about, and looks at the connection
6 between option prices and stock prices.
7 And my recollection is the Franklin Allen paper
8 shows this is evidence of market inefficiency in these
9 meme stocks during this period of time, that the
10 connection between options and the underlying stock, for
11 whatever reason, broke down.
12 And the Franklin Allen paper used this as
13 evidence of market inefficiency in this time. The --
14 also the paper -- I'm almost finished here -- the Jones
15 paper also called this some sort of bubble, too.
16 So the Jones paper that Dr. Werner mentioned is
17 also aware of the sort of non-efficient market story
18 going on during this time. And as sort of part and
19 parcel to this, there was something unusual going on
20 between options and the stock. I just, as I sit here,
21 haven't looked at it enough to be able to disentangle
22 what caused what, whether the options caused the stock or
23 the stock caused the options.
24 All I know is there's some empirical evidence by
25 some researchers that the normal, non-arbitrage
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1 relationship between these things broke down for these
2 stocks during that time.
3 Q. Do you know who Professor Gabaix is?
4 A. A little bit. G-A-B-A-I-X?
5 Q. Yeah.
6 A. He's -- yes, he's a -- I forget if he's at NYU.
7 But yes, I'm aware of him. He's a relatively famous
8 economics professor.
9 Q. All right. And are you aware of a paper he
10 wrote with a guy named Koijen in 2022. I'll show it to
11 you. Well, I don't know.
12 Have you -- the name of the paper -- let's see.
13 It's called "In Search of the Origins of Financial
14 Fluctuations: The Inelastic Markets Hypothesis."
15 A. No.
16 Q. Have you ever read it?
17 A. I haven't.
18 Q. Well, it's only 123 pages long. How long do you
19 think it would take you to read it?
20 A. Longer than most people. It takes me a long
21 time to read articles.
22 Q. All right. Let's talk about coordinated
23 trading.
24 What is your definition of "investor
25 sentiments"?
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1 A. Investor sentiments?
2 Q. Yes. I see that in the literature here and
3 there. Is there like an accepted definition of it?
4 A. So I certainly do know -- I have definitely seen
5 the phrase used in academic literature. I don't have a
6 great definition of it other than it usually occurs in
7 papers. Because obviously on the face of it, investor
8 sentiment could be anything that investors believe.
9 But my recollection is the context of the papers
10 that cite it are usually getting at something akin to
11 noise traders. Investor sentiment is usually given that
12 sort of meaning of something that's not driven by sort of
13 value-relevant information. But that may not be the only
14 standard paper. But that's my general reading of that
15 phrase.
16 Q. Did the investor discussions on Reddit and Wall
17 Street Bets and other social media in January 2021
18 concerning the nine affected stocks, in your opinion,
19 represent widespread investor sentiments?
20 A. I don't know if I've come to that conclusion. I
21 certainly -- I mean, I don't have that conclusion. I
22 certainly could find possibly others that may have that
23 belief. I'm sure there are many. But I haven't come to
24 that conclusion.
25 Q. What conclusions did you come to about the
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1 investor discussions on Reddit and other social media in
2 January 2021 about the nine affected stocks?
3 A. Sure. Just a few. So in the context, this came
4 up when I mentioned that I have an opinion that the
5 market for these nine stocks during this two-week period
6 that we've spoken about were not traded in efficient
7 markets.
8 And then to put that in context, I wanted to
9 mention other people. So I mean academics, stock
10 analysts, and the media in general commented at length
11 about this, and many of the comments talked about social
12 media and Reddit and the like. And they had all sorts of
13 discussions about that.
14 So this is, I would say, contextual. I do not
15 have an opinion one way or another about the content of
16 these other than the fact that I'm aware as an empirical
17 matter that there is an association between the level of
18 activity of social media mentions of the meme stocks and
19 their price activity. So I'm aware of that.
20 It's in academic articles. It's in a couple of
21 Bank of America analysts reports. It's in a Lasse
22 Pedersen recent paper. That's all interesting and I
23 think provides interesting context and important context
24 for this. But I don't have an opinion one way or another
25 about the underlying discussions on Reddit.
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1 Q. You used the term "coordinated trading" in your
2 reports. What is your definition of "coordinated
3 trading"?
4 A. Sure.
5 So it's finding a mechanism for multiple
6 investors to trade in concert in some way. And keep in
7 mind, I'm talking as an economist. I'm not talking
8 anything about conspiracies or anything about the law.
9 It's just a mechanism for coordinated trading,
10 for people to trade together in a certain way, for
11 whatever reason they may have for that.
12 Q. Well, so there were people -- a large number of
13 people who -- well, you heard of this term "diamond
14 hands" on social media on January 21 in the context of
15 the nine affected stocks; right?
16 A. So yes, I have. I don't know what it means,
17 though. I know it and I've seen it. I did not Google it
18 to figure out what "diamond hands" means. I can honestly
19 say I don't know what "diamond hands" means.
20 Q. All right. I can represent to you that I
21 actually believe someone testified to this, one of the
22 plaintiffs, but I'll -- my understanding is that it means
23 I'm holding the stock forever for, you know, the long
24 haul. I'm not -- I'm not in this for the short term.
25 I'm going the hold this and not -- not let go of it. I'm
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1 going to hold it and not let go, ever.
2 A. Buy and hold investor. Okay?
3 Q. Yeah. And so there were those -- you know,
4 there were a large contingent who were diamond hands
5 people, and then there was also people who were talking
6 about short squeeze.
7 And like I guess to me, the -- the idea of
8 making money with a short squeeze is you're going to hold
9 it until it gets up -- goes up, and then you're going to
10 sell it before, you know, before the shorts cover it;
11 right? Before it goes back down; right?
12 Is that a fair analysis of how you make money on
13 a short squeeze?
14 A. So that strikes me as a way of doing it. Of
15 course, it's easier said than done. But yes, the idea of
16 a short squeeze is to ride it up as it puts pressure on
17 the shorts to end up buying back the stock, which feeds
18 on itself and makes it go up even higher. And then
19 generally people believe, for various reasons, the price
20 goes back down. In that time, you want to be out of the
21 stock. But the timing of it is always very tricky.
22 Q. So would you agree that these would be two very
23 different investment strategies? The diamond hands,
24 long-term investors would be having a very different
25 investment strategy than the more short term, short
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1 squeeze investors?
2 A. So I'm just accepting as given the premise of
3 your question. I have no reason to doubt your -- your
4 definitions.
5 So yes, I think definitionally an investor who I
6 would call buy and hold -- I think you called that
7 diamond hands -- a buy-and-hold investor and investor
8 who's trading based on some timing mechanism is very
9 different.
10 And I kind of think if I was teaching a class on
11 portfolio or investment strategies, I would probably
12 start with the difference between buy-and-hold investors
13 and short-term investors. That's like where I would
14 start as very different strategies.
15 Q. Is it your opinion that the people who were
16 engaging in coordinated trading on social media were in
17 some way manipulating the prices of the nine affected
18 stocks?
19 A. I don't have an opinion on that.
20 Q. Is it your opinion that the people who were
21 coordinating trading on social media for the nine
22 affected stocks were somehow distorting the prices of the
23 nine affected stocks?
24 MR. RYAN: Objection to form.
25 THE WITNESS: I don't have an opinion on
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1 causation of what caused what I would consider the
2 incredible run-up in prices during that period. I don't
3 have an opinion on causation, whether it's coordinated
4 trading or short squeezes.
5 Q. BY MR. ROSEN: Okay. Now in your report, you
6 mention analysts. There's a section on analysts, I
7 believe, somewhere. And you discuss -- let's see if I
8 can find it. I guess it's on page 66. Let's see.
9 I'll withdraw that question.
10 So do analysts' recommendations -- would you
11 consider analyst recommendations to buy, sell, or hold
12 the stock to be value-relevant news that could impact the
13 price of stock, move the price of stock?
14 A. It -- it depends on why they make such a
15 decision. So here's what I mean. A recommendation is
16 not in and of itself information. It is sort of a
17 summary of information in how they base an overall
18 decision based on underlying information.
19 So if -- I'm just making a hypothetical here to
20 make my point. If an analyst said, "I have updated my
21 opinion that stock A dividends or cash flows are going to
22 increase much more than I anticipated, or much more than
23 other investors think; therefore, I'm raising my rating,"
24 I would call that in its totality value relevant.
25 If on the other hand, the investor said, "I
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1 think we're in a bubble and I suggest this bubble is here
2 to stay for a while, why don't you ride the bubble and
3 buy it and hang onto it for a while, and therefore, I'm
4 going to say it's a strong buy," I would call that
5 non-value relevant information.
6 I'm not going to judge the recommendation unto
7 itself as value relevant or not, but the basis for that
8 recommendation.
9 Q. But if an analyst's recommendation is based on
10 his changed view of the cash flows, but that changed view
11 is not a function of any new news coming from the company
12 or any other source as to the nature of those cash flows,
13 why should that new view impact the price of the stock?
14 A. So analysts in general -- I'm not going to say
15 any one analyst in particular -- provide value in at
16 least two ways. I'm thinking about it as two ways
17 fundamentally: One is uncovering information that's
18 value relevant; but two, and sometimes more common, is
19 interpreting -- interpreting new value-relevant
20 information.
21 So as an obvious example, a firm could have an
22 earnings announcement on a day. Generally, that's at
23 least fodder for value-relevant information. And the
24 fact that two analysts both mentioned that would not be
25 very interesting. You wouldn't be paid for that.
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1 However, one analyst might say, "This
2 foreshadows more of the same because I believe there's
3 barriers to entering this industry." And then the other
4 analyst says, "Don't be fooled by this. This is an
5 accounting trick because they had a temporary, you know,
6 increase in, you know, goodwill or something like that."
7 All I'm saying is that analysts also interpret
8 that information, and if one analyst interprets that
9 information in a way that changes the recommendation, and
10 it's based on their interpretation of value-relevant
11 information, like in my hypothetical, then I would
12 consider that potentially value-relevant news.
13 Q. So in paragraph 109 of your report, you say that
14 academic research has recognized that noise traders can
15 pose risks to arbitrageurs.
16 A. I have the right page. I just want to see where
17 you got that from. Was that a quote or was that like a
18 summary, what you just said? I couldn't find it.
19 MR. RYAN: I think it's at the end of the second
20 sentence.
21 THE WITNESS: Okay. Thank you.
22 Okay. I see it.
23 Q. BY MR. ROSEN: So do you think that the retail
24 traders in these nine affected stocks posed a risk to the
25 arbitrageurs who were selling short these nine affected
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1 stocks?
2 A. Did you say retail? Because that one word, I
3 didn't hear. I think you said retail.
4 Q. Yes, retail. Yes.
5 A. So I don't have an opinion on that. That's a
6 causal story. I certainly am aware that some people have
7 the opinion that there was -- that these retail investors
8 either purposefully or non-purposefully coordinated
9 driving up the price, putting pressure on these short
10 sellers.
11 That's a story that's out there. It's obviously
12 in the Franklin Allen paper and others. I don't have an
13 opinion on that. It's a story that is definitely
14 credible to me, but I haven't formed an opinion on that
15 one way or the other.
16 Q. Well, wouldn't the flip side of that story be
17 that the short sellers were ganging up against these nine
18 affected stocks to drive the price down so they could
19 profit?
20 A. So I don't know if either of those stories are
21 true, in fact. All I'm convinced of is that those
22 markets were not efficient during that period of time.
23 Whether you believe it's possible that the line of
24 causation goes from retail investors to the stock price,
25 or alternatively, you believe the line of directionality
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1 goes from the short sellers to the stock price, it
2 doesn't change my opinion.
3 I would just say that when I read the academic
4 articles and the analyst reports, they mostly subscribe
5 to the hypothesis that the directionality goes from
6 retail investors causing the prices to go up beyond
7 efficient values, putting pressures on short sellers to
8 even exacerbate the price run-up itself.
9 That's -- I don't have an opinion on that. I'm
10 just saying that's what I view as the common narrative
11 from the academic articles, for example.
12 Q. Is there limit to how many shares of a company's
13 stock can be sold short?
14 A. That's an interesting question because most
15 people are surprised that short interest can go above
16 100 percent. So I don't know if there's a limit. There
17 may not be.
18 So it is unusual to have short interest go over
19 100 percent because that would mean more than the number
20 of shares outstanding are shorted, and there's a
21 technical reason why that is the case, is that one person
22 borrows stocks from another, and then that person itself
23 lends it to another person. So it gets turned around
24 twice. It's shorted twice, the same shares. And it can
25 be done even more.
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1 So it's something that we know is possible. I
2 personally wasn't aware how -- that I thought this was a
3 very rare event, and maybe it is. But I'm certainly
4 aware of GameStop, for example, at times having shorts
5 over 100 percent, which is a surprising number.
6 Q. In paragraph 26 -- let me see which report this
7 is. Yeah, it's your opening report.
8 On paragraph 26, you say, "My own analysis of
9 data from the stock lending market also provides evidence
10 to the strengths that may have inhibited the ability of
11 arbitrageurs and other market participants to sell short
12 certain at issue stocks."
13 Now you used the term "may have inhibited,"
14 which is uncertain. It implies some level of
15 uncertainty; is that right?
16 A. So what I would view this as -- I'm not
17 necessarily disagreeing with your characterization. What
18 I'm saying is I have not formed an opinion in this case
19 about causality.
20 So as I said earlier, I've come to the
21 conclusion that these stocks were not traded in efficient
22 markets during this two-week period. There are stories
23 about short squeezes and coordinated retail trading that
24 are out there.
25 To the extent we're talking for the moment in
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1 this paragraph about short squeezes or attempted short
2 squeezes, what I point out is I am showing in this report
3 some empirical evidence of constraints to short selling.
4 But because I don't have an opinion about whether, or if
5 so, how much of the price increase was due to short
6 selling -- short squeezes, I do not say as a factual
7 matter it caused it. I'm saying it may have caused it.
8 That's the story there. I don't have a
9 conclusion about causality.
10 Q. So in paragraph 132 of your opening report, it
11 says, "In sum, risks and constraints on an arbitrageurs'
12 ability to sell stock short -- whether due to sharply
13 rising stock prices, high costs, or limited supply for
14 borrowing stocks, or risks due to the possibility of loan
15 recall or changes in the borrow rate -- can present
16 impediments to trading that inhibit the incorporation of
17 new, value-relevant information."
18 Do you have any evidence that there was a
19 limited supply for borrowings these nine affected stocks,
20 more limited than any other company, I mean, that was
21 traded on the market?
22 A. So the empirical evidence that I showed was
23 certainly not -- in this report, was not directly that
24 variable. I believe I showed borrowing costs and short
25 interest. I believe other papers have touched on that.
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1 I think the Franklin Allen paper does discuss that, and I
2 can't recall it, but I would be -- I think it's quite
3 possible that that paper does shed some light empirically
4 on the amount of shares available to be shorted during
5 that time.
6 But I didn't independently do that, but there's
7 ample discussion about short-selling constraints and
8 potential short squeezes during that time that are based
9 on that.
10 Q. Do you have -- do you know of any specific
11 instances in which an arbitrageur was prevented from
12 taking either a long or short position in the nine
13 affected stocks during the pre-class period or class
14 period?
15 A. I do not have any sort of information about any
16 individual arbitrageur. All of my statements are in the
17 context of what I see in the market itself.
18 Q. Do you have any opinion as to whether there
19 actually was a short squeeze in any of the nine affected
20 stocks during the pre-class period?
21 A. So I don't have an opinion on that. I do cite
22 the Franklin Allen paper, where he and his coauthors, I
23 believe, I think was it seven of their stocks? So maybe
24 that's five.
25 Q. Five.
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1 A. Five of the stocks.
2 Q. Five of the nine, seven of the thirteen,
3 probably.
4 A. Yes. But I certainly cite that as an academic's
5 opinion of that. But again, of course, that's -- I'm
6 providing that as -- as context for my opinion that these
7 stocks did not trade in efficient markets during this
8 two-week period.
9 Q. Do you know how one might go about performing a
10 test to determine if there was a short squeeze in any of
11 these nine stocks?
12 A. Well, the Franklin Allen paper is a method of
13 doing that, but I haven't considered doing that research
14 myself.
15 Q. So in paragraph 128, you define -- I don't know
16 if it's a definition, but you say -- you say, "A 'short
17 squeeze' is a situation where short sellers are forced to
18 close out their positions due to the risk and constraints
19 they face."
20 Is that the definition of a short -- of a short
21 squeeze that you base your opinion on in this case?
22 A. Not necessarily. That is one definition, and
23 obviously I cite it from this D'Avolio academic article.
24 There are other definitions of short squeezes that are
25 similar, but not exactly the same.
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1 Q. Could you give me an example the other
2 definitions?
3 A. I'd have to go through it, but I'm sure the
4 Franklin Allen paper has a definition of a short squeeze
5 in there.
6 Q. I see.
7 What are the risks and constraints a short
8 seller might face that would constitute or contribute to
9 a squeeze?
10 A. Sure.
11 So there are several. This may be not all
12 inclusive. There may be more. So one is borrowing
13 costs. So when you're shorting, you borrow stock until
14 you unwind the position. Not only are you paying
15 interest while you borrow the stock, but that interest
16 rate could go up. And that's a risk.
17 Another very sort of simple technical risk is
18 that the stock may be recalled and you have to quickly
19 find another source for that stock to be able to short
20 it. You have to borrow somewhere else.
21 In normal circumstances, it may be very easy to
22 find another stock, but when over 100 percent of the
23 stock is being shorted, it may be very difficult.
24 Another example, and probably the primary risk
25 at issue at this time here, is that the stock could keep
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1 going up in value. And while it goes up in value, you
2 are going to -- the shorter is going to have to increase
3 their collateral and come up with more money to meet
4 those margin requirements. And if they do not meet those
5 margin requirements, they will be forced to sell those at
6 a price that most likely is above what they sold them for
7 initially and lose money on the position.
8 So it's the combination of borrowing costs, the
9 scurrying to find new shares if they're recalled, and the
10 risk that even though you might have initially believed
11 that the stock prices were too high, they can become
12 higher. And even though in the fullness of time you
13 might be fine, but they don't have unlimited capital, and
14 they can be hit by margin calls or may simply say "I
15 cannot bear this risk, anymore."
16 So it's capital constraints, limited horizons,
17 and those sort of frictions that make short selling very
18 risky in these kinds of markets.
19 Q. If there was an attempted short squeeze but not
20 an actual short squeeze, would that have an impact on a
21 stock's price?
22 A. So that's a very semantic-driven question. It's
23 obviously a fair question, but when an attempted short
24 squeeze, we all can imagine what I mean by that and
25 others mean by that. It could be something that is
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1 intentional, such as coordinated retail trading to push
2 up the stock, put pressure on existing short sellers.
3 Now if it's attempted but not successful, yes.
4 It depends. But if it's attempted and it pushes the
5 stock price up into inefficient market territory, that
6 certainly in and of itself can make the market
7 inefficient and cause the stock price to be higher than
8 it should be otherwise.
9 If the attempt could be you and I try to attempt
10 to engender a short squeeze on Apple stock, we might
11 really try to do it hard, but I guarantee you we couldn't
12 do it.
13 So what I mean by attempted short squeeze is to
14 make sure I'm clear that the fact that some people claim
15 that investors, retail investors on Reddit, were
16 coordinating to do a short squeeze. I'm sure you can
17 find quotes of people trying to do that. I'm not
18 accepting that as evidence that they caused a short
19 squeeze.
20 So I'm putting that in the category of attempted
21 short squeezes to say that could also cause the stock
22 price to go up, probably not as much as a successful
23 short squeeze, though.
24 Q. Is there a minimum amount of short interest
25 required for there to be a short squeeze?
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1 A. I'm not aware of a number for that. I do not
2 know one.
3 Q. What level of certainty is required for you to
4 give an opinion that the market for a stock is
5 inefficient?
6 A. I don't have a precise answer. What I would say
7 is I'm not -- it's not my general nature as an academic
8 or an expert to argue that a stock is clearly not trading
9 in an efficient market for a period of time.
10 So I need a lot -- I need some facts of a case
11 to be very extreme, and I know it's a bit of a broken
12 record, but just to be clear, this is not your normal
13 case.
14 Q. You know, they're charging you by the word in
15 this transcript.
16 A. That's okay. This is not your normal case, and
17 so I'm not exaggerating. I demonstrate to -- in my -- in
18 my report that this is really a one-in-a-million event.
19 So this one week for these nine affected stocks, the
20 portfolio of them increased by more than a random drawing
21 of nine other stocks over a 25-year period. A million of
22 them. And not only did it outperform them; it
23 outperformed them by a lot.
24 So, again, I feel like your question insinuates
25 that I am being characterized as somebody who's imposing
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1 these strict efficient market conditions. I'm a firm
2 believer in efficient markets as being the normal course
3 of events, and I wouldn't rule that out so strongly as I
4 do in this case unless I was really convinced.
5 And as I said, a one-in-a-million event when
6 many of these stocks had no value-relevant information.
7 Like I forget the ones, but it could have been Trivago,
8 for example. I forget. But Trivago may not have had
9 any -- I couldn't find any value-relevant information
10 going on, yet this was an unusually good performing stock
11 during this time.
12 So I'm not being unbelievably loose in my
13 definition of deviation from an efficient market. I am
14 just saying that this is so extreme there is no way a
15 finance professor could look at the facts of those nine
16 stocks during this two-week period, just this two-week
17 period, could come away and saying these stock price
18 increases during the first one-week period are justified
19 in any way by value-relevant information.
20 Q. Is it your opinion that the supposed or alleged
21 short squeeze for these nine stocks was illegal
22 manipulation?
23 A. I have no opinion about the legality or lack of
24 legality of that sort of behavior.
25 Q. Are you offering any opinion in this case as to
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1 what caused investors to sell their shares after the PCO
2 restrictions were imposed by Robinhood?
3 A. I am not.
4 Q. Do you offer any opinion as to whether investors
5 were aware of fraud or manipulation as a result of the
6 restrictions Robinhood imposed or that others imposed on
7 these nine affected stocks?
8 MR. RYAN: Objection to form.
9 THE WITNESS: So I do not, and I don't have an
10 opinion that even of what would constitute fraud or
11 manipulation in a particular case.
12 Q. BY MR. ROSEN: Did the purchase restrictions and
13 subsequent price decline in the nine affected stocks
14 induce investors to sell shares to the nine affected
15 stocks during the class period?
16 MR. RYAN: Objection to form.
17 THE WITNESS: So that's, again, what I would put
18 in the category of causality. I don't have an opinion on
19 that. Other than during that period, the class period, I
20 have an opinion that those nine stocks did not trade in
21 an efficient market.
22 Q. BY MR. ROSEN: What information did investors
23 have on beginning January 28th, 2021, about the
24 restrictions; do you know?
25 A. So I don't know a lot about this. I do
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1 recall -- I believe I have a footnote from a deposition
2 of one of, I guess, the named plaintiffs, and my
3 recollection is that -- I believe it was a "he" --
4 mentioned that his app showed a restriction. And then he
5 went to the website and found that there was a
6 restriction.
7 That's my recollection, and we could go through
8 that. But that was -- I cited that as a footnote in my
9 report. So that would be an example of what one
10 investor, I believe, in deposition testimony said.
11 Q. Now did you do an analysis of the Cammer and
12 Krogman factors -- well, you know what the Cammer and
13 Krogman factors are?
14 A. I do. I don't have them memorized. I am
15 broadly familiar with them, and I know most of them, but
16 I'm familiar with them.
17 Q. So you know there's five Cammer factors, the
18 fifth being price moving in response to news?
19 A. Yes. The fifth is the sort of empirical
20 cause-and-effect relationship.
21 Q. So did you do an analysis of the first four
22 factors?
23 A. I did not. I certainly had commentary on them,
24 particularly in my rebuttal report, but commentary to the
25 extent of comments on Dr. Werner's treatment of them.
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1 Q. And did you do an analysis of the Krogman
2 factors?
3 A. I -- if I did, it would only be to the extent
4 that I commented on Dr. Werner's report. And I don't
5 believe I mentioned them. I think I mentioned in my
6 rebuttal report Cammer 2, 3, and 5. That's my
7 recollection.
8 Q. Did you do an event study in this matter?
9 A. I would say you could call it that. I don't
10 want to fiddle over semantics. But yes, I did -- in
11 my -- I think they were appendices E and F. I did
12 something very close to what you would call an event
13 study.
14 Q. And why do you call it -- why do you say it's
15 close to an event study, but not an event study?
16 A. Sure.
17 I have no problem with calling it an event
18 study. Generally speaking, what I did was technically a
19 regression, a regression with two right-hand side
20 variables, an industry and a market factor that we talked
21 about earlier. And then I looked at on all of the days
22 for these at-issue stocks for this one-week period prior
23 to the class period and then the class period itself, I
24 looked if I could find any value-relevant information
25 there.
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1 So that's what I did. I didn't call it an event
2 study. If you want to call it an event study, that's
3 fine.
4 Q. I don't want to call it an event study. I want
5 to call it a reverse event study.
6 A. Okay.
7 Q. Is that okay?
8 MR. RYAN: Objection to form.
9 THE WITNESS: If you ask me a question about
10 reverse event study, I'm happy to answer questions about
11 it.
12 Q. BY MR. ROSEN: Well, you know, this is -- this
13 is my issue with the way you did your event study.
14 So you, at the time you -- you first -- before
15 you selected event study, you did your regression and
16 found out what dates during the pre-class period and
17 class period were statistically significant; right?
18 A. I'm not sure I agree with that statement.
19 Q. Well, what was the design? Explain the design
20 of your event study, then.
21 A. Sure.
22 So for -- unless you disagree, for purposes of
23 my answers in this section, it's easier if I just talk
24 about the one week prior to the class period. Because
25 there's --
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1 Q. Yeah.
2 A. -- three different ones. And that's obviously
3 the period under study by Dr. Werner, also. Okay.
4 So this is -- actually, if you don't mind,
5 there's a footnote in the appendix that I'm going to be
6 referring to because that answers directly your question.
7 Let me see if I can find this.
8 A. So if you're interested, on the PDF --
9 MR. ROSEN: I can't hear you all the sudden.
10 Something happened to your voice, to your mic.
11 THE WITNESS: How about now? Can you hear me
12 okay?
13 MR. ROSEN: It's still changed. It's not as
14 strong.
15 THE WITNESS: If it keeps going, I can talk
16 louder. But I will --
17 Q. BY MR. ROSEN: Now I hear better. Now I hear
18 better.
19 A. Okay. I moved for a second.
20 But I'm on page 117 of my PDF.
21 Q. Okay.
22 A. And just it helps me recall.
23 What I would argue is my methodology of the
24 event study is summarized in the footnotes on this page,
25 largely.
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1 So there's two things that are done, and the
2 first is a regression. So you can feel free to ask me
3 more about regression, but I'm just going to briefly
4 describe that part of process. And that's not in the
5 footnotes here. That's talked about elsewhere. And I --
6 I think footnote 2 mentions that.
7 So I run a regression over, my recollection is a
8 120-day estimation period that goes up, I think it ends
9 at just before January 2021. So it doesn't go quite up
10 against the class period and the week before.
11 And that regression is a statistical technique
12 that is not unlike what you described the Roll paper as
13 earlier. So one regressor for all of these at-issue
14 stocks is the market portfolio, and another regressor is
15 an industry regressor, which you're welcome to ask me
16 questions about the details of that, but I'll leave that
17 out for the moment.
18 And so that regression is run. And those -- a
19 regression is run means it estimates those parameters,
20 what are called a slow co-efficient on the market and the
21 slow co-efficient on the industry. And each day the
22 difference between those values and what's predicted is
23 called the residual for the company-specific return.
24 So the regression is run. And then as an output
25 of that, besides those parameter values, you can
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1 determine for each stock and each of those five trading
2 days whether or not the return was statistically
3 significant, say it's a 5 percent level significance. So
4 that's one part of it.
5 I'm not calling it step one because -- you're
6 welcome to ask me about the timing of this, but I'm just
7 saying that's one aspect of this.
8 And the other aspect which is much more detailed
9 in the footnotes at hand here is a search for potentially
10 value-relevant information about these stocks on these
11 days.
12 And so first part of that is where do we search
13 for this value-relevant information. And what I list
14 there is press releases by the companies, SEC filings,
15 equity analyst reports, and then I also include debt
16 rating agencies' changes. So those are the sources that
17 I look at.
18 And then based on those sources, I determine
19 whether or not on a stock on a given day, there is
20 potentially value-relevant information. And what I mean
21 by value-relevant information is the stuff we talked
22 about earlier, stuff that deals eventually with the cash
23 flows of the firm. Things to do with the firm's earnings
24 and costs and customers and things like that.
25 But explicitly, as I've put in there in the
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1 footnote, I do not include as value-relevant information
2 information that deals with things such as short
3 squeezes, because that has nothing to do with the firm
4 itself, its earnings. I don't deal with what's going on
5 with coordinated retail investors. I don't -- and
6 lastly, I don't include information of commentary by
7 analysts that, in my words, would say these stocks are
8 inefficient.
9 If an analyst says this stock is trading in an
10 inefficient market, I wouldn't call that value-relevant
11 information.
12 Q. Why wouldn't it be?
13 A. Why would an analyst saying that the stock
14 doesn't trade in an efficient market?
15 Q. He's saying the stock is overvalued or
16 undervalued; right? Isn't that value relevant?
17 A. So I'm defining value relevant as -- because I'm
18 doing this on purpose because I'm connecting it to the
19 earlier discussions you and I have had about what an
20 efficient market is.
21 An efficient market is that the prices quickly
22 and fully reflect new information that I say is value
23 relevant. So if a stock price quickly and fully reflects
24 new information about earnings, that's fine. That's what
25 I'm looking for in an efficient market.
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1 If on the other hand, a stock price quickly and
2 fully reflects information about sun spot activity, that
3 is not value relevant. I'm not saying that's a great or
4 bad thing, but no finance professor would consider that
5 value relevant.
6 And so as an extreme case, and as I point out in
7 my rebuttal report, ironically, quite a bit of the
8 information that Dr. Werner uses as news is commentary by
9 an analyst, for example, or a market commentator that
10 says, "This stock" -- is in my words -- "this stock is
11 untethered from anything value relevant." And the fact
12 that it's mentioned, he uses that as evidence that it's
13 trading inefficiency.
14 So under his approach, just briefly, if
15 everybody on a day said GameStop is clearly trading in an
16 inefficient market, and GameStop stock moved, he would
17 use that as evidence that GameStop trades in an efficient
18 market. That's extremely ironic.
19 So I am looking at -- so that's my procedure.
20 And then I look at this in its totality and try to come
21 to my opinion, which was quite easy in this case because
22 of the nature of the facts, that is there a reasonable
23 basis for me to come to the conclusion or to be able to
24 support what Dr. Werner is saying, that these unusual
25 statistically significant stock price changes of these
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1 at-issue stocks for these trading days is reasonably
2 related to the potentially value-relevant information.
3 And my answer is no. It's not even a close
4 call. So that's how I did this event study.
5 Q. Well, January 21 to January 27th is a very short
6 time frame. It's five trading days; right?
7 A. It is.
8 Q. Why didn't you look earlier than that?
9 A. So first of all, I am looking at this period
10 right before the class period as the most relevant one.
11 For example, this is what was going on if -- if, for
12 example, as I do find that the stocks were not traded
13 efficiently during the class period, it's useful to have
14 some context about, well, did that just start on that day
15 or was it a continuation? And obviously, I find that
16 it's a continuation.
17 I did not want to look at the class period as a
18 snapshot unto itself. I think it's really important --
19 especially since I believe your expert believes that that
20 January 27th price after Koss went up a thousand percent
21 with some fair price, you need context. Where did that
22 price come from? So that's why I do the one week just
23 prior to it.
24 On the other hand, if I went back far, again,
25 like Dr. Werner does and looks a year in advance at the
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1 class period, that's not of interest to me. I am not
2 shocked if somebody -- if somebody would show me that one
3 year before the class period, that some of these stocks
4 traded in an efficient market. I didn't look at that,
5 but that wouldn't shock me, nor is it relevant to this
6 case.
7 We're talking about a meme stock event where
8 there was lots of discussion about these stocks and
9 unusual short interest.
10 The Franklin Allen paper has figures that show
11 when the discussions on social media started heating up,
12 and it was roughly that one week period prior. So that's
13 another reason why I did that one week prior.
14 Q. So do you have any opinion as to whether the
15 market for these nine affected stocks was efficient prior
16 to that, to the January 21st?
17 A. I have not looked at it so I don't have an
18 opinion.
19 Q. What hypothesis did you test in your event study
20 for these nine affected stocks?
21 A. So the way I viewed it as, I would start with a
22 null hypothesis that these stocks traded in an efficient
23 market. And what that means is that I need extreme
24 evidence to demonstrate that it did not.
25 So and the extreme evidence speaks for itself,
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1 and I'll be even more brief not to count up -- add up
2 your word count, but the extreme evidence was the
3 unprecedented increase in these individual stock prices
4 during that one-week period combined with the lack of
5 concomitantly important potential value-related
6 information about those stocks during that period.
7 It was so clear to me that I could find no
8 rational basis to be able to explain those extreme stock
9 price movements, in that case, increases, based on the
10 value -- potentially value-relevant information that I
11 was able to obtain.
12 I couldn't even imagine trying to come up with a
13 story based on what I found in terms of information
14 during those days to explain why costs went up a thousand
15 percent.
16 I -- I don't see Dr. Werner even attempting to
17 do that. It's impossible.
18 So you might explain it by other things. Of
19 course, everything has an explanation. But my job was to
20 see if I could potentially explain it by value-relevant
21 information, and I could not.
22 And if you can't explain extreme stock movements
23 for nine stocks over a week of trading by anything
24 approximating value-relevant information, then you have
25 to come to the conclusion you would reject a null
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1 hypothesis of market efficiency.
2 Q. Have you ever performed an event study in the
3 same manner that you performed this event study?
4 A. I think all of my event studies are the same. I
5 have a regression that's quite similar. Usually has the
6 market industry effect. I calculate the -- whether or
7 not the stock price was significant, and then on the day
8 of the event study, I look at information on that day and
9 try to discern whether there's any causal relationship
10 between the two.
11 MR. RYAN: I think we've been going about an
12 hour and a half again, Larry. Is now a good time for a
13 break?
14 MR. ROSEN: Yeah, that's fine. Ten minutes. So
15 come back at 6 o'clock. 13 minutes, 6 o'clock.
16 MR. RYAN: Sounds good.
17 MR. ROSEN: 3 o'clock your time.
18 MR. RYAN: All right. Thanks.
19 (Recess.)
20 THE REPORTER: Back on the record.
21 Q. BY MR. ROSEN: Okay. Dr. Grenadier, before our
22 break we were talking about your event study, and you
23 said it was found in appendix E and F of your report.
24 Now are you aware that -- so in appendix E, you
25 selected news and determined whether it was value
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1 relevant to the nine stocks; is that right?
2 MR. RYAN: Objection to form.
3 THE WITNESS: So I characterize it as
4 potentially value relevant. So I'm trying to err on the
5 side of being generous to including news that's
6 potentially value relevant.
7 Q. BY MR. ROSEN: Now you're aware that Professor
8 Fischel went through the news on those days as well, and
9 he selected potentially value-relevant news for the nine
10 stocks. And he selected -- and the two of you didn't
11 disagree -- the two of you didn't agree as to what was
12 potentially value-relevant news.
13 You're aware of that?
14 A. So I'm aware that the days that -- at least over
15 the period that I covered, and he covered the same -- the
16 days that I found potentially value-relevant news did not
17 perfectly overlap with his. But, of course, we used
18 different data sources. I used primarily analyst
19 reports, and my understanding is that Mr. Fischel used
20 public press.
21 So they're different sources. So clearly there
22 will not be perfect overlap between our two
23 determinations.
24 Q. So you didn't look at the press, the media
25 articles?
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1 A. So I did look at public press articles for
2 context, and I mentioned that earlier in my report. But
3 in terms of the determination of value relevant --
4 potentially value-relevant information, I did not use
5 popular press articles. I used what's listed in that
6 footnote 1 that we talked about.
7 Press releases, specific SEC filings,
8 importantly to my answer here, analyst reports, and then
9 lastly, debt rating agency changes.
10 Q. Do you know for sure whether the only
11 differences between your view of potential value-relevant
12 news and Fischel's view of potential value-relevant news
13 was press articles that were not press releases?
14 MR. RYAN: Objection to form.
15 THE WITNESS: So I'm not an expert on his
16 methodology. It's my understanding that he did not use
17 analyst reports, while I used analyst reports, and he
18 used presses -- or press -- not press releases, but news
19 articles, and I did not use news articles in that
20 section.
21 So we're using different data sources, and I
22 chose mine for my reasons, and he chose his for his
23 reasons. And so because to some extent he is using
24 public press release -- not -- public press articles,
25 news articles, and I'm using analyst reports, they're not
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1 going to be one and the same. We have different sources
2 of potential value-relevant information.
3 Q. BY MR. ROSEN: Okay. Let's take a look at your
4 rebuttal report. Let's go to Exhibit 1A, which is page
5 58 of the PDF.
6 A. Okay, sorry. It took me a while trying to
7 remember what this was. Now I certainly do remember it,
8 yes.
9 Q. So you did some sort of news/no news analysis in
10 Exhibit 1A, 1B, and 1C; is that right?
11 A. That is correct.
12 Q. And 1A, there's a news/no news test using just
13 earnings and guidance releases; is that right?
14 A. Yes. Let me briefly explain what I'm doing
15 here. So he has what I'll call a technique that he uses
16 in his report that compares the -- I'll use as much as I
17 can his phraseology for this.
18 He looks at -- to come up with high information
19 flow days, what he does is use that public press reports
20 and looks in the headings of the names or ticker symbols
21 of each one of these nine at-issue stocks, and the
22 days -- the 10 percent of days with the most mentions in
23 the headings, he calls high-information flow days, and
24 the remaining 90 percent he calls low-information flow
25 days. So that's what he does in his report.
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1 What I point out is in these three exhibits that
2 you mentioned is that when I look at earlier reports that
3 are in the public domain by Dr. Feinstein, he uses
4 alternative definitions of news days, widely construed.
5 So in the one here is in some of his expert
6 reports in the past, it was like five or six of them that
7 I had seen. He counts as a news day when there is
8 basically an earnings announcement, but he also counts a
9 guidance release.
10 And so what I did is did everything that he did
11 with the exception -- try to replicate it, with the
12 exception of rather than search through headings of news
13 articles by mentions, doing the technique they did in the
14 past by including as news days that occurred on earnings
15 or guidance releases.
16 And so with that one change, I replicated his
17 analysis. And then if you look at the far right-hand
18 column, what he would call significant would be any of
19 those numbers that's below 5 percent.
20 And so in this case, we see one, two, three
21 stocks that would be a statistically significant
22 difference between high-information flow days and
23 low-information flow days.
24 So I think he found seven. Using a technique
25 that he used in many of his previous reports, only three
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1 of them would survive.
2 And so what I do in these tables one by one is I
3 replicate, just like here, using his previous expert
4 reports that I had found publicly available, and redid
5 it. And I think you find much less, like three, two, or
6 only one stock survives this test.
7 And I'm just pointing out that this -- which
8 I've already criticized, his defining of news by mentions
9 in the popular press. If we use it -- the definition of
10 news he uses in previous matters, we get much weaker
11 results.
12 MR. RYAN: You said Feinstein, but I think you
13 may have meant Werner.
14 THE WITNESS: Sorry. Hopefully, that's the
15 first time I did that. My apologies to Dr. Werner.
16 Q. BY MR. ROSEN: Now Exhibit 1B, you do a similar
17 test, but you use Form 8-K and 6-K?
18 A. Yes.
19 Q. And then Exhibit 1C, you do the similar test
20 using just press releases?
21 A. Yes. And as you see in this last one, only two
22 of them, Blackberry and Bed Bath & Beyond. I'm sorry.
23 Just -- it looks like just Bed Bath & Beyond would
24 survive this test.
25 So rather, when he uses this counting mentions
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1 in press -- in the popular press, when he finds, I think,
2 seven of them survive this test, when you do his older
3 approach in other reports of press releases, only Bed
4 Bath & Beyond survive that.
5 My point is: It makes a huge difference for the
6 particular statistical test that he's using that I'm not
7 advocating, but his definition of what includes for high
8 news and low news days matters a lot.
9 So there's something very unusual about his
10 definition of news days and non news days in this case
11 that seems to really matter.
12 Q. Okay. And did it occur to you that maybe you
13 should just combine all of the events that you selected
14 for Exhibits 1A, 1B, and 1C into a single test and just
15 call -- uses high information flow days all the earnings
16 and guidance releases, and all the 8-Ks and 6-Ks and all
17 the press releases?
18 A. I don't believe so. Because the way I'm
19 thinking about what I'm doing is I find in sight
20 previously publicly available expert reports, Dr. Werner,
21 and I'm trying to replicate that definition with the data
22 at hand. So it's a replication.
23 So to the extent I was trying to replicate some
24 sort of agglomeration of those previous tests, that might
25 have occurred to me. But I'm trying to replicate what he
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1 did in previous reports, which is exactly what I did in
2 these three exhibits.
3 Q. What he did in previous reports isn't relevant
4 to this case. It's what he did in previous reports
5 relevant to different cases with different facts and
6 circumstances; right?
7 MR. RYAN: Objection to form.
8 THE WITNESS: So that -- that sounds like your
9 opinion. What I'm trying to say is, number one, as I
10 make very clear, I do not agree at all with his
11 definition of what news is and not news. Because it
12 ignores any conception of value relevance.
13 So if, for example, on a given day many reports
14 come upon GameStop's unusual short interest and the stock
15 price jumps, or just ignoring the stock price jumping, if
16 they're commenting on unusual short interest, that's
17 clearly not value relevant by my definition. He doesn't
18 seem to care either way what they're saying as long as
19 they're saying something.
20 So he's not in his approach even what the news
21 is. He's literally only counting mentions.
22 So I don't know of a finance or economics
23 textbook that says what should drive the value of a stock
24 is a number of mentions it gets in the press, regardless
25 of what they're saying. Whether they're saying good
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1 things, bad things, important things, or irrelevant
2 things.
3 He includes mentions of such things as reporting
4 on what happened to the stock price the day before. Why
5 in an efficient market does he even consider that
6 important news to buttress the opinion of a market
7 efficiency? He's literally not looking at the
8 information. He's ignoring it.
9 He's just counting cites. And counting cites,
10 just mentions, is orthogonal to any measure of what is
11 value relevant. It takes some work to notice whether
12 it's value relevant or not. But just counting tickers or
13 names in a headline is not looking at whether that
14 information is value relevant or not.
15 So in that context, that's my critique. What he
16 does in previous reports is different, but at least it
17 has some nexus between information flow and value
18 relevance.
19 So, for example, earnings announcements. We
20 could all say that that's at least broadly related to
21 something that's value relevant. I do not know why he
22 would not look at earnings announcements in this case.
23 If in other cases he looked at company
24 revelations through SEC documents, why is that not
25 relevant in this case? What is it -- in your question,
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1 what is special about this case that would make him not
2 care about earnings announcements but now interested in
3 just mentions in the popular press.
4 I don't see any reason, any sort of scientific
5 reason for doing so.
6 Q. BY MR. ROSEN: So you think that he was bound to
7 do the same type of study in every single case he gets
8 hired to work on?
9 MR. RYAN: Objection to form.
10 THE WITNESS: Of course not. I do think it's
11 fair to wonder when someone changes their technique for a
12 particular case, why? Is there -- is there a reason why
13 you changed it? And I -- I have not asked him that
14 question and I don't know the answer to it.
15 What I'm pointing out is I don't know why he
16 changed it. It's not obvious to me what is it about this
17 case, though in previous cases would make him focus on
18 earnings announcements but not here.
19 And what I wanted to show is for that
20 unexplained reason, what I do note is it matters. That
21 is, if he had used his previous approach, his results
22 would have been significantly weakened.
23 And I'm not insinuating whether -- what his
24 reason was, whether it was data scooping or not. I'm not
25 saying anything like that. I'm saying he changed his
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1 approach here from the publicly available ones that I've
2 seen. He doesn't say in his report why he does that, and
3 it matters. That's all I'm saying.
4 Q. BY MR. ROSEN: Okay. Now if you had done one
5 single news/no news test for -- and combined all of the
6 events in Exhibits 1A, 1B, 1C, and that unitary or
7 combined test had shown the nine stocks or -- to be -- to
8 have a statistically significant difference between
9 high-information flow days and low-information flow days,
10 would that change your opinion about this?
11 MR. RYAN: Objection to the hypothetical.
12 THE WITNESS: So my opinion wouldn't change
13 because what I'm trying to show is if I look at his
14 techniques in the previous reports, and I've identified
15 three, and my opinion is if you do the techniques that he
16 did in those -- those three techniques in previous
17 reports, you get strongly different results.
18 That opinion doesn't change based on the
19 hypothetical you gave me. Because I'm unaware of a
20 previous report that he did what you're insinuating.
21 I'm simply saying if he did the techniques that
22 he did in previous reports to the data -- applied it to
23 the data in this case, his results would be dramatically
24 different.
25 Q. BY MR. ROSEN: Let's go to your Opinion
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1 Number 2.
2 A. What page? This is the rebuttal report two?
3 Q. No.
4 A. Okay.
5 Q. Let's see. It's page -- it begins on page 75 or
6 78 of the PDF, your first report.
7 So in Opinion 2, paragraph 149, it says that:
8 "If plaintiffs' allegations were true and Robinhood's
9 restrictions impacted the prices of the at-issue stocks
10 'artificially' throughout the proposed class period, that
11 would be inconsistent with market efficiency."
12 A. I'm sorry, where --
13 Q. Why is that?
14 A. Where are you -- is this paragraph 149?
15 Q. Yeah. It's -- I don't know. It's the last
16 sentence --
17 A. Yep. Give me just one second just to make sure
18 I just read that full sentence.
19 Okay. Feel free to ask it again, please.
20 Q. So what is the basis for that sentence?
21 A. Sure.
22 What I'm trying to say is the notion of market
23 efficiency and the notion that a restriction on demand of
24 a subset of retail investors impacting the stock price
25 are fundamentally inconsistent. It's the combination.
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1 I want to be clear on this because in
2 Dr. Werner's rebuttal report, he quotes this, like with
3 quotation marks, but leaves out the part about "under the
4 assumption of market efficiency."
5 He would say, for example, if you look at the --
6 the -- he says -- let me find a good example. If you
7 look at the heading right above 149, he puts in quotes, I
8 believe, something to the effect of one would not expect
9 Robinhood's trading restrictions to have allegedly
10 'artificially distorted' prices. And he mentions that a
11 lot in his report. And it's -- I'm trying to explain why
12 that's an important misquote.
13 I am saying if the stocks traded in an efficient
14 market, then the allegation that these restrictions on
15 demand of a substantive retail investor would impact the
16 stock price are inconsistent.
17 I'm making a very simple point. But to take off
18 the part about if one assumes that they trade in an
19 efficient market is a really strong mischaracterization.
20 And he goes on to say that Grenadier contends
21 that -- that some sort of causality, that these
22 restrictions could not have impacted stock price. And I
23 never said that. I just wanted to point out here because
24 this is literally -- your question here is about that
25 sentence, and you fairly asked me to explain it. I'm
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1 just saying that I was surprised that he put quotation
2 marks around a fraction of my sentence over and over
3 again, which gives a very misleading inference for my
4 statement. And I was very surprised by that.
5 I don't know if I've ever seen that in a report,
6 someone putting quotations around half of my sentence.
7 Q. Well, so when you say -- you preface that
8 sentence with "assuming the stock is trading in an
9 efficient market," but is it possible that the stock was
10 trading in an efficient market and then the restrictions
11 come into place, and as a result of the restrictions, the
12 market is no longer efficient?
13 MR. RYAN: Objection to form.
14 THE WITNESS: If the market is not efficient --
15 so I'm just simply saying that if the market is
16 efficient, you would not find that a restriction on a
17 subset of retail investors would impact the stock price.
18 If you're saying if the market is not efficient, could
19 other things happen, yes.
20 If markets are not efficient, lots of things can
21 happen that are very difficult to explain. In
22 particular, causality, and in particular, what a but-for
23 stock price would be.
24 So that's -- that's exactly my point is I'm very
25 limited here in this expression here. I'm just saying
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1 that you can't say two things at the same time: One,
2 that these stocks traded in an efficient market; and two,
3 a restriction on a subset of retail investors would
4 impact the stock price. You could say other things, but
5 not that.
6 It's a very sort of I think relatively
7 non-controversial point that I would think almost
8 everybody would agree with. But if you cut off half of
9 my sentence, then it becomes controversial.
10 Q. BY MR. ROSEN: All right. Don't -- you're
11 getting so sensitive about that quotation. I -- you
12 know, you can ask Mr. Ryan to grill Dr. Werner about
13 that, plans for that if you like next week or the week
14 after. But I'm just trying to understand your opinion
15 here.
16 And is it possible -- I mean, is it possible for
17 someone to manipulate an efficient market?
18 MR. RYAN: Objection to form.
19 THE WITNESS: So "manipulate" sounds like a
20 legal term. So I don't know what that is. I've
21 certainly said in my report examples from the academic
22 literature about friction. I'm not -- I'm not
23 attributing any motives on that, but there are frictions
24 that can make arbitrageurs have an inability to create
25 efficient markets.
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1 So if, for example, arbitrageurs of very large
2 transaction costs and risks their capital, they are not
3 able to perform their duty to enforce an efficient
4 market. So that can happen here.
5 But all I'm saying is that, one, that these
6 markets are not efficient during -- before and during the
7 class period, and two, if you want to assume that they
8 are efficient during the class period, you can't have at
9 the same time the belief that the restriction on demand
10 of a subset of retail investors would impact the stock
11 price.
12 Q. BY MR. ROSEN: All right. So let me ask you
13 another hypothetical question.
14 So instead of Robinhood being the only firm that
15 was PCO only for the entire day on the 28th, I think
16 there was one firm that was PCO only for a couple of --
17 for a few stocks later in the date, like at 2 p.m.
18 But let's say 90 percent of the stockbrokers in
19 America went PCO only that day for these nine stocks.
20 Could that reduction in ability of people to purchase the
21 stock cause the prices -- cause the prices of the stocks
22 to be distorted or -- and decline?
23 MR. RYAN: Objection to form.
24 THE WITNESS: So I don't know. Obviously, as
25 you change the facts, you get -- you have to think about
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1 it. That's why, of course, when I mentioned this here,
2 there's two things that I think are important.
3 One is these restrictions. As far as I know, do
4 not impinge on institutional investors. And two, the
5 Robinhood segment of the market, for example, during the
6 one week prior to the PCO restrictions was a relatively
7 small part of the market. I think I show their net buy
8 behavior was like a couple percent of the market.
9 So I'm saying that I don't know the answer to
10 your question because it depends on magnitude. But I
11 certainly took into account magnitude in my answer. As I
12 said, one is that Robinhood seemed to be relatively --
13 its investors seemed to be relatively small part of the
14 buy side of the market just prior to the restriction, and
15 two, institutional investors, as we talked about earlier,
16 have other ways of trading than through Robinhood.
17 So in the facts of the case as I understand it,
18 it would not be the case in an efficient market that the
19 restrictions on Robinhood would impact the market.
20 If you ask me to add on other types of
21 restrictions, I would have to look at it.
22 Q. BY MR. ROSEN: Well, but then you're admitting
23 it is a matter of degree. At some point if you put
24 enough restrictions on purchasing, it's going to affect
25 the price; right?
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1 A. If you restrict, for example, all retail and all
2 institutional investors, yes. But not if you restrict a
3 subset of just retail investors. I don't know how to
4 answer your question without some empirical --
5 Q. Where do you draw the line? What -- what how
6 much demand do you have to cut off before it will have an
7 effect in an efficient market? Do you have any idea?
8 A. There is no one number for that one. What I was
9 trying to say is: It's important in your hypothetical to
10 also tell me what the restriction is on demand for
11 institutional investors.
12 So -- and also, what fraction of -- if there's
13 any way -- so if there's any way of getting around those
14 restrictions.
15 So one of the articles that's mentioned by
16 Dr. Werner is this Jones paper, which says there was lots
17 of activity trading of options. You got at that earlier.
18 So it's a simple answer to your question about
19 the facts matter. But in this case, the facts, as I
20 understand that, is that these restrictions were not
21 placed at all on institutional investors.
22 AQR, for example, did not trade through
23 Robinhood. That would be my best guess. And AQR could
24 buy if it wanted to. AQR could sell if it wanted to.
25 And also, Robinhood investors, by the data that
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1 I've shown in my report, was a very small fraction of the
2 market in terms of the buy side the week before for these
3 traded stocks.
4 So that is just used to provide a grounding of
5 my statement about a -- when I say a subset of retail
6 investors, I put some data behind it and show that
7 Robinhood was a subset of investors. It was relatively
8 small subset of investors.
9 Q. Did it come up with percentage points of the net
10 buy?
11 A. I'm sorry, I didn't quite hear you.
12 Q. You said Robinhood investors represented about
13 2 percent of the net buy, something like that?
14 A. Yeah. It's on the next page.
15 So the net buy, what I have is this 1 percent of
16 the total volume across all the at-issue stocks. And
17 during the class period, it was 2.2 percent of the net
18 sell.
19 Oh, sorry. Of the net sell, it was .6 of
20 1 percent. Those are very tiny numbers.
21 I'm not opining --
22 Q. Right. But if you look at the change, the
23 change is 1.6 percent; right? So there's a 1.6 percent
24 reduction in demand for the stocks; right?
25 MR. RYAN: Objection to form.
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1 THE WITNESS: So I don't see it that way. Let's
2 look at why I do the net buy just prior to it, which is
3 the most important number.
4 So the net buy -- and you could look at the week
5 before or the 27th itself. This is the demand. When I
6 look at the net demand of Robinhood investors, that's
7 relevant because under my understanding of this case, the
8 issue is the restriction on demand for those investors,
9 the Robinhood investors.
10 So just moments prior to the restrictions,
11 roughly speaking, the net buy of Robinhood customers was
12 about 1 percent. And then the restrictions come into
13 play. And if they were totally successful, we're talking
14 about stopping something that was accounting for, just
15 before they came on, 1 percent of the net buy.
16 That's the most important number here. Not how
17 it changed after the restrictions, but what they were
18 restricting. And in principle, that strikes me as a very
19 low number.
20 I'm not saying that's a good or bad thing. I'm
21 not opining on that at all. I'm putting that in context.
22 Because in the first question you asked me about this
23 section, which is the relevant concept, is I mention a
24 subset of retail investors. And I didn't want to be
25 accused of saying a subset of retail investors when it
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1 maybe accounted for 99 percent of retail investors. That
2 would be -- that would be a mischaracterization.
3 And so when I put it in context, when I say a
4 restriction on a subset -- a demand restriction on a
5 subset of retail investors, I bring these numbers into
6 context. And I think the most relevant one is this
7 1 percent of net buy of these stocks in the week prior to
8 the restrictions.
9 Q. BY MR. ROSEN: Do you have any support in the
10 academic literature for what the effect would be if you
11 reduced the demand for a stock by 1 percent, what effect
12 it would have on its price?
13 A. So if that reduce in demand was driven by
14 non-value-relevant information, as my understanding here,
15 then the academic literature would probably be quite
16 universal in saying it would have a de minimus effect on
17 the price.
18 1 percent would not -- would be very easily
19 overcome by an institutional investor.
20 Q. Do you know what caused these nine affected
21 stock prices to decline dramatically on January 28th when
22 the restrictions were in place?
23 A. Just to be sure, you said that these nine
24 affected stocks?
25 Q. Yes.
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1 A. I don't have an opinion on causality.
2 MR. ROSEN: I'll go to your third opinion.
3 MR. RYAN: I'm sorry, I didn't catch that,
4 Larry.
5 MR. ROSEN: Let's go to your third opinion.
6 MR. RYAN: Thank you.
7 Q. BY MR. ROSEN: What do you believe is the
8 plaintiffs' theory of liability here?
9 A. So what I'm addressing in paragraph 161 of the
10 report is that in terms of my commenting on a methodology
11 for calculating damages, that's consistent with the
12 theory and applicable on a class-wide basis.
13 I am looking at this. One is: What is the
14 but-for price -- prices of these securities? And as I
15 put here as the but-for price would be all else constant,
16 but-for the restrictions of Robinhood.
17 That means it includes the price run-up prior to
18 it and the restrictions on other firms such as E*TRADE
19 would continue.
20 So they would normally try to find the damages
21 by the difference in actual price versus the but-for
22 price. And I've explained what my assumption was for the
23 but-for price.
24 Q. BY MR. ROSEN: And why is the price rise prior
25 to the class period relevant to the but-for price during
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1 the class period?
2 A. Sure.
3 So when I did my report, it was to try to
4 explain that the fact that I find it not efficient for
5 the class period is obviously also consistent with how I
6 found it prior to the class period.
7 It would be odd to find differences, and I don't
8 find -- I find just as much justification for claiming
9 it's a non-efficient market before the one week prior and
10 the class period itself.
11 So to the extent chaud in many of my cases when
12 I look at these and I try to opine on market efficiency,
13 it's usually focused on the class period.
14 In this case for various reasons, Dr. Werner
15 doesn't do any analysis during the class period. I
16 assume he is just assuming that it's not efficient and
17 focuses on the prior class period. I'm not 100 percent
18 sure why, then. But I show it's not efficient during the
19 class period, and for extra measure, that it's not
20 efficient for the one week prior to the class period.
21 In addition, to the extent it appears to me that
22 Dr. Werner is saying that the price as of the end of the
23 27th of January, 2021, was what I think he called a fair
24 price, my analysis during the prior period puts that in
25 context.
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1 What he seems to be deeming a fair price is that
2 price that I've mentioned many times today, for example,
3 Koss was a thousand percent run up without any sort of
4 reasonable value-related news, he calls that the fair
5 price.
6 He's saying that GameStop without any
7 value-relevant news, in my opinion, during that previous
8 period, went up something like 700 percent. And he
9 starts there and he says that's a fair price.
10 And so when you put that in context with this --
11 this is right at the end of that extreme period that I've
12 talked about many times today. He looks at that extreme
13 run-up and says that's the fair price.
14 Why? I don't see how you can say that Koss
15 going up a thousand percent leads to a fair price. Why?
16 You have to have at least some story as to why a stock
17 had an unprecedented week's movement, and he doesn't, he
18 just accepts it.
19 And so that's another reason why it's relevant
20 here. To the extent he wants to use the price at the end
21 of the week prior to the class period as a fair price, I
22 think it's worth pointing out that I've already shown
23 that it's far from efficient, and that price is nowhere
24 grounded in value-relevant information.
25 Q. Now let's assume we have an expert. Plaintiffs
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1 hire an expert. That expert does a regression analysis
2 and shows that the but-for price at each point during the
3 class period is a certain price that's, let's say,
4 10 percent higher than it was on January 27th, that if
5 had there been no restrictions by Robinhood, that the
6 prices would have stayed somewhat above -- somewhat above
7 where they were on the 27th and stayed there during the
8 class period based on a regression analysis. And it's
9 able to disaggregate the restrictions that other firms
10 may have implemented during this class period.
11 Why couldn't that serve as a model for a but-for
12 price in damages in this case?
13 MR. RYAN: Objection to form.
14 THE WITNESS: So the point of a good segment of
15 this section of mine is a difficulty of doing such an
16 analysis in a market that's not efficient. So when you
17 do a typical event study, information that's under the
18 presumption of an efficient market.
19 If you can't do that inference, I'm not sure how
20 that regression study would tell me anything.
21 Remember, in an inefficient market, as we said
22 earlier, the best predictor of tomorrow's price is not
23 the market price. It's what's in the minds and hearts of
24 all the individual investors, and I don't know what it
25 is.
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1 But the kind of analysis that you're insinuating
2 doesn't work in a market that's not efficient. You're
3 trying to look at the data and figure out how the market
4 price would respond to that. But doing that has some
5 presumption of rationality on the prices that's tethered
6 to value-relevant information.
7 You can do stuff like that sometimes if you
8 believe in an efficient market. But that's why in your
9 very standard cases, like you called the stock drop
10 cases, why people first want to show that the market
11 during the class period is efficient so that they can do
12 that sort of event study. That's why they do that so
13 it's meaningful.
14 But if you don't have market efficiency, those
15 sort of standard techniques don't work. You don't see in
16 the literature about using event studies that this is a
17 great technique, markets are not efficient. The whole
18 premise of an event study is to infer from the impact of
19 value-relevant information on the market price. But if
20 markets are not efficient, there is no connection between
21 those two.
22 So that's my main point of the first section of
23 this section is that when you don't have an efficient
24 market, the standard techniques like one person's net
25 present value analysis or an event study, they just don't
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1 work.
2 And I'm not saying it's impossible, but he
3 doesn't offer me any idea -- Dr. Werner doesn't offer any
4 idea of what is he even thinking of? What is the
5 technique you use to get but-for values in an inefficient
6 market?
7 Q. BY MR. ROSEN: Well, let's assume the Court
8 disagrees with you and determines the market in the
9 pre-class -- the one-year period is efficient and that's
10 enough to permit a regression analysis that's reliable
11 enough for damages, and the regression analysis is
12 able -- shows the -- the but-for price of the stocks, and
13 it's 10 percent above the January 27th price during the
14 class period.
15 Why isn't that sufficient to infer the but-for
16 price to calculate damages?
17 MR. RYAN: Objection.
18 THE WITNESS: So for the same reason I said
19 earlier, that in most typical cases I'm involved in, the
20 expert trying to set up a methodology for damages first
21 tries to prove that during the class period, the market
22 was efficient. So they can do that.
23 Q. BY MR. ROSEN: But we just took that off the
24 table; right?
25 A. No, no.
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1 Q. I just said assume the Judge accepts that it is
2 efficient.
3 A. Unless I misheard you, your assumption
4 hypothetical was that a Judge determined that the market
5 was efficient in the pre-class period. You did not say
6 during the class period. So that's what I'm speaking of
7 now, and you can change your hypothetical, obviously.
8 But let me just first respond.
9 If you're doing an analysis of an event study or
10 regression for damages during the class period, you have
11 to have the presumption of market efficiency to do that.
12 It doesn't change. That's, again, why I say in most
13 cases that I'm involved in as an expert witness, the side
14 asserting damages and explaining how they calculate them
15 first tries to assert that during the class period when
16 damages are calculated, that the market is efficient, and
17 then they run things akin to your regression/event study.
18 But if you don't presume that the market is
19 efficient during the period you're running that event
20 study, you're violating the same attribute of causality
21 between value-relevant information and prices. They're
22 unable to do that unless you have a market -- an
23 efficient market.
24 Q. So in that scenario, it would be impossible to
25 compute damages if someone manipulates the market to the
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1 point where it's not efficient during the class period?
2 MR. RYAN: Objection to form to the extent it
3 calls for a legal conclusion.
4 THE WITNESS: So I never said in my report that
5 it's impossible to calculate damages in an inefficient
6 market.
7 What I'm saying is: It's a difficult problem.
8 I haven't been tasked with doing that. But to the extent
9 that Dr. Werner is asserting that this is something he
10 can do, I am saying it's a difficult task. I am not as I
11 sit here aware of a model that accomplishes that.
12 Because as you just mentioned, the standard
13 models that you normally see done, such as net present
14 value and event studies, will not work in a market that's
15 not efficient.
16 So I'm not saying it's impossible. Of course
17 not. I'm saying it's difficult, and I don't believe he
18 has explained what model he's going to use to accomplish
19 this difficult task.
20 Q. BY MR. ROSEN: So you say in your report that
21 plaintiffs would need to propose a methodology that could
22 identify whether and how market participants, both
23 Robinhood investors and others, would have traded, taking
24 into account that the restrictions imposed by other
25 brokers.
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1 I'm just -- are you suggesting that as part of
2 their damages analysis, plaintiffs have to show how
3 market participants would have acted, what trades they
4 would have made, had there been no restrictions imposed?
5 A. I might have lost you a bit because I thought
6 you mentioned Robinhood, and then I thought for a moment
7 you said something about other like investment platforms.
8 I just heard the later.
9 Q. Other brokers.
10 A. So I'm confused by the question. I see that as
11 two different things. Can you try that again on me,
12 please?
13 Q. All right. So this is paragraph 162, page 82 of
14 the PDF of your initial report. At -- it says, "As
15 discussed in Section 8 below, plaintiffs would need to
16 propose a methodology that could identify whether and how
17 market participants (both Robinhood investors and others)
18 would have traded and the evolution of trading and prices
19 in the counterfactual scenario, taking into account that
20 the restrictions imposed by other brokers would have
21 still existed."
22 And so what I'm trying to understand from that
23 is: Do you believe that in their damage analysis
24 plaintiffs must show how market participants would have
25 traded? In other words, whether -- whether certain
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1 people would have traded or not have traded or would have
2 traded different days or bought more, sold less, sold
3 more, bought less, in order to show damages?
4 MR. RYAN: Objection to form.
5 THE WITNESS: So what I'm trying to say here is
6 in a world during this damage period, where there is
7 not --
8 (Interruption in proceedings.)
9 THE WITNESS: Sorry about that. I don't know
10 what that is.
11 So what I'm trying to say is that in a world
12 without efficient markets during this class period, which
13 my understanding is Dr. Werner is agreeing that it's not
14 efficient -- he can answer that himself, but it sounds
15 like he's also saying it's not efficient -- I'm
16 mentioning in those sentences the difficulty of coming up
17 with a but-for price.
18 So you can't do a simple statistical
19 relationship that relies on market efficiency to do this.
20 What you need to look at is in a but-for world, where
21 people are making individual decisions without focusing
22 on just the market price, you introduce lots of
23 complexity.
24 So if we have a change in behavior that says
25 without the restrictions of Robinhood, but with the
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1 restrictions of other brokers such as E*TRADE, what would
2 have been the prices in that inefficient market in that
3 state of the world.
4 And I'm pointing out that that's difficult.
5 Because if it's an inefficient market and you change the
6 parameters, such as take out restrictions of investors,
7 there is no simple way of say ah-ha, here's what the
8 prices would have been.
9 Because when you take out those restrictions in
10 an inefficient market, you have to look at individual
11 calculus -- calculi.
12 So what would an individual investor have done
13 in that but-for world where Robinhood got rid of the
14 restrictions but E*TRADE did not.
15 So in an efficient market, that could be an
16 story, but in an inefficient market, that's very
17 difficult. Because you'd have to get into that -- what
18 was the model in that but-for world that that investor
19 would have used. We know the model is not reliant on the
20 market price in an economic sense because it's not an
21 efficient market. They'd have to use some model to do
22 that, and I don't know what it is.
23 I'm not saying it's impossible to come up with,
24 but I haven't been told or even hinted at that what that
25 model might be.
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1 Q. BY MR. ROSEN: Dr. Grenadier, I think that the
2 thing that I'm not understanding is I understand why you
3 believe that in creating a damages model, plaintiffs
4 should -- should attempt to show what the but-for price
5 would -- what the price would have been; right?
6 But what I'm -- what I don't understand and what
7 I'd like you to explain better is why you think a
8 plaintiff has to explain on an individual level whether
9 they would have traded the same amount had there been no
10 alleged manipulation by Robinhood.
11 A. Yes. And I'll repeat what I said, but hopefully
12 in a way that conveys it to you better.
13 That what I'm speaking about here is how you
14 would come up with but-for prices. As you just
15 acknowledged, you agree we have to come up with but-for
16 prices or Dr. Werner would need to come up with but-for
17 prices, but in a market that's not efficient.
18 And so usually in these matters, we come up with
19 but-for prices in an efficient market, and we've seen the
20 kind of techniques that are often used.
21 Now we're in different territory here. So I
22 haven't been involved in the case where a but-for price
23 was to be calculated in an inefficient market. You may
24 have -- obviously you've been involved in many more cases
25 than I have. I'm just saying as an expert, I've never
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1 seen an other expert contemplate but-for prices in a
2 market where seemingly they admit it's not subject to
3 market efficiency.
4 And so what would be a value in a market where
5 you changed something such as a restriction on demand for
6 Robinhood investors? How would that -- what would that
7 translate into an actual price in that world when markets
8 are not efficient?
9 So that's the problem I'm defining. And I think
10 I am confident that that's the problem that he would need
11 to solve if the market was deemed, as I say it is, not
12 efficient during that period.
13 So he's tasked with calculating a market price
14 in an inefficient market where you changed some variables
15 such as a demand restriction on some investors but not
16 other investors.
17 So where would you -- what model would you use?
18 So if you think about yourself in a Ph.D. program, and
19 they say find the value of a stock in a world without
20 efficiency, and you change some assumption.
21 That's a fair question. I don't know what -- I
22 don't know what paper you would do. It would be a very
23 complicated analysis.
24 And all I'm saying is that since there's no
25 simple way of doing that, where in an efficient market we
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1 take prices as a fair reflection of the best guess of
2 tomorrow's price. When you throw that out, you're in the
3 world of complicated models.
4 And it's possible that Dr. Werner could find
5 some complicated models. I mean, complicated doesn't
6 mean bad. It's possible he could find a model. I
7 just -- I don't know. I don't teach a class where I have
8 such a complicated model to do that. But it's very
9 difficult because when you have an inefficient market,
10 it's driven by what motivates those investors to buy and
11 sell when it's not an efficient market. And that is
12 very, very difficult to come up with.
13 Q. Why are the investor's motivations to buy and
14 sell relevant to their damages in the seller class?
15 A. So the main reason is because not just the
16 people involved here, but all of the investors, what
17 would their -- what would determine the price in the
18 market when it's not efficient.
19 So it's not just these investors; it's the
20 agglomeration of all investors. How would all investors
21 interact in a market, determine a price, in a market
22 that's not efficient.
23 So it's not just these investors. It's all
24 investors would -- would face a different world if you
25 changed the but-for assumption. But for these investors
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1 in particular, you would have to ask questions, all
2 right, if these investors can now trade in -- with
3 Robinhood, well, what fraction of them were trading,
4 anyway, by going to E*Trade or using, as you said, call
5 options.
6 So that's the problem. We have to ask these
7 complicated questions. When you change a but-for, such
8 as you opened up the spigots and allow Robinhood
9 investors to buy, to come up with the difference in some
10 non-efficient market stock price, you have to ask the
11 question: How does that change things for them? Were
12 they still buying by going to E*TRADE? Were they what
13 you called, investors who were buying and hold? All
14 these questions are relevant to know the impact on the
15 market price in an inefficient market.
16 Q. Did you make any effort to come up with a
17 methodology for determining damages in this case?
18 A. No. I wasn't asked to do that in this case.
19 Q. Did you make any efforts to disentangle
20 potential non-fraud-related or allegedly fraud-related
21 impact on Robinhood's stock price?
22 Sorry. Let me rephrase that. I'll withdraw
23 that question.
24 Did you make any effort to disentangle the
25 potential other factors that could have caused the
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1 non-affected stock prices to decline during the class
2 period?
3 A. As I said earlier, I determined that, in my
4 opinion, the class period these nine stocks did not trade
5 in efficient markets. But I didn't look at causality of
6 the prices. I didn't look at what caused them to fall,
7 just that whatever happened, it was not an efficient
8 market.
9 Q. Now the Jones paper you mentioned earlier found
10 that the PCO restrictions caused large and negative
11 return effects on these nine affected stocks.
12 Do you have any reason to believe that the Jones
13 paper is inaccurate or in that respect?
14 MR. RYAN: Objection to the characterization of
15 the Jones paper.
16 THE WITNESS: So I don't agree with how you
17 characterize it.
18 Q. BY MR. ROSEN: Okay. I'll ask you again.
19 Do you -- do you have any criticisms of the
20 Jones paper?
21 A. So I have comments on it in the relevance to
22 this case. So first of all, the paper certainly doesn't
23 ascribe causality. It ascribes association.
24 Secondly, there's a footnote in Dr. Werner's
25 rebuttal report which cites some statistics that I
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1 believe you may have in mind in your question. Those are
2 statistics when you pool all of the stocks together, in a
3 table or exhibit farther back in their paper, they show
4 that -- unless I'm missing one of them, for none of the
5 individual stocks were the PCO restrictions statistically
6 significant.
7 So from a -- you know, obviously in academic
8 papers, you don't just look at directionality and signs;
9 you look at statistical significance. And my
10 recollection is not for a single one of the stocks at
11 issue in this case were the PCO restrictions
12 statistically significant.
13 And then another issue with that paper is that
14 some of the discussions are very hard to understand just
15 from a technical standpoint. How they did their
16 regressions and statistical analysis? It's missing lots
17 of information, and I don't know why that is.
18 I think you may not know that one of the main
19 authors has passed away from that paper. So that could
20 explain some of this. So it may have been work in
21 progress. I literally don't know, but it's a sad thing
22 that a relatively young guy died.
23 There's also a discussion about the meme stock
24 effect that they talk about, which is an alternative
25 hypothesis to the PCO restrictions. And the results
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1 there literally make no sense. They are talking that the
2 stocks that they list in their paper, which are a big
3 overlap with the nine at-issue stocks in this case,
4 they're basically saying those stocks are rarely
5 discussed on social media.
6 So what they said is that only two of the stocks
7 that they're looking at, AMC and GameStop, are in the top
8 20 most mentioned stocks in the internet like Reddit.
9 I have no idea what -- that makes no sense that
10 Bed Bath & Beyond and Tootsie Roll and all other stocks
11 here, Blackberry, they're not even mentioned in the top
12 20 of most talked about stocks during this period.
13 So there's something wrong. They did a mistake
14 there. And we all make mistakes. It's a working paper.
15 But I don't know how to rely on that paper at all.
16 So those are the sort of off the top of my head
17 problems I have with that paper in terms of relevance to
18 this case. One, as I said, they were not causality.
19 Two, it didn't show statistical significance for any of
20 the stocks in terms of the PCO effects, and three, when
21 they tried to investigate whether there was a meme stock
22 effect, there seemed to be some technical mistake that
23 made them miss all the important stuff going on in the
24 real world.
25 Q. Are you offering any opinion as to whether a
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1 presumption of reliance is available to --
2 A. You know, I didn't hear you.
3 Q. All right. Are you offering any opinion as to
4 whether the class is entitled to a presumption of
5 reliance under the affiliated Ute case?
6 A. That sounds squarely in the realm of legal
7 opinions, and obviously, I'm not going to render any
8 legal opinion.
9 MR. RYAN: It's so clearly a legal opinion, I
10 didn't even object on that basis.
11 (Discussion off the record.)
12 MR. ROSEN: Okay. I don't have any other
13 questions, Professor. Thank you very much for your time.
14 THE WITNESS: Thank you.
15 MR. RYAN: I have no questions at this time.
16 Thank you.
17 (Time noted: 4:10 p.m. Pacific Daylight Time.)
18 --oOo--
19
20
21
22
23
24
25
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1 STATE OF CALIFORNIA ) ss:
2 COUNTY OF MARIN )
3
4 I, LESLIE ROCKWOOD ROSAS, RPR, CSR NO. 3452, do
5 hereby certify:
6 That the foregoing deposition testimony was
7 taken before me at the time and place therein set forth
8 and at which time the witness was administered the oath;
9 That testimony of the witness and all objections
10 made by counsel at the time of the examination were
11 recorded stenographically by me, and were thereafter
12 transcribed under my direction and supervision, and that
13 the foregoing pages contain a full, true and accurate
14 record of all proceedings and testimony to the best of my
15 skill and ability.
16 I further certify that I am neither counsel for
17 any party to said action, nor am I related to any party
18 to said action, nor am I in any way interested in the
19 outcome thereof.
20 IN WITNESS WHEREOF, I have subscribed my name
21 this 20th day of April, 2023.
22
23
<%5411,Signature%>
24 LESLIE ROCKWOOD ROSAS, RPR, CSR NO. 3462
25
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1 ANTONY L. RYAN, ESQ.
2 aryan@cravath.com
3 April 20, 2023
4 RE: IN RE JANUARY 2021 SHORT SQUEEZE TRADING LITIGATION
5 4/19/2023, Steven Grenadier, Ph.D. (#5868343)
6 The above-referenced transcript is available for
7 review.
8 Within the applicable timeframe, the witness should
9 read the testimony to verify its accuracy. If there are
10 any changes, the witness should note those with the
11 reason, on the attached Errata Sheet.
12 The witness should sign the Acknowledgment of
13 Deponent and Errata and return to the deposing attorney.
14 Copies should be sent to all counsel, and to Veritext at
15 cs-ny@veritext.com.
16
17 Return completed errata within 30 days from
18 receipt of testimony.
19 If the witness fails to do so within the time
20 allotted, the transcript may be used as if signed.
21
22 Yours,
23 Veritext Legal Solutions
24
25
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1 IN RE JANUARY 2021 SHORT SQUEEZE TRADING LITIGATION
2 4/19/2023 - Steven Grenadier, Ph.D. (#5868343)
3 E R R A T A S H E E T
4 PAGE_____ LINE_____ CHANGE________________________
5 __________________________________________________
6 REASON____________________________________________
7 PAGE_____ LINE_____ CHANGE________________________
8 __________________________________________________
9 REASON____________________________________________
10 PAGE_____ LINE_____ CHANGE________________________
11 __________________________________________________
12 REASON____________________________________________
13 PAGE_____ LINE_____ CHANGE________________________
14 __________________________________________________
15 REASON____________________________________________
16 PAGE_____ LINE_____ CHANGE________________________
17 __________________________________________________
18 REASON____________________________________________
19 PAGE_____ LINE_____ CHANGE________________________
20 __________________________________________________
21 REASON____________________________________________
22
23 ________________________________ _______________
24 Steven Grenadier, Ph.D. Date
25
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1 IN RE JANUARY 2021 SHORT SQUEEZE TRADING LITIGATION
2 4/19/2023 - Steven Grenadier, Ph.D. (#5868343)
3 ACKNOWLEDGEMENT OF DEPONENT
4 I, Steven Grenadier, do hereby declare that I
5 have read the foregoing transcript, I have made any
6 corrections, additions, or changes I deemed necessary as
7 noted above to be appended hereto, and that the same is
8 a true, correct and complete transcript of the testimony
9 given by me.
10
11 ______________________________ ________________
12 Steven Grenadier, Ph.D. Date
13 *If notary is required
14 SUBSCRIBED AND SWORN TO BEFORE ME THIS
15 ______ DAY OF ________________, 20___.
16
17
18 __________________________
19 NOTARY PUBLIC
20
21
22
23
24
25
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***ERRATA SHEET***
NAME OF CASE: In re January 2021 Short Squeeze Trading Litigation
No. 21-MDL-2989 (S.D. Fla.)
DATE OF DEPOSITION: 04/19/2023
NAME OF DEPONENT: Steven Grenadier
I have read the transcript of my deposition taken on April 19, 2023. The contents thereof
are an accurate transcription of the deposition, subject to the following corrections or
changes:
Page Line(s) Original Correction Reason
Transcription
9 10 valuated value-weighted
Error
valuated indices are value-weighted indices are Transcription
10 5
generally quite easy o generally quite easy to Error
49 22 is the stock price’s value is the stock price Misspoke
49 25 is a stock value is the current stock price Misspoke
Transcription
51 20 MPV NPV
Error
Transcription
52 2 MPV NPV
Error
Transcription
52 17 in inefficient in an inefficient
Error
in efficient market and
in efficient markets and
some investors don’t Transcription
56 2-3 some investors don’t
believe in efficient Error
believe in efficient markets
market
Transcription
57 22-23 be an efficient market occur in an efficient market
Error
Transcription
59 9 costs Koss
Error
Transcription
61 24 costs Koss
Error
in, I-N, an efficient Transcription
62 10 in, I-N, inefficient market
market Error
it’s going to go back to Transcription
67 16 it’s going to go back up ten
ten Error
that only change those
72 17 that only change under Misspoke
beliefs under
Transcription
74 14 could proper up could prop up
Error
Transcription
80 5 didn’t say markets didn’t say which markets
Error
Transcription
80 25 close closer
Error
Case 1:21-md-02989-CMA Document 585-5 Entered on FLSD Docket 06/30/2023 Page 215 of
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***ERRATA SHEET***
NAME OF CASE: In re January 2021 Short Squeeze Trading Litigation
No. 21-MDL-2989 (S.D. Fla.)
DATE OF DEPOSITION: 04/19/2023
NAME OF DEPONENT: Steven Grenadier
Page Line(s) Original Correction Reason
Transcription
89 7 arbitraged arbitrage
Error
Transcription
106 10 value-relative value-relevant
Error
Transcription
113 19 mean a version mean reversion
Error
Transcription
114 15 version reversion
Error
Transcription
118 12 an important important
Error
Transcription
118 25 to a Court – curtail to curtail
Error
Transcription
122 25 rationale rational
Error
Why would an analyst Why wouldn’t an analyst
saying that the stock saying that the stock Transcription
164 13-14
doesn’t trade in an doesn’t trade in an efficient Error
efficient market? market be value relevant?
Transcription
166 21 with some fair price was some fair price
Error
Transcription
168 14 why costs went up why Koss went up
Error
Transcription
172 19 use that public use public
Error
173 3 Feinstein Werner Misspoke
Transcription
174 9 use it -- the use the
Error
Transcription
175 7 what includes what to include
Error
I find in sight previously I find previously publicly
Transcription
175 19-20 publicly available expert available expert reports by
Error
reports, Dr. Werner Dr. Werner
even considering what the Transcription
176 20 even what the news
news Error
Transcription
184 1 of have
Error
Transcription
185 3 these restrictions. As far these restrictions, as far
Error
Case 1:21-md-02989-CMA Document 585-5 Entered on FLSD Docket 06/30/2023 Page 216 of
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***ERRATA SHEET***
NAME OF CASE: In re January 2021 Short Squeeze Trading Litigation
No. 21-MDL-2989 (S.D. Fla.)
DATE OF DEPOSITION: 04/19/2023
NAME OF DEPONENT: Steven Grenadier
Page Line(s) Original Correction Reason
Transcription
189 13 reduce reduction
Error
to the extent chaud in Transcription
191 11 to the extent that in many
many Error
Transcription
200 15-16 that could be an story that could be a story
Error
I declare under penalty of perjury under the laws of the United States of America that the
foregoing is true and correct.
_________________________
Steven Grenadier
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