Underestimation of Securities Fraud Aggregate Damages Due to Inter-Fund Trades

23 Pages Posted: 6 Jul 2013

See all articles by Steven P. Feinstein

Steven P. Feinstein

Babson College - Finance Division

Gang Hu

Hong Kong Polytechnic University - School of Accounting and Finance

Mark Marcus

Crowninshield Financial Research

Zann Ali

Fidelity Investments, Inc.

Date Written: July 2013

Abstract

Aggregate damages in class action securities cases estimated using standard methodologies and public volume data may be understated due to the frequent occurrence of inter-fund trades. Inter-fund trades are internal crossing trades between funds within the same fund family, and are one of the few instances of trading transactions that are not reported publicly. Consequently, while inter-fund trades show up in submitted claims they are omitted from the public trade volume data generally used to estimate aggregate damages. Using actual claims data obtained from a claims administrator in a recent case, we find a significant number of damaged shares attributable to inter-fund trades, which traditional damage estimation models do not account for without an adjustment to the models’ trading volume input. Our findings have implications for how aggregate damages should be estimated, and call for policy reform in the reporting of inter-fund trades.

Keywords: inter-fund trades, class action securities cases, damages estimation, aggregate damages, two-trader proportional trading model

JEL Classification: K22, G14, G23

Suggested Citation

Feinstein, Steven P. and Hu, Gang and Marcus, Mark and Ali, Zann, Underestimation of Securities Fraud Aggregate Damages Due to Inter-Fund Trades (July 2013). Journal of Forensic Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2289971

Steven P. Feinstein

Babson College - Finance Division ( email )

Babson Park, MA 02457-0310
United States

Gang Hu (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M1038, Li Ka Shing Tower
Hung Hom, Kowloon
Hong Kong
(852) 3400 8455 (Phone)

HOME PAGE: http://ganghu.org

Mark Marcus

Crowninshield Financial Research ( email )

14 Mica Lane
Suite 202
Wellesley, MA 02481
United States

Zann Ali

Fidelity Investments, Inc. ( email )

United States

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