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ECD Investor Group v. Credit Suisse International

United States District Court, S.D. New York

September 1, 2017

ECD INVESTOR GROUP, et al., Plaintiffs,

          OPINION & ORDER


         This case arose from events preceding the demise of Energy Conversion Devices, Inc. (“ECD”), a solar panel manufacturer that went bankrupt in 2012. In June 2008, approximately four years before the bankruptcy, ECD contracted with Credit Suisse International and Credit Suisse Securities (USA) LLC (collectively, “Credit Suisse”) to execute an offering to raise capital for the company. This offering allowed investors to enter long positions in convertible notes and hedge their investments via “synthetic” short positions in ECD common stock. Such hedging was made possible by a “share lending facility, ” through which ECD lent 3.4 million shares to Credit Suisse for a nominal fee, so the bank could sell them short into the market to facilitate the investors' hedging. This type of arrangement, popularly termed in the financial media as a “Happy Meal” because of its favorable terms for investors, was typically used by cash-strapped companies with difficulties raising capital. The structure provided minimal risk for investors, who could benefit from bonds convertible into stock if the company did well, and profit from their countervailing short positions in case the company's prospects went sour.

         Though ECD's performance immediately following the June 2008 Offerings was generally positive, and the company share price remained at or above the offering price for the next several months, ECD's stock price entered a tailspin from which it would never recover starting in the fall of 2008. Plaintiffs contend that the “Happy Meal” was to blame, at least in part, for ECD's demise, and that Credit Suisse misled ECD and its investors to benefit itself and its hedge fund clients who, rather than taking advantage of the share lending facility to offset the risk of their long positions in ECD's notes, instead conspired to take on excessive short positions and deliberately contributed to ECD's woes.

         Plaintiffs' claims survived Credit Suisse's motion to dismiss, where Judge Marrero found that they had adequately pled the elements of misrepresentation and market manipulation claims under the Securities Exchange Act of 1934. Sharette v. Credit Suisse Int'l, 127 F.Supp.3d 60 (S.D.N.Y. 2015). Credit Suisse now moves for summary judgment, arguing that discovery has repudiated the core allegations of Plaintiffs' Consolidated Amended Complaint and demonstrated that, contrary to their allegations of unrestrained short-selling, Credit Suisse did nothing more than what it contracted to do-assist ECD's investors to take market-neutral positions in hedging between convertible notes and stock. Credit Suisse also moves to exclude the testimony of Plaintiffs' liability experts under the standard set forth in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), and Federal Rule of Evidence 702.

         The Court holds that portions of Plaintiffs' experts' testimony must be excluded because it is speculative and not based on sufficient facts or data. Accordingly, Credit Suisse's Daubert motion is GRANTED in part and DENIED in part. Considering the remaining evidence in the record, the Court finds that Plaintiffs have failed to raise a genuine dispute of material fact concerning key elements of their securities fraud causes of action, and GRANTS Credit Suisse's motion for summary judgment. Consequently, Plaintiffs' motion for class certification pursuant to Federal Rule of Civil Procedure 23(b)(3), which was stayed pending consideration of Credit Suisse's summary judgment motion, is DENIED as moot.[1]


         The following facts are undisputed unless otherwise stated.

         A. Introduction and Definitions of Financial Terms

         ECD was a company that manufactured solar panels. ECF No. 176, Credit Suisse Rule 56.1 Statement (“CS St.”) at ¶ 1. During the fall of 2007, ECD was a growth-stage company with a limited history of profits that sought to raise capital in order to maintain production of laminates for a growing solar energy market. Id. at ¶¶ 2-3. In order to do so, ECD turned to Credit Suisse to explore financing options. Id. at ¶ 6; ECF No. 178, Plaintiffs' Rule 56.1 Counterstatement (“Pls.' St.”) at ¶ 155. Credit Suisse prepared a number of presentations for ECD management and ultimately recommended that ECD issue a “tandem offering” of convertible notes, coupled with an equity offering, including shares offered in connection with a “share lending facility.” CS St. at ¶ 8; Pls.' St. at ¶¶ 159-60. The parties dispute whether Credit Suisse adequately informed ECD management of all of their financing options and truthfully disclosed the risks inherent in the offering structure, and whether ECD management carefully and competently analyzed the implications of Credit Suisse's proposal. See CS St. at ¶¶ 6-13; Pls.' St. at ¶¶ 159-63.

         The “tandem offering” (hereinafter, the “June 2008 Offerings”) agreed to by ECD and Credit Suisse consisted of two components-common stock and convertible notes. CS St. at ¶ 20. Because, however, a significant client and target of the June 2008 Offerings were “convertible arbitrage investors” who would “hedge” their purchases of convertible notes by taking “short positions” in ECD's common stock, some explanation of the general concepts involved in convertible arbitrage investing is necessary in order to understand the mechanics of the tandem offering and the rationale for the “share lending facility” that accompanied it.

         A “convertible note” is a debt obligation that at the holder's option may be exchanged for a specific number of shares of common stock. Id. at ¶ 21. It is a hybrid security composed of two elements: (1) a note in which the note's issuer promises to make periodic payments to the holder over the life of the note and repay the face value of the note at the end of its lifetime; and (2) an option to convert the note into a specified number of shares of the issuing company's common stock. Id. Any convertible note has a “conversion ratio, ” which is the number of shares into which it may be converted, and a “conversion price, ” which is a breakeven point above which the noteholder will profit from exercising its option to convert the note into stock.

         A “short sale” is a transaction where an investor borrows and then sells common stock from a third party. Id. at ¶ 29. Generally, an investor pays a borrowing fee to the lender that depends on the market supply of shares for lending. Pls.' St. at ¶ 182. The “short sale” is eventually closed out when the investor buys back or otherwise obtains the borrowed shares and returns them to the share lender: this is called “covering the short.” If the share price has decreased between the time the short seller borrowed the shares and the time he must return them, the seller makes money; if the share price has increased during this period, the seller loses money. CS St. at ¶ 29. Therefore, making a short sale is economically the opposite of purchasing the security, otherwise known as holding a “long position” in the security. Id.

         Short selling is an important element of “hedging” an investment. A “hedge” is an offsetting investment that limits the downside risk of a principal investment. Id. at ¶ 34. Hedging involves the sale of one security or option against the purchase of another related security, with the object of minimizing the risk in one position while attempting to profit from inefficiencies in the market's valuation of the various securities. Id.

         The level of such hedging is referred to as the “hedge ratio, ” which refers to the number of underlying common shares sold short divided by the number of shares into which the bonds are convertible. Id. at ¶ 38. A desired hedge ratio is a product of the issuer's share price relative to the conversion price. Id. As the company's share price increases above the conversion price, conversion becomes a near certainty and the hedge ratio approaches 100%; on the contrary, if the share price falls well below the conversion price, conversion becomes highly unlikely, and the hedge ratio approaches 0%. Id. When properly done, convertible arbitrage is non-directional; that is, it is not meant to profit from a decline in a company's share price. Id. at ¶ 36.

         A “share lending facility” is created when a company lends a number of shares to a financial institution for the purpose of being lent out for shorting to investors who have purchased the company's convertible notes. Id. at ¶ 30. The purpose of such a facility is generally to guarantee to investors that they will be able to obtain a sufficient short position over the lifetime of the notes to permit adjustment of the hedge ratio to maintain their desired hedge position. Id.

         A common method of hedging an investment is “delta-neutral hedging.” Broadly speaking, “delta” refers to the change in the price of the convertible note with respect to the change in underlying common stock price. Id. at ¶ 39. Therefore, “delta-neutral hedging” is achieving the exact short position in common stock necessary to eliminate the risk from stock price movement inherent in holding a long position in convertible notes at any given time. The delta of a convertible option does not remain constant, and therefore traders must generally adjust their positions dynamically to remain delta-neutral; when the delta increases, an investor must increase its short position or decrease its long position to remain delta-neutral, and vice versa if the delta decreases. Id. at ¶ 41. In the context of this case, “convertible arbitrage investors” were hedge funds who sought to hold a long position in ECD's convertible notes and a short position in ECD's common stock in order to hedge against movements in price of the underlying stock. Id. at ¶ 36.

         The meaning of the word “hedging” in the context of this case is contested by the parties, and is key to Plaintiffs' theory of the case. Plaintiffs argue that in the context of convertible arbitrage, industry custom dictates that “hedging” invariably refers to delta-neutral hedging only. Pls.' St. at ¶ 169. Moreover, Plaintiffs contend that this was the understanding that Credit Suisse and ECD had when they entered their agreement because Credit Suisse's presentations to ECD indicated that the purpose of the borrowed shares was to “hedge out the equity risk embedded in the convertible, ” with the “amount of selling the hedge fund does” being a “function of a number of shares underlying the convertible and the expected sensitivity of the convertible relative to the company's shares (the delta of the convertible).” Id. at ¶ 170. Plaintiffs also point out that, during their depositions, Credit Suisse witnesses indicated that they actually calculated a delta-neutral model hedge percentage that was similar to the model used by the convertible investors, and that there was no evidence that Credit Suisse considered any other variables in this transaction. Id.

         For its part, Credit Suisse responds that delta is just one of the model outputs that convertible arbitrage investors rely upon to hedge their investments, with at least a half dozen other Greek letters referring to other risks. See CS St. at ¶ 42 (referring to variables representing the rate of change of a security with relation to implied volatility, time, change in interest rates, spot exchange rates, change in the credit recovery rate, and change in the underlying stock dividend yield). According to this argument, investors could have chosen to hedge any number of variables, not just the delta, provided that they were generally seeking to reduce risk by making offsetting investments. Moreover, Credit Suisse argues that delta calculations themselves are not objective, and that each investor would have an individual proprietary model that could vary in its output. Id. at ¶¶ 40-41.

         B. The June 2008 Offerings

         In total, ECD's June 2008 Offerings sold 1, 460, 500 shares of common stock at $72 per share and $316.3 million of five-year convertible notes that carried an interest rate of 3% per year and would mature on June 15, 2013. CS St. at ¶¶ 20, 22. The convertible notes had a conversion ratio of 10.8932 shares of ECD stock. Id. at ¶ 22. $250 million of the convertible notes were sold to convertible arbitrage investors, whereas the remainder were sold to long-only investors. Pls.' St. at ¶ 172.

         Contemporaneous with its offerings, on June 18, 2008, Credit Suisse and ECD entered into a Share Lending Agreement (“SLA”) establishing a share lending facility, which is substantially at issue in this litigation. The SLA stated, as relevant here, that ECD would lend Credit Suisse 3, 444, 975 shares of ECD stock for a borrowing fee of $0.01 per share “solely for the purpose of directly or indirectly . . . facilitating the sale and the hedging of the Convertible Notes by the holders thereof or, . . . with the prior written consent of the Lender, facilitating the sale and the hedging of any additional convertible securities which the Lender may issue from time to time by the holders thereof.” Pls.' St. at ¶ 165. The 3, 444, 975 shares that Credit Suisse borrowed from ECD were equivalent to the total number of shares into which all the $316.3 million of the notes sold could be converted, and Credit Suisse was required to return the shares to ECD by the convertible notes' maturity date of June 15, 2013. CS St. at ¶ 23.

         On the same date as the SLA was signed, Credit Suisse sold 2, 723, 300 of the borrowed shares into the market (in addition to the 1, 460, 500 shares sold by ECD). Id. at ¶ 24. By doing so, Credit Suisse established a short position in ECD stock. On June 20 and June 23, 2008, Credit Suisse sold and then immediately repurchased the remaining 721, 675 borrowed shares through what is called a “double print” procedure. Id. at ¶¶ 24-25. The objective of a “double print” is to ensure that the shares are properly registered and freely tradable under the securities laws in the future, thus ensuring that Credit Suisse would have sufficient stock available to support hedges up to the total number of shares into which the notes were convertible, should it become necessary. Id. at ¶ 25.

         After selling all 3, 444, 975 borrowed shares into the market, and then immediately repurchasing the 721, 675 “double print” shares, Credit Suisse was left with a net short position of 2, 723, 300 shares. To facilitate hedging, Credit Suisse offered convertible notes investors the opportunity to acquire the economic substance of its short position through instruments called “total return swaps.” Id. at ¶ 31. A total return swap is a private contract by which two parties agree to make payments to each other on the basis of the performance of different assets specified in the contract. Id. In this case, each total return swap entered into required investors to pay Credit Suisse the total return on ECD's stock, while Credit Suisse committed to paying investors the London Interbank Offered Rate (“LIBOR”), a benchmark interest rate that banks charge one another for short-term loans, minus a few basis points. Id. This resulted in these investors acquiring a synthetic short position that was economically equivalent to engaging in a short sale of ECD stock; if ECD's share price increased, swap holders would have been obligated to pay Credit Suisse when unwinding or closing the swaps, but if ECD's share price decreased, Credit Suisse could end up paying them. Id. Credit Suisse argues that because a total return swap is a private, off-market transaction, it cannot affect a company's share price. Id. Plaintiffs respond that while this may be true of the total return swaps held by the investors themselves, the creation of any total return swap required an underlying short sale into the market by Credit Suisse, which can and did have a negative effect on ECD share prices. ECF No. 178, Plaintiffs' Response to Defendants' Statement of Undisputed Facts (“Pls.' Resp.”) at ¶ 31.

         Using a licensed modeling software, Credit Suisse calculated what it considered to be the appropriate delta-neutral hedge ratio of 0.78 for the ECD notes on the date of the offerings. CS St. at ¶ 45. Therefore, investors seeking a delta-neutral position would have had to acquire a short position equivalent to 78% of the shares into which their holdings in notes could be converted. Id.

         C. Plaintiffs' Allegations of Credit Suisse's “Excess Short-Selling” in June 2008 Offerings

         Plaintiffs do not dispute that 0.78 was an appropriate delta-neutral hedge ratio on the date of the offerings. See ECF No. 180-7, Expert Report of David M. DeRosa (“DeRosa Rpt.”) at ¶¶ 70-71, 73. They do, however, argue that Credit Suisse in fact permitted its hedge fund clients to acquire a delta ratio of 1.0, by entering into total return swaps equivalent to 2, 723, 300 shares, when only 2, 124, 183 shares were necessary to create a delta-neutral hedge. Pls.' St. at ¶¶ 172- 73, 177. Plaintiffs allege that Credit Suisse promised 40 of its hedge fund clients short positions equivalent to a full conversion amount of delta 1.0, rather than the “correct” delta-neutral ratio of 0.78, before the closing of the offerings. Id. at ¶ 174. Instead, allegedly to “create the appearance of a delta-neutral hedge, ” these same hedge funds bought long positions in 599, 129 shares directly from ECD, which Plaintiffs refer to as the “plug shares.” ECF No. 192, Credit Suisse Reply 56.1 St. (“CS Reply St.”) at ¶ 177.[2] Credit Suisse argues that, once the hedge funds' “long” position was properly accounted for, all of the hedge funds had a delta-neutral “net hedge ratio” of 0.78. CS St. at ¶ 45. Plaintiffs contend, however, that Credit Suisse placed no constraints on the hedge funds' ability to continue to sell the 599, 129 shares and failed to monitor their use in any way, and therefore had no way of ensuring that investors actually maintained a delta-neutral hedge ratio. Pls.' St. at ¶ 177. Therefore, Plaintiffs argue that, rather than using the borrowed shares for “hedging, ” as permitted by the SLA, Credit Suisse in fact facilitated hedge funds' “directional bets, ” that in turn required it to short a larger than necessary amount of ECD stock.

         Plaintiffs also object to Credit Suisse's “double print” sale and repurchase of the 721, 675 remaining sales. They argue that Credit Suisse's records show that the double-print shares were not continuously held by Credit Suisse after they were repurchased, and account statements produced between June and August 2008 did not reflect that they were held by any Credit Suisse entity. Id. at ¶ 179. Therefore, Plaintiffs posit that Credit Suisse may have been shorting these shares during the period before August 7, 2008, when they were moved to a Credit Suisse segregated account. Id.

         In sum, Plaintiffs argue that in order to be faithful to the language of the SLA, Credit Suisse should have sold short only the number of shares necessary to generate the exact number of total return swaps that would allow convertible arbitrage investors to achieve a delta-neutral hedge of 0.78 on their convertible notes holdings. This number of shares was 2, 124, 183. Id. at ¶ 177; DeRosa Rpt. at ¶ 78. Instead, they allege, Credit Suisse engaged in two unnecessary transactions in June 2008 that allowed them to place all 3, 444, 975 shares into the market, but were inconsistent with the promises made in the SLA-Credit Suisse sold short an additional 599, 129 shares to generate a number of total return swaps equivalent to a hedge ratio of 1.0, not 0.78, and it sold short the remaining 721, 675 shares in an alleged “double print” transaction, but could not account for them immediately thereafter.

         Credit Suisse argues that there is no basis for either of these assertions. First, even assuming that the SLA committed it to using the borrowed shares to assist its clients in establishing delta-neutral hedge positions only-which Credit Suisse does not concede-Credit Suisse contends that it did in fact establish delta-neutral hedge positions for its hedge fund clients. It argues that the proper 0.78 hedge ratio could have been achieved not only by selling total return swaps up to a hedge ratio of 78%, but also by investors' simultaneous acquisition of swaps up to a hedge ratio of 100% coupled with the necessary amount of additional long shares necessary to achieve a net hedge ratio of 78%. Therefore, because the convertible arbitrage investors also purchased 599, 129 shares long from ECD, they could enter into an additional 599, 129 total return swaps with Credit Suisse while maintaining delta-neutrality. CS St. at ¶ 45. As to the “double print” shares, Credit Suisse argues that, while there might have been a theoretical possibility that these shares could have been sold short between June 2008 and August 2008, Plaintiffs have uncovered no evidence that this actually occurred. CS Reply St. at ¶¶ 178-79.

         According to Credit Suisse's expert Charles Jones, there are valid reasons why investors chose to enter into total return swaps up to a hedge ratio of delta 1.0 and offset them with “long” positions in ECD stock to achieve a net hedge ratio of 0.78 as to the convertible notes, rather than simply entering into total return swaps up to a hedge ratio of 0.78. Total return swaps, which are bilateral contracts, are not conducive to frequent transactions, and therefore investors who wanted to adjust dynamically the size of their short positions in line with a changing delta to maintain delta-neutrality would prefer to hold ECD stock and adjust their position by buying or selling that stock directly into the market. See ECF No. 180-73, Rebuttal Expert Report of Charles M. Jones (“Jones Rebuttal Rpt.”) at ¶ 52 n.109. Therefore, according to Credit Suisse, the structure of the offering permitted convertible noteholders flexibility to adjust their hedge ratio as needed. Id.

         D. Credit Suisse's Conduct During the Proposed Class Period After the June 2008 Offerings

         In addition to challenging the propriety of the two aforementioned transactions at the time of the June 2008 Offerings, Plaintiffs argue that Credit Suisse's allegedly improper use of the borrowed shares continued throughout 2009 and 2010. Specifically, in January 2009, Plaintiffs' expert David DeRosa alleged that ECD's convertible notes had become a “busted convertible.” A “busted convertible” is an instrument that behaves like a bond, not a bond with an option, because the price of both the note and the underlying stock have collapsed sufficiently. DeRosa Rpt. at ¶ 100.

         According to DeRosa, for an investor to hedge a convertible note, the common stock must move in the same direction as the convertible note. Pls.' St. at ¶ 180. In other words, when the note position accumulates profits, a short position in the common stock should generate losses. ECF No. 180-7, DeRosa Rpt. at ¶ 88. Based on a regression analysis, DeRosa concluded that the price of the notes and the bonds had decoupled by January 2009, with bond prices moving steadily upward and the stock price continuing to fall. Pls.' St. at ¶ 181. Therefore, because changes in the price of ECD stock were allegedly no longer predictive of changes in the price of ECD bonds, DeRosa argued that any further short selling of stock was no longer a hedge against price fluctuation in the notes, but rather a mere directional bet against the stock itself. Id.

         According to Plaintiffs, because Credit Suisse's convertible note desk sold the hedge funds their initial note positions, was the market maker for the notes thereafter, and oversaw all or almost all secondary market trades in the notes, Credit Suisse knew the number of convertible notes its clients held and the synthetic short position that each client would have needed to maintain a delta-neutral hedge. Id. at ¶ 188. Armed with this knowledge, Plaintiffs allege, Credit Suisse's excessive short-selling and failure to unwind outstanding total return swaps after the convertible notes “busted” had the effect of circumventing normal market restrictions on shorting stock by virtually eliminating loan fees and allowing hedge fund investors to take short positions in ECD stock without having to access the expensive share lending market and pay the associated costs. Id. at ¶ 186.

         Proceeding on this theory, DeRosa computed a daily “excess short shares” calculation for every day of the Proposed Class Period.[3] DeRosa Rpt. at ¶ 108. In doing so, he made three principal assumptions about the data. First, DeRosa did not incorporate the 599, 129 “plug shares” in which convertible note investors acquired a long position in the Offerings, under the premise that those shares could have easily been resold or otherwise disposed of, because Credit Suisse had imposed no limitations on them. Id. at ¶ 79 (describing DeRosa's rationale for not counting these shares); CS St. at ¶¶ 118-19. Second, although they were undisputedly repurchased by Credit Suisse shortly after they were sold in June 2008, DeRosa included the “double print” shares in his calculations of excess shares for several months until August 7, 2008, when they were placed into a segregated Credit Suisse account called 2M2YG0. CS St. at ¶ 135; ECF No. 179-47, DeRosa Deposition Transcript (“DeRosa Tr.”) 217:25-219:25. DeRosa did this because Credit Suisse allegedly could not account for these shares' whereabouts during this period of time, and they could have theoretically been sold into the market. Id. Third, because DeRosa concluded that the convertible notes were “busted” by January 1, 2009, he assumed that the proper hedge ratio was zero for the entirety of 2009 and 2010. DeRosa Rpt. at ¶¶ 99-101; Pls.' St. at ¶ 181. Therefore, DeRosa deemed all outstanding short positions to be “excess short shares” during these periods, and argued that Credit Suisse should have unwound all of its total return swaps and repurchased all of the stock it sold short after January 2009, because the shares could no longer reasonably be characterized as being used for hedging, as required by the SLA. Id.

         Based on these assumptions, DeRosa's “excess short shares” computation started at around 1 million in June 2008, and increased to approximately 1.8 million by August 6, 2008. See ECF No. 180-7, DeRosa Rpt. Appendix 9, Excess Short Share Calculations, at 183. The calculations during this period consists of two categories, “hedge fund synthetic short in excess of delta-neutral position” and “excess loan facility shares sold short.” Id. at 183-97. On August 7, 2008, presumably due to the creation of Credit Suisse's segregated 2M2YG0 account, the number of “excess loan facility shares sold short” plummeted to zero, and the “total excess shorts” calculation decreased to approximately 325, 000. Id. at 183. Throughout 2008, the number of “total excess shorts” in DeRosa's calculations generally declined, falling to a low of only 75, 000 shares on December 31, 2008. Id. at 183-86. As of January 1, 2009, however, when the convertible notes became “busted” in DeRosa's calculation, this figure rose to approximately 1.2 million shares, reflecting his estimation that all of Credit Suisse's outstanding short positions were “excess” at that point. Id. at 186. As Credit Suisse unwound its swaps and repurchased its stock, this number declined steadily.[4] Id. at 186-97.

         Credit Suisse vehemently disputes all three assumptions in support of both its summary judgment and Daubert motions. First, it argues that simply ignoring the 599, 129 “plug shares” purchased “long” by convertible arbitrage investors at or around the time of the June 2008 Offerings led to a deliberately misleading presentation of these investors' net hedge ratios and, therefore, a miscalculation of the “excess shares” that Credit Suisse had to sell short to maintain their total return swaps. CS St. at ¶¶ 118-23. Second, Credit Suisse characterizes DeRosa's inclusion of the 721, 675 “double print” shares as “excess shares” from June to August 2008 as baseless, in the face of uncontested evidence of the bank's same-day repurchase of those shares. Id. at ¶ 135. The mere possibility that these shares could have been lent out for further short selling in that two-month period, Credit Suisse argues, was irrelevant given the lack of any evidence that any such shares were actually so used. Id.

         As pertains to the “busted” convertible notes, Credit Suisse indicates that while DeRosa's Appendix 5 providing his “Daily Delta Calculation” decreases the option delta from 79% to 0% between December 31, 2008, and January 1, 2009, his Appendix 6 “Hedging Simulation” maintains deltas of over 70% through June 2009, and over 50% through February 2010. ECF No. 180-73, Jones Rebuttal Rpt. at ¶¶ 45-46. Credit Suisse's expert Jones challenges the variables and regression analysis used by DeRosa. Id. at ¶¶ 41-43. And finally, Jones notes that DeRosa's analyses were “ex-post and based on hindsight”-therefore, even if DeRosa were empirically correct that the relationship between the convertible notes and common stock had decoupled, he is only able to make this assessment because he has historical data for that time period, data that would not have been available to contemporaneous market participants. Id. at ¶ 44.

         Credit Suisse lodges several other critiques of the Plaintiffs' “excess short shares” theory as a whole. First, Credit Suisse disputes Plaintiffs' contentions that convertible noteholders could not have created large short positions on the open market, independent of Credit Suisse's intervention; instead, they argue that data produced in discovery shows that some investors did do so, and that one, Highbridge Capital, purchased long over 400, 000 and sold short over a million ECD shares in the open market between June 2008 and June 2009. Id. at ¶ 34. Second, Credit Suisse argues that Plaintiffs' position improperly presumes that Credit Suisse had both the obligation and the ability to monitor convertible noteholders' net hedging position throughout the term of the Proposed Class Period. Credit Suisse's expert Jones argues that Credit Suisse did not have and could not have had perfect data to determine this ratio. Id. at ¶ 37.

         Instead, Credit Suisse argues that it and the hedge funds who engaged in convertible arbitrage acted appropriately, with notes investors generally compensating for the fall in ECD share price by reducing or unwinding their total return swaps, thereby causing Credit Suisse to purchase shares out of the market and place them in its segregated account. CS St. at ¶ 64. Credit Suisse notes that by December 21, 2008, account 2M2YG0 contained approximately 2.2 million shares, leaving approximately 1.2 million shares short in the market. Id. at ¶ 67. By June 3, 2009, account 2M2YG0 contained approximately 2.7 million shares, leaving approximately 600, 000 short in the market. Id. By December 31, 2009, account 2M2YG0 contained approximately 3.3 million shares, leaving fewer than 200, 000 shares short in the market, a figure that remained stable throughout the end of the Proposed Class Period. Id. Plaintiffs do not dispute that Credit Suisse generally rebought these shares over time, but argue that the bank nonetheless permitted its clients to maintain damaging “excess short positions” over an extended period of time. Pls.' Resp. at ¶ 68.

         E. Evolution of ECD Stock Prices

         Immediately after the June 2008 Offerings, the share price of ECD common stock rose from the offering price of $72 per share, to a high of $81.07 on June 23, 2008. ECF No. 180-7, DeRosa Rpt. Appendix 7, ECD Stock and Convertible Note Price History, at 148. Though the share price fell below the offering price between July 1, 2008, and August 19, 2008, it surpassed it once more between August 20, 2008, and August 29, 2008. Id. at 148-49. In the fall of 2008, however, ECD's share price began a steady decline, falling to $34.14 by October 31, 2008; $25.21 by December 31, 2008; $13.27 by March 31, 2009; and $4.60 by December 31, 2010. Id. at 148-61. By 2012, ECD filed for bankruptcy. CS St. at ¶¶ 69-70.

         Credit Suisse offers many explanations for ECD's precipitous decline and eventual demise, many of which Plaintiffs do not dispute. In the fall of 2008, the capital and credit markets suffered a historic disruption, which affected the solar industry along with the broader market. Id. at ¶ 50. In 2009, the solar industry suffered specific challenges, including credit-challenged customers reluctant to invest in solar-related capital projects, reductions in subsidies for solar power, and competition with Chinese companies. Id. at ¶ 52. ECD's products used amorphous silicon, which was cheaper than the polysilicon used by most other manufacturers. Id. ECD, however, lost this price advantage when Chinese manufacturers began producing polysilicon more cheaply, and ECD was unable to compete with the resulting products. Id. at ¶ 53. ECD's former CEO Mark Morelli and Chairman of the Board of Directors Stephen Rabinowitz, when deposed, both ascribed ECD's decline to these market factors. Id. at ¶¶ 55-56.[5]

         Plaintiffs do not argue that Credit Suisse's allegedly excessive short sales were the exclusive, or even the predominant cause of the decline of ECD's share price and its eventual bankruptcy. They do, however, contend that Credit Suisse's alleged misuse of the borrowed shares adversely impacted ECD stock on every day of the Proposed Class Period, and allege that Credit Suisse's conduct in selling “excess” shares into the market caused up to 9.5% of the decline. Pls.' St. at ¶ 191. In reaching this conclusion, Plaintiffs rely on the “supply effect” theory supported by their expert Matthew Ringgenberg.

         The “supply effect” theory suggests that an increase in the number of shares will cause the stock price to decrease until all of the shares are sold. ECF No. 180-14, Report of Matthew C. Ringgenberg (“Ringgenberg Rpt.”) at ¶ 17. The magnitude of the price decline, according to Ringgenberg, is determined by the slope of the demand curve for the stock, or the elasticity of demand. Id. at ¶ 18. Ringgenberg calculated the elasticity of demand for ECD stock to be -0.47, and then incorporated DeRosa's calculations of “excess shares” and estimated a price impact from the introduction of those additional shares into the market. Id. at ¶ 43. He ultimately concluded that there was a negative price impact on every day of the Proposed Class Period, ranging from -0.4% on December 31, 2008, to -9.5% on August 6, 2008. Id. at ¶ 44.

         Credit Suisse disputes Ringgenberg's analysis on numerous grounds. Because the inputs for Ringgenberg's model directly incorporate DeRosa's calculations of “excess shares, ” Credit Suisse argues that the model is based on unsupported assumptions regarding the “plug shares, ” double print shares, and the alleged “busting” of the convertible notes in January 2009, and therefore is itself unreliable.[6] Moreover, even if one accepts DeRosa's estimates of “excessive shares” to be an accurate representation of the number of short positions that Credit Suisse maintained that were over and above what was necessary to support delta-neutral hedging by ECD's investors, Credit Suisse points out that such estimates represent share balances and not new transactions. ECF No. 180-73, Jones Rebuttal Rpt. at ¶ 68. Therefore, because most of Credit Suisse's actual short selling was limited to the period shortly after the June 2008 Offerings and certain limited days thereafter that were insignificant when compared to Credit Suisse's repurchase of shares, any “selling pressure” from the “excess” short sales should have dissipated shortly after the transactions themselves. Id. at ¶ 69. Finally, Credit Suisse challenges Ringgenberg's estimates of ECD's stock elasticity as unscientific and unreliable, on the grounds that he did not properly incorporate all the studies relevant to the subject and utilized monthly instead of daily or weekly returns. CS St. at ¶¶ 138-40.


         I. Credit Suisse's Daubert Motion to Exclude Testimony of Plaintiffs' Experts David DeRosa and Matthew Ringgenberg

         A. Legal Standards for Admissibility of Expert Evidence

         Trial courts serve as gatekeepers for expert evidence and are responsible for “ensuring that an expert's testimony both rests on a reliable foundation and is relevant to the task at hand.” Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 597 (1993). Under Federal Rule of Evidence 702, expert testimony is admissible where:

(a) the expert's scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence ...

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