SEC Report Is Relevant To Litigators Presenting Financial Information

|||SEC Report Is Relevant To Litigators Presenting Financial Information

SEC Report Is Relevant To Litigators Presenting Financial Information

September 2012

This week, the Securities and Exchange Commission (SEC) released a report required by Section 917 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The study’s legislative mandate includes addressing:

  1. “the existing level of financial literacy among retail investors, including subgroups of investors identified by the Commission;

  2. methods to improve the timing, content, and format of disclosures to investors with respect to financial intermediaries, investment products, and investment services;

  3. the most useful and understandable relevant information that retail investors need to make informed financial decisions…”

The SEC study demonstrates that investors have a weak grasp of elementary financial concepts, and lack critical knowledge of ways to avoid investment fraud. The Library of Congress performed a literature search in support of the SEC report, and issued a 49-page report summarizing numerous past studies. The Library of Congress concluded:

“Since 2006, academic researchers, financial-industry associations, and other interested organizations have conducted various surveys of financial literacy among retail investors in the United States. These studies have consistently found that American investors do not understand the most basic financial concepts, such as the time value of money, compound interest, and inflation. Investors also lack essential knowledge about more sophisticated financial concepts, such as the meaning of stocks and bonds; the role of interest rates in the pricing of securities; the function of the stock market; and the value of portfolio diversification (spreading investments across asset classes to reduce risk). Surveys also demonstrate that investors lack essential knowledge about investment fraud and the importance of investment costs and expenses. …

Studies consistently demonstrate that the young, the very elderly, the poorly educated, minorities, and women perform below average on investor-literacy quizzes.”

The Library of Congress then concludes:

“Low levels of investor literacy have serious implications for the ability of broad segments of the population to retire comfortably, particularly in an age dominated by defined-contribution retirement plans.”

The SEC’s study included testing of investors regarding their ability to read and understand basic investment statements and confirmations. The approximate 1200 study participants were probably more sophisticated than the typical trial jury pool because the participants had to (i) have specified amounts of direct investments outside of retirement plans provided by their employers, and (ii) be currently paying a broker, investment advisor, financial planner or other professional for financial advice or assistance. This group was given investment transaction confirmations and account statements, and asked basic questions about the information on the documents. Generally speaking, no more than around half of the study participants were able to answer correctly basic questions about the information shown on these statements.

In a litigation context, these conclusions should warn litigators presenting complex business cases, and/or damage presentations. Specifically:

  1. These findings raise serious questions of an individual juror’s ability to look at basic evidence involving business and financial records, and understand what the records mean without expert assistance.

  2. Any damage presentation more complicated than a list of expenses to be reimbursed would benefit from a damages expert who can present the amounts in an educating and reassuring manner.

The SEC’s report directly suggests altering the manner of presenting financial data in financial reports to investors to make them more helpful. The same advice applies in a courtroom setting. Specifically:

“With respect to the format of disclosure documents, investors prefer that disclosures be written in clear, concise, understandable language, using bullet points, tables, charts, and/or graphs.”

This conclusion probably will not strike readers as revolutionary, yet the existing financial disclosures made to investors have a shocking lack of effective graphics. Similarly, litigators also will almost uniformly state that graphics are valuable in their courtroom presentations, yet we continue to see other financial experts present their findings using detailed spreadsheets without meaningful graphical support. If you are using a financial expert with this approach, it is time to find a new expert.

The article,  The Ten Commandments of Demonstrative Evidence in Litigation, provides useful suggestions.

Fulcrum Inquiry presents  damages analyses in complex litigation settings.

Monthy Archives