LIFO Wins the Day Again

Quick. Which do you use for calculating a Lead plaintiffs’ losses, FIFO or LIFO? Don’t know? Well, the City of Philadelphia Board of Pensions & Retirement no doubt does now, because they have just won the Lead Plaintiff position in the Dana Corp securities class action, and LIFO helped them do it.

You see, Judge James G. Carr (N.D. Ohio), who appointed the City as lead, reasoned that "with respect to any pre-existing shares, defendant's misconduct did not influence the purchases which were based on accurate information. Thus, those shares fall outside the purpose and plain language of the statute." "Further, losses with respect to pre-existing shares stem not from defendant's misconduct, but from the failure of defendant's business. If a firm overstates its earnings, artificially propping up its share price, and then corrects the problem causing that share price to fall, the drop in value itself is not a product of the overstatement - only the timing of the drop in value is. Put simply, the value of those pre-existing shares would have fallen even if the firm did not misstate its earnings - the drop in value would just have occurred sooner."

So, "to determine which party has the largest financial interest for the purposes of appointing a lead plaintiff, this court endorses the use of LIFO over FIFO. Consequently, the City of Philadelphia has the largest financial interest and is the presumptive lead plaintiff."

If you want more on this LIFO thing (like who wouldn't, right?), you can hop over to this Nugget article from last July.

You can read Johnson v. Dana Corp, issued March 27, 2006, at 2006 U.S. Dist. LEXIS 17018.

Nugget: "The IRS, [on the other hand], adopts FIFO not because it is necessarily more accurate than LIFO, but because it forces taxpayers to recognize gains they would prefer - for tax purposes - to ignore. In this context, however, FIFO has the opposite effect - allowing plaintiffs to cordon off their profits from the defendant's misconduct."