Litigation Consulting

lady-justiceCapMarket Consulting provides a full range of Litigation Consulting services focusing on financial market related disputes.

Our Litigation Consulting services are guided by hands-on experience in many of the world’s largest financial institutions, providing us a detailed knowledge of the inner-workings of the people, processes and technology utilized in the financial service industry. Our inter-disciplinary approach to assignments integrates backgrounds in finance, economics, and financial regulation with broad capital market industry knowledge.

Our work has included individual components as well as the full litigation life cycle: Case Assessment; Discovery Assistance; Pre-Trial Preparation; and Trial Testimony & Support.


Litigation Consulting Services

Financial Markets & Transactions

CapMarket Consulting has industry knowledge and litigation expertise in a wide array of financial markets and transactions in these markets:

  • Equity Markets
  • Bond Markets – Government, Corporate, Municipal, High Yield, Collateralized Debt Obligations, Mortgage Backed Securities, and Asset Backed Securities
  • Foreign Exchange Markets
  • Derivative Markets – Swaps, Options, Futures and Hybrids
  • Credit Markets
  • Commodity Markets
  • Money Markets
  • Private Markets

The financial markets consist of both publicly issued financial transactions as well as privately structured deals. Standardized financial transactions are typically traded on a wide assortment of exchanges and are “liquid” – able to be easily bought and sold in the financial markets. Alternatively, customized financial transactions are less liquid or “illiquid” as they are not traded on exchanges. These structured deals are commonly traded “over-the-counter” (OTC) or off-exchange which involves trading done directly between two parties without the trading infrastructure of an exchange. Evaluating the risks and valuing “illiquid” structured transactions is more difficult and requires the use of industry tools and methodologies.

CapMarket Consulting has significant experience with both liquid and illiquid markets and transactions.

Risk Management

CapMarket Consulting professionals have extensive experience with the assessment, measurement, and management of risk including the risks arising from transactions, trading strategies, and hedging techniques.

Risk management in the capital markets is commonly subdivided into three risk components: market risk, credit risk, and operations risk. Market risk represents the potential changes in the market price of a particular transaction, investment, or portfolio. Credit risk is the risk of financial loss of the provider of credit, where the borrower will not perform as required under the agreement. In a simple loan transaction, for example, the lender has credit risk that the borrower will not repay the loan. Operational risk includes the risks of financial loss resulting from inadequate or failed processes or systems. Operational risks of transactions, trading strategies, and hedging techniques can be broadly defined as the risks associated with execution details, and typically include systems, processes, tax, legal, accounting, regulatory, and reputational risks.

The use of industry risk management practices can be beneficial in Litigation Consulting engagements to uncover the financial drivers of transactions, trading strategies, and hedging techniques. Participants in the capital markets assess, measure, and manage specific risks to achieve desired objectives.

Structured Finance

CapMarket Consulting has extensive litigation and industry expertise in the area of Structured Finance including Securitization and Credit Enhancement.

Structured Finance is a specialized area of finance that involves the transfer of risk using non-standard methods. Structured Finance is often used in transactions to lower funding costs, change the composition of a balance sheet, affect financial reporting, or influence the tax characterization of a deal. Two widely used Structured Finance tools are Securitization and Credit Enhancement.

Securitization techniques are commonly used to create securities that are backed by diversified pools of assets. Almost any combination of financial assets can be securitized:

  • Asset Backed Securities (ABS)
  • Mortgage Backed Securities (MBS)
  • Collateralized Debt Obligation (CDO)
  • Collateralized Bond Obligations (CBO),
  • Collateralized Mortgage Obligations (CMO)
  • Collateralized Loan Obligations (CLO)

Credit Enhancement is a technique used to improve the credit worthiness of a deal and often employs customized credit derivatives, financial guarantees, and/or credit insurance.

Characterization of Financial Transactions

CapMarket Consulting has significant expertise in litigation in which the characterizations of financial transactions were in dispute.

The characterization of financial transactions can often have significant implications on the tax liability, accounting, and/or the regulatory requirements. Therefore, the “label” used by the deal’s participants may be driven by a desired outcome. An analysis of the financial risks of the deal done in accordance with industry practices may be inconsistent with the desired “label.”  For example, a deal may be documented to appear as a “sale” instead of a “loan” or documented as “equity” instead of “debt.”  However, an analysis of the deal’s risks will identify the participants’ economic intent of the structure which may be inconsistent with the participants’ desired characterization represented by the label.

CapMarket Consulting uses an industry standard framework for evaluating the risks of a deal compared to the risks of the “label.” The risk analysis includes analyzing the deal’s purpose as well as the specific risks taken – whether market, credit or operations risk. Inconsistencies between the represented risks and the financial market risks are then evaluated. This capital markets characterization approach is based upon experience trading, structuring and risk managing complex financial transactions. Assessing the capital market risks of a deal is not typically performed by economists in litigation but is commonly performed by capital markets practitioners who do the deals and is best achieved using capital markets industry tools and practices.

Management Oversight and Internal Controls in Financial Institutions

CapMarket Consulting has a wealth of expertise in the area of Management Oversight and Internal Controls at financial institutions.

Management Oversight and Internal Controls are the tools financial intermediaries – banks, investment banks, insurance companies, pension funds, hedge funds, etc. – use to ensure that they operate and undertake financial transactions appropriately. In the financial service industry, effective management and oversight involves identifying, assessing, monitoring, and controlling risks associated with an institution’s activities. Financial intermediaries typically comply with three control infrastructures:   internal control, industry standard practices, and regulatory requirements.

Often a critical fact in litigation is whether a financial intermediary abided by internal controls and standard industry risk management practices. CapMarket Consulting’s depth of industry experience is a unique strategic advantage in dealing with litigation involving control breakdowns and/or insufficient management oversight at financial institutions.

Selected Engagement Descriptions – Litigation Consulting

Characterization of Structured Transactions

The dispute focused on whether a set of transactions should be characterized as debt or equity.   CapMarket Consulting analyzed the financial market characteristics of complex structured transactions by evaluating and quantifying the risks of the deals. The analysis was based upon standard industry risk management practices.  Although documented as equity, the financial market risks were inconsistent with equity and revealed financial attributes more similar to debt. The approach was used to obtain a favorable settlement.

Misrepresentation of the Risks of Complex Derivative Transactions

A corporation claimed a bank misrepresented the financial risks of structured derivative transactions. The complaint stated that the bank, which was responsible for the design and sale of the transactions, defrauded the company and breached its fiduciary responsibility as financial advisor. CapMarket Consulting created targeted discovery requests, valued the derivative transactions at issue, and analyzed the risks represented by the bank. CapMarket Consulting’s knowledge of a bank’s trading operations and risk management infrastructure led to targeted acquisition of documentation that resulted in the rapid resolution and settlement in favor of the corporation.

Bank Collateral Risk Management Practices

At issue were a bank’s contractual obligations in managing collateral posted to secure a commercial loan. Defense counsel retained CapMarket Consulting to analyze the bank’s credit risk and collateral risk management practices. These practices were then compared to standard industry credit and collateral risk management practices. CapMarket Consulting’s analysis and report helped obtain a beneficial pre-trial settlement for the defendant.

Valuation of Derivative Contracts

A counterparty to numerous derivative contracts went into bankruptcy triggering the liquidation of these contracts by the dealer counterpart. At issue in the litigation were the processes used and the rates obtained by the dealer in liquidating these contracts. CapMarket Consulting was retained to independently analyze the processes used and the rates obtained in liquidating the derivative transactions of the bankrupt counterpart.  The analysis examined compliance with deal documentation and the rates applied in liquidation. The evaluation uncovered inappropriate actions taken, and pricing used by, the liquidating dealer. The bankruptcy trustee leveraged our work to negotiate a multi-million dollar settlement from the dealer.

Bank Compliance of Internal Guidelines and Industry Practices

The case involved whether the financial institutions that engaged in structured transactions with the corporate entity knew or should have known that these deals were being used to allow a public company to mislead public investors and creditors. Plaintiffs’ counsel requested CapMarket Consulting’s assistance in evaluating the financial institutions’ compliance with internal policies and external guidelines in the execution of numerous structured transactions. The investigation and subsequent report analyzed numerous structured transactions in determining whether the financial institutions followed internal controls, accepted industry practices, and government regulations when entering into these deals. The case resulted in the receipt of large settlement payments.