Valuing Partial Interests in Trusts
The financial interests of a trust's beneficiaries are often diametrically opposed and conflict among trust beneficiaries is common. Although applicable law requires that trustees adhere to lofty standards of 'good faith' and 'fair dealing' they must make tangible, specific decisions, and sometimes under circumstances in which the settlor's expectations regarding investments and distributions as set forth in the trust document are unclear. Traditional methods for valuing partial interests in trusts offer insufficient guidance to courts in assessing the prudent investor standard, as they often disregard many of the important factors which go into investment decisions--notably, the allocations to different asset classes.
In this paper, we develop a valuation methodology based on Monte Carlo Simulation techniques which allows for economically feasible ex ante valuation of partial interests in trusts. The MCS technique is widely used in modern finance and economics, and is especially useful for valuing partial interests because it can incorporate mortality risk, portfolio asset allocation, varying distributions and the discretionary sale of the trust's assets to fund distributions. We explain how the MCS method can incorporate a variety of assumptions about the income beneficiary's mortality and the trustee's decisions, and show how these factors affect the valuation of partial interests.
Mandatory Arbitration of Securities Disputes
Dr. O'Neal and attorney/author Dan Solin today released a statistical analysis of the results of the mandatory arbitration process during the 1995 - 2004 period. They assessed almost 14,000 NASD and NYSE arbitration cases and found that Claimant win rates and recovery amounts have declined significantly over time. Moreover, claimants fare more poorly in large cases and in cases against larger brokerage firms. Dr. O'Neal and Mr. Solin estimate that the expected recovery before legal fees and expenses in a large case against a top brokerage firm is only 12% of the amount claimed.
Mutual Fund Share Classes and Conflicts of Interest between Brokers and Investors
Dr. O'Neal describes the various mutual fund share classes and explains how differences in commissions to brokers and costs to investors across share classes can create conflicts of interests.
Securities Class Action Lawsuits
Investors sometimes sue publicly traded companies, executives, accountants and underwriters alleging that important information concerning the companies was omitted or misrepresented thereby causing the investors to pay too much for the companies' securities. Financial economists assist fact finders in determining whether allegedly omitted or misrepresented information was truly important or 'material.' This is done with the use of event studies or by reference to published scientific literature. Financial economists help the parties reach settlements by estimating alleged damages. Alleged damages depend on the amount by which a company's stock price was allegedly inflated and the number of shares that were bought at fraudulently inflated prices. In these slides, SLCG outlines the major issues in estimating alleged damages in securities class action lawsuits.