Corporate Partners v. Coopers & Lybrand
Phar-Mor, a retail drug chain, was found to have overstated inventory levels and understated operating expenses, thereby inflating profits and earnings. A group of investors sued the company's auditor, Coopers & Lybrand, alleging that Coopers should have discovered these material discrepancies. The law firm Hughes, Hubbard & Reed retained Analysis Group on behalf of Coopers & Lybrand to determine the value of Phar-Mor, assuming the fraud had been uncovered prior to each of the investments made by plaintiffs in the lawsuit. Analysis Group constructed a history of share offerings and identified the key valuation dates.
Our team, led by Managing Principal Richard Starfield and Co-Founder Bruce Stangle, also reviewed plaintiffs' expert reports, theories of damages, and Phar-Mor valuations included in private placement memoranda. We developed a database of industry comparables over the relevant time period and worked with retail industry experts to identify "but-for" growth in new stores, average size of stores, and gross margins for existing and new stores. We developed a stock valuation (cash flow) model that incorporated key variables regarding growth, expenses, capital expenditures, and financing. Based on economic research on the impact of fraud on security prices, we also reviewed the current financial condition of Phar-Mor and analyzed damages.
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