Some inaccuracies in DCC expert's model

A model devised by a US expert to support his view that the stock market would have been able to predict Fyffes plc trading difficulties in early 2000 was based on some inaccuracies, the expert agreed before the High Court yesterday.

Prof SP Kothari, who has been called as an expert by DCC plc, also agreed that he had not found any report written by either an analyst or a financial journalist immediately after a Fyffes profit warning of March 20th, 2000, which reflected his view that the Fyffes stock price fall after that profit warning was due to a decline in dotcom stocks rather than trading performance.

However, dotcom stocks were beginning to decline from early March 2000, he said.

He said that Fyffes shares were traded on both the Dublin and London stock exchanges and he would have expected analysts and the market to track global exchanges.

Prof Kothari agreed that he had not examined the Nasdaq index in early March 2000 and agreed, when given figures for its performance, that the index did not indicate dotcom stocks were "falling off a cliff" at that point. However, the Nasdaq index was very broad, he added.

Prof Kothari was being cross-examined in the continuing action by Fyffes alleging insider dealing in connection with the €106 million sale of the DCC stake in Fyffes over three days in February 2000.

The action is against DCC plc, its chief executive, Mr Jim Flavin, and two DCC subsidiaries - S&L Investments Ltd and Lotus Green Ltd - all of which deny the claims and plead the share sales were properly organised by Lotus.

The court has heard that Lotus Green is a Dutch-resident subsidiary of DCC to which beneficial ownership of the Fyffes shareholding was transferred in 1995 in order to avoid payment of capital gains tax on any subsequent sale of the shares.

After 74 days at hearing yesterday, the case was adjourned for two weeks as Ms Justice Laffoy is going on circuit. The case will resume on June 14th. It is understood that there are two more witnesses to be called and that evidence will finish on June 17th.

It is expected that the hearing will then be adjourned to allow both sides to file written submissions after which oral submissions will be made.

Earlier yesterday, in his continuing cross-examination of Prof Kothari, Paul Sreenan SC read a number of financial articles and analysts reports published in the immediate aftermath of Fyffes' profit warning of March 20th, 2000.

Mr Sreenan put to Prof Kothari that those documents indicated a view that the fall in Fyffes share price was due to a weak trading performance by Fyffes in the first months of fiscal year 2000 and was not due to falling market enthusiasm for dotcom stocks.

Prof Kothari said that Fyffes had a history of turning things around and this was recognised in the market. He also believed that Davy and Goodbody stockbrokers had revised their forecasts after March 2000 for Fyffes earnings because they recognised adverse exchange rates and that banana prices were unfavourable.

Asked about a Financial Times article of March 21st, 2000, which referred to Fyffes profit warning taking "the shine off" Fyffes announcement of a €100 million investment in its internet business, Prof Kothari said he had not previously seen that article.

He said what was important was not what reports said but what the market said. There could be different interpretations of material but one could not conclude from any one of those interpretations what the market's view was. Sometimes the market agreed with a favourable assessment and sometimes it discounted it. At that time, the entire e-commerce industry was falling and an internet investment would be greeted negatively.

Prof Kothari said that ABN Amro had said in a report in April that the Fyffes profit warning was largely anticipated.

Mr Sreenan put to Prof Kothari that the ABN Amro report was issued in April and asked if the witness could point to any report written immediately after the profit warning that commented negatively on Fyffes internet venture.

Prof Kothari said the biggest comment was regarding how the Fyffes stock price reacted.

Mr Sreenan asked whether there was a single document issued immediately after the share price fall that implicated worldoffruit, Fyffes proposed internet venture, in that price fall. Prof Kothari said he had not seen that being reported.

He said there was a demand for analysts to repackage information in financial statements. It did not mean it was new information. He agreed that investors would look to analysts to some extent to see what the profit warning meant.

Asked about a model he had presented to support his evidence that the market would have been able to anticipate Fyffes' weaker performance in the first months of fiscal year 2000, beginning November 1999, Prof Kothari agreed that it contained inaccuracies.

He said he had attempted to build a simple model and had spent two days on building the model while an analyst might have months. He said he had used seasonality in his reworked assumptions. He had discovered an error in pricing in his model in the past few days.

He also agreed that, when the correct figure was inserted into his original model, it would not match his conclusions in his report regarding Fyffes results for the first quarter of fiscal year 2000. He agreed he had then redesigned the model specifications. He said he was not arguing his model was accurate and a substitute for market expectations.

Mr Sreenan suggested Prof Kothari had not told the court that, when correcting an error to his original model, he had discovered that the original model on which he relied on for his report did not work to forecast Fyffes performance in early 2000.

Prof Kothari said he was just, as an expert, trying to explain the process any reasonable individual would use. He had made corrections, he had said assumptions were changed and it was natural that, if assumptions were substituted, other numbers would be produced.