Z-Scores, Market Drops, and Methodological Missteps: How Expert Testimony Impacted the Freddie Mac Class Certification

A cautionary tale of exclusion, rebuttal, and how expert reports can make—or break—a securities class action.

More than a decade after the financial crisis, the Freddie Mac securities litigation continues to echo through the federal courts. Brought by the Ohio Public Employees Retirement System (OPERS), the case accused senior Freddie Mac executives of misleading investors about the company’s exposure to subprime and Alt-A mortgage risk. While the claims survived initial motions to dismiss, the Plaintiff’s bid to certify a class of defrauded investors ultimately fell short.

That turning point came in 2017, when OPERS filed a renewed motion for class certification. Their key argument: Freddie Mac’s common stock traded in an efficient market, and all investors relied on the same alleged misstatements—making class treatment appropriate. To support this, OPERS turned to Dr. Steven Feinstein, a financial economist who analyzed stock price movements, news events, and trading data. Feinstein concluded that Freddie Mac’s stock met all the criteria for market efficiency, and that damages could be calculated across the class using standard methodologies.

But Freddie Mac countered with its own expert: Dr. Mukesh Bajaj. In a detailed rebuttal, Bajaj challenged Feinstein’s assumptions and argued that price movements alone were insufficient to show classwide reliance. He questioned the link between the alleged misstatements and the stock’s decline, suggesting individual issues would dominate.

In the end, the court sided with the defense. The renewed motion for class certification was denied, halting OPERS’ attempt to proceed on behalf of all affected investors.

Still, the battle between Feinstein and Bajaj remains a key episode in this long-running litigation—illustrating how expert testimony can make or break securities class actions, even years after the crisis that set them in motion. And that’s the battle we will review in this edition of the Expert Witness Weekly with copies of the Complaint, the Motion for Class certification, the expert reports written by Dr. Feinstein and Dr. Bajaj, their deposition transcripts and the Court’s order on Daubert motions by opposing parties and the motion for class certification.

In late 2016, nearly a decade into litigation, the Ohio Public Employees Retirement System (OPERS) renewed its bid to certify a class of investors in its case against Freddie Mac and four of its former executives. At the heart of that renewed motion was a crucial question: did Freddie Mac’s stock trade in an efficient market during the proposed class period from August 1, 2006, to November 20, 2007?

To answer that, OPERS turned to Dr. Steven P. Feinstein, an economist and finance professor with a long track record of expert testimony in securities litigation. His report aimed to update and expand on a previous expert’s work by applying newer methods to show that the stock market price of Freddie Mac reflected all publicly available information—a key requirement for invoking the “fraud-on-the-market” theory under Basic v. Levinson.

Why Market Efficiency Matters

At the class certification stage in securities fraud litigation, plaintiffs need to demonstrate that investors relied on the integrity of the market price when buying or selling securities. This is generally done by showing the stock traded in an “efficient market”—one that absorbs and reflects public information quickly and accurately.

If market efficiency is proven, reliance on public misstatements can be presumed for all class members, making a class action viable. Without it, each investor might need to prove individual reliance, defeating the purpose of class treatment.

Feinstein’s Assignment

Feinstein was brought in after the original expert, Dr. Hallman, was no longer available. His task: review Hallman’s methodology, incorporate advances in economic testing, and apply updated legal standards post-Halliburton II and Comcast Corp. v. Behrend.

Feinstein was tasked with demonstrating that Freddie Mac’s stock traded in an efficient market—an essential condition for invoking the “fraud-on-the-market” presumption of reliance. This legal doctrine allows courts to presume that investors relied on public misstatements when buying or selling securities, simplifying the path to class certification.

Feinstein applied the Cammer and Krogman factors—well-established frameworks in securities litigation—to analyze market efficiency. His findings showed that Freddie Mac’s common stock met or exceeded all relevant benchmarks: high trading volume, extensive analyst coverage, narrow bid-ask spreads, and strong responsiveness of stock price to new public information. His event study confirmed that Freddie Mac’s stock price dropped sharply—by nearly 29%—following the November 20, 2007 disclosures of massive losses and high-risk loan exposure. That movement, Feinstein concluded, demonstrated the causal link between the alleged misstatements and investor losses.

Acknowledging critiques of traditional event studies—especially their limitations in detecting efficiency in large-cap stocks—he introduced additional empirical tests. These included Z-tests, F-tests, and Binomial tests, all designed to measure whether the stock price responded more frequently and significantly on days when material information was released. These statistical methods allowed Feinstein to test not just the existence of price movement, but its connection to information flow—a critical distinction emphasized in Halliburton II.

Feinstein also addressed the question of damages, which had become more legally salient after Comcast. He proposed a standard out-of-pocket loss model, using an event study framework to isolate the price inflation caused by the alleged misstatements. Specifically, he pointed to the 29% decline in Freddie Mac’s stock price on November 20, 2007, following disclosures of losses and risk exposures that had allegedly been concealed. That price reaction, he argued, reflected the market’s correction once the truth was revealed—and was measurable across the entire class.

Importantly, Feinstein emphasized that his findings were not reliant on any one test. Rather, it was the cumulative weight of multiple factors and methodologies—trading data, market structure, news sensitivity, and statistical analysis—that supported the conclusion of market efficiency and the feasibility of classwide damages.

Dr. Steven Feinstein’s report offered the plaintiffs a sophisticated and multi-faceted framework to support market efficiency and classwide damages. But the defense came armed with a counterpunch: an expert rebuttal from Dr. Mukesh Bajaj, a seasoned economist with extensive experience in securities litigation. Bajaj’s report took direct aim at Feinstein’s methodology, conclusions, and statistical reasoning—arguing that the plaintiffs’ case, as built on Feinstein’s work, failed both legally and economically.

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Documents Available:

1. Amended Complaint

2. Motion for Class Certification

3. Expert Report of Dr. Steven Feinstein

4. Expert Report of Dr. Mukesh Bajaj

5. Deposition Transcript of Dr. Steven Feinstein

6. Deposition Transcript of Dr. Mukesh Bajaj

7. Order Excluding Feinstein, Admitted Bajaj and Denying Class Certification

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Dr. Mukesh Bajaj’s Rebuttal: Disputing the Foundation

Challenging the Efficiency Conclusion