Williams Securities Litigation

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Cornerstone Research supported Professor Craig Pirrong of the University of Houston in reviewing and opining on the reasonableness of The Williams Companies’ methodologies for valuing multibillion-dollar long-term energy contracts during the class period.

Cornerstone Research supported Professor Craig Pirrong of the University of Houston in reviewing and opining on the reasonableness of The Williams Companies’ methodologies for valuing multibillion-dollar long-term energy contracts during the class period (July 2000 through July 2002). The valuation of these complex contracts depended substantially on the embedded real option value contained in the structure of the contract. As part of its financial reporting and risk management program, Williams developed a sophisticated, multilayered process that employed option valuation techniques to value the contract.

Professor Pirrong argued successfully that an alternative model advanced by the plaintiffs, when used with reasonable inputs, validated Williams’ models, methodology, and values.

The plaintiffs attacked this process, focusing their criticism on several significant inputs to the valuation model. Professor Pirrong’s analysis showed that Williams used reasonable inputs in its proprietary valuation models and that these models produced reasonable valuations for the complex contracts. Professor Pirrong argued successfully that an alternative model advanced by the plaintiffs, when used with reasonable inputs, validated Williams’ models, methodology, and values.

Cornerstone Research also supported Professor William Holder of the University of Southern California in his review and evaluation of the appropriate financial accounting and reporting related to The Williams Companies’ multibillion-dollar energy trading and risk management activities during the class period.

Professor Holder concluded that there was no evidence to support an opinion that internal controls were inadequate and ineffective during the class period.

For financial accounting and reporting purposes, Williams was required to estimate the fair value of its energy trading contracts at each balance sheet date and recognized gains and losses resulting from increases or decreases in fair value in earnings. Plaintiffs alleged that Williams inflated earnings by using certain improper valuation approaches and methodologies to overstate fair value. Plaintiffs further alleged that Williams failed to disclose material changes to its valuation approaches and methodologies during the class period.

Based on a review and analysis of the available information, Professor Holder concluded that Williams’ financial statements were not materially misstated. Professor Holder further concluded that the types of changes Williams made to its valuation methodologies did not require disclosure for financial reporting purposes.

Professor Holder also reviewed plaintiffs’ allegations relating to weaknesses in internal controls. Based on a review and evaluation of the professional auditing standards and communications between Williams and its financial statement auditor, he concluded that there was no evidence to support an opinion that internal controls were inadequate and ineffective during the class period.

Case Expert

William W. Holder

Dean, Alan Casden Dean’s Chair, and Professor of Accounting,
Leventhal School of Accounting,
Marshall School of Business,
University of Southern California;
Senior Advisor, Cornerstone Research