Irving H. Picard v. Saul B. Katz et al

Filing 107

DECLARATION of Bruce G. Dubinsky in Support re: 81 MOTION for Partial Summary Judgment.. Document filed by Irving H. Picard. (Attachments: # 1 Exhibit 1-1, # 2 Exhibit 1-2, # 3 Exhibit 1-3)(Bohorquez, Fernando)

EXHIBIT 1
(Part 3 of 3)

HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
INCOME APPROACH: RECAPITALIZATION
(USD in millions)

Exhibit 2

Notes

BALANCE SHEET
Assets
Cash
Regulatory cash
Receivable from brokers or dealers and clearing
Securities and spot commodities owned, at market value
Memberships in exchanges
PP&E, net
Other Assets
Total Assets

Total Liabilities and Ownership Equity

Adj.
(14)

Pro Forma (2)
Beg.
2002
(14)

2003

Projected year ending 12/31
2004
2005
2006

2007

(15)

(16)
(16)
(16)

(17)
(18)

(19)
(20)
(21)

38.1
.1
160.5
312.9
2.3
7.8
3.4
525.1

90.6
.1
133.5
291.3
2.3
12.7
2.3
532.7

106.9
.0
72.9
194.8
2.3
10.5
2.1
389.5

-19.4
.0
.0
377.1
.0
.0
.0
357.7

71.2
.1
133.5
668.4
2.3
12.7
2.3
890.4

71.2
.1
133.5
706.7
2.3
12.7
2.3
928.7

68.7
.1
140.2
742.1
2.3
12.7
2.4
968.3

68.7
.1
146.5
775.5
2.3
12.7
2.5
1,008.2

68.6
.1
153.3
811.4
2.3
12.7
2.6
1,050.8

68.5
.1
160.5
849.6
2.3
12.7
2.7
1,096.2

68.3
.1
168.2
890.3
2.3
12.7
2.8
1,144.7

.0
4.5
233.7
29.1
267.3

.0
1.3
223.5
27.0
251.8

.0
1.3
133.6
3.0
137.9

235.3
.0
122.4
.0
357.7

235.3
1.3
345.9
27.0
609.5

235.3
1.3
365.8
27.0
629.3

235.3
1.4
384.1
28.3
649.0

235.3
1.5
401.4
29.6
667.7

235.3
1.5
419.9
31.0
687.7

235.3
1.6
439.7
32.4
709.0

235.3
1.7
460.8
34.0
731.7

285.0

280.9

-16.3
-10.9
.0
257.8

257.8
40.0
-10.2
-6.8
.0
280.9

-17.6
-11.7
.0
251.6

.0

280.9
.0
.0
.0
.0
280.9

280.9
.0
18.5
.0
.0
299.4

299.4
.0
19.9
.0
.0
319.3

319.3
.0
21.3
.0
.0
340.5

340.5
.0
22.6
.0
.0
363.1

363.1
.0
24.1
.0
.0
387.3

387.3
.0
25.7
.0
.0
413.0

525.1

Liabilities
Bank loans payable
Payables to broker-dealers or clearing organizations
Securities sold not yet purchased at market value
Accounts payable and accrued liabilities
Total Liabilities
Ownership Equity
Beginning Equity
Plus: New Equity
Plus: Income
Plus: Adjustment for taxes not paid
Less: Distributions
Total Ownership Equity (Year End)

Historical year ending 12/31 (1)
2000
2001
2002

532.7

389.5

357.7

890.4

928.7

968.3

1,008.2

1,050.8

1,096.2

1,144.7

See the footnotes, which are deemed an integral part of this exhibit, on Pages 6 and 7.
* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report. Accordingly, this schedule must be considered in
conjunction with those assumptions and should not be read on a stand-alone basis.

DUFF & PHELPS

Exhibits, Page 3 of 15

HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
INCOME APPROACH: RECAPITALIZATION
(USD in millions)

Exhibit 2

Notes

CASH FLOW SUMMARY
Chg in cash (Non-cash assets)
Chg in cash (Non-interest bearing Liabilities)
Net change in non-cash A&L
Plus: Profit After Tax
Plus: Unpaid Taxes
Operating Cash Flow
Change in Debt
Equity Capital Raise
Equity Distribution
Financing Cash Flow

Historical year ending 12/31 (1)
2000
2001
2002

Adj.

Pro Forma (2)
Beg.
2002

2003

Projected year ending 12/31
2004
2005
2006

2007

(17)
(21)

Total Change in Cash

159.5
-113.9
45.6

-377.1
122.4
-254.7

-38.3
19.8
-18.5

-42.1
19.7
-22.4

-39.9
18.7
-21.2

-42.7
20.0
-22.7

-45.5
21.3
-24.2

-48.6
22.7
-25.9

-16.3
-10.9
-27.1

-10.2
-6.8
12.5

-17.6
-11.7
16.3

.0
.0
-254.7

18.5
.0
.0

19.9

21.3

22.6

24.1

25.7

-2.5

.0

-.1

-.1

-.2

.0
.0

.0
40.0

.0
.0

235.3

40.0

.0

235.3

.0
.0
.0
.0

.0
.0
.0
.0

.0
.0
.0
.0

.0
.0
.0
.0

.0
.0
.0
.0

.0
.0
.0
.0

-27.1

(20)

45.0
-15.5
29.5

.0

(22)

53.7
-53.6
.1

52.5

16.3

-19.4

.0

-2.5

.0

-.1

-.1

-.2

VALUATION - Discounted Cash Flow Approach
Interim Cash Flows (Distributions)
Partial Period Adjustment
End-of-Year Convention
Present Value Factor @ 16.5%

(21)

.0

.0

.0

.0

.0

.0

(23)

0.056
0.056
0.992

1.000
1.056
0.851

1.000
2.056
0.731

1.000
3.056
0.627

1.000
4.056
0.538

1.000
5.056
0.462

.0

.0

.0

.0

.0

.0

Present Value of Interim Cash Flows
Terminal Value
Projected Book Value 2007
P/Book Multiple (Average Projected ROE)
Terminal Value
Timing of terminal cash flow
Present Value Factor @ 16.5%
PV of Terminal Value
Plus: Sum of Present Value of Distributions

(24)

(23)

413
2.4
991

6.4%

Terminal Value Multiple
460.0

5.056
0.462
458

Total Equity Value

460

Equivalent Price / Book multiple

1.9

2.4

2.9

13.5%
16.5%
19.5%

410
360
320

520
460
400

630
550
490

Implied L-T Growth Rate

n/a

13.5%
16.5%
19.5%

1.9
7%
9%
11%

2.4
8%
10%
12%

2.9
9%
11%
14%

1.5X

See the footnotes, which are deemed an integral part of this exhibit, on Pages 6 and 7.
* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report. Accordingly, this schedule must be considered in
conjunction with those assumptions and should not be read on a stand-alone basis.

DUFF & PHELPS

Exhibits, Page 4 of 15

HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
INCOME APPROACH: RECAPITALIZATION
(USD in millions)

Exhibit 2

Notes

Historical year ending 12/31 (1)
2000
2001
2002

Adj.

Pro Forma (2)
Beg.
2002

2003

Projected year ending 12/31
2004
2005
2006

2007

KEY RATIOS
% Change (YOY)
Trading Assets
Trading Liabilities
Total Revenue
EBIT
Total Assets
Total Liabilities
Total Equity
Inflation estimate
Margins & Expenses
Compensation % of Pre-comp Profit
Other expenses/ Revenue
Operating Margin
Ratios & Average Balances
Avg. Trading Assets
Avg. Equity
Avg. Trading Liabilities
Short Ratio
Cash Ratio
Turnover
Net Margin
Asset Turnover
Leverage Ratio
Return on Assets
Return on Equity
Avg. Short Ratio
Pre-Tax Financing Cost
After-Tax Financing Cost
Operating Earnings Leverage

(4)

(7)

n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a

-7%
-4%
-28%
-37%
1%
-6%
9%
n/a

-33%
-40%
-53%
73%
-27%
-45%
-10%
n/a

n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a

n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a

143%
64%
2%
-335%
74%
150%
7%
n/a

5%
5%
5%
6%
4%
3%
7%
2.9%

5%
5%
5%
5%
4%
3%
7%
2.9%

5%
5%
5%
5%
4%
3%
7%
2.9%

5%
5%
5%
5%
4%
3%
7%
2.6%

5%
5%
5%
5%
4%
3%
7%
2.4%

(9)
(8)
(25)

376%
52%
-20%

190%
41%
-17%

-240%
70%
-64%

n/a
n/a
n/a

n/a
n/a
n/a

33%
21%
40%

33%
21%
40%

33%
21%
41%

33%
21%
41%

33%
21%
41%

33%
21%
41%

Adjusted Data
302.1
243.1
269.4
266.2
228.6
178.6
77%
69%
17%
27%
32%
19%
-11%
-39%
18%
9.9%
1.9X
1.5X
-2%
-4%
-4%
-7%
76%
73%
0%
0%
0%
0%
532%
n/a

n/a
n/a
n/a
32%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a

n/a
n/a
n/a
52%
8%
n/a
n/a
n/a
3.2X
n/a
n/a
n/a
n/a
n/a
n/a

687
290
356
52%
8%
14%
19%
11%
3.1X
2%
6%
52%
1%
1%
n/a

724
309
375
52%
7%
14%
19%
11%
3.0X
2%
6%
52%
1%
1%
118%

759
330
393
52%
7%
14%
19%
11%
3.0X
2%
6%
52%
1%
1%
121%

793
352
411
52%
7%
14%
20%
11%
2.9X
2%
6%
52%
1%
1%
112%

830
375
430
52%
6%
14%
20%
11%
2.8X
2%
6%
52%
1%
1%
113%

870
400
450
52%
6%
14%
21%
11%
2.8X
2%
6%
52%
1%
1%
114%

As-Reported

(26)
(27)
(28)
(29)
(30)
(31)
(32)
(33)
(34)

419.1
307.9
301.0
75%
7%
n/a
-12%
24%
2.0X
-3%
-6%
72%
0%
0%
n/a

See the footnotes, which are deemed an integral part of this exhibit, on Pages 6 and 7.
* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report. Accordingly, this schedule must be considered in
conjunction with those assumptions and should not be read on a stand-alone basis.

DUFF & PHELPS

Exhibits, Page 5 of 15

HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
INCOME APPROACH: RECAPITALIZATION
(USD in millions)

Exhibit 2

NOTES:
(1) Historical results were adjusted for the removal of revenue and expenses related to House 17, whereby such adjustments flow directly to the Total Equity line. All assets and liabilities
are re-cast from as-reported FOCUS report data based on Adjusted BV and as-reported common-size ratios expressed as a percent of Total Equity.
(2) Pro Forma adjustments were made to the ending 2001 balance sheet to illustrate the impact of a market participant re-levering of the business. The pro forma adjustments include (a)
the use of excess cash to increase Trading Assets, and (b) expansion of Trading Assets so as to produce a Leverage Ratio equal to the weighted average level for market participants,
or 3.17, using a combination of Trading Liabilities and Debt. The pro forma 2002 revenue is projected quarterly, based on the actual historical Turnover and therefore presumes that
net investment in Trading Assets and Trading Liabilities in the amount of net earnings generated during a quarter is made at the end of the quarter.
(3) Revenue Adjustments reflect reported revenue deemed attributable to House 17 operations. See Table 10 in the Dubinsky expert report dated November 22, 2011.
(4) Pro Forma 2002 revenue projection is based on adjusted 2002 quarterly Turnover. Prospective revenue growth is based on the assumption that Trading Assets would grow 5% in
2003, based on Securities Industry Association estimates. The growth rate from 2004-2007 is based on the Sustainable Growth Rate of the business.
(5) Expenses forecast to increase with Trading Assets.
(6) Occupancy and equipment costs reflects the total expense for both House 5 and House 17. Adjustment for advisory reduces the expense by 19%. The adjustment is based the
percentage of work stations on the 17th floor, out of the total work stations for the 17th, 18th, and 19th floors. The work station count was determined using the December 2008 and
January 2009 floor plans.
(7) Expense forecast to increase with annual inflation of 2.4% - 2.9%, as estimated by DFI-WEFA, Inc.
(8) Other Expenses includes fees paid to exchanges on commission revenue. Forecast expense is based on the historical average measure of other expense as a % of revenue
(approximately 21%) during periods where the Leverage Ratio ranged from 3.0 - 4.0.
(9) Forecast to reflect a constant Payout Ratio based on actual experience during historical periods where the Leverage Ratio ranged from 3.0 - 4.0.
(10) Clerical and administrative employees' expenses reflects total compensation for both House 5 and House 17, projected based on recent levels of compensation expense as a % of precompensation income. Adjustment to market participant headcount reduces the expense by 15%. The adjustment is based on the percent of total compensation attributed to House 17
employees; the House 17 employees were identified by cross-referencing the 2008 payroll data with the December 2008 and January 2009 floor plans.
(11) Interest expense on Debt after recapitalization at the Prime Rate of 4.25% less 50 bps, based on the average spread of House 5 historical implied interest rate versus the Prime Rate.
(12) Median effective tax rate of the Concluded Comparable Companies.
(13) Historical earnings figures were adjusted to reflect after-tax earnings at the effective tax rate of the Concluded Comparable Companies.

* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report. Accordingly, this schedule must be considered in
conjunction with those assumptions and should not be read on a stand-alone basis.

DUFF & PHELPS

Exhibits, Page 6 of 15

HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
INCOME APPROACH: RECAPITALIZATION
(USD in millions)

Exhibit 2

NOTES:
(14) Recapitalization is deemed to occur at the beginning of 2002, whereby the Cash Ratio is reduced to 8%, and Debt is issued and Trading Liabilities are grown to fund Trading Asset
purchases such that the Leverage Ratio is approximately equal to Concluded Comparable Companies' Leverage Ratio of 3.17. No cash is distributed directly as a result of the
recapitalization.
(15) Cash is projected as beginning of period cash, plus net cash flows after consideration for distributions to equity investors.
(16) PP&E is assumed to remain fixed at the Valuation Date level, and thus it is assumed that depreciation is equal to capital expenditure during the projection period. Memberships in
exchanges and Other Assets presumed not to require any adjustment.
(17) Projected Debt reflects the recapitalization Debt and is presumed to be carried at the pro forma 2002 balance in all future years to maintain leverage above actual 2002 levels.
(18) Forecast as a percentage of average Trading Assets based on actual experience during historical periods when the Leverage Ratio ranged 3.0 - 4.0.
(19) New Equity in 2001 reflects cash flows resulting from the business form transition from sole proprietorship to LLC.
(20) An adjustment is made to historical periods to add back entity-level taxes to ensure the historical balance sheets balance.
(21) Distributions are projected to be made to equity investors in the amount of any positive free cash flows from 2003 onward.
(22) Represents the net investment in Trading Assets and Liabilities during the period, in addition to projected growth in other asset and liability balances.
(23) The present value factor is based on the discount rate and assumes that any distributions of positive free cash flow generated during the year are made at the end of the calendar year.
(24) The selected multiple represents the average of the range of P/BV multiples of the Concluded Comparable Companies observed in industry reports, adjusted by a control premium of
40%. A 10% discount was applied to account for House 5's smaller size.
(25) EBIT/ Total revenue.
(26) Profit After Taxes/ Total Revenue.
(27) Total Revenue/ Average Total Assets.
(28) Average Total Assets/ Average Total Equity.
(29) Profit After Taxes/ Average Total Assets.
(30) Profit After Taxes/ Average Total Equity.
(31) Average Trading Liabilities/ Average Trading Assets.
(32) (Interest Expense)/ Avg. Total Liabilities.
(33) [(Interest Expense)/ Avg. Total Liabilities] * (1 - effective tax rate).
(34) % Change in EBIT/ % Change in Total Revenue.

* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report. Accordingly, this schedule must be considered in
conjunction with those assumptions and should not be read on a stand-alone basis.

DUFF & PHELPS

Exhibits, Page 7 of 15

HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
LEVERAGE AND PRO FORMA FINANCIALS
(USD in millions)

Exhibit 2.A

Dupont Direct Financial Holdings, Inc.
Crown Financial Holdings, Inc
Knight Capital Group Inc.
LaBranche & Co. Inc.
INTL FCStone Inc.
Totals & Weighted Average

Assets

Cash

(1)

Mkt Cap

Current Capital IQ Name

Book
Value

(1)

(1)

Leverage Equity %
Ratio
of Assets

Cash
Ratio

(1)

2.7
2.8
667.9
1,617.2
5.2

2.0
4.9
765.0
900.7
3.9

4.6
13.0
3,337.5
1,949.0
14.7

0.8
1.6
340.0
100.1
2.0

2.25x
2.66x
4.36x
2.16x
3.74x

44%
38%
23%
46%
27%

17%
12%
10%
5%
14%

2,295.9

1,676.6

5,318.8

444.5

3.17x

32%

8%

See the footnotes, which are deemed an integral part of this exhibit, on Page 9.
* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report.
Accordingly, this schedule must be considered in conjunction with those assumptions and should not be read on a stand-alone basis.

DUFF & PHELPS

Exhibits, Page 8 of 15

HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
LEVERAGE AND PRO FORMA FINANCIALS
(USD in millions)

Notes:
Total Assets
Cash
Trading Assets
Book Value
Debt
Trading Liabilities
Leverage Ratio
Short Ratio
Total Revenue
Turnover

12/31/01
Adjusted
532.7

(3)

Exhibit 2.A

Re-Cap
Change
(2)

01/01/02

1Q02

Pro Forma
2Q02

3Q02

Pro Forma
2002

4Q02

357.7

890.4

900.9

909.3

917.2

928.7

928.7

90.6
291.3
280.9

(19.4)
377.1

71.2
668.4
280.9

71.2
678.9
285.9

71.2
687.3
290.0

71.2
695.2
293.8

71.2
706.7
299.4

71.2
706.7
299.4

223.5
1.90x
77%

235.3
122.4

235.3
345.9
3.17x
52%

235.3
351.4
3.15x
52%

235.3
355.7
3.14x
52%

235.3
359.8
3.12x
52%

235.3
365.8
3.10x
52%

235.3
365.8
3.10x
52%

26.0
3.9%

23.2
3.4%

22.3
3.3%

27.5
4.0%

99.1
14.4%

Notes:
(1) As of the last available date prior to the Valuation Date. Leverage Ratio is calculated as Total Assets / Book Value.
(2) The hypothetical adjustments required to (a) swap cash for Trading Assets to effect a reduction in the cash balance to
levels closer to market participant levels, while avoiding future debt raises in the projection period, and (b) adjust to market
participant leverage by issuing Debt and growing Trading Liabilities.
(3) The adjusted Cash Ratio was set equal to 8%.

* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report.
Accordingly, this schedule must be considered in conjunction with those assumptions and should not be read on a stand-alone basis.

DUFF & PHELPS

Exhibits, Page 9 of 15

HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
ASSET TURNOVER ADJUSTMENT
(USD in millions)

Exhibit 2.B

TURNOVER RATIO ADJUSTMENT (1)

a.
b.
c.
d.

Total Revenue
Beginning Trading Assets
Ending Trading Assets
Average Trading Assets
Turnover Ratio (a ÷ d)
Proportion (Adjusted/ Reported)

As Reported (1)
e. Total Revenue
f. Beginning Trading Assets
g. Turnover Ratio (e ÷ f)
h. Proportion
Adjusted Turnover (g * h)

2002 Financial Results
As
Reported (2)
Adjusted (3)
106.0
45.5
428.3
291.3
340.7
194.8
384.5
243.1
27.6%

Variance
-60.5
-137.0
-145.9
-141.4

18.7%

42.8%

68%
2002 Quarterly Results
Q1
Q2
Q3

Q4

24.6
428.3
5.7%

24.1
478.3
5.0%

24.5
512.8
4.8%

32.8
563.5
5.8%

68%

68%

68%

68%

3.9%

3.4%

3.3%

4.0%

Notes:
(1) Calculations were made to approximate Adjusted Turnover, giving rise to the impact of removing House 17 revenue from as-reported
FOCUS report data.
(2) 2002 historical results as presented in FOCUS reports.
(3) Adjusted Total Revenue and Trading Asset balances reflect House 5 financial results excluding revenue deemed attributable to House 17
from 2000 to 2002.

* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report.
Accordingly, this schedule must be considered in conjunction with those assumptions and should not be read on a stand-alone basis.

DUFF & PHELPS

Exhibits, Page 10 of 15

HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
ESTIMATION OF THE EQUITY COST OF CAPITAL
(USD in millions)

Exhibit 2.C

Assumptions

Source:

Risk-free Rate
Equity Risk Premium
Small Stock Premium
Effective Tax Rate
Beta

Rf =
Rp =
Ssp =
t =
B =

5.02%
6.00%
1.94%
40.0%
1.58

(1)

20 Year Treasury CMT Yield (Federal Reserve)
Ibbotson 2002 SBBI Valuation Yearbook (rounded)
Ibbotson 2002 SBBI Valuation Yearbook (8th Decile)
Market Participant Tax Rate
Industry Average

Comparable Company Analysis
Barra
US Beta
(2)

Non-Trust
Financing
Preferred
Debt (D) Equity (Pref.)
(3)

Stock
Price as of
12/10/2002

(4)

Common
Shares
Outstanding

Market
Value of
Equity (E)

Total
Capital

Common
Equity /
Capital

Preferred
Equity /
Capital

Debt /
Capital

Tax
Rate

Unlevered
Beta

(in millions)

1 Knight Capital Group Inc.

1.86

-

-

5.65

118.22

667.9

667.9

100.0%

0.0%

0.0%

28.7%

1.86

2 LaBranche & Co. Inc.

1.46

261.0

61.1

27.18

59.50

1,617.2

1,939.3

83.4%

3.2%

13.5%

49.3%

1.30

87.6%

2.3%

10.0%

Weighted Average

1.57

Relevered Beta Analysis

1.46

Relevering Calculations

Beta (Unlevered)
Industry D / E Ratio (5)
Industry Pref. / E Ratio (5)
Tax Rate (6)

1.46
0.14
0.00
40.0%

Beta (Relevered)

1.58

Equity Cost of Capital - Capital Asset Pricing Model
Required Return on Equity Capital
Concluded Value (rounded to the nearest 50 basis points)

Unlevered Beta = Beta (Observed) / [1 + D/E ( 1 - t ) + Pref./E]
Relevered Beta = Unlevered Beta * [ 1 + D/E ( 1 - t ) + Pref./E]

Rate of Return
16.5%

x

Weighting
100.0%

Equity Cost of Capital
=
16.5%
16.5%

See the footnotes, which are deemed an integral part of this exhibit, on Page 12.
* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report. Accordingly, this schedule must be considered in conjunction with those
assumptions and should not be read on a stand-alone basis.

DUFF & PHELPS

Exhibits, Page 11 of 15

HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
ESTIMATION OF THE EQUITY COST OF CAPITAL
(USD in millions)

Exhibit 2.C

Notes:
(1) Ibbotson 2002 SBBI Yearbook, as of December 31, 2001. The Equity Risk Premium is based on the S&P 500 Market Total Return of 12.65 percent and long-horizon risk free rate of 5.23
percent, adjusted by 1.5 percent for survivorship bias. Copeland, Koller, and Murrin (2000) recommend a downward adjustment of 1.5 to 2 percent for survivorship bias in the S&P 500
Index, using arithmetic mean estimates.
(2) The predicted beta, calculated against the universe represented by the S&P 500 Index. Betas as of November 30, 2002, provided by BARRA.
(3) Debt includes long-term interest-bearing liabilities deemed to be financing debt, including subordinated debt and debentures, all at carrying value. Long-term liabilities include liabilities
maturing more than five years following the date of the latest debt footnote, typically in the annual report for the most recent completed fiscal year prior to the Valuation Date.
(4) Includes all other preferred equity, at carrying value.
(5) Based on a review of historic capitalization of the comparable companies, it was determined that preferred equity is not part of the normalized capital structure of a market participant.
(6) Tax rate is consistent with the effective tax rates of market participants.
(7) Concluded cost of equity is on the basis that cash flows are net of interest expense on any applicable financing debt.

* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report. Accordingly, this schedule must be considered in conjunction with those
assumptions and should not be read on a stand-alone basis.

DUFF & PHELPS

Exhibits, Page 12 of 15

HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
MARKET APPROACH: COMPARABLE COMPANY METHOD
(USD in millions)

Exhibit 3

Financial Data (1)

LTM as of

Equity
Value (EV)

Book
Value
(BV)

Tangible
BV
LTM
LTM
(TBV) Revenue Earnings

Valuation Multiples
Return LTM Profit
on BV
Margin

EV /
TBV

EV /
EV /
Revenue Earnings

(2)

Concluded Comparable Companies
LaBranche & Co. Inc.
Knight Capital Group Inc.
CONCLUDED COMP SET
Average Value
Median Value

9/30/2002
9/30/2002

2,264.1
935.1

900.7
765.0

(80.3)
714.9

412.1
547.6

84.2
(26.2)

9.3%
N/M

20.4%
N/M

excl.
1.3x

5.5x
1.7x

26.9x
excl.

832.8
832.8

317.3
317.3

479.9
479.9

29.0
29.0

9.3%
9.3%

20.4%
20.4%

1.3x
1.3x

3.6x
3.6x

26.9x
26.9x

Notes:
(1) Financial data as provided by Capital IQ. LTM income statement figures or actual balance sheet figures are as of the most recent filing date prior to the Valuation Date.
(2) EV is based on the closing share price on the day before the Valuation Date, multiplied by the share count on the most recently-issued regulatory filing prior
to the Valuation Date and includes a control premium of 40%.

* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report. Accordingly, this schedule must be considered in conjunction with those
assumptions and should not be read on a stand-alone basis.

DUFF & PHELPS

Exhibits, Page 13 of 15

HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
MARKET APPROACH: COMPARABLE COMPANY METHOD
(USD in millions)

Exhibit 3.A

EV /
BV

EV /
TBV

EV /
Revenue

EV /
Earnings

LaBranche & Co. Inc.
Knight Capital Group Inc.

2.5x
1.2x

excl.
1.3x

5.5x
1.7x

26.9x
excl.

Average Value
Median Value

1.9x
1.9x

1.3x
1.3x

3.6x
3.6x

26.9x
26.9x

Concluded Comparable Companies

Financial
Data

EV / BV

Relative
Factor

Selected
Multiple Range

Indicated
EV Range

(1)

Financial Multiple

(2)

(3)

(4)

299.4

90%

1.1 x

-

2.3 x

329

EV / Revenue

99.1

90%

1.5 x

-

4.9 x

152

490

EV / LTM Earnings

18.5

90%

24.2 x

-

24.2 x

448

448

Indicated Equity Value Range (controlling, marketable basis)

(5)

Indicated Equity Value Range (controlling, marketable basis)

-

677

310

-

538

310

-

538

See footnotes, which are deemed an integral part of this exhibit, on Page 15.
* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report. Accordingly, this schedule must be considered in
conjunction with those assumptions and should not be read on a stand-alone basis.

DUFF & PHELPS

Exhibits, Page 14 of 15

HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
MARKET APPROACH: COMPARABLE COMPANY METHOD
(USD in millions)

Exhibit 3.A

Notes:
(1)
House 5 financials for the year ending 12/31/2002. BV and TBV are equivalent. Revenue and Earnings are pro forma as if the recapitalization was in
effect for the entire year of 2002.
(2)
The Relative Factor is based on the relevant size of the Company as compared to the Concluded Comparable Companies. Otherwise, it is presumed
that the EV/BV multiple reflects the adjustments made to House 5 pro forma ROE, the EV/Revenue presumes a similar pro forma net margin of House 5
relative to that of the Concluded Comparable Companies, and the EV/LTM Earnings presumes House 5 projected earnings growth rate is in-line with
that of the Concluded Comparable Companies.
(3)
The selected range includes a control premium and is based on the range of multiples of Knight Capital Group, Inc. and LaBranche & Co. Inc., which
were deemed to be the closest comparable companies in the analysis, given their similar size, concentration of revenue mix toward trading activities,
business focus relating to market making in the case of Knight, and acting as a specialist in the case of LaBranche.
(4)
Indicated EV range is calculated as the Selected Multiple Range x Financial Data.
(5)
Calculated based on the average of the results indicated from the EV/BV, EV/Revenue and EV/LTM Earnings. Rounded to the nearest $1 million.

* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report. Accordingly, this schedule must be considered in
conjunction with those assumptions and should not be read on a stand-alone basis.

DUFF & PHELPS

Exhibits, Page 15 of 15

Expert Report of Bruce G. Dubinsky
Exhibit C

Section 13

Appendix

November 22, 2011

59

Expert Report of Bruce G. Dubinsky
Exhibit C

Comparable
Transaction
Method

The Market Approach, Comparable Transaction Method was considered,
but ultimately not relied upon in the estimate of Fair Market Value due to
the limited comparability of the indentified transaction targets to House 5.
The targets were mostly retail brokerage firms, whereas House 5 focused
on institutional markets, and on its proprietary trading activities.
Transaction multiples were calculated from merger transactions in the
relevant industry group by accessing the Capital IQ transactions database.
The time frame considered spanned the two years leading up to and
including the Valuation Date.
Determination of Comparable Transactions
In selecting comparable transactions, the Capital IQ database and financial
publications in which transactions are disclosed were searched, to gather
information about the prices paid for similar businesses under similar
circumstances. The acquisitions are relevant indicators of an actual
market participant’s perception of Fair Market Value, and, therefore, can
be useful valuation indicators. Based on the research and accessing of
the Capital IQ database and a review of SEC filings of the companies in
the industry, 13 potential comparable transactions were identified.
The following is the list of 13 transaction identified (target company /
acquiring company):


Harrisdirect LLC/Harris Financial Corporation



Consors Discount-Broker AG/Cortal Consors S.A.



Hoenig Group Inc./Investment Technology Group Inc. (NYSE:ITG)



Beeson Gregory Group plc/Evolution Group plc (LSE:EVG)



Dempsey & Company LLC/ETrade Financial Corporation



Tucker Anthony Sutro/Royal Bank of Canada



Morgan Keegan Inc./Regions Financial Corporation



Datek Online Holdings Corp./Ameritrade Holding Corporation



Dain Rauscher Corp./Royal Bank of Canada



H.D. Vest Inc./Wells Fargo & Company



Advest Group Inc./MONY Group Inc.



JWGenesis Financial Corp./First Union Corporation



Spear, Leeds & Kellogg LP/Goldman Sachs Inc.

The 13 transaction targets would, for the most part, most closely be
classified as retail trading businesses, and hence most transactions are
not directly representative of House 5. Spear, Leeds & Kellogg LP, while a

November 22, 2011

60

Expert Report of Bruce G. Dubinsky
Exhibit C

comparable business, was not publicly traded and closed more than two
years prior to the Valuation Date. As a result of the aforementioned
issues, the results of the Comparable Transaction Method are used mainly
to corroborate the results of the Income Approach and Comparable
Company Method.
Application of the Comparable Transaction Method
Once the comparable transaction set was established, transaction
multiples were computed. Transaction multiples are ratios of equity value
to the operating results of a company. The EV for each target company
was taken from the Capital IQ transaction database. Multiples were
calculated for EV to BV, Revenue, and Earnings to the extent those
financial metrics were available for the target companies. The following
points illustrate the multiples calculated for the comparable transaction set,
and how those multiples were applied to House 5 financials to estimate
Fair Market Value as of the Valuation Date:


EV / BV


The average multiple for the transaction targets, which
included a control premium, was approximately 3.6x, with a
range of multiples of 1.4x to 11x.



The selected multiple of 1.6x was applied to the pro forma y/e
59
2002 BV of $299.1 million to arrive at a Fair Market Value of
a 100 percent interest in the common equity of House 5 of
$467 million. The selected multiple is based on the low-end of
the range, due to below-average ROE of House 5 compared to
the target firms.

Results of the Comparable Transaction Method
Based on the Comparable Transaction Method as described above, an
indicated Fair Market Value of a 100 percent interest in the common equity
of House 5 on a marketable, controlling interest basis was $470 million,
as of the Valuation Date. Since the valuation conclusion in this report is
based on the premise of value that House 5 is a going concern, any
evidence to the contrary would have a significant negative impact on the
valuation. Further, there is evidence that House 5 was artificially
supported by millions of dollars of Other People’s Money from the IA

59

Since the valuation conclusion in this report is based on the premise of value that House 5
is a going concern, any evidence to the contrary would have a significant negative impact
on the valuation. Further, there is evidence that House 5 was artificially supported by
millions of dollars of Other People’s Money from the IA Business.

November 22, 2011

61

Expert Report of Bruce G. Dubinsky
Exhibit C

Business. This concluded value is based on the time-weighted average
EV / BV multiple of the target set.
See Appendix 1 for detailed calculations.

November 22, 2011

62

HOUSE 5
ESTIMATION OF THE FAIR MARKET VALUE OF EQUITY
AS OF DECEMBER 11, 2002
MARKET APPROACH: COMPARABLE TRANSACTION METHOD
(USD in millions)

Appendix 1

Trailing Financial Data (3)

Deals Closed By 12/11/2002

Target / Buyer

Notes:

Harrisdirect LLC/Harris Financial Corporation
Consors Discount-Broker AG/Cortal Consors S.A.
Hoenig Group Inc./Investment Technology Group Inc. (NYSE:ITG)
Beeson Gregory Group plc/Evolution Group plc (LSE:EVG)
Dempsey & Company LLC/ETrade Financial Corporation
Tucker Anthony Sutro/Royal Bank of Canada
Morgan Keegan Inc./Regions Financial Corporation
Datek Online Holdings Corp./Ameritrade Holding Corporation
Dain Rauscher Corp./Royal Bank of Canada
H.D. Vest Inc./Wells Fargo & Company
Advest Group Inc./MONY Group Inc.
JWGenesis Financial Corp./First Union Corporation
Spear, Leeds & Kellogg LP/Goldman Sachs Inc.

Average Value
Median Value
Time-Weighted Average Value
Selected EV / BV Multiple
BV

(5)

(6)

Indicated Fair Market Value (controlling, marketable) (rounded)

Closing
Date
2/4/02
4/29/02
9/3/02
7/11/02
10/1/01
10/31/01
3/30/01
9/9/02
1/10/01
7/2/01
1/31/01
1/2/01
10/31/00

Implied
Total Equity
Value (EV)
(1)

520.0
431.8
105.4
61.8
178.2
625.0
789.2
989.2
1469.7
114.1
311.8
102.7
5512.6

1-week
Transaction
Premium
(2)

N/A
N/A
N/A
N/A
N/A
-12.0%
49.0%
N/A
24.0%
N/A
9.6%
1.6%
N/A

14.4%
9.6%
9.2%

Total
Assets
252.7
1774.6
98.6
42.6
52.6
717.7
2057.5
0.0
2814.6
50.1
1970.6
95.9
25345.4

BV
178.7
314.6
52.0
39.6
16.2
347.8
267.4
316.9
469.0
11.4
147.2
64.7
1501.7

Return
on
BV

LTM
Profit
Margin

EV /
BV

-15.3
N/A
-123.5
N/A
1.9
3.7%
-5.7
N/A
40.9 251.9%
22.8
6.6%
47.3 17.7%
21.6
6.8%
87.2 18.6%
1.6 13.6%
18.9 12.9%
13.3 20.5%
971.4 64.7%

N/A
N/A
1.8%
N/A
26.7%
3.5%
10.6%
7.4%
8.0%
0.8%
5.4%
8.1%
49.9%

2.9X
1.4X
2.0X
1.6X
11.0X
1.8X
3.0X
3.1X
3.1X
10.0X
2.1X
1.6X
3.7X

1.8X
2.3X
1.0X
4.0X
1.2X
1.0X
1.8X
3.4X
1.3X
0.6X
0.9X
0.6X
2.8X

N/A
N/A
55.0 x
N/A
4.4 x
27.4 x
16.7 x
45.8 x
16.8 x
73.5 x
16.5 x
7.7 x
5.7 x

41.7%
15.7%
24.9%

12.2%
7.7%
5.1%

3.6X
2.9X
3.4X

1.7X
1.3X
2.0X

26.9X
16.8X
23.7X

LTM
LTM
Revenue Earnings
289.8
189.3
103.6
15.4
152.9
654.7
444.7
291.8
1091.4
195.6
347.8
165.1
1945.5

Transaction Multiples (4)
EV /
EV /
Revenue Earnings

1.6X
299
470

Notes:
(1) Implied Total Equity Value (TEV), plus other consideration paid to non-common shareholders.
(2) Calculated as (offer price - target stock price 1-week prior to offer date) / target stock price 1-week prior to offer date.
(3) Financial information for comparable transaction target companies from SEC Filings, Published Transaction Overviews and Capital IQ.
(4) Multiples are based on implied EV at the announcement date of the transaction.
(5) Time-weighted average places more weight on recent transactions to reflect the most current market dynamics in the calculation of multiples. The calculated multiples exclude those transactions where
the price paid was less than TBV on the view that the discount is likely due to significant negative fair value adjustments to tangible net assets of the target.
(6) The selected multiple is at the low end of the range, due to below-average ROE of House 5 compared to target firms.

* * *IMPORTANT NOTICE TO READER* * *
This schedule contains financial information based upon certain critical assumptions as set forth in the narrative section of the report. Accordingly, this schedule must be considered in conjunction with those assumptions and should not be read on a stand-alone
basis.

DUFF & PHELPS

Appendix, Page 1 of 1

Expert Report of Bruce G. Dubinsky
Exhibit C

November 22, 2011

63