Expert Witness Services for Undue Risk-Taking Allegations
In financial markets disputes, allegations of undue or excessive risk-taking frequently rely on hindsight, selective time frames, or misunderstandings about how risk was measured, approved, monitored, and communicated at the time decisions were made. An expert witness analysis provides Financial litigation support and reconstructs what was known, or reasonably knowable, at each relevant decision point and evaluates conduct against stated strategy objectives, mandate constraints, internal policies and limits, governance processes, applicable disclosures, and prevailing market practice.
Excessive or undisclosed risk may arise through leverage, concentration, tail exposure, liquidity and funding risk, convexity, basis risk, or hidden correlations within a portfolio.
Our financial markets expert witness work examines whether these risks were properly identified, measured, monitored, escalated, and managed in practice, including whether limit breaches and exceptions were addressed appropriately and whether the actual risk profile aligned with what was represented to investors, counterparties, or supervisors.
We distinguish market-driven outcomes from avoidable losses linked to mandate drift, control or escalation failures, unsuitable exposures, valuation practices, financing and margin dynamics, and liquidation or de-risking decisions. Where appropriate, we quantify loss causation and damages under alternative feasible risk profiles consistent with the mandate and applicable constraints.
Expert Witness Methodology in Undue Risk Taking Matters
Reconstruct the decision record
Review policies, limits, committee materials, risk reports, valuations, financing and margin documentation, and key communications in the context of prevailing market conditions
Map exposures and embedded risks
Identify concentrations, leverage, optionality, correlation effects, liquidity pressures, and funding dynamics that contribute to tail outcomes.
Evaluate governance and controls
Assess authority structures, escalation procedures, exception handling, independence of oversight, model risk, and valuation controls.
Quantify and attribute outcomes
Break down P&L into identifiable drivers and stress scenarios, calibrated to the available data and market environment.
Assess feasible alternatives where appropriate:
Model risk profiles consistent with the mandate and constraints and quantify the impact of deviations.
Communicate findings for litigation
Present clear exhibits and a structured narrative supporting expert opinions on prudence, foreseeability, loss causation, and damages.
Representative Matters
SVXY options and margin liquidation
Matter type: Arbitration.
Facts:A retail trader was liquidated due to option losses realized in the last two hours of Volmaggedon day.
Instruments & Strategy: SVXY (short-volatility ETP), equity options on those VIX reverse ETFs.
Core Questions:
Loss causation, product complexity and foreseeability, suitability, supervision and margin methodology, and allocation of responsibility.
Our work: We performed a document and quantitative review focused on:
- Loss causation: Reconstructed how short put selling on a short-volatility ETP amplified losses during a volatility jump.
- Product analysis: Explained the mechanics of VIX futures, ETP rebalancing, and why options on a short-volatility ETP can compound tail exposure. The strategy was ‘exotic’ , highly volatile and highly risky.
- Foreseeability: Used professional-grade fat-tailed statistical analysis to show that large volatility shocks are not rare, and should be considered in professional risk management.
- Disclosures: Reviewed the ETP’s offering documents and risk disclosures plainly stating the potential for rapid and substantial losses.
- Suitability: Assessed whether the client’s sophistication matched the strategy, and contrasted it with the broker-dealer’s technical knowledge and supervisory obligations.
- Supervision and margin: Evaluated platform risk models and margin calculations, including whether methodology understated tail risk and whether additional margin or trading restrictions were warranted.
Outcome:
Provided a detailed report and exhibits supporting a defense narrative that the lack of supervisory and deficient margin practices materially contributed to the loss and to the inappropriateness of the broker’s claimed damages.Related articles:
- Don’t touch the VIX explains the non-normality of the VIX, and the mechanics of leveraged ETPs. (White paper)
- Options on leveraged VIX ETFs – Legal Issues explain the high exoticity and toxicity of those ETPs, as well as the margin requirements for volatile customer portfolios. (White paper)
Allianz Structured Alpha
Matter type: Investigation and litigation support.
Facts: At the onset of COVID, in February and March 2020, equity markets fell rapidly as volatility spiked. Allianz Structured Alpha, a strategy marketed as market-neutral and volatility-neutral, reported significant losses tied to derivatives referencing the S&P 500 and volatility instruments. The episode raised questions about the strategy’s true exposures.
Instruments & Strategy: S&P 500 futures and options, VIX futures and options, and complex volatility strategies & risks.
Core Questions:
Strategy characterization, risk assessment, loss causation, and whether risk representations were consistent with the portfolio’s exposure.
Our work: After researching and finding the fund’s trading positions, we conducted an independent analysis focused on:
- Loss causation: Reconstructed exposures and showed the losses were consistent with a short-tail, short-volatility profile under severe market stress.
- Strategy review: Evaluated how the portfolio deployed “selling catastrophe insurance” through S&P options and volatility option structures.
- Disclosure review: Compared marketing claims such as “risk-controlled” and crash protection language to the portfolio’s modeled and realized downside drivers.
- Public-facing analysis: Published technical articles explaining the strategy mechanics and the loss drivers, which were cited by prominent financial journalists covering the matter.
Outcome:
Plaintiff counsel retained us for follow-on work supporting claims tied to misrepresentation and risk governance deficiencies. The SEC later delivered criminal indictments against the firm and the money managers.Related articles:
- Losing your shirt, institutional style: Malachite’s strategy of ‘selling catastrophic risk insurance’ via derivatives, and its subsequent losses. (White paper)
- Allianz Global Investors: Understand: Allianz Structured Alpha’s strategy, loss causation, and fraud by misrepresentation (White paper)
Litigation Deliverables in Undue Risk Taking Matters
These engagements result in clearly defined work products prepared for use in litigation and arbitration. Deliverables are structured according to the issues in dispute and the procedural posture of the matter.
Risk narrative and timeline:
Positions, market context, decision points, governance actions, and allocation of responsibilities.
Risk and limit analysis:
Limit breaches, exceptions, escalation processes, and materiality over time.
Stress and scenario exhibits:
Tail analysis, correlation and liquidity stress, margin practices, and funding dynamics.
Loss attribution and damages:
Decomposition of drivers, sensitivity analysis, and counterfactual assessment where appropriate.
Valuation and marks review:
Pricing conventions, reserves, and the impact of overrides.
Deposition and testimony support:
Preparation materials, demonstratives, and technical support if the matter proceeds.
Why Law Firms Choose Navesink for Undue Risk Taking Cases?
- Senior practitioner-led analysis with no junior expert layering.
- Deep experience across derivatives, structured products, volatility, valuation, margin, and unwind mechanics.
- Work product developed to withstand deposition and cross-examination.
- Expert witnesses of the highest quality with strong technical knowledge.
- In-house experts supported by a financial markets network of C-level industry professionals.
- Expert witness reports, depositions, and expert testimony prepared for litigation and arbitration.