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Frida ghitis: fraud-on-the-market theory is under fire at the u.s. Supreme Court. She says the Basic presumption allows class action without proof of misrepresentations. The theory is based on the efficient-market hypothesis, she says, But is under attack in real world.
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Day of Reckoning for Securities Class Actions - Published With LADJ (12....
Frida ghitis: fraud-on-the-market theory is under fire at the u.s. Supreme Court. She says the Basic presumption allows class action without proof of misrepresentations. The theory is based on the efficient-market hypothesis, she says, But is under attack in real world.
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Frida ghitis: fraud-on-the-market theory is under fire at the u.s. Supreme Court. She says the Basic presumption allows class action without proof of misrepresentations. The theory is based on the efficient-market hypothesis, she says, But is under attack in real world.
Copyright:
Attribution Non-Commercial (BY-NC)
Verfügbare Formate
Als PDF, TXT herunterladen oder online auf Scribd lesen
for modern private securities lit- igation for 25 years, the most powerful engine of civil liability ever es- tablished in American law is now under re at the U.S. Supreme Court. Known as the Basic presumption, the fraud-on-the-market theory allows plain- tiff lawyers to certify a securities class action for fraudulent misrepresentations under Rule 23 of the Federal Rules of Civil Procedure without any proof that class members actually relied on the false information when purchasing or selling a companys securities. See Basic Inc. v. Levinson, 485 U.S. 224, 241-42, 250 (1988). Reliance is presumed according to the efcient-market hypothesis: that an efcient market will immediately in- corporate all material, public representa- tions about the company. Thus, a person is presumed to have relied on a compa- nys misrepresentations if he or she pur- chases or sells securities at the market price. Reliance ties into the predomi- nance requirement for class certication under FRCP 23(b). But after years of growing scholarly and empirical attack in light of real-world market inefciencies, this hypothesis, along with the Basic presumption itself, is now on the chopping block for the rst time since inception. In making a second appearance before the Supreme Court, the petitioners in Er- ica P. John Fund Inc. v. Halliburton Co., 13-317, are asking the justices to over- rule or substantially modify the Basic presumption, or at least allow defendants the opportunity to rebut the presumption to prevent class certication. Such re- buttal would be price impact evidence that alleged misrepresentations did not actually distort the market price of the stock in this instance. The defendant petitioners assert the assumption that an efcient market is always efcient is nave and faulty. Markets are not rational. Referring to the 1998 to 2001 technolo- gy bubble and the most recent economic crisis as examples, the petitioners stress that real-world experience dictates that only some markets are efcient some of the time with respect to some informa- tion a reality which shakes the Basic majority held that proof was not required given that its merits affected all class members equally, not just individuals. In his concurrence, Justice Samuel Ali- to observed that more recent evidence suggests that the presumption may rest on a faulty premise .... [R]econsideration of the Basic presumption may be appro- priate. Likewise, Justice Antonin Scalia echoed Whites sentiments in his dissent by calling the holding a worsening of a regrettable situation: Todays holding does not merely accept what some con- sider the regrettable consequences of the four-Justice opinion in Basic; it expands those consequences from the arguably regrettable to the unquestionably disas- trous. Some may wonder why this should matter given that the plaintiffs hold the ultimate burden of proof on the merits. The reality is that once the class is cer- tied, the sheer aggregation of claims exerts so much settlement pressure that most cases are settled without regard to the merits; they are settled because the defendants simply cannot risk the conse- quences of an adverse result, even if that adverse result is wrong on the merits. See Brief of DRI The Voice of the De- fense Bar as Amicus Curiae in Support of Petitioners at *3, Halliburton Co. v. Eri- ca P. John Fund Inc., 2013 WL 5652548 (Oct. 11, 2013) (No. 13-317). Class cer- tication literally crushes defendants under the weight of possible liability. Indeed, over 3,050 private securities fraud class actions were led between 1997 and 2012, generating more than $73.1 billion in settlements. See Brief of Former SEC Commissioners and Of- cials and Law Professors as Amici Cur- iae in Support of Petitioners at *3-4, Hal- liburton Co. v. Erica P. John Fund Inc., 2013 WL 5652547 (Oct. 11, 2013) (No. 13-317). Included are six of the 10 largest settlements in class action history. These astounding gures are matched by the tens of billions in fees for plaintiffs and defense attorneys. Several former SEC commissioners have commented that the Basic presumption revolutionized pri- vate securities litigation and made it the massive multibillion-dollar industry that it is today. For that reason, requiring this additional proof before class certication would be a game changer. presumption to its core. The Supreme Court adopted Basic with only four justices, representing a bare majority of a bare quorum. Rely- ing on concepts of fairness, public pol- icy, probability, judicial economy, and common sense, the majority adopted the presumption as a practical resolution to the problem of balancing the substan- tive requirement of reliance against the procedural elements of class certication under Rule 23. At the time, the hypothesis enjoyed widespread support from recent empirical studies. The court itself did not assess the general validity of the hypoth- esis. Rather, it presumed its validity and simply focused on whether it was proper to adopt a reliance presumption in securi- ties cases as a matter of rst impression. In his dissent, Justice Byron White ex- pressed great concern with replacing bed- rock securities and class action law with such a newly minted economic hypothe- sis: [T]he Court today ventures into this area beyond its expertise, beyond by its own admission the connes of our previous fraud cases. Describing it as a mere babe, White cautioned that the court embraced the hypothesis with the sweeping condence usually reserved for more mature legal doctrines. He feared it would lead to many adverse, unintended consequences down the road. Such questioning and criticism only grew louder over time, with claims that the economic hypothesis was out of step with modernity and simply did not work in practice. In fact, in a recent opinion, some justices outright questioned the need to revisit the Basic presumption. See Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, 133 S. Ct. 1184, 1204-06 (2013). While addressing a sim- ilar issue of whether plaintiffs must prove the materiality of alleged misrepresenta- tions by a company (a Basic presumption prerequisite) before class certication, the By Christina Lincoln THURSDAY, DECEMBER 19, 2013 www.dailyjournal.com LOS ANGELES Day of reckoning for securities class actions PERSPECTIVE After years of growing scholar- ly and empirical attack in light of real-world market inefcien- cies, this hypothesis, along with the Basic presumption itself, is now on the chopping block. So what is the likely result from the court? Some believe that Basic will stand untouched given stare decisis and the courts overall wariness to intro- duce blanket changes to the law; oth- ers mourn the impending doom of the presumption, along with shareholder rights. It will probably be somewhere in between. Because the Basic pre- sumptions laissez-faire approach to Rule 23 sits awkwardly with recent cases that heightened plaintiffs bur- den of proof in the general class action context, the court may continue down its increasingly conservative path and tighten the requirements of Basic due to recent economic realities whether adding to one of the existing require- ments for the presumption or creating a whole new requirement for price im- pact. See AT&T Mobility LLC v. Con- cepcion, 131 S. Ct. 1740, 1753 (2011) (federal preemption regarding uncon- scionability of class arbitration waiv- ers); Wal-Mart Stores Inc. v. Dukes, 131 S. Ct. 2541, 2556-57 (2011) (fail- ing commonality requirement by not showing general policy for discrimina- tion); Comcast Corp. v. Behrend, 133 S. Ct. 1426, 1434-35 (2013) (rejecting regression model to calculate damages to prove predominance). Regardless, the Basic doctrine appears to be deteriorating before our very eyes and the court should address the legal communitys growing concerns over the validity of the underlying economic hy- pothesis. With arguments set for March 5, 2014: let the battle begin. Christina Lincoln is an associate with Newmeyer & Dillion LLP in Newport Beach. Reprinted with permission from the Daily Journal. 2013 Daily Journal Corporation. All rights reserved. Reprinted by ReprintPros 949-702-5390. CHRISTINA LINCOLN Newmeyer & Dillion