Posts Tagged ‘Securities litigation’

Rethinking Basic: Towards a Decision in Halliburton

Posted by Lucian Bebchuk and Allen Ferrell, Harvard Law School, on Wednesday April 9, 2014 at 9:02 am
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Editor’s Note: Lucian Bebchuk is William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance, Harvard Law School. Allen Ferrell is Greenfield Professor of Securities Law, Harvard Law School. They are co-authors of Rethinking Basic, a Harvard Law School Discussion Paper that is forthcoming in the May 2014 issue of The Business Lawyer and available here.

We have recently revised our paper Rethinking Basic (discussed earlier on the Forum here). Our revision, which will be published in the May issue of the Business Lawyer, takes into account, and relates our analysis to, the Justices’ questions at the Halliburton oral argument. As our revision explains, questions asked by some of the Justices at the oral argument suggest that the fraudulent distortion approach we support might appeal to the Court.

In the Halliburton case, the United States Supreme Court is expected to reconsider the Basic ruling that, twenty-five years ago, adopted the fraud-on-the-market theory, which has since facilitated securities class action litigation. Our paper seeks to contribute to this reconsideration by providing a conceptual and economic framework for a reexamination of the Basic rule.

…continue reading: Rethinking Basic: Towards a Decision in Halliburton

Do Conservative Justices Favor Wall Street?

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday March 19, 2014 at 9:35 am
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Editor’s Note: The following post comes to us from Marco Ventoruzzo of Pennsylvania State University, Dickinson School of Law, and Bocconi University.

The appointment of Supreme Court justices is a politically-charged process and the “ideology” (or “judicial philosophy”) of the nominees is perceived as playing a potentially relevant role in their future decision-making. It is fairly easy to intuit that ideology somehow enters the analysis with respect to politically divisive issues such as abortion and procreative rights, sexual conduct, freedom of speech, separation of church and state, gun control, procedural protections for the accused in criminal cases, and governmental powers. Many studies have tackled the question of the relevance of the ideology of the justices or appellate judges on these issues, often finding a correlation between policy preferences and decisions.

…continue reading: Do Conservative Justices Favor Wall Street?

Supreme Court Allows State-Law Securities Class Actions to Proceed

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday March 18, 2014 at 9:29 am
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Editor’s Note: The following post comes to us from Jonathan C. Dickey, partner and Co-Chair of the National Securities Litigation Practice Group at Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn publication.

On February 26, 2014, the Supreme Court decided Chadbourne & Parke LLP v. Troice, 571 U.S. ___ (2014), ruling by a 7-2 vote that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) does not bar state-law securities class actions in which the plaintiffs allege that they purchased uncovered securities that the defendants misrepresented were backed by covered securities. The decision is the first in which the Court has held that a state-law suit pertaining to securities fraud is not precluded by SLUSA, suggesting that there are limits to the broad interpretation of SLUSA’s preclusion provision that the Court has recognized in previous cases. While Chadbourne leaves many questions unanswered concerning the precise contours of SLUSA preclusion, and could encourage plaintiffs to pursue securities-fraud claims under state-law theories, the unusual facts in Chadbourne could limit the reach of the holding and provide defendants with avenues for distinguishing more typical state-law claims in other cases.

…continue reading: Supreme Court Allows State-Law Securities Class Actions to Proceed

Supreme Court Hears Arguments in Halliburton

Editor’s Note: Robert Giuffra is a partner in Sullivan & Cromwell’s Litigation Group. The following post is based on a Sullivan & Cromwell publication by Jeffrey B. Wall. The Supreme Court’s reconsideration of Basic is also discussed in a Harvard Law School Discussion Paper by Professors Lucian Bebchuk and Allen Ferrell, Rethinking Basic, discussed on the Forum here.

On March 5, 2014, the U.S. Supreme Court heard oral argument in Halliburton Co. v. Erica P. John Fund, Inc., No. 13-317, which presents whether to overrule or significantly limit plaintiffs’ ability to rely on the legal presumption that each would-be class member in a securities fraud class action relied on the statements challenged as fraudulent in the lawsuit. Without this so-called fraud-on-the-market presumption of classwide reliance, putative class action plaintiffs would face substantial barriers in maintaining securities fraud class actions. The Court’s decision in Halliburton, which is expected by June 2014, could lead to a significant change in the conduct of securities class actions. Even if the Court ultimately retains some formulation of the fraud-on-the-market presumption of reliance, the Court could increase defendants’ ability to contest what in practice has evolved into a virtually irrebuttable presumption.

…continue reading: Supreme Court Hears Arguments in Halliburton

Remarks on the Halliburton Oral Argument (3): The Consistency of a Fraudulent Distortion Approach with Not Resolving Merit Issues at Class Certification

Posted by Lucian Bebchuk and Allen Ferrell, Harvard Law School, on Thursday March 13, 2014 at 8:00 am
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Editor’s Note: Lucian Bebchuk is William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance, Harvard Law School. Allen Ferrell is Greenfield Professor of Securities Law, Harvard Law School. They are co-authors of Rethinking Basic, a Harvard Law School Discussion Paper forthcoming in the May 2014 issue of The Business Lawyer, that is available here. This post is the third in a three-part series in which they remark on the oral argument at the Halliburton case; the first two posts are available here and here.

As we discussed in our first two posts, the Halliburton oral argument (transcript available here), provided encouraging signs that a number of the Justices might choose to avoid making a judgment on the state of efficient market theory and to focus on the presence of fraudulent distortion (sometimes also referred to as price impact). In this post, we respond to arguments that the adoption of such an approach would be inconsistent with or at least in tension with the Court’s earlier rulings that merit issues should not be resolved at the class certification case.

In Rethinking Basic, we explain that class-wide reliance should depend not on the “efficiency” of the market for the company’s security but on the existence of fraudulent distortion of the market price, and that focusing on fraudulent distortion would provide a coherent and implementable framework for identifying class-wide reliance in appropriate circumstances. We also go on to explain that, in contrast to some claims to the contrary, determining fraudulent distortion would not usurp the merits issues of materiality and loss causation.

In responses to our paper (see, e.g., Kevin LaCroix of D&O blog’s thoughtful post here http://www.dandodiary.com/2014/01/articles/securities-litigation/dump-fraud-on-the-market-yet-preserve-securities-plaintiffs-ability-to-establish-reliance/) and in reactions to the oral argument in Halliburton, commentators raised the possibility that adopting a fraudulent distortion approach would create tension with some recent Supreme Court rulings.

In particular, questions were raised as to (1) whether a finding of fraudulent distortion would necessarily imply a finding of materiality, an issue that the Court held in Amgen to be a merits issue?, and (2) whether such a finding would necessarily imply a finding of loss causation, an issue that the Court in the earlier Halliburton case held also to be a merits issue?

As we explain below, based on our analysis in Rethinking Basic, the answer to both questions is no. We first address the question of materiality and then turn to loss causation.

…continue reading: Remarks on the Halliburton Oral Argument (3): The Consistency of a Fraudulent Distortion Approach with Not Resolving Merit Issues at Class Certification

Remarks on the Halliburton Oral Argument (2): Implementing a Fraudulent Distortion Approach

Posted by Lucian Bebchuk and Allen Ferrell, Harvard Law School, on Wednesday March 12, 2014 at 9:10 am
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Editor’s Note: Lucian Bebchuk is William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance, Harvard Law School. Allen Ferrell is Greenfield Professor of Securities Law, Harvard Law School. They are co-authors of Rethinking Basic, a Harvard Law School Discussion Paper forthcoming in the May 2014 issue of The Business Lawyer, that is available here. This post is the second in a three-part series in which they remark on the oral argument at the Halliburton case; the first post is available here.

In our first post on the Halliburton oral argument (transcript available here), we discussed the encouraging signs that a number of the Justices might choose to avoid making a judgment on the state of efficient market theory and to focus on the presence of fraudulent distortion (sometimes also referred to as price impact). In this post, we remark on how a fraudulent distortion approach could be implemented should the Court indeed adopt such an approach. In particular, we discuss the financial econometric tools for assessing the presence or absence of fraudulent distortion and we explain that these tools are not limited to event studies at the time of the misrepresentation.

In Rethinking Basic, we present a detailed case for using a fraudulent approach and explain why it would provide a conceptually superior framework than a focus on market efficiency. We go on, however, to show that an approach focusing on fraudulent distortion would have significant administrability and implementation advantages over the federal courts’ practice in this area.

Because the courts have thus far had to provide a yes/no answer to whether the market for a given security is efficient, significant problems of over- and under-inclusion have arisen (as has been noted by the Supreme Court in its Amgen decision). Focusing on the presence of fraudulent distortion in the case at hand would avoid these significant problems. Furthermore, as we describe in Rethinking Basic, there are standard and sound methods drawn from the academic finance and accounting literature for ascertaining the presence of a distortionary price impact (a toolkit that should displace the current exclusive focus on the Cammer factors, which test for market efficiency). Without attempting to be comprehensive, we discuss below three tools that are potentially available for implementing a fraudulent distortion approach.

…continue reading: Remarks on the Halliburton Oral Argument (2): Implementing a Fraudulent Distortion Approach

Remarks on the Halliburton Oral Argument (1): Toward a Fraudulent Distortion Approach

Posted by Lucian Bebchuk and Allen Ferrell, Harvard Law School, on Tuesday March 11, 2014 at 8:22 am
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Editor’s Note: Lucian Bebchuk is William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance, Harvard Law School. Allen Ferrell is Greenfield Professor of Securities Law, Harvard Law School. They are co-authors of Rethinking Basic, a Harvard Law School Discussion Paper forthcoming in the May 2014 issue of The Business Lawyer, that is available here. This post is the first in a three-part series in which they remark on the oral argument at the Halliburton case.

Last week the Supreme Court heard oral arguments in the Halliburton case (transcript available here), which is expected to have a major impact on the future of securities litigation. Encouragingly, there were signs that a number of the Justices might choose to avoid making a judgment on the state of efficient market theory and to focus on the presence of fraudulent distortion (sometimes also referred to as price impact). As we explain in our recent paper, Rethinking Basic, adopting such an approach would be the desirable outcome of this major case both conceptually and practically.

In this first post of a three-part series on the Halliburton oral argument, we comment on prospects of the fraudulent distortion approach in light of what was said at the oral argument. The two subsequent posts will discuss (1) the implementation of such an approach and, in particular, the availability of tools other than events studies for this implementation, and (2) the consistency of the fraudulent distortion approach with not resolving merit issues at the class certification stage. In their briefs, one side of the case argued that the Justices should overrule the Basic ruling in part because of the evidence of market inefficiency that has accumulated over the past twenty five years. The other side, however, urged the Justices to recognize the substantial support that the efficient market hypothesis still has among financial economists.

…continue reading: Remarks on the Halliburton Oral Argument (1): Toward a Fraudulent Distortion Approach

SEC Enforcement Year in Review

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday March 3, 2014 at 8:58 am
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Editor’s Note: The following post comes to us from Adam S. Hakki, partner and global head of the Litigation Group at Shearman & Sterling LLP, and is based on a Shearman & Sterling client publication. The complete publication, including footnotes, is available here.

Marked by leadership changes, high-profile trials, and shifting priorities, 2013 was a turning point for the Enforcement Division of the Securities and Exchange Commission (the “SEC” or the “Commission”). While the results of these management and programmatic changes will continue to play out over the next year and beyond, one notable early observation is that we expect an increasingly aggressive enforcement program.

…continue reading: SEC Enforcement Year in Review

Securities Class Action Filings—2013 Year in Review

Posted by John Gould, Cornerstone Research, on Saturday February 22, 2014 at 9:00 am
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Editor’s Note: John Gould is senior vice president at Cornerstone Research. This post discusses a Cornerstone Research report by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse, titled “Securities Class Action Filings—2013 Year in Review,” available here.

Plaintiffs filed 166 new federal securities class actions in 2013, a 9 percent increase over 2012, according to Securities Class Action Filings—2013 Year in Review, an annual report prepared by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse. The 2013 filings, although boosted by a second-half surge, are still 13 percent below the historical average from 1997 to 2012.

One possible explanation for filings remaining below the historical average in recent years is the decline in the number of unique companies listed on the NYSE and NASDAQ. A new analysis in the report shows that the number of companies on these exchanges has decreased 46 percent since 1998, providing fewer companies for plaintiffs to target as the subject of federal securities class actions.

…continue reading: Securities Class Action Filings—2013 Year in Review

2013 Delaware Decisions and What They Mean For 2014

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday February 20, 2014 at 9:26 am
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Editor’s Note: The following post comes to us from John L. Reed, chair of the Wilmington Litigation group and a partner in the Corporate and Litigation groups at DLA Piper LLP. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Delaware’s Leading Role in Business and Business Litigation

Delaware has long been known as the corporate capital of the world. It is the state of incorporation for 64 percent of the Fortune 500 and more than half of all companies whose securities trade on the NYSE, Nasdaq and other exchanges. Its preeminence in business law started with its corporate code—the Delaware General Corporation Law—and has been enhanced by business law innovations that have led to the creation of many new business entities designed to meet the expanding needs of corporate and financial America.

…continue reading: 2013 Delaware Decisions and What They Mean For 2014

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