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
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