Controversial Orthodoxy: The Efficient Capital Markets Hypothesis And Loss Causation
AbstractSince the Supreme Court's landmark holding in Basic, Inc. v. Levinson, courts have incorporated the efficient capital markets hypothesis as an analytical tool in securities fraud cases. Nevertheless, recent turmoil in the financial markets and a growing chorus of scholarship challenging traditional notions of market efficiency have caused some courts to reconsider the role of the efficient capital markets hypothesis in securities fraud litigation. This Note analyzes a question that has split the circuits and marks the intersection of market efficiency and securities fraud: how quickly must an equity security depreciate in price following the publication of a corrective disclosure for a plaintiff to plead and prove loss causation? Part I introduces the efficient capital markets hypothesis, securities fraud actions, and the ways in which courts have traditionally employed concepts of market efficiency into their analyses. Part II analyzes the circuit split regarding the speed with which the market must incorporate information into price for a plaintiff to properly plead and prove loss causation. Finally, Part III argues that courts should resist the temptation to draw bright-line rules in the context of loss causation and should engage each case on its facts by analyzing the efficiency of the relevant market during each event giving rise to the fraud and economic loss.INTRODUCTION 192I. ECONOMIC AND LEGAL BACKGROUND 193A. THE EFFICIENT CAPITAL MARKETS HYPOTHESIS 193B. SECTION 10(B) SECURITIES FRAUD 196C. ELEMENTS OF RULE 10B-5 IN AN EFFICIENT CAPITAL MARKET 2001. Materiality 2002. Reliance 2013. Loss Causation 203II. THE CIRCUIT SPLIT 205A. IMMEDIATE DEPRECIATION REQUIRED 205B. IMMEDIATE DEPRECIATION NOT REQUIRED 211III. COURTS SHOULD FOLLOW THE FIFTH CIRCUIT'S DECISION IN LORMAND 215A. CONTEMPORARY CRITICISM OF THE EFFICIENT CAPITAL MARKETS HYPOTHESIS 216B. TEMPORALLY ACCURATE AND INDIVIDUAL ANALYSIS OF EACH 10B-5 ELEMENT 218C. CONSISTENCY WITH LANDMARK RULE 10B-5 CASES 223D. ARGUMENTS IN FAVOR OF A BRIGHT-LINE RULE 225CONCLUSION 230INTRODUCTIONThere is an old joke, widely told among economists, about an economist strolling down the street with a companion when they come upon a $100 bill [layingl on the ground. As the companion reaches down to pick it up, the economist says "Don't bother- if it were a real $100 bill, someone would have already picked it up."1This joke is representative of a widely endorsed economic theory - the efficient capital markets hypothesis ("ECMH") - taken to its logical extreme.2 Developed in its contemporary form by the Chicago School of Economics, the ECMH posits that in "efficient" markets, the prices of securities accurately reflect all publicly available information.3 Over the course of the last four decades, the ECMH has had a monumental influence on securities litigation, particularly in the context of Rule 10b5 securities fraud.4 This Note examines a question that has split the circuits: how quickly must an equity security depreciate in price following the release of a corrective disclosure for a plaintiff to prove the element of loss causation? Part I provides a brief explanation of the ECMH, Rule 10b-5, and the ways in which at least three elements of Rule 10b-5 have been shaped by judicial endorsement of the ECMH. Part II examines the circuit split regarding this issue and discusses recent case law addressing the rapid incorporation of information into securities prices. Part III takes the position that courts should adopt a fact-specific rule with respect to loss causation and resist the temptation to apply any bright-line rule based on the ECMH. …
Did the Private Securities Litigation Reform Act Work
In 1995 Congress passed the Private Securities Litigation Reform Act to address abuses in securities fraud class actions. In the wake of Enron, WorldCom, Adelphia, and other high profile securities frauds, critics suggest that the law made it too easy to escape liability for securities fraud and thus created a climate in which frauds are more likely to occur. Others claim that the Act has largely failed because it did little to deter plaintiff's lawyers from filing non-meritorious cases. This article employs a database of the 1,449 class actions filed from 1996 through 2001 to explore whether the Act achieved several of its primary goals - discouraging the filing of non-meritorious suits, reducing litigation risk for high technology issuers, and reducing the "race to the courthouse," whereby class actions were filed soon after significant stock price declines, apparently with very little pre-filing investigation. The picture that emerges from studying these data is that the PSLRA did not work as intended. This article demonstrates that as many or more class actions are filed after the Act as before. High technology issuers remain at significantly greater risk than issuers in other industries. There is statistically significant evidence, however, that suggests that the Act improved overall case quality at least in the circuit that most strictly interprets one of the Act's key provisions, a heightened pleading standard. The data in the article also demonstrate that Congress did not achieve its goal of increasing the filing delay in class actions. Actions are filed as quickly now as they were before passage of the Act. Nonetheless, that too may provide indirect evidence that plaintiff's attorneys are selecting more apparent cases of fraud that require less pre-filing investigation.
Heightened Pleading and Discovery Stays: An Analysis of the Effect of the PSLRA's Internal-Information Standard on '33 and '34 Act Claims
This Article presents a new model for analyzing securities-fraud claims. It then discusses the pleading and stay-of-discovery requirements enacted by Congress in the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), arguing that the combined impact of these provisions is likely to be overinclusive. The Reform Act's pleading standard is best understood in light of the common law preceding it. To survive a motion to dismiss under pre-Reform Act pleading standards, plaintiffs had to plead specific types of facts derived from internal company information. Plaintiffs met this internal-information standard through the use of the Federal Rules of Civil Procedure's liberal discovery provisions. The Reform Act, aimed at abusive securities litigation, both prohibits such discovery and heightens the pleading standard necessary to survive a motion to dismiss. By combining these reforms, the Reform Act implements a standard that is outcome-determinative and, if strictly applied, virtually impossible to meet. Early decisions under the Reform Act illustrate the outcome-determinative impact of these provisions and reveal that despite Congress's stated intent to resolve the circuit split on the applicable pleading standard, the Reform Act's language and legislative history have left the courts in a quandary. As a result, the beginning of a new circuit split is already apparent. To resolve these problems, I propose that Congress repeal the stay-of-discovery requirements and, instead, adopt managerial-judge provision to process securities-fraud claims. Such a mechanism would better balance the competing goals of protecting markets and defendants and limiting so-called abusive litigation. Finally, I consider whether the Reform Act's pleading standards apply to claims pursuant to the Securities Act of 1933 ("Securities Act") and conclude that, contrary to their practice before the Reform Act, courts should not apply the new scienter-based pleading standard to the negligence and strict-liability claims of the Securities Act. I support this argument with references to both the Reform Act's plain language and legislative history, and the Securities Act's purpose. The post-Reform Act decisions considering this issue have relied on pre-Reform Act case law without considering whether the Reform Act changed that law, resulting in some incorrectly applying the pleading standards to plaintiffs' claims under the Securities Act.