Valuation experts working and testifying in securities cases take note: The Supreme Court has acknowledged that the efficient market theory has come under attack from economists.
Experts involved in private securities fraud litigation (Rule 10b-5 lawsuits) know how central the efficient market theory has been to class action suits. The theory says that the price of stock reflects all the public, material information, including material misstatements. But the theory has become a target of criticism, and the Supreme Court has acknowledged this in a freshly minted decision.
Presumption under attack: The case arose from a putative class action an investor brought against Halliburton, alleging the company made misrepresentations to inflate the company's stock price. Once the company issued correctives, the stock price dropped and the investors lost money. Investors can recover damages only if they prove reliance on the defendant's misrepresentation when deciding to buy or sell a company's stock. Until now, they have been able to invoke a presumption that, whenever an investor buys or sells stock at the market price, he or she relied on the misrepresentation. In petitioning the Supreme Court, Halliburton challenged the presumption, arguing that developments in economic theory show that many investors no longer rely on the integrity of the market price. If you take this presumption away, class certification becomes inappropriate. Therefore, investors should have to prove their reliance on an individual basis.
The Supreme Court did not go that far, but it went far enough to make class certification more difficult for investors. It upheld the right of investors to invoke the presumption to form class-action groups, but it gave corporate defendants the right to rebut the presumption with evidence that the misrepresentation had no impact on price early in the suit, at the class certification stage.
The court's decision aligns with its earlier rulings making it harder for plaintiffs to bring class actions. Whether it will expand or contract opportunities for experts working in this area remains to be seen. The case is Halliburton Co. v. Erica P. John Fund, Inc., 2014 U.S. LEXIS 4305 (June 23, 2014).
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