Financial expert’s ‘market efficiency’ analysis survives Daubert attack

In re Groupon Securities Litigation, 2015 U.S. Dist. LEXIS 27334 (March 5, 2015)

The efficient-markets theory, which says that the market price of a company’s stock reflects all public information about the company, has been under attack from financial experts for a while.

Detractors, especially economists, question its usefulness, arguing that what investors are willing to pay for a company’s stock may have little to do with public information, nor reflect the value of the stock. But the hypothesis is still an integral component of a securities fraud case, as a recent ruling in the Groupon litigation shows. The theory allows investors to show that they relied on the company’s information in their trading decisions and that misrepresentation by the company automatically affected the share price and caused injury to them. Showing reliability on the market price is a key element of a an Exchange Act claim.

As is typical, in Groupon, the investors hired an experienced financial expert to perform an events study with which to demonstrate that the company’s stock traded in an efficient market during the class period. The company in turn retained a similarly seasoned expert to poke holes in the assumptions and conclusions undergirding the analysis. Numerous elements of the event study were defective and the testimony was inadmissible under Daubert, the company contended.

The court decided the company’s expert got the legal standard by which to assess market efficiency for the purpose of showing fraud all wrong.

Read more about the court’s view here.