Securities Law in 2014: Fraud-on-the-Market Theory Demystified
Overview:
This course offers companies and organizations, an overview of the latest trends; critical issues and best practices with respect to Fraud-on-the-Market Theory in 2014.In a two-hour live webcast, the speakers will discuss:
- 2014 Fraud-on-the-market theory: an overview
- Recent related cases and lessons learned
- Significant trends, issues and impacts
- Compliance and best practices
- Up-to-minute regulatory updates
Agenda:
Latham & Watkins LLP
- Before Basic v. Levinson: Discounting Reliance
- Blackie v. Barrack, 524 F.2d 891 (9th Cir. 1975):
- “Here we eliminate the requirement that plaintiffs prove reliance directly . . . because the requirement imposes an unreasonable and irrelevant evidentiary burden.”
- “A purchaser on the stock exchanges . . . relies generally on the supposition that that the market price is validly set . . . and thus indirectly on the truth of the misrepresentations underlying the stock price.”
- Before Basic (continued):
- Panzirer v. Wolf, 663 F.2d 365 (2d Cir. 1981)
- Plaintiff “never saw the annual report” but “relied on The Wall Street Journal”
- “Where plaintiff acts upon those working in or reporting on the securities markets, and where that information is circulated after a material misrepresentation or omission, plaintiff has stated a sufficient claim of reliance . . .”
- “Our holding is no more than an extension of Blackie.”
- Basic v. Levinson, 485 U.S. 224 (1987):
- Rule 23’s class certification requirements are a “problem” because “[r]equiring proof of individualized reliance from each member of the proposed class effectively would have prevented . . . proceeding as a class action.”
- The fraud on the market presumption “provided a practical resolution to the problem” of Rule 23.
- Basic v. Levinson (continued):
- “The fraud on the market theory is based on the premise that, in an open and developed securities market, the price of the company’s stock is determined by the available information regarding the company and its business . . . Misleading statements will therefore defraud investors of stock even if the purchasers do not rely on the misstatements.”
- A 4-2 decision (Rehnquist, Scalia, White abstaining)
- After Basic: Reliance Makes a Comeback
- Central Bank of Denver, 511 U.S. 164 (1994)
- Reliance a “critical” element that plaintiff “must” show
- Stoneridge, 552 U.S. 148 (2008)
- “Reliance . . . is an essential element”
- Janus, 131 S.Ct. 180 (2011)
- “[T]he public could not have relied on . . . undisclosed deceptive acts.”
- Central Bank of Denver, 511 U.S. 164 (1994)
Lane Powell PC
- If the Supreme Court adopts a “middle position” in Halliburton, will the need for “event study” analysis at the class certification state have any real or practical effect in class action securities litigation?
- Is there anything more than irony in the proposition that, because of the limitations or failures of the efficient market hypothesis, a class plaintiff seeking certification must show “price impact’ through an event study, when an assumption of most event study methodologies is the presence of an efficient market?
- Does an efficient market have to be a rational market, for the purposes of securities law? Should “irrational exuberance” limit investor protection?
Kramer Levin Naftalis & Frankel LLP
- Theoretical Underpinning of the Fraud-on-the-Market Doctrine
- The Efficient Capital Markets Hypothesis
- Basic Theory -- Market Prices Reflect Public Information
- Empirical Critiques of the Theory
- Elements of the Presumption of Reliance Under Basic
- Proving (or Disproving) Market Efficiency
- Typical Indicators of Market Efficiency
- Use of the Event Study Methodology
- Defeating Application of the Presumption -- Vivendi
- The Efficient Capital Markets Hypothesis
- Case Law Background to Halliburton II
- Basic, Inc. v. Levinson (1988)
- Subsequent Emphasis on Reliance in Section 10(b) Cases
- Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A. (1994)
- Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. (2008)
- Janus Capital Group, Inc. v. First Derivative Traders (2011)
- Erica P. John Fund, Inc. v. Halliburton Co. (2011) (Halliburton I)
- Amgen, Inc. v. Connecticut Retirement Plans & Trusts (2013)
- The Affiliated Ute Omissions Theory
- Non-Class Private Litigation
- SEC Enforcement Proceedings
Willkie Farr & Gallagher LLP
- Long before the Supreme Court decided Basic, it held that “positive proof of reliance” is not required in cases involving primarily a failure to disclose a material fact that the defendant had a duty to disclose.
- The critical difference is that unlike the fraud-on-the-market presumption, the Affiliated Ute presumption does not depend on the acceptance of the efficient market hypothesis.
- Were the Court to eliminate the fraud-on-the-market presumption, plaintiffs would likely respond by attempting to re-characterize and refashion affirmative misrepresentation claims as omission claims.
- Eliminating the presumption of reliance also would not appear to affect an investor’s ability to pursue class actions for violations of Sections 11 and 12 of the Securities Act.
- If foreclosed from presuming reliance under the fraud-on-the-market doctrine, plaintiffs may try to find creative ways to bring state law class action claims, either in state or federal court.
- However, even if Basic were overruled and the fraud-on-the-market doctrine rejected, plaintiffs may be able to prosecute certain securities fraud claims.
- Individual Reliance Claims -- The largest plaintiffs’ firms with large institutional investors might still find it worthwhile to file large individual and non-class collective actions in certain situations. Smaller plaintiffs’ firms probably could potentially also file individual and non-class collective actions.
Lieff Cabraser Heimann & Bernstein, LLP
- Halliburton II is the third in a series of recent decisions in which the U.S. Supreme Court—beginning with Halliburton I in 2011 and continuing with Amgen in 2013—has addressed the relationship between the fraud-on-the-market presumption and class certification under Federal Rule of Civil Procedure 23.
- The Court in Halliburton II reaffirmed the fundamental principles underlying the Basic presumption.
- The Court struck a middle ground with respect to “price impact” evidence: To invoke the Basic presumption, plaintiffs need not prove that the alleged misrepresentation affected the price of the subject security, but defendants can rebut the presumption by proving the absence of price impact.
- Because “price impact” is a concept distinct from (though related to) materiality and loss causation, Halliburton II is consistent with Amgen and Halliburton I.
- While the Court’s ruling is significant—primarily in that it preserves Basic—most cases likely will not be susceptible to a showing of no price impact.
Howard Privette, Partner
Paul Hastings LLP
- Moderator Overview
- FOM’s significance is to facilitate the modern securities class action by allowing plaintiffs a rebuttable presumption of reliance.
- It has been the subject of Supreme Court review in Halliburton II
- Today’s panel will discuss the background of the FOM doctrine, legal and economic issues encompassed by the FOM doctrine, the Halliburton II decision, and future of the FOM doctrine (and securities litigation generally) post-Halliburton II
- Brief History of the Fraud on the Market Doctrine
- Pre-Basic legal commentary and case law in lower courts on reliance (e.g., Blackie v. Barrack (9th Cir. 1975), Panzirer v. Wolf (2d Cir. 1981)).
- Basic, Inc. v. Levinson (1988)
- Subsequent emphasis on reliance in Section 10(b) Cases
- Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A. (1994)
- Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. (2008)
- Janus Capital Group, Inc. v. First Derivative Traders (2011)
- The Private Securities Litigation Reform Act of 1995 - was the private right of action "frozen in time"? What effect would this have on the FOM doctrine?
- The Fraud on the Market Doctrine and Economic Theory
- The relationship between the Fraud on the Market (FOM) doctrine and the Efficient Capital Markets Hypothesis (ECMH)
- Discussion of empirical critiques of the ECMH.
- Is the ECMH a necessary part of the FOM doctrine or, can the FOM doctrine exist without the ECMH?
- What attributes must exist for there to be an efficient market for purposes of the FOM doctrine (e.g., is price response to news enough or must price also reflect fundamental value)?
- How efficient does the market have to be to justify the FOM doctrine?
- Does an efficient market have to be a rational market, for the purposes of securities law? Should "irrational exuberance" limit investor protection?
- IV. The Fraud on the Market Doctrine in Practice
- Rule 26 and establishing and challenging the FOM doctrine at class certification
- The Cammer factors and other tests of market efficiency
- Rebutting the presumption
- Use of the event study methodology
- Trial of securities class actions (including discussion of Vivendi)
- The relationship between the reliance element based on the FOM doctrine and other elements of a securities claim, esp. materiality and loss causation.
- V. Halliburton II and the Supreme Court's Decision
- Background of the Halliburton case, including Halliburton I and the district court and Fifth Circuit decisions.
- Amgen, Inc. v. Connecticut Retirement Plans & Trusts (2013).
- Description of the Halliburton II decision.
- Future of the Fraud on the Market Doctrine and Securities Class Actions
- Implementing the Supreme Court's Halliburton II decision
(Adapt to nature of decision. For example:)
- If the Supreme Court adopts a "middle position" in Halliburton II, will the need for "event study" analysis at the class certification state have any real or practical effect in class action securities litigation?
- Is there anything more than irony in the proposition that, because of the limitations or failures of the efficient market hypothesis, a class plaintiff seeking certification must show "price impact" through an event study, when an assumption of most event study methodologies is the presence of an efficient market?
- What happens in pending cases where classes have been certified?
- Securities claims not dependent on FOM.
- Pure omissions cases - "Affiliated Ute" presumption
- 1933 Act cases
- Individual-plaintiff claims by large investors - e.g., pension funds
- SEC enforcement actions
- Potential legislative responses
- Implementing the Supreme Court's Halliburton II decision
(Adapt to nature of decision. For example:)
Who Should Attend:
- Securities Attorneys- General Counsel
- Senior Management
- Business Lawyers
Howard Privette is a partner in the global Securities Litigation and Enforcement practice of Paul Hastings LLP. Mr. Privette represents …
Jeff Hammel is a partner in the New York office of Latham & Watkins. He is a member of the Litigation …
Milo Petranovich has extensive experience in complex civil and corporate litigation, including substantial trial experience in cases involving securities fraud, antitrust …
Mr. Sinaiko is a partner in the litigation department at Kramer Levin Naftalis & Frankel LLP in New York City. …
Todd G. Cosenza is a partner in the Litigation Department of Willkie Farr & Gallagher LLP in New York specializing …
Michael Miarmi is a partner at Lieff, Cabraser, Heimann & Bernstein, LLP, residing in the firm’s New York office. He …
Course Level:
Intermediate
Advance Preparation:
Print and review course materials
Method of Presentation:
On-demand Webcast (CLE)
Prerequisite:
NONE
Course Code:
144686
NASBA Field of Study:
Specialized Knowledge and Applications
NY Category of CLE Credit:
Skills
Total Credits:
2.0 CLE
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SPEAKERS' FIRMS:
About Paul Hastings LLP
Paul Hastings LLP is a leading international law firm that provides innovative legal solutions to many of the world's top financial institutions and Fortune Global 500 companies. With a strong presence throughout Asia, Europe, Latin America, and the U.S., the firm has the global reach and extensive capabilities to provide personalized service wherever its clients’ needs take it. Paul Hastings' commitment to superior client service begins with its legal professionals, who form customized service teams, such as the Securities Litigation and Enforcement practice group, that integrate with the legal needs, business objectives and strategies of the firm’s clients. Among the firm’s recent accolades, it continues to ascend the ranks of the Financial Times’ U.S. Innovative Lawyers report, placing second among the top 40 most innovative law firms that “have brought original thinking and practices to business issues in the U.S.”
Website: https://www.paulhastings.com/
About Latham & Watkins LLP
Latham & Watkins LLP is a leading global law firm dedicated to working with clients to help them achieve their business goals and overcome legal challenges anywhere in the world. The firm has earned considerable market recognition based on a record of landmark matters and a unified culture of innovation and collaboration. From a global platform of offices covering the world’s major financial, business and regulatory centers, the firm’s lawyers help clients succeed. For more information, visit www.lw.com.
Website: https://www.lw.com/
About Lane Powell PC
A multi-specialty law firm, Lane Powell has helped emerging and established businesses navigate the Pacific Northwest and beyond for more than 135 years. Respected clients — from individuals to small businesses to Fortune 500 companies — turn to us for trusted legal counsel. In fact, Fortune 500 companies including Home Depot, Nike, Tesoro, Eli Lilly, Wells Fargo, Aetna and Nordstrom have named Lane Powell as one of the prestigious "Go-To Law Firms of Top U.S. Companies®" by Corporate Counsel magazine. The Firm was also named “Washington Firm of the Year” for the second consecutive year by Benchmark Litigation in 2014. In addition, Lane Powell has been described as “an excellent, full-service firm with bright people and lots of depth” by Chambers USA: America’s Leading Lawyers for Business. Furthermore, Lane Powell was recently named one of "Washington's Best Workplaces” by Puget Sound Business Journal and one of the “100 Best Companies to Work For in Oregon” byOregon Business magazine.
With approximately 200 attorneys in offices located throughout Washington, Oregon, Alaska and London, England, we're thoroughly versed in the industries of the Pacific Northwest as well as the legal issues that face our clients on a regional, national and international level.
Website: https://www.lanepowell.com/
About Kramer Levin Naftalis & Frankel LLP
High-stakes, high-profile litigation is a major focus of Kramer Levin Naftalis & Frankel. Our lawyers defend issuers and their officers and directors in securities class action and derivative litigation; public auditing firms accused of securities law violations and accounting malpractice; professionals charged with securities and RICO violations; corporations, their officers and directors, and investment banking firms in litigation arising out of corporate control and affiliated transactions; broker-dealers, mutual funds and investment advisors accused of trading and regulatory improprieties; and securities firms and professionals in customer disputes and employment arbitrations. Additionally, our cases involve every substantive aspect of white collar criminal and regulatory work affecting U.S. and foreign business entities and individuals. Our Litigation department has received the highest rankings, awards and honors for its work including from Best Lawyers, Chambers USA/ Global, Legal 500, Lawdragon 500, American College of Trial Lawyers, The National Law Journal and Benchmark Litigation.
Website: https://www.kramerlevin.com/
About Willkie Farr & Gallagher LLP
Willkie Farr & Gallagher LLP is a leading international law firm that provides strategic legal representation and counsel to market-leading public and private companies worldwide. Founded in 1888, the firm has approximately 600 lawyers based in key financial centers: New York, Washington, Paris, London, Milan, Rome, Frankfurt and Brussels. Willkie’s top-tier Securities Litigation and Enforcement Practice is particularly renowned for its strength in the area of financial reporting and related proceedings. The firm has handled some of the highest-profile audit committee investigations into fraudulent financial reporting, and most recently is defending numerous SEC, Department of Justice, and congressional proceedings arising out of the financial crisis.
Website: https://www.willkie.com/
About Lieff Cabraser Heimann & Bernstein, LLP
Described as “one of the nation’s premier plaintiffs’ firms” by The American Lawyer, Lieff Cabraser Heimann & Bernstein, LLP has participated in many of the most important individual and class action lawsuits in the U.S. over the past four decades, helping recover over $91 billion in verdicts and settlements for our clients. We are committed to advancing the rights of investors and promoting corporate responsibility. With over 60 attorneys in offices in San Francisco, New York, and Nashville, we represent investors across America in class, direct (opt-out), derivative, and other actions. Our clients include public pension funds, union funds, and non-public institutional investors such as mutual funds, as well as high-wealth and individual investors.
Website: https://www.lieffcabraser.com/