Fraud on the market - part 2

8/10/2019 Fraud on the market - part 2

1/20

Prof. George W. ConkGuest lecturer: Wallace Showman, Esq.

[email protected]

Room 409

212-636-7446

Adjunct Professor of Law &

Senior Fellow

Stein Center for Law & Ethics

Remedies

Fall 2014

10b-5 Securities Fraud ActionsFraud on the market after Halliburton v. Erica P.

John Fund (204)

Fraud on the market - 10 (b)(5) actions 1
mailto:[email protected]:[email protected]


2/20

Fraud on the Market

the fraud-on-the-market theory, which

holds that the market price of shares

traded on well-developed markets reflects

all publicly available information, and,

hence, any material misrepresentations.



3/20

Fraud on the market - Basic

[I]n an open and developed securities

market, the price of a company's stock

is determined by the available material

information regarding the company andits business. . . . Misleading statements

will therefore defraud purchasers of

stock even if the purchasers do not

directly rely on the misstatements. . .



4/20

Two constituent presumptions

(1) that the public and materialmisrepresentation impacted the price ofthe security because it was traded in an

efficient market; and

(2) that the plaintiff purchased thesecurity in reliance on his belief that the

market's valuation of the security wouldnot reflect fraudulently disseminatedmisinformation.



5/20

To invoke the presumption

Plaintiff must show:

Publicity

Materiality

Market efficiency

Market timing



6/20

LangevoortJudgment Day

What Basic does, as much as

anything, is create an entitlement to

an undistorted stock price via, as Ihave described it, an act of juristic

grace.

This is no different from what

happens in the common law of fraud.Fraud on the market - 10 (b)(5) actions 6


7/20

Three Presumptions - Goldberg &

Zipursky 1) Legally cognizable injury is shown by

purchaseof securities at a market pricedistortedby the defendantsmisrepresentations

2) Distortion is presumed if amisrepresentation is material,disseminated to the public, and securities

are sold on an efficient market 3) Reliance is presumed but may be

rebutted



8/20

Rebuttable Presumption of Reliance

on the Integrity of the Market Price

Requiring a plaintiff to show a speculativestate of facts, i.e., how he would haveacted if omitted material information had

been disclosed, ... or if themisrepresentation had not been made...would place an unnecessarily unrealisticevidentiary burden on the Rule 10b-5

plaintiff who has traded on an impersonalmarket.



9/20

Rebutting the presumption

Any showing that severs the linkbetween the alleged

misrepresentation and either the

price received (or paid) by the

plaintiff, or his decision to trade at a

fair market price, will be sufficient to

rebut the presumption of reliance.



10/20

Markets are imperfect

n28 By accepting this rebuttablepresumption, we do not intend

conclusively to adopt any particular

theory of how quickly and completely

publicly available information is

reflected in market price.



11/20


12/20

Halliburton Co. V. Erica P. John Fund

Cert. granted 11/15/ 2013

Questions presented 1. Whether this Court should overrule

or substantially modify the holding of

Basic Inc. v. Levinson to the extent

that it recognizes a presumption of

classwide reliance derived from the

fraud-on-the-market theory.



13/20

Halliburton Co. V. Erica P. John Fund

Cert. granted 11/15/ 2013

Questions presented 2. Whether, in a case where the

plaintiff invokes the presumption of

reliance to seek class certification,the defendant may rebut thepresumption and prevent classcertification by introducing evidence

that the alleged misrepresentationsdid not distort the market price

of its stock.Fraud on the market - 10 (b)(5) actions 13


14/20

13-CV-23878-UU, 2014 WL

4814352 (S.D. Fla. Sept. 29,2014)

Aranaz v. Catalyst Pharm.

Partners Inc.,



15/20

Rule 23 Class Actions - Fed. R. Civ. Pro.

(a) Prerequisites. One or more members of a class

may sue or be sued as representative parties onbehalf of all members only if:

(1) the class is so numerousthat joinder of allmembers is impracticable;

(2) there are questions of law or fact commonto the class;

(3) the claims or defenses of therepresentative parties are typicalof the claimsor defenses of the class; and

(4) the representative parties will fairly andadequately protect the interests of the class.



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Aranaz v. Catalyst Pharma (2014)

What was the misrepresentation?

What was the alleged price impact?

How did Catalyst respond?

Who is properly in the class?



17/20

Aranaz v. CatalystPlaintiffs proposed class

All persons or entities that purchased or

otherwise acquired CatalystPharmaceutical Partners Inc. securitiesduring the period from August 27, 2013,

through October 18, 2013, and who didnot sell such securities prior to October18, 2013

What is the judges objection to thisdefinition?



18/20

Entitlement to presumption of reliance

(1) the misrepresentation was material;

(2) the misrepresentation was publiclyknown

(3) the plaintiff traded the security after

the misrepresentation was made publicbut before the truth was revealed

(4) the security traded in an efficientmarket.

What is the truth on the marketdefense? To what is it relevant?



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Price impact

What is it and what is its relevance to

class certification?

Who has the burden of rebuttal?

Is it a question for the jury? Or the

judge?



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Superiority

Under Rule 23(b)(3), a movant must show

that a class action is superior to otheravailable methods for fairly and efficientlyadjudicating the controversy.

The focus of this analysis is on therelative advantages of a class action suitover whatever other forms of litigation

might be realistically available to theplaintiffs.

Why is a class action a superior remedy?


Fraud on the market - part 2

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