Stephen M. Bainbridge

National Business Law Scholars Conference

June 20, 2014

Thoughts While Waiting (and Waiting) for Halliburton

Part I

The Illegitimacy of Basic

Basically Bad Statutory Construction

• Bare majority of a bare quorum

Birth by judicial fiat

Ignored the basic

question

Overlooked the obvious

analogy

Basically Bad Statutory Construction

• Bare majority of a bare quorum

Birth by judicial fiat

• The “awkward task” of inferring what Congress would have done

Ignored the basic

question

Overlooked the obvious

analogy

Basically Bad Statutory Construction

• Bare majority of a bare quorum

Birth by judicial fiat

• The “awkward task” of inferring what Congress would have done

Ignored the basic

question

• i.e., Section 18(a) of the Securities Exchange Act

Overlooked the obvious

analogy

Part I

The Irrelevance of Economic Analysis to Fraud on the Market

Financial Economics Common Sense

The irrelevance of financial economics

Fraud Price-setting investors react

Price changesOrdinary Investors Affected

No FotM = No Class Action

8

The Henderson/Pritchard Proposal Problems

The continuing irrelevance of financial economics

Invoke fraud on the market if “the challenged disclosure artificially inflated ([or] deflated) the market price of the particular security.”

“The event study Is the best available tool to examine market distortion and show reliance”

“A direct analysis of the market impact of a specific alleged misstatement, rather than examination of general market efficiency, is a more straightforward and reliable test for whether the fraud on the market theory should be invoked”

Serious problems:• Define the event correctly• Setting horizons• Sample selection

Assumes validity of CAPM Perpetuates the battle of

financial experts• De facto mini-trial

Fisch critique:• Event studies ineffective re

statements are in line with market expectations

• Securities fraud more often arises from an effort to cover up an unexpected problem than from making false statements about positive development

Part III

Why the Supreme Court Routinely Gets it Wrong

Supreme Court Securities law Decisions Widely Criticized

Why?

Bainbridge & Gulati, How do Judges Maximize? (The Same Way Everybody Else Does—Boundedly): Rules of Thumb in Securities Fraud Opinions, 51 Emory Law Journal 83 (2002)

Typically lack a broad, consistent understanding of the relevant public policy considerations.

Frequently lack such basics as doctrinal coherence and fidelity to prior opinions.

Lack of expertise among Justices• What incentive do they have to deal with “dog” cases?

Lack of expertise among clerks

11

What not to do

What to do

Implication for Reading SCOTUS Opinions in Securities Law

Courts and commentators read SCOUS opinions as though:• Those decisions were statutes to be interpreted from strict textualist

perspective• One could ascribe intentionality to the justice’s utterances

Do not ascribe intentionality to the courtInterpret Supreme Court decisions in this area narrowly, as reaching only the specific issues before the court• Dictum should be largely ignored