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From Securities Regulation Daily, May 8, 2015

Role playing: Basic’s “modest premise” via the lens of Halliburton II

By Mark S. Nelson, J.D.

When the Supreme Court handed down its Halliburton II ruling nearly a year ago, many observers saw Chief Justice Robert’s majority opinion (backed by Justice Ginsburg’s brief concurrence on discovery, the defendant’s burden and plaintiffs’ “tenable claims”)  to be a reaffirmation of Basic v. Levinson’s “fairly modest premise” of how markets absorb material information about a stock. Halliburton II’s fast-tracking of the price impact decision to before a class certification decision also was broadly consistent with the Roberts Court’s often procedural bent in its recent securities opinions, and it set the stage for a battle of the experts in these cases.

But Dr. David Tabak, Senior Vice President at National Economic Research Associates, Inc. described to the annual symposium at Loyola University Chicago School of Law’ s Institute for Investor Protection Conference his initial take on a new gambit in which securities plaintiffs and defendants invert their expected approaches to market efficiency, with plaintiffs focusing on how the market for a stock was less efficient, while defendants emphasize the greater efficiency of that market.

Dr. Tabak’s paper appears in a forthcoming issue of the Loyola University Chicago Law Journal, which also includes views by Loyola law professor Charles W. Murdock, Shira A. Scheindlin, Senior U.S. District Court judge for the Southern District of New York, and Thomas Goldstein, Partner, Goldstein & Russell, P.C. and Publisher of SCOTUSblog.

Playing against type. The jumping-off point for Dr. Tabak’s Post-Halliburton II review is a July 2014 analysis, first published in Law 360 and later included in the Loyola symposium, by Mark I. Gross, a partner at plaintiffs’ firm Pomerantz LLP. Gross posited that the Supreme Court’s Halliburton II ruling shied away from a “robust” view of Basic’s presumption in favor of a more “generally efficient” theory of markets. Dr. Tabak said in his paper that Gross’s idea could result in plaintiffs and defendants engaging in a “role reversal” in some cases when the question of price impact arises as a court gets ready to rule on class certification.

Chief Justice Roberts mentioned this general efficiency idea five times in his opinion for the Court (See Slip Op. at pp. 10, 17, and 18). The sole mention of a “robust” view of Basic in Halliburton II came as the Court rejected Halliburton’s argument that new scholarship showed markets to be far more inefficient, such that Basic had inaptly clung to a “binary” (i.e., a “yes or no”) view of market efficiency that was both over- and under-inclusive (See Slip Op. at p. 9).

The chief justice went on to note that the Basic Court opted to avoid the “fray” over academic debates about market efficiency, which even then (1988) were “not new.” The Halliburton II Court then reiterated that Basic did not adopt a “binary” approach to market efficiency. “Indeed, in making the presumption rebuttable, Basic recognized that market efficiency is a matter of degree and accordingly made it a matter of proof,” said Chief Justice Roberts.

Not too inefficient. Dr. Tabak’s paper features a hypothetical he crafted in which a securities plaintiff would have to make a “Goldilocks” type argument that the market for a defendant company’s stock was inefficient, but not too inefficient. According to the hypothetical, there is no stock drop in response to a single corrective disclosure. But the company’s stock later falls after a “reiteration” or “re-analysis” of the prior information. Under this scenario, Dr. Tabak said, a securities plaintiff might wish to argue that the market for that stock was less efficient, while the defendant company would assert the standard version of market efficiency (i.e., the later information did not cause the stock drop).

While not entirely ruling out the possibility of this scenario actually happening, Dr. Tabak suggested a few things that may put the brakes on the implicit plaintiff-defendant roleplaying opportunity in Halliburton II. For one, Dr. Tabak noted that if Gross’s theory is correct, then pre-Halliburton II cases should have already featured role reversals instead of plaintiffs’ waiting for the Supreme Court to clarify Basic. Dr. Tabak also noted that parties in a securities case might not always be able to easily tell if their opponent has switched roles.

Dr. Tabak said other issues can arise in the role reversal scenario. For example, the length of the event window could be tricky to define, and it may become difficult to interpret price movements when information about a company only partially includes corrective disclosures. Yet another worry for parties dealing with a less efficient market is how to apply familiar methods (e.g., constant-dollar and constant-percentage) to calculate inflation at different times.

Attorneys: Mark I. Gross (Pomerantz LLP); Thomas Goldstein (Goldstein & Russell, P.C.)

Companies: National Economic Research Associates, Inc.; SCOTUSblog

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