Abstract

http://ssrn.com/abstract=2371304
 


 



Rethinking Basic


Lucian A. Bebchuk


Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Allen Ferrell


Harvard Law School; European Corporate Governance Institute (ECGI)

April 2014

The Business Lawyer, Vol. 69, No. 3, pp. 671-697, May 2014
Harvard Law School John M. Olin Center Discussion Paper No. 764

Abstract:     
In the Halliburton case, the United States Supreme Court is expected to reconsider the Basic ruling that, twenty-five years ago, adopted the fraud-on-the-market theory, which has since facilitated securities class action litigation. In this paper we seek to contribute to this reconsideration. We provide a conceptual and economic framework for a reexamination of the Basic rule, taking into account and relating our analysis to the Justices’ questions at the Halliburton oral argument.

We show that, in contrast to claims made by the parties, the Justices need not assess the validity or scientific standing of the efficient market hypothesis; they need not, as it were, decide whether they find the view of Eugene Fama or Robert Shiller more persuasive. Class-wide reliance, we explain, should depend not on the “efficiency” of the market for the company’s security but on the existence of fraudulent distortion of the market price. Indeed, based on our review of the large body of research on market efficiency in financial economics, we show that, even fully accepting the views and evidence of market efficiency critics such as Professor Shiller, it is possible for market prices to be distorted by fraudulent disclosures. Conversely, even fully accepting the views and evidence of market efficiency supporters such as Professor Fama, it is possible for market prices not to be distorted by fraudulent disclosures. In short, even assuming the Court was somehow in a position to adjudicate the academic debate on market efficiency, market efficiency should not be the focus for determining class-wide reliance.

We put forward an alternative approach that is focused on the existence of fraudulent distortion. We further discuss the analytical tools that would enable the federal courts to implement our alternative approach, as well as the allocation of the burden of proof, and we explain that a determination of fraudulent distortion would not usurp the merits issues of materiality and loss causation. Questions asked by some of the Justices at the oral argument suggest that such an alternative approach might appeal to the Court.

The proposed approach avoids reliance on the efficient market hypothesis and thereby avoids the problems with current judicial practice identified by petitioners (as well as those stressed by Justice White in his Basic opinion). It provides a coherent and implementable framework for identifying class-wide reliance in appropriate circumstances. It also has the virtue of focusing on the economic impact (if any) of the actual misstatements and omissions at issue, rather than general features of the securities markets.

Number of Pages in PDF File: 41

Keywords: Basic, Class Action, Class Certification, Fraud-on-the-Market, Halliburton, Securities Litigation

JEL Classification: G14, K22, K42

working papers series


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Date posted: December 24, 2013 ; Last revised: June 11, 2014

Suggested Citation

Bebchuk, Lucian A. and Ferrell, Allen, Rethinking Basic (April 2014). The Business Lawyer, Vol. 69, No. 3, pp. 671-697, May 2014; Harvard Law School John M. Olin Center Discussion Paper No. 764. Available at SSRN: http://ssrn.com/abstract=2371304 or http://dx.doi.org/10.2139/ssrn.2371304

Contact Information

Lucian A. Bebchuk (Contact Author)
Harvard Law School ( email )
Cambridge, MA 02138
United States
617-495-3138 (Phone)
617-812-0554 (Fax)
HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)
Allen Ferrell
Harvard Law School ( email )
Griswold 303 1525 Massachusetts Avenue
Cambridge, MA 02138
United States
(617) 495-8961 (Phone)
(617) 495-1110 (Fax)
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
HOME PAGE: http://www.ecgi.org
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