Distortion Other than Price Distortion
Washington University Law Review, Vol. 93, pp. 425-451 (2015)
28 Pages Posted: 14 Sep 2016
Date Written: 2015
Financial disclosure fraud is economically harmful not only because it hurts buyers and sellers of public company stock — though it certainly hurts some — but because it produces considerable economic consequences that are not fully captured by stock price movements. A significant portion of welfare losses caused by financial manipulation is the product of the distortion in capital allocation, and resulting changes in investment, employment, and output, all of which are used to detect, avoid, exploit, or cover up the misrepresentation. Fraud firms’ disclosures are used by other firms in their own investment decisions, spreading welfare losses beyond the fraud firm like fruit rot.
In light of these observations, the Article suggests that fraud-on-the-market litigation should not be understood primarily as a remedy for victimized shareholders, who can often eliminate the cost of fraud ex ante, but as a quasi qui tam cause of action available to purchasers and sellers of (usually equity) securities to police economically-harmful false disclosures by public companies. Even in cases where buyers and sellers of stock are not the class most significantly harmed by disclosure fraud, they nearly always suffer some identifiable losses, thus avoiding difficult evidentiary questions about standing. When viewed through this lens, many of the objections to securities litigation become moot and some of its virtues are revealed.
Keywords: Securities class action litigation, Halliburton
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