The Less than Efficient Capital Markets Hypothesis: Requiring More Proof from Plaintiffs in Fraud-on-The-Market Cases

26 Pages Posted: 29 Mar 2004

See all articles by Paul A. Ferrillo

Paul A. Ferrillo

Weil Gotshal & Manges LLP

Frederick C. Dunbar

U.S. Securities and Exchange Commission

David Tabak

National Economic Research Associates, Inc. (NERA)

Abstract

In 1988, the United States Supreme Court in Basic Inc. v. Levinson created a "rebuttable" presumption of reliance for all members of a class alleging misstatements or omissions of material fact in their purchase or sale of securities of an issuer. The Basic Court founded its decision in reliance upon the fraud on the market theory, which is premised upon the efficient markets hypothesis (EMH). We discuss developments in the study of the EMH since 1988 and argue that the evidence against the universality of the EMH should mean that tests of whether it holds for a particular security should be undertaken before it is invoked. We discuss the tests often used in prior cases and argue that they are not as useful as an alternative test discussed that more directly examines whether news affects a security's price.

Keywords: Market efficiency, securities fraud

JEL Classification: K22, K41, G14

Suggested Citation

Ferrillo, Paul A. and Dunbar, Frederick C. and Tabak, David, The Less than Efficient Capital Markets Hypothesis: Requiring More Proof from Plaintiffs in Fraud-on-The-Market Cases. St. Johns Law Review, Vol. 78, pp. 81- 129, Winter 2004. Available at SSRN: https://ssrn.com/abstract=521342

Paul A. Ferrillo

Weil Gotshal & Manges LLP ( email )

767 Fifth Avenue
New York, NY 10153
United States

Frederick C. Dunbar

U.S. Securities and Exchange Commission ( email )

100 F Street, NE
Washington, DC 20549
United States
202-551-3615 (Phone)

David Tabak (Contact Author)

National Economic Research Associates, Inc. (NERA) ( email )

1166 Avenue of the Americas, 24th Floor
New York, NY 10036
United States
212-345-2176 (Phone)
212-345-4664 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
693
rank
35,484
Abstract Views
3,423
PlumX Metrics
!

Under construction: SSRN citations while be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information