A loss for the efficient market theory could provide a more practical victory for aggrieved investors. Halliburton and other companies can block group securities-fraud cases by showing a lie didn’t hurt prices, the U.S. Supreme Court ruled unanimously on Monday. That defies assumptions about how share value reflects public information and will curb some stockholder suits. Stronger cases, though, should more effectively deter deceit.
Investors claimed they overpaid for Halliburton stock because the oil field services company lied about asbestos liabilities. To sue en masse, they didn’t have to prove each shareholder relied on the alleged misrepresentations. The market efficiency hypothesis made famous by Nobel Prize winner Eugene Fama suggests such misstatements were factored into the share price, and reliance could therefore be presumed.
The nation’s top tribunal, however, gave Halliburton the chance to rebut that presumption by showing the information had no effect. If the company succeeds, the lawsuit ends.
The decision makes securities class-action lawsuits harder to pursue. The number filed last year jumped 9 per cent over 2012, according to Cornerstone Research. Merck, Pfizer , HSBC and other targets will undoubtedly ask courts to reconsider cases against them.
In the short term, the higher bar could hurt investors. Such claims produce more and bigger settlements and force out more senior executives than do Securities and Exchange Commission investigations, according to research by New York University and University of Michigan. The SEC may be ready to pick up the slack under steely chairwoman Mary Jo White, but the agency’s recent spate of defeats at trial doesn’t inspire confidence.
Almost any big dip in a stock price prompts a lawsuit. Allowing a defendant to prove at the outset there’s no connection between the market value and an alleged lie should prevent wasteful litigation. Solid cases, on the other hand, will survive.
Their numbers may fall initially, as upfront costs and the need for evidence increase. The rise of litigation-finance firms eventually should ease the burden of bankrolling good cases, though, and shareholder attorneys have proved remarkably adept at navigating obstacles to class-action cases. The upshot should be a greater number of well-considered cases that can truly hold wrongdoers accountable.
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