Effect on rule 10b-5 damages of the 1995 private securities litigation reform act: A forward-looking assessment

Business Lawyer

Volumn 51, Issue 4, 1996, Pages 1203-1218

  Dickey, Jonathan C ^a   Mayer, Marcia Kramer ^a  

^a National Economic Research Associates Inc ^*

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EID: 21444456515     PISSN: 00076899     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Conference Paper

References (38)

1. Pub. L. No. 104-67, 109 Stat. 737 (1995)
2. (to be codified in scattered sections of 15 U. S. C.). The Act became law on December 22, 1995 when Congress overrode the President's veto.
3. See 141 Cong. Rec. S19, 180 (daily ed. Dec. 22, 1995);
4. Cong. Rec. H15, 214 (daily ed. Dec. 20, 1995) (President Clinton's veto message).
5. 15 U. S. C. § 78 (j) (b) (1994).
6. See generally Mark C. Dickinson, Damages For Insider Trading Viotations in an Impersonal Market Context, 7 J. CORP. L. 97 (1981);
7. See Robert B. Thompson, The Measure of Recovery Under Rule 10b-5:A Restitution Alternative to Tort Damages, 37 Vand. L. Rev. 349, 357 (1984);
8. Kenneth R. Cone & James E. Laurence, How Accurate are Estimates of Aggregate Damages in Securities Fraud Cases?, 49 Bus. LAW. 505, 511 n. 31 (1994).
9. In the Ninth Circuit, damages theory has been addressed infrequently and imperfectly.
10. See, e.g., Blackie v. Barrack, 524 F.2d 891 (9th Cir. 1975)
11. Cert. denied, 429 U. S. 816 (1976). The Ninth Circuit somewhat casually remarked that "from an appropriate mix of various methods, [the court is] confident that the jury will be able to trace a graph delineating the actual value of the stock throughout the class period."
12. Id. at 909 n. 25.
13. For a discussion of in-and-out damages, see, e.g., Green v. Occidental Petroleum Corp., 541 F.2d 1335, 1345-46 (9th Cir. 1976) (Sneed, J., concurring).
14. Bradford Cornell & R. Gregory-Morgan, Using Finance Theory to Measure Damages in Fraudon-the-Market Cases, 37 UCLA L. Rev. 883, 896 (1990).
15. H. R. CONF. Rep. No. 369, 104th Cong., 1st Sess. (1995)
16. Reprinted in 1996 U. S. C. C. A. N 730-748 [hereinafter HOUSE CONFERENCE Report].
17. Id.
18. 15 U. S. C. A. § 78u-4 (e) (West Supp. 1996).
19. 15 U. S. C. A. § 78u-4 (e) (West Supp. 1996).
20. Id.
21. Id. The operative language in § 21D (e)
22. States that damages "shall not exceed" the difference between the purchase price and the mean trading price. This language clearly is a "cap" on damages, but not necessarily the measure of damages. In other words, § 21D (e) does not say that damages "shall be equal to" the difference between the purchase price and the mean trading price. Defendants will have powerful arguments that if Congress meant to expand damages, it clearly would have said so. The Conference Report on the legislation makes clear that, if anything, Congress intended to limit, not expand, damages. The Conference Report states, for example, that calculating damages based on the date a curative disclosure is made "may end up substantially overestimating plaintiffs damages," and the Conference Committee "intends to rectify" this uncertainty. HOUSE Conference REPORT, supra note 7, at 42
23. Reprinted in 1996 U. S. C. C. A. N. 730.
24. 15 U. S. C. § 77k (e) (1994).
25. See generally Cornell & Morgan, supra note 6;
26. Baruch Lev & Meiring de Villiers, Stock Price Crashes and 10b-5 Damages, 47 Stan. L. Rev. 1 (1994).
27. Many shareholder class actions in recent years have been filed within days of an adverse disclosure, but not all are. Also, many suits are brought well after adverse disclosures are made, and allege that such disclosures were themselves misleading or were only "partial" curative disclosures. Under the new legislation, plaintiffs' counsel may be slower to file new suits, now that the court will select the lead plaintiff who in turn will select the lead counsel. The 90-day "bounce-back" period may itself cause plaintiffs' counsel to wait longer before bringing suit, in order to determine if class-wide damages will be limited by post-curative disclosure price increases. Since passage of the Reform Act, many new case filings have been in the range of 30 to 60 days following a curative disclosure.
28. M. Bremer & R. J. Sweeney, The Reversal of Large Stock-Price Decreases, 46 J. Fin. 747 (June 1991).
29. D. R. Cox & D. R. Peterson, Stock Returns Following Large One-Day Declines: Evidence on Short-Term Reversals and Longer-Term Performance, 49 J. FIN. 255 (Mar. 1994).
30. Id.
31. 15 U. S. C. A. § 78u-4 (e) (West Supp. 1996).
32. Id.
33. Id.
34. Id.
35. Id. § 78u-4 (e) (l). Section 21D (e) (l) recites that the 90-day period begins "on the date on which the information correcting the misstatement or omission.. is disseminated to the market."
36. Id.
37. See FREDERICK C. Dunbar ET AL., National Economic Research Associates, Recent Trends III: What Explains Settlements in Shareholder Class Actions? (June 1995). Other criteria of the sample are detailed in the report's notes 4 and 7.
38. Id. at 4 n. 4, 6 n. 7.