Basic at twenty: Rethinking fraud on the market

Wisconsin Law Review

Volumn 2009, Issue 2, 2009, Pages 151-198

  Langevoort, Donald C ^a  

^a GEORGETOWN UNIVERSITY LAW CENTER   (United States)

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EID: 84855899032     PISSN: 0043650X     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Conference Paper

References (126)

1. 485 U.S. 224 (1988). For more on Basic and its facts, see Donald C. Langevoort, Investor Protection and the Perils of Corporate Publicity: Basic Inc. v. Levinson, in THE ICONIC CASES IN CORPORATE LAW 257 (Jonathan R. Macey ed., 2008).
2. See, e.g., Flamm v. Eberstadt, 814 F.2d 1169 (7th Cir. 1987);
3. Greenfield v. Heublein, Inc., 742 F.2d 751, 756-57 (3d Cir. 1984).
4. See JAMES D. COX ET AL., SECURITIES REGULATION: CASES AND MATERIALS 590-92 (5th ed. 2006).
5. The recent "Paulson Committee" report calls for clarifying the definition of materiality to enhance U.S. competitiveness in the global capital markets. See COMMITTEE ON CAPITAL MARKETS REGULATION, INTERIM REPORT OF THE COMMITTEE ON CAPITAL MARKETS REGULATION 80-81 (Nov. 2006), available at http://www.capmktsreg.org/pdfs/11.30Committee-Interim-ReportREV2.pdf.
6. For discussions of the indeterminacy problem, see Joan MacLeod Heminway, Materiality Guidance in the Context of Insider Trading: A Call for Action, 52 AM. U. L. REV. 1131 (2003);
7. Richard C. Sauer, The Erosion of the Materiality Standard in the Enforcement of the Federal Securities Laws, 62 BUS. LAW. 317 (2007).
8. See Barbara Black, Fraud on the Market: A Criticism of Dispensing with Reliance Requirements in Certain Open Market Transactions, 62 N.C. L. REV. 435, 440-41 (1984).
9. The seminal case prior to Basic was the United States Court of Appeals for the Ninth Circuit's decision in Blackie v. Barrack, 524 F.2d 891 (9th Cir. 1975).
10. See, e.g., Brief for the American Corporate Counsel Association as Amicus Curiae in Support of Petitioners, Basic Inc. v. Levinson, 485 U.S. 224 (1988) (No. 86-279);
11. Brief Amici Curiae of Arthur Andersen & Co. et al. in Support of Petitioners, Basic Inc. v. Levinson, 485 U.S. 224 (1988) (No. 86-279).
12. The initial bill introduced by then-Congressman Christopher Cox, H.R. 10, would have undone Basic. See Litigation Reform Proposals Hearing Before the Subcomm. on Telecommunications and Finance of the Comm. on Commerce, 105th Cong. (1995) (statement of Arthur Levitt, Chairman, Securities and Exchange Commission) (opposing that provision, which was later deleted), available at www.sec.gov/testimony/1995/spch025.txt;
13. JOEL SELIGMAN, THE TRANSFORMATION OF WALL STREET 664-65 (3d ed. 2003).
14. Private correspondence between Justice Blackmun and Justice Brennan while the Basic opinion was being drafted sheds some light on what they were thinking; Basic' s confusion is in part a product of trying to join the two justices' conflicting ideas while trying to hold onto the vote of Justice Stevens, who worried about issues of loss causation and damages. See Memoranda from Justice Brennan to Justice Blackmun, Jan. 14, 15, 22, 27, 1988 (on file with author).
15. This correspondence is excerpted in STEPHEN J. CHOI & A.C. PRITCHARD, SECURITIES REGULATION: CASES AND ANALYSIS 324-25 (2005)
16. and I am grateful to Professor Pritchard for bringing it to my attention. For a critique of Basic that invokes this correspondence, see A.C. Pritchard, Stoneridge Investment Partners v. Scientific Atlanta: The Political Economy of Securities Class Action Reform, 2008 CATO S. CT. REV. 217, 221-22.
17. See, e.g., Larry E. Ribstein, Fraud on a Noisy Market, 10 LEWIS & CLARK L. REV. 137, 153 (2006).
18. Joel Seligman, The Merits Do Matter: A Comment on Professor Grundfest's "Disimplifying Private Rights of Action Under the Federal Securities Laws: The Commission's Authority," 108 HARV. L. REV. 438, 444-49 (1994).
19. See Stephen J. Choi, The Evidence on Securities Class Actions, 57 VAND. L. REV. 1465 (2004).
20. Of course some of this is presumably due to the PSLRA. Marilyn F. Johnson et al., Do the Merits Matter More? The Impact of the Private Securities Litigation Reform Act, 23 J. L. ECON. & ORG. 627 (2007).
21. See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007).
22. For a very perceptive but infrequently cited article saying this about Basic, see Dennis S. Karjala, A Coherent Approach to Misleading Corporate Announcements, Fraud, and Rule 10b-5, 52 ALB. L. REV. 957, 967 (1989).
23. See, e.g., Jonathan R. Macey & Geoffrey P. Miller, Good Finance, Bad Economics: An Analysis of the Fraud-on-the-Market-Theory, 42 STAN. L. REV. 1059, 1069-70 (1990) (explaining that the lie was an effort to protect Combustion's investment in identifying Basic as a good acquisition candidate). This debate in the law reviews is about whether and when lying to investors should be permitted because some lies, at least, can increase or protect shareholder value.
24. See Ian Ayres, Back to Basics: Regulating How Corporations Speak to the Market, 77 Va. L. REV. 945 (1991);
25. Marcel Kahan, Games, Lies, and Securities Fraud, 67 N.Y.U. L. REV. 750 (1992).
26. Levinson v. Basic Inc., No. C79-1220, 1984 WL 1152 (N.D. Ohio Aug. 3, 1984).
27. Levinson v. Basic Inc., 786 F.2d 741 (6th Cir. 1986).
28. See A.C. Pritchard, Justice Lewis F. Powell, Jr. and the Counterrevolution in the Federal Securities Laws, 52 DUKE L.J. 841 (2003);
29. E. Thomas Sullivan & Robert B. Thompson, The Supreme Court and Private Law: The Vanishing Importance of Securities and Antitrust, 53 EMORY L.J. 1571, 1573 (2004) (noting that Justice Powell was influential in determining which securities-law cases were taken and how they came out). Powell voted to grant certiorari in Basic, though only on the materiality issue. See Pritchard, supra, at 897 n.343.
30. See Brief for the Securities and Exchange Commission as Amicus Curiae, Basic Inc. v. Levinson, 485 U.S. 224 (1988) (No. 86-279).
31. Basic Inc. v. Levinson, 485 U.S. 224, 243 (1988).
32. Correspondence between the two justices shows that Justice Brennan wanted a conception of the "price" theory of reliance that would allow recovery simply because the trader had to accept a price distorted by fraud. See Memoranda from Justice Brennan to Justice Blackmun, supra note 9. Justice Blackmun, by contrast, was insistent on some kind of reliance on market integrity. Id
33. See Donald C. Langevoort, Theories, Assumptions, and Securities Regulation: Market Efficiency Revisited, 140 U. PA. L. REV. 851, 892 (1992).
34. One recent case has so noted. See In re Salomon Analyst Metromedia Litig., 544 F.3d 474, 482-84 (2d Cir. 2008).
35. See, e.g., Lynn A. Stout, Are Stock Markets Costly Casinos? Disagreement, Market Failure, and Securities Regulation, 81 VA. L. REV. 611 (1995).
36. See Langevoort, supra note 28, at 895-96. Other articles on Basic have also noted this muddle. See, e.g., Barbara Black, The Strange Case of Fraud on the Market: A Label in Search of a Theory, 52 ALB. L. REV. 923 (1988);
37. Nicholas L. Georgakopoulos, Fraud, Markets, and Fraud-on-the-Market: The Tortured Transition of Justifiable Reliance from Deceit to Securities Fraud, 49 U. MIAMI L. REV. 671 (1995).
38. See Basic, 485 U.S. at 245-46 (citing H.R. REP. No. 73-1383, at 11 (1934)). For a recent endorsement of this approach to fraud-on-the-market litigation, see Zohar Goshen & Gideon Parchomovsky, The Essential Role of Securities Regulation, 55 DUKE L.J. 711, 771-80 (2006).
39. See RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 111 (7th ed. 2007). The point, of course, is that transactional efficiency is enhanced by creating a right to rely on the factual representations of the maker in the absence of affirmative reasons, rather than force the other party to investigate its accuracy.
40. Jonathan R. Macey et al., Lessons From Financial Economics: Materiality, Reliance and Extending the Reach of Basic v. Levinson, 77 VA. L. REV. 1017, 1021 (1991).
41. This provoked a number of law-and-economics-oriented scholars who considered Justice White's dissent to be a misunderstanding of (and perhaps an attack on) modern finance theory. See, e.g., William J. Carney, The Limits of the Fraud on the Market Doctrine, 44 BUS. LAW. 1259, 1277-78 (1989);
42. Daniel R. Fischel, Efficient Capital Markets, the Crash, and the Fraud on the Market Theory, 74 CORNELL L. REV. 907 (1989).
43. See Daniel R. Fischel, Use of Modern Finance Theory in Securities Fraud Cases Involving Actively Traded Securities, 38 BUS. LAW. 1 (1982). Professor Fischel later applauded the result in Basic, even though he did not necessarily concur in the Court's reasoning. See Fischel, supra note 48, at 917-18, 922.
44. Easterbrook was a principal author of the Department of Justice's brief in Chiarella v. United States, 445 U.S. 222 (1980), and the creator of what later came to be known as the misappropriation theory for insider-trading liability. See Douglas G. Baird & M. Todd Henderson, Other People's Money, 60 STAN. L. REV. 1309, 1335 n. 114 (2008).
45. Paul G. Mahoney, Precaution Costs and the Law of Fraud in Impersonal Markets, 78 VA. L. REV. 623, 624-25 (1992).
46. Roberta Romano, The Shareholder Suit: Litigation Without Foundation?, 7 J.L. ECON. & ORG. 55, 56 (1991). Other critical perspectives quickly came as well.
47. E.g., Janet Cooper Alexander, Do the Merits Matter? A Study of Settlements in Securities Class Actions, 43 STAN. L. REV. 497, 499-501 (1991);
48. Jennifer H. Arlen & William J. Carney, Vicarious Liability for Fraud on Securities Markets: Theory and Evidence, 1992 U. ILL. L. REV. 691;
49. Joseph A. Grundfest, Disimplying Private Rights of Action Under the Federal Securities Laws: The Commission's Authority, 107 HARV. L. REV. 961, 967-68 (1994);
50. A.C. Pritchard, Markets as Monitors: A Proposal to Replace Class Actions with Exchanges as Securities Fraud Enforcers, 85 VA. L. REV. 925, 928 (1999).
51. see also Eckstein v. Balcor Film Investors, 8 F.3d 1121, 1129 (7th Cir. 1993) (demonstrating that Judge Easterbrook reads Basic as if it does just that).
52. Frank H. Easterbrook & Daniel R. Fischel, Optimal Damages in Securities Cases, 52 U. CHI. L. Rev. 611, 651-52 (1985).
53. See Janet Cooper Alexander, Rethinking Damages in Securities Class Actions, 48 STAN. L. REV. 1487, 1496-99 (1996); (Pubitemid 126407557)
54. John C. Coffee, Jr., Reforming the Securities Class Action: An Essay on Deterrence and Its Implementation, 106 COLUM. L. REV. 1534, 1535-37 (2006);
55. Donald C. Langevoort, Capping Damages for Open-Market Securities Fraud, 38 ARIZ. L. REV. 639, 648-50 (1996).
56. Professor Fox points out that the kind of reliance described in Basic is so far removed from traditional "fraud in the inducement" that it does not properly deserve the label "transaction causation." Merritt B. Fox, Demystifying Causation in Fraud-on-the-Market Actions, 60 BUS. LAW. 507, 516 (2005);
57. see also Merritt B. Fox, Why Civil Liability for Disclosure Violations When Issuers Do Not Trade?, 2009 WIS. L. REV. 297. Once the Court kept to the reliance approach, it sowed seeds of further confusion, including inviting loss causation. See infra Part III.
58. Donald C. Langevoort, On Leaving Corporate Executives "Naked, Homeless and Without Wheels": Corporate Fraud, Equitable Remedies, and the Debate over Entity Versus Individual Liability, 42 WAKE FOREST L. REV. 627, 630 (2007).
59. see also Randall S. Thomas & James F. Cotter, Measuring Securities Market Efficiency in the Regulatory Setting, 63 LAW & CONTEMP. PROBS. 105 (2000) (questioning measures used in SEC standard setting).
60. For useful discussions of the inconsistencies in the way district courts applied the efficiency standards in the years after Basic, see Paul A. Ferrillo et al., The "Less Than" Efficient Capital Markets Hypothesis: Requiring More Proof from Plaintiffs in Fraud-on-the-Market Cases, 78 ST. JOHN'S L. REV. 81, 83 (2004);
61. Geoffrey Christopher Rapp, Proving Markets Inefficient: The Variability of Federal Court Decisions on Market Efficiency in Cammer v. Bloom and Its Progeny, 10 U. MIAMI BUS. L. REV. 303 (2002).
62. One of the earliest empirical studies to address the definition of efficiency in fraud-on-the-market cases, still often cited, concluded that only two of the factors (number of analysts and volume of trading) are particularly probative. See Brad M. Barber et al., The Fraud-on-the-Market Theory and the Indicators of Common Stocks' Efficiency, 19 J. CORP. L. 285, 290 (1994);
63. see also Victor L. Bernard et al., Challenges to the Efficient Market Hypothesis: Limits to the Applicability of the Fraud-on-the-Market Theory, 73 NEB. L. REV. 781 (1994).
64. 432 F.3d 1 (1st Cir. 2005). At roughly the same time, a number of other circuit courts similarly came to the conclusion that there should be rigorous district-court scrutiny of efficiency claims and rigorous appellate-court review of class certifications where efficiency is in question. See, e.g., Unger v. Amedisys Inc., 401 F.3d 316 (5th Cir. 2005); Gariety v. Grant Thornton, 368 F.3d 356 (4th Cir. 2004).
65. See generally Douglas C. Conroy & Johanna S. Wilson, Class Actions - Evening the Playing Field: Stress-Testing the Efficient Market Hypothesis, 4 CORP. ACCOUNTABILITY REP. 26 (2006).
66. In re PolyMedica Sec. Litig., 224 F.R.D. 27, 43 (D. Mass. 2004).
67. Poly Medica, 432 F.3d at 13-14, 17-18.
68. See Poly Medica, 432 F.3d. at 14-17.
69. See A. Craig MacKinlay, Event Studies in Economics and Finance, 35 J. ECON. LIT. 13, 25 (1997).
70. The key case was Ross v. Bank South, 885 F.2d 723 (11th Cir. 1989), decided shortly after Basic. The court did not overrule Shores, but did limit it severely. In a concurring opinion emphasizing the reasonableness point, Judge Tjoflat said flatly that Shores was wrongly decided. Id. at 739; see also In re Initial Pub. Offering Sec. Litig., 471 F.3d 24 (2d Cir. 2006) (determining that IPO market inefficiency was one reason not to certify);
71. Joseph v. Wiles, 223 F.3d 1155 (10th Cir. 2000);
72. Eckstein v. Balcor Film Investors, 8 F.3d 1121 (7th Cir. 1993).
73. See Margaret V. Sachs, The Relevance of Tort Law Doctrines to Rule 10b-5: Should Careless Plaintiffs Be Denied Recovery?, 71 CORNELL L. REV. 96 (1985).
74. In re Poly Medica Sec. Litig., 432 F.3d 1, 16 (1st Cir. 2005).
75. For a very thoughtful set of suggestions for reconciling the fraud-on-the-market theory with justifiable reliance, see Roberta S. Karmel, When Should Investor Reliance Be Presumed in Securities Class Actions?, 63 BUS. LAW. 25 (2007).
76. In re PolyMedica Corp. Sec. Litig., 453 F. Supp. 2d 260, 277-78 (D. Mass. 2006) ("What this suggests is that the same forces (i.e., reaction to news) that were affecting PolyMedica's stock price on Day D were also affecting its price on Day D+1⋯ [the First Circuit's decision, however] requires that the reaction to news be fully completed on the same trading day as its release - and perhaps even within hours or minutes."). Judge Young took over the case from Judge Keeton, and seemed uncomfortable with the implications of the court of appeals's decision. Id. at 272 n.10 (suggesting that the future of securities-fraud class-action lawsuits "may be in jeopardy"). Ironically, he may have been too strict in his reading. In the companion case to PolyMedica, Xcelera, the First Circuit seemed willing to accept a two-five day speed of adjustment because the district judge determined, by reference to the Cammer factors, that there was sufficient evidence of immediate reaction to the news, even though it took a while longer for abnormal returns to cease.
77. See In re Xcelera.com Sec. Litig., 430 F.3d 503, 513 n.11 (1st Cir. 2005). I am grateful to Elliott Weiss for pointing this out. This inconsistency underscores the point about the law failing to explain itself at all coherently.
78. See Poly Medica, 453 F. Supp. 2d at 268-70, 277-78.
79. 432 F.3d 261 (3d Cir. 2005). For a critique of Merck, see Stefan J. Padfield, Who Should Do the Math? Materiality Issues in Disclosures that Require Investors to Calculate the Bottom Line, 34 PEPPERDINE L. REV. 927 (2007).
80. Id. at 269 (quoting Oran v. Stafford, 226 F.3d 275, 282 (3d Cir. 2000)). The court also said, "An efficient market for good news is an efficient market for bad news," paying no attention to evidence that there may be precisely such an asymmetry. Id. at 271. See generally Harrison Hong et al., Bad News Travels Slowly: Size, Analyst Coverage, and the Profitability of Momentum Strategies, 55 J. FIN. 265 (2000).
81. For thorough studies of this question, see Fredrick C. Dunbar & Dana Heller, Fraud on the Market Meets Behavioral Finance, 31 DEL. J. CORP. L. 455, 509-10 (2006);
82. Ferrillo et al., supra note 74, at 84;
83. William O. Fisher, Does the Efficient Market Theory Help Us Do Justice in a Time of Madness?, 54 EMORY L.J. 843 (2005);
84. see also Alon Brav & J.B. Heaton, Market Indeterminacy, 28 J. CORP. L. 517, 535-36 (2003);
85. For two very recent surveys summarizing much of this research, see Malcolm Baker & Jeffrey Wurgler, Investor Sentiment and the Stock Market, 21 J. ECON. PERSP. 129 (2007);
86. Harrison Hong & Jeremy C. Stein, Disagreement and the Stock Market, 21 J. ECON. PERSP. 109 (2007).
87. On the degree of doubt and disagreement about efficiency among finance and economics professors, see Ivo Welch, Views of Financial Economists on the Equity Premium and on Professional Controversies, 73 J. BUS. 501 (2000);
88. James S. Doran et al., Market Efficiency and Its Importance to Individual Investors - Surveying the Experts (Aug. 10, 2007) (unpublished Ph.D. dissertation, Florida State University), available at http://ssrn.com/abstract= 1006237 (noting that not only are economists in disagreement about the degree of efficiency, but more strongly, do not act as if the market is efficient in their own investment activities).
89. See Donald C. Langevoort, Taming the Animal Spirits of the Stock Markets: A Behavioral Approach to Securities Regulation, 97 NW. U. L. REV. 135 (2002); Langevoort, supra note 28.
90. Strangely, PolyMedica used an article by Professor Stout that is mainly about market inefficiency as one of its main sources on market efficiency. See Lynn A. Stout, The Mechanisms of Market Inefficiency: An Introduction to the New Finance, 28 J. CORP. L. 635, 636-39 (2003).
91. See Burton G. Malkiel, The Efficient Market Hypothesis and Its Critics, 17 J. ECON. PERSP. 59 (2003). Professor Fischel emphasized this in arguing that doubts about efficiency should not undermine the Basic presumption. See Fischel, supra note 52, at 9-12.
92. See, e.g., Bradford Cornell & James C. Rutten, Market Efficiency, Crashes, and Securities Litigation, 81 TUL. L. REV. 443, 450 (2006).
93. See David Hirshleifer & Siew Hong Teoh, Limited Attention, Information Disclosure, and Financial Reporting, 36 J. ACCT'G & ECON. 337 (2003).
94. See, e.g., Bradford Cornell, Is the Response of Analysts to Information Consistent with Fundamental Valuation? The Case of Intel, 30 FIN. MGT. 113, 131-35 (2001);
95. Gur Huberman & Tomer Regev, Contagious Speculation and a Cure for Cancer: A Nonevent that Made Stock Prices Soar, 56 J. FIN. 387 (2001). Enron is often put forward as an example of delayed reaction to palpable warning signs inconsistent with market efficiency.
96. See Jeffrey N. Gordon, What Enron Means for the Management and Control of the Modern Business Corporation: Some Initial Reflections, 69 U. CHI. L. REV. 1233 (2002); Langevoort, supra note 107.
97. See Edward Swanson et al., Stealth Disclosures of Accounting Irregularities: Is Silence Golden? (Social Science Research Network Working Paper Series, available at http://papers.ssrn.com/sol3/papers.cfm?abstract-id= 1004299;
98. see also Ron Kasznik & Baruch Lev, To Warn or Not to Warn: Management Disclosures in the Face of an Earnings Surprise, 70 ACCT'G REV. 113 (1995).
99. See In re Poly Medica Sec. Litig., 432 F.3d 1, 10 n.15 (1st Cir. 2005).
100. See Dunbar & Heller, supra note 105, at 509-10. For an expression of doubt that the distinction between informational and fundamental efficiency holds the weight it is often asked to bear, see Ronald J. Gilson & Reinier Kraakman, The Mechanisms of Market Efficiency Twenty Years Later: The Hindsight Bias, 28 J. CORP. L. 715, 716 n.4 (2003).
101. A rare judicial acceptance of the inefficiency concern is found in Bell v. Ascendant Solutions, Inc., 422 F.3d 307, 315 n.17 (5th Cir. 2005). As noted earlier, a number of commentators have called for a complete reexamination of Basic in light of this literature. This was rejected in Unger v. Amedisys Inc., 401 F.3d 316, 322 n.4 (5th Cir. 2005), as a job for the Supreme Court, not the lower courts. And it is worth noting that Congress spoke to this at least indirectly in the PSLRA, acting in response to concerns about marketplace overreaction to corrective disclosure without altering Basic' s presumption in any way. See Langevoort, supra note 107, at 182-86; Nathaniel Carden, Comment, Implications of the Private Securities Litigation Reform Act of 1995 for Judicial Presumptions of Market Efficiency, 65 U. CHI. L. REV. 879 (1998);
102. Jeffrey L. Oldham, Comment, Taking "Efficient Markets" Out of the Fraud- on-the-Market Doctrine After the Private Securities Litigation Reform Act, 97 NW. U. L. REV. 995 (2003). In the lower courts, then, the more likely response is to continue to narrow the definition of efficiency in class-certification decisions. Thus, for instance, Dunbar and Heller suggest adding to the Cammer factors inquiry into the level of short-selling ability for the stock in question, because short-sale restrictions are one common reason to doubt the ability of arbitrage to cleanse the market of behavioral biases. See Dunbar & Heller, supra note 105, at 517-19.
103. Accord Recent Cases, First Circuit Defines an Efficient Market for Fraud-on-the-Market Purposes - In re PolyMedica Corp. Securities Litigation, 432 F.3d 1 (1st Cir. 2005), 119 HARV. L. REV. 2284 (2006).
104. Here again, Professor Fischel is clear: "Because the focal issue of every case will be whether there has been any effect on the market price of the firm's securities, the increased certainty resulting from this objective determination will reduce the amount of litigation." Fischel, supra note 52, at 16. A classic expression of this approach, cited in Basic, is Roger J. Dennis, Materiality and the Efficient Capital Market Model: A Recipe for the Total Mix, 25 WM. & MARY L. REV. 373 (1984).
105. See, e.g., Janet Cooper Alexander, The Value of Bad News in Securities Class Actions, 41 UCLA L. REV. 1421, 1424-26 (1994); (Pubitemid 24818386)
106. Bradford Cornell & R. Gregory Morgan, Using Finance Theory to Measure Damages in Fraud on the Market Cases, 37 UCLA L. REV. 883 (1990).
107. See Cornell & Rutten, supra note 110; Dunbar & Heller, supra note 105, at 509-10. Dunbar's contribution to this issue explores this problem in depth. See Frederick C. Dunbar & Arun Sen, Counterfactual Keys to Causation and Damages in Shareholder Class-Action Lawsuits, 2009 WIS. L. REV. 199. To some extent at least, doubts about efficiency also call into question the precision of the event study itself, which often makes efficiency-driven assumptions in drawing the baseline against which observed returns are measured. See Brav & Heaton, supra note 105, at 536-37.
108. For a cogent discussion of loss causation, see Jill E. Fisch, Cause for Concern: Causation and Federal Securities Law, 94 IOWA L. REV. (forthcoming 2009), available at http://papers.ssrn.com/sol3/papers.cfm?abstract-id=1234021.
109. E.g., Cornell & Morgan, supra note 124; Robert B. Thompson, "Simplicity and Certainty" in the Measure of Recovery Under Rule 10b-5, 51 BUS. LAW. 1177, 1181-85 (1996). This is particularly apt when what plaintiffs allege is an omission rather than an affirmative lie: the omission will not necessarily lead to an identifiable market move; rather, the plaintiffs' claim is that the market would have adjusted had the truth been told.
110. Others have analyzed Dura in more depth. See e.g., Elizabeth Chamblee Burch, Reassessing Damages in Securities Fraud Class Actions, 66 MD. L. REV. 348 (2007);
111. Allen Ferrell & Atanu Saha, The Loss Causation Requirement for Rule 10b-5 Causes of Action: The Implication of Dura Pharmaceuticals, Inc. v. Broudo, 63 BUS. LAW. 163 (2007);
112. Merritt B. Fox, Understanding Dura, 60 BUS. LAW. 1547 (2005);
113. James C. Spindler, Why Shareholders Want Their CEOs To Lie More After Dura Pharmaceuticals, 95 GEO. L.J. 653 (2007);
114. Madge S. Thorsen et al., Rediscovering the Economics of Loss Causation, 6 J. BUS. & SEC. L. 93 (2006). My purpose here is simply to underscore the conceptual tensions between Dura and Basic as they relate to the presumption of reliance.
115. Courts here have developed a test that asks whether a reasonable person at the time of the fraud could have foreseen this kind of injury as a result of the fraud, see AUSA Life Ins. Co. v. Ernst & Young, 206 F.3d 202, 216-17 (2d Cir. 2000), or alternatively, whether the loss was caused by a materialization of the risk that was misrepresented or concealed. See Suez Equity Investors, LP v. Toronto-Dominion Bank, 250 F.3d 87, 98 (2d Cir. 2001). The test has proved notoriously difficult to apply in practice, as illustrated by AUSA, where the three judges on the panel had three different answers to the foreseeability question. 206 F.3d at 209, 224, 228.
116. See Jonathan C. Dickey & Daniel S. Floyd, The Dura Debate: Recent Securities Litigation Decisions on Loss Causation, 21 INSIGHTS 2, 8-9 (2007).
117. Professor Coffee makes a very similar argument about loss causation. See John C. Coffee, Jr., Causation by Presumption? Why the Supreme Court Should Reject Phantom Losses and Reverse Broudo, 60 BUS. LAW. 533 (2005).
118. The best explanation of this is Edmund W. Kitch, The Theory and Practice of Securities Disclosure, 61 BROOK. L. REV. 763 (1995). Disclosure is costly in terms of production, delivery, and its effects on legitimate corporate needs for confidentiality, and these factors counter the desire for full disclosure. The result is a compromise. For an argument that stock-price accuracy should be abandoned as a disclosure philosophy in favor of policing against managerial disloyalty
119. see Paul G. Mahoney, Mandatory Disclosure as a Solution to Agency Problems, 62 U. CHI. L. REV. 1047 (1995).
120. See Donald C. Langevoort, Half-Truths: Protecting Mistaken Inferences by Investors and Others, 52 STAN. L. REV. 87 (1999);
121. Donald C. Langevoort & G. Mitu Gulati, The Muddled Duty to Disclose Under Rule 10b-5, 57 VAND. L. REV. 1639 (2004).
122. For a thoughtful discussion along these same lines, see Victor Brudney, A Note on Materiality and Soft Information Under the Federal Securities Laws, 75 VA. L. REV. 723 (1989);
123. see also Theresa A. Gabaldon, The Disclosure of Preliminary Merger Negotiations as an Imperfect Paradigm of Rule 10b-5 Analysis, 62 N.Y.U. L. REV. 1218 (1987).
124. See Geoffrey P. Miller, Pleading After Tellabs, 2009 WIS. L. REV. 510.
125. The classic article on how market efficiency is generated is often cited (including in Basic) as a testament to efficiency; in fact, it warned that efficiency was a highly complex phenomenon and unlikely to be accurate under all conditions all of the time. See Ronald Gilson & Reinier Kraakman, The Mechanisms of Market Efficiency, 70 VA. L. REV. 549 (1984). That it was read as a testament says much about the intellectual environment of the times.
126. See Donald C. Langevoort, Foreword: Revisiting Gilson and Kraakman's Efficiency Story, 28 J. CORP. L. 499, 501 (2003). For more on the ideological point, see Langevoort, supra note 28, at 912-20.