Excerpt:
"A Miami federal judge has refused to certify a class of investors in so-called meme stocks who alleged they were hurt when trading platform Robinhood suspended purchases of those stocks to avoid a purported liquidity problem, finding the investors failed to show that common issues predominate their claims."
Summary:
The authors provide an overview of the legal framework for the analysis of market efficiency in securities class actions. Analyzing all publicly traded U.S. stocks for 2014 - September 2021, using intraday data from TAQ, TRACE, I/B/E/S, and Capital IQ, using daily data from CRSP, Compustat, CRSP-Compustat Merged Database, and FRED, they find that all reaction, overreaction, correction, overcorrection, bounce back, etc., for equities, are systemically all out of the system within two hours after a potentially material event. Therefore, it is imperative to use high-frequency intraday data for event studies and market efficiency work, in the case of every securities litigation and valuation. The authors compile a dataset of systematic, independent, and objective characterizations of each ticker-year, ticker-half year, ticker-quarter, and ticker-month, and each year, half year, quarter, and month, 2014 - September 2021, as statistically and economically significant efficient, statistically, and economically significant inefficient, or otherwise. They find that Cammer Factors and other previous work in securities litigation using daily data and/or ad hoc subjective judgments are unreliable.
Summary:
Event-driven securities suits—ones that arise after an issuer has experienced some kind of disaster—have become increasingly prevalent in recent years. These suits are based on the fraud-on-the-market doctrine, a doctrine that ultimately gives rise to the bulk of the damages paid out in settlements and judgments pursuant to private litigation under the U.S. securities laws. The theory behind fraud-on-the-market cases is that when an issuer’s share price has been inflated by a Rule-10b-5-violating misstatement, investors who purchased shares at the inflated price have suffered a compensable injury if they still hold the shares after the inflation is gone. Although these event-driven suits differ in important ways from their more traditional cousins based on the same doctrine, they constitute a kind of stress test for the overall doctrine. The growth of event-driven cases thus provides a unique opportunity to reconceptualize the overall system of adjudicating fraud-on-the-market suits more generally. In this Article, we identify the basic logic behind this cause of action and consider what that logic implies as to when liability should and should not be imposed from a social welfare perspective. The result suggests ways we can both solve the challenges posed by event-driven litigation and improve fraud-on-the-market jurisprudence more generally.
In an event-driven case, the plaintiff points to a pre-disaster statement that allegedly underplayed the likelihood that the disaster would occur and argues that the disaster announcement was the corrective disclosure. But in these cases, the price drop on the day of the disaster announcement is almost never a reasonable measure of the misstatement’s share price inflation. By focusing on the price drop at the time of a corrective disclosure, as courts generally do in fraud-on-the-market suits, they have lost track of the real issue: whether the misstatement inflated the share price by a meaningful amount in the first place. More often, the answer to that question is better indicated by the price change back at the time of the misstatement.
For all fraud-on-the-market suits where the plaintiff can establish a misstatement made with scienter, we argue that liability should be imposed where the misstatement’s price impact appears to be at least as great as an inflation threshold chosen to trade off the costs and benefits of adjudicating securities class actions. Liability should not be imposed where both the misstatement’s price impact appears to be smaller than this inflation threshold, and the market would not have drawn negative inferences had the issuer stayed silent instead of making the misstatement. Where the misstatement’s price impact is less than the inflation threshold, but the market would have drawn negative inferences from issuer silence, liability should be imposed if and only if both the corrective disclosure’s price impact is a reliable proxy for how much the misstatement inflated the share price and this impact appears to be at least as great as the inflation threshold.
Summary:
Plaintiffs’ lawyers in the United States play a key role in combating corporate fraud. Shareholders who lose money as a result of fraud can file securities class actions to recover their losses, but most shareholders do not have enough money at stake to justify overseeing the cases filed on their behalf. As a result, plaintiffs’ lawyers control these cases, deciding which cases to file and how to litigate them. Recognizing the agency costs inherent in this model, the legal system relies on lead plaintiffs and judges to monitor these lawyers and protect the best interests of absent class members. Yet there is remarkably little data on the business of securities class action lawyers, leaving lead plaintiffs and judges to oversee this area without the tools to understand how it works.
This Article looks inside the black box of securities class action lawyering to explore the business behind these cases. Our study includes hand-collected data on all securities fraud class actions against public corporations filed between 2005 and 2018, a total of nearly 2500 cases. We find that the business of securities class action lawyering is far more complex than prior scholarship has recognized. Contrary to conventional wisdom, there are not two tiers of plaintiffs’ law firms; instead, there are multiple tiers of firms, each with its own client base, litigation patterns, and revenue model. Our study gives lead plaintiffs and judges the data and tools they need to understand these tiers and to compare the performance of the law firms within them. We also examine how these law firms are compensated, finding that judges’ fee awards fail to account for the difficulty of cases or the risk of non-recovery in any systematic way. These fees are crucial to ensuring that law firms pursue the right cases on behalf of shareholders, so we suggest ways that judges can use data to improve fee awards. As we will see, the path to reforming securities class actions starts with understanding the business behind them.
Summary:
This article analyzes a significant Supreme Court securities law decision from the 2020 term, Goldman Sachs v. Arkansas Teachers Retirement System (Goldman). Goldman was a blockbuster class action, brought by shareholders seeking $13 billion in damages from Goldman Sachs based on claims that date back to the 2008 financial crisis. This article proceeds by taking an in-depth look at the case history of Goldman from start to finish. In the process, it shows that the Supreme Court’s recent decision was more impactful than has been widely appreciated. Rather than being a recap of existing precedents, the Court’s holding in Goldman made significant changes to some of the core doctrines in securities law that were first set forth in 1988 when the modern securities class action was created by Basic v. Levinson. This article also looks beyond doctrinal categories to assess how the Goldman decision can be understood as the latest chapter in the Supreme Court’s longstanding role as a leading policymaker in the law of securities class actions. Lastly, the article explains how the precedent set in Goldman will affect securities litigation on the ground going forward. As a result of Goldman, it will be argued, the class certification stage in shareholder securities fraud suits has been moved closer to an open-ended totality of the circumstances test, in which the federal courts have an increasing number of tools to act as gatekeepers on the merits of a litigation.
Summary:
Much of the research in law and finance reduces long, complex texts down to a small number of variables. Examples include the coding of corporate charters as an entrenchment index or characterizing dense securities complaints by using variables that capture the amount at issue, the statutes alleged to have been violated, and the presence of an SEC investigation. Legal scholars have often voiced concerns that this type of dimensionality reduction loses much of the nuance and detail that is embedded in legal text. This paper assesses this critique by asking whether methods that can analyze text are able to capture meaningful—and perhaps even more—information than traditional low-dimension studies that rely on non-textual inputs. It does so by applying text analysis and machine learning to a corpus of more than five thousand complaints filed in private securities class actions that collectively contain over 90 million words. This analysis shows that there is significant information embedded in the text of these complaints, albeit with substantial limitations on how much information that text analysis can extract. The analysis proceeds in three parts. The first asks whether the text provides indications about the eventual outcomes in the cases. The best performing models predict whether cases will settle or get dismissed with an accuracy rate of about 70 percent. That is substantially better than baseline rates, but still leaves significant room for improvement. The second part of the analysis compares text-based models to non-text models and assesses their relative performance in predicting outcomes. While the best performing text-based models are more accurate than the best performing non-text models, a hybrid model that uses both text and non-text components performs better than either of these two components alone. These results suggest that there may be some information omitted from the non-text models and that augmenting them with textual information may improve them. Finally, the analysis uses abnormal returns as an additional means of validation. Previous research shows that there are substantial differences in the abnormal returns of cases that will get dismissed and those that will settle in the days following the filing of a securities lawsuit. This section replicates this result and then shows that the predictions made by the machine learning models are associated with substantial abnormal returns. While market participants take about three or four days to settle on the likely outcome of a case on stock price, the machine learning models can make these predictions more or less instantaneously. In addition, to validating the predictions against human judgment, these results also suggest that there is some stock price drift in the reactions to the complexities of securities lawsuits.
Summary:
The US securities laws allow security-holders to bring a class action suit against a public company and its officers who make materially misleading statements to the market. The class action mechanism allows individual claimants to aggregate their claims. This procedure mitigates the collective action problem among claimants, and also creates potential economies of scale. Despite these efficiencies, the class action mechanism has been criticized for being driven by attorneys and also encouraging nuisance suits. Although various statutory and doctrinal “solutions” have been proposed and implemented over the years, the concerns over the agency problem and nuisance suits persist. This paper proposes and examines a novel mechanism that attempts to preserve the benefits of class action system while curtailing its cost: allowing company’s shareholders to vote on securities class actions. The shareholders can vote on the structural dimensions of securities class actions, e.g., whether to allow class actions at all, limit discovery, impose fee-shifting, etc., before any class action suit has been filed (ex ante voting) or vote to determine the course of a specific class action suit, e.g., whether to terminate or settle a class action (ex post voting). The paper analyzes the conditions under which allowing shareholders to manage and control securities class actions can benefit the shareholders across the board and its potential limitations.
Summary:
This essay considers the issues raised in the latest securities fraud class action to reach the Supreme Court – Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System – and finds that the claims asserted therein against Goldman Sachs on behalf of open-market buyers of its common stock are claims that should have been asserted on behalf of Goldman Sachs (by means of a derivative action) and against the individuals who caused the losses at issue. The losses suffered by individual buyers of Goldman Sachs stock during the extraordinarily long forty-month alleged fraud period are minimal if they exist at all. Moreover, the law is quite clear that claims on behalf of the company arising from the same constellation of facts should take precedence over any claims on behalf of individual buyers. Yet the practice that has evolved is the opposite: Class claims take priority, and company claims are settled for governance reforms of dubious value rather than for real money. The forces that have led to this classic example of market failure are both fascinating and sinister. But the bottom line is that ordinary investors – such as investors in well-diversified mutual funds and index funds - end up losing far more than they gain from class actions. Indeed, index fund investors effectively pay out about twenty dollars for every dollar they recover. Thus, the best hope for reforming the system is for index funds to step up and intervene to assert the interests of diversified investors in favor of litigating such claims as derivative actions rather than as class actions.
Summary:
A Special Purpose Acquisition Company (“SPAC”) is a publicly listed firm with a two-year lifespan during which it is expected to find a private company with which to merge and thereby bring public. SPACs have been touted as a cheaper way to go public than an IPO. This paper analyzes the structure of SPACs and the costs built into their structure. The authors find that costs built into the SPAC structure are subtle, opaque, and far higher than has been previously recognized.
Summary:
This paper provides novel evidence suggesting that securities class action lawsuits, a central pillar of the U.S. litigation and corporate governance system, can constitute an obstacle to valuable corporate innovation. The authors first establish that valuable innovation output makes firms particularly vulnerable to costly low-quality class action litigation. Exploiting judge turnover in federal courts, they then show that changes in class action litigation risk affect the value and number of patents filed, suggesting firms take into account that risk in their innovation decisions. Our results challenge the widely held view that greater failure propensity of innovative firms drives their litigation risk.
Summary:
This paper investigates the prevalence and attributes of securities litigation. In a sample from 2010-2015, I find that roughly 16.5% of securities class actions arise from conduct where the most direct victims are not shareholders. However, I find that these cases have roughly a 20% lower likelihood of being dismissed, and settle for significantly higher amounts. These lawsuits are also more likely to be brought against large defendant firms, more likely to involve an institutional investor as a lead plaintiff, and much more likely to involve a non-SEC investigation or inquiry than cases where the primary victims are shareholders. Many of these attributes are used in the literature as proxies for merit. However, I argue that the merit of these cases is not clear-cut. Further, from a policy perspective, while these cases may have deterrence value, they may not be an optimal means to monitor corporate misconduct that harms outsiders.
Summary:
The Securities Act of 1933 provides for concurrent federal and state jurisdiction. In 2015, plaintiffs significantly increased the frequency with which they filed Securities Act claims in state court, where dismissal rates are lower and weaker claims have greater settlement value. The cost of directors and officers insurance for issuers conducting initial public offerings, the form of transaction most sensitive to Securities Act litigation risk, has increased dramatically. This increase is concurrent with plaintiffs’ shift away from federal court.
Summary:
The Securities Act of 1933 provides for concurrent federal and state jurisdiction. Securities Act claims were historically litigated in federal court, but in 2015 plaintiffs began filing far more frequently in state court where dismissals are less common and weaker claims more likely to survive. D&O insurance costs for IPOs have since increased significantly. Today, approximately 75% of defendants in Section 11 claims face state court actions. Federal Forum Provisions [FFPs] respond by providing that, for Delaware-chartered entities, Securities Act claims must be litigated in federal court or in Delaware state court.
Summary:
This Article examines the effect of investor attention on value losses and long-term value due to securities class action lawsuits and fraud discovery. The Article finds that investor attention influences the magnitude of value losses suffered upon lawsuit filing and that lawsuit filing has no effect on the long-term value for the group of firms where investor attention is low.
Summary:
This Article opines that for the Leidos case, the U.S. Supreme court's ruling will make little difference for the prevailing or losing party. The Article also examines the potential for pure omission liability arising from the Sarbanes-Oxley Section 906 certification.
Summary:
This Article examines the different gatekeepers for different types of shareholder litigation - institutional investors for securities class actions, corporate boards for derivative suits, judges in their review of settlements for merger cases, etc. The Article explores why corporate law has chosen different gatekeepers for different types of shareholder litigation and argues that the legal system should look for ways to use a greater mix of gatekeepers in these cases.
Summary:
This Article analyzes the potential reasons why corporate counsels keep silent in the face of potential wrongdoing in their own firms. In spite of their legally-mandated central role to prevent fraud, corporate counsels typically do not appear to discover any corporate wrongdoing. The Article proposes policy recommendations to better protect shareholders' interests against self-dealing by top management.
Summary:
This Article argues the strong presumption against extraterritorial application of federal securities laws, as articulated in Morrison v. National Australia Bank, has significant implications for liability under Section 11 of the Securities Act. Morrison restricts federal securities law liability to purchases or sales "listed on domestic exchanges and domestic transactions in other securities." The Article finds that this limitation could, in some instances, dilute the incentive to engage in due diligence and have other consequences that the SEC could view as contrary to the public interest.
Summary:
This Article provides a general methodology to measure the market efficiency percentile for a stock for any relevant period, and calculates arbitrage risk for each U.S. exchange-listed common stock for every calendar year from 1988 to 2010. The Article finds that market efficiency is significantly affected by turnover (negatively), the number of market makers for Nasdaq stocks (negatively), and serial correlation in the market model of the stock (positively).
Summary:
This Article argues that the scope of recovery under the implied Section 10(b) private right should be no greater than the recovery available under the most analogous express remedy, Section 18(a), thus Section 10(b) plaintiffs must either demonstrate actual reliance as a precondition to recovery of damages, or the Supreme Court should revisit Basic, and overturn Basic's rebuttable presumption of reliance.
Summary:
This Article provides a general methodology to measure the market efficiency percentile for a stock for any relevant period, and calculates arbitrage risk for each U.S. exchange-listed common stock for every calendar year from 1988 to 2010. The Article finds that market efficiency is significantly affected by turnover (negatively), the number of market makers for Nasdaq stocks (negatively), and serial correlation in the market model of the stock (positively).
Summary:
This Article discusses the appeal (to be argued in October 2013) in which the Supreme Court will consider whether the Securities Litigation Uniform Standards Act of 1998 ("SLUSA") precludes investors' state law class actions against third-party actors, where the complaints alleged a scheme of fraudulent misrepresentation about transactions in connection with SLUSA covered securities. The defendants seek reversal of a Fifth Circuit decision that declined to apply SLUSA's preclusion provision, which essentially permitted the litigation against the defendants to proceed in federal court.
Summary:
This Article examines which independent directors are held accountable when investors sue firms for financial and disclosure related fraud, and finds that shareholders use litigation along with director elections and director retention to hold some independent directors more accountable than others when firms experience financial fraud.
Summary:
This Article identifies the central flaw of Basic that has over the decades distorted applications of fraud on the market but also suggests, building on Amgen, what the future focus should be in considering whether a suit can proceed as a class action based on fraud on the market.
Summary:
This Article examines who pays when a company settles, and finds that D&O insurance is quite protective and that individual officers rarely contribute to settlements, even in cases in which the SEC has imposed a serious penalty on the same individuals for the same misconduct.
Summary:
This Article provides commentary and analysis of the Supreme Court's February and March 2013, decisions in three major class action appeals: Amgen Inc. v. Connecticut Retirement Plan and Trust Funds (February 27, 2103); Standard Fire Ins. Co. v. Knowles (March 19, 2013), and Comcast Corp. v. Behrends (March 27, 2013).
Summary:
This Article provides some basic statistics on the timing of dismissals and settlements in securities class actions.
Summary:
This Article seeks to reconcile two seemingly conflicting definitions of a material fact: first, as one that would be important to a reasonable investor in deciding how to act in that it would change the total mix of information - although it need not necessarily change the ultimate decision of the investor as to how to vote or whether to trade, and second, as one that would affect market price - which clearly implies that it must have changed the decisions of some investors.
Summary:
This Article reviews the empirical literature evaluating the lead plaintiff provision of the Private Securities Litigation Reform Act, and concludes that, overall, the provision has markedly improved the conduct of these cases.
Summary:
Predicting Securities Fraud Settlements and Amounts: A Hierarchical Bayesian Model of Federal Securities Class Action Lawsuits
Summary:
This Article focuses on how courts have treated two types of carve-outs from federal jurisdiction under the Class Action Fairness Act of 2005 (CAFA): a mandatory carve-out, dealing with securities litigation, and a permissive carve-out, dealing with repetitive, duplicative class litigation.
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The views expressed in these articles are those of the authors, and do not necessarily reflect the views of the SCAC, Stanford University, Cornerstone Research , the authors' employers, or organizations affiliated with the authors.
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