Rethinking Basic: Towards a Decision in Halliburton

Lucian Bebchuk is William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance, Harvard Law School. Allen Ferrell is Greenfield Professor of Securities Law, Harvard Law School. They are co-authors of Rethinking Basic, a Harvard Law School Discussion Paper that is forthcoming in the May 2014 issue of The Business Lawyer and available here.

We have recently revised our paper Rethinking Basic (discussed earlier on the Forum here). Our revision, which will be published in the May issue of the Business Lawyer, takes into account, and relates our analysis to, the Justices’ questions at the Halliburton oral argument. As our revision explains, questions asked by some of the Justices at the oral argument suggest that the fraudulent distortion approach we support might appeal to the Court.

In the Halliburton case, the United States Supreme Court is expected to reconsider the Basic ruling that, twenty-five years ago, adopted the fraud-on-the-market theory, which has since facilitated securities class action litigation. Our paper seeks to contribute to this reconsideration by providing a conceptual and economic framework for a reexamination of the Basic rule.

We show that, in contrast to claims made by the parties, the Justices need not assess the validity or scientific standing of the efficient market hypothesis; they need not, as it were, decide whether they find the view of Eugene Fama or Robert Shiller more persuasive. Thus, our analysis directly responds to a question that Chief Justice Roberts pointedly asked at the oral argument “How am I supposed to review the economic literature and decide which of you is correct on that?” Our analysis indicates that there is absolutely no need for the Court to attempt to make such a decision.

Class-wide reliance, we explain, should depend not on the “efficiency” of the market for the company’s security but on the existence of fraudulent distortion of the market price. We further discuss the analytical tools that would enable the federal courts to implement our alternative approach, as well as the allocation of the burden of proof, and we explain that a determination of fraudulent distortion would not usurp the merits issues of materiality and loss causation. Our analysis thus answers some of the key questions involved in adopting a fraudulent distortion approach.

Our revision is available here.


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