Playing the stock market is a better gamble if you can sue when you lose. That’s what some sophisticated investors have been doing with some success as a result of the 1988 Supreme Court decision in Basic v. Levinson. Although there’s no statute that says you can sue when your stock bet loses money, you can always look around after the fact and try to find evidence that the company didn’t publicize something that might have had an effect on the price. If you can show fraud by the company, you can sue under an implied right-of-action under the securities laws.
Showing that you were defrauded requires that you prove that you relied on some statement that the company made when deciding whether to buy or sell your stock. Lucky for you, that requirement was eliminated when the Supreme Court ruled that a court may presume that you relied on information generally available to stock market participants. Under the “efficient capital markets” theory accepted by the Court, it is assumed that stock prices accurately reflect their true price in open and well developed markets with many trades.
If you relied on the efficient market in buying stock, a court will assume the price accurately reflects material information about the stock, and if there was price distortion from erroneous or misleading information, you can sue for your losses.
The Court assumed that investors invest on the assumption that the trading price of the stock accurately reflects the true value of the stock. The problem with that is that many sophisticated investors buy stock because they think it will outperform the valuation that the market assigns. Many investors buy or sell a security precisely because they believe the market price is wrong – buying when they assess the market has undervalued the stock and selling when the stock is overvalued in their estimation.
That’s the argument the NAM made to the Supreme Court in an amicus brief in Halliburton v. Erica P. John Fund, a case being argued March 5. The Court is reconsidering its presumption-of-reliance ruling, and we hope it will require that reliance be proven. You can’t have it both ways, relying on your own view of the market price, but also relying on the efficient market theory to sue if you guessed wrong. That’s an unfair and expensive outcome that adds yet another cost to doing business, reducing competitiveness and hampering job creation.
Quentin Riegel is Vice President and Deputy General Counsel for the National Association of Manufacturers.
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