Law Professors’ Brief in Halliburton

It’s been a busy enough week that I haven’t yet been able to post on the brief that colleagues and I filed on behalf of law professors Adam Pritchard and Todd Henderson in Halliburton Co. v. Erica P. John Fund, Inc., involving the continuing validity of Basic Inc. v. Levinson.  Below is a short summary of the argument.

Basic’s view of capital market efficiency was unrealistic. Rather than being totally “efficient” or “inefficient,” securities markets enjoy varying degrees of efficiency, and incorporate information at varying rates. Although some well-developed markets incorporate most information into prices relatively quickly, research conducted since Basic suggests that even the most open markets are not completely efficient and incorporate some information slowly (if at all). Accordingly, Basic’s understanding that a particular alleged fraud will necessarily be incorporated into the stock price is no longer sound.

Moreover, lower courts’ attempts to estimate efficiency have been inconsistent and empirically inaccurate. Faced with the difficult task of determining whether a market is “efficient,” courts have resorted to examining proxies for efficiency. Many such proxies are highly correlated with each other (and therefore redundant), while others have little empirical relationship with efficiency, and there is confusion about how to weigh the various factors. The result is a doctrinal and empirical muddle for both courts and litigants.

The brief argues that “[i]n light of the difficulties in evaluating efficiency, the Court should shift the focus of fraud on the market inquiries from a market’s overall efficiency to the question whether the alleged fraud affected market price.”

The most novel aspect of the argument is our contention that the conventional measure of damages “should be limited to cases in which the plaintiff can show actual reliance or that a material misstatement has distorted the market price for a security. If a plaintiff cannot make that showing, the remedy should be limited to disgorgement.”

There’s a second law professors brief supporting petitioners (also signed by former SEC Commissioners); I’ll post a link to that when I get it.

It’s a fascinating case; I can’t wait to see what the Court does.