Article by Bradford Cornell and James C. Rutten
In Basic Inc. v. Levinson the United States Supreme Court effectively affirmed the efficient market hypothesis by ruling that a plaintiff who purchased securities on an open and developed market can be presumed to have relied on the integrity of the market price and in that way to have relied indirectly on false public statements allegedly affecting that price. Although the Court confined its analysis to the question of reliance and explicitly avoided any question of damages, Justice White worried in his dissent that one could not be separated from the other. In this Article, we argue that Justice White's concerns were well founded. In light of theoretical and empirical research in finance, we show that the failure to understand the differing implications of the efficient market hypothesis for proving reliance and assessing damages introduces a significant plaintiff's bias in securities class action litigation. Furthermore, although Congress attempted to address this bias in passing the Private Securities Litigation Reform Act of 1995, the Act is likely to be ineffective in this regard.
About the Author
Bradford Cornell. Professor of Financial Economics, California Institute of Technology, Pasadena, California.
James C. Rutten. Partner, Munger, Tolles & Olson LLP, Los Angeles, California.
Citation
81 Tul. L. Rev. 443 (2006)