`================================================================
`
`In The
`Supreme Court of the United States
`--------------------------------- ♦ ---------------------------------
`
`ERICA P. JOHN FUND, INC.
`F/K/A ARCHDIOCESE OF MILWAUKEE
`SUPPORTING FUND, INC.,
`
`v.
`
`Petitioner,
`
`HALLIBURTON CO. AND DAVID J. LESAR,
`Respondents.
`--------------------------------- ♦ ---------------------------------
`
`On Writ Of Certiorari To The
`United States Court Of Appeals
`For The Fifth Circuit
`--------------------------------- ♦ ---------------------------------
`
`BRIEF OF NATIONAL ASSOCIATION OF
`SHAREHOLDER AND CONSUMER ATTORNEYS
`AS AMICUS CURIAE IN SUPPORT OF PETITIONER
`--------------------------------- ♦ ---------------------------------
`
`MICHAEL J. MIARMI
` Counsel of Record
`DANIEL P. CHIPLOCK
`LIEFF, CABRASER, HEIMANN
` & BERNSTEIN, LLP
`250 Hudson Street
`8th Floor
`New York, NY 10013
`(212) 355-9500
`mmiarmi@lchb.com
`Counsel for
` Amicus Curiae NASCAT
`
`================================================================
`COCKLE LAW BRIEF PRINTING CO. (800) 225-6964
`OR CALL COLLECT (402) 342-2831
`
`
`
`i
`
`TABLE OF CONTENTS
`
`Page
`I. INTEREST OF AMICUS CURIAE ............
`1
`
` II. SUMMARY OF ARGUMENT ....................
`2
` III. ARGUMENT ..............................................
`5
`A. This Court Has Endorsed A Rebutta-
`ble Presumption Of Reliance Prem-
`ised On The Fraud-On-The-Market
`Doctrine, Which Allows Securities
`Class Plaintiffs To Meet The Predom-
`inance Requirement Of Rule 23 ..........
`B. Availability Of The Basic Presump-
`tion Turns On Whether The Security
`At Issue Traded In An “Efficient”
`Market .................................................
`C. Courts Assessing Market Efficiency
`At The Class Certification Stage En-
`gage In A Fact-Intensive Analysis ....... 16
`D. Market Efficiency And Loss Causa-
`tion Are Distinct Concepts, And The
`Latter Should Not Be Conscripted As
`A Prerequisite To Triggering The
`Fraud-On-The-Market Presumption .... 32
` IV. CONCLUSION .......................................... 38
`
`
`9
`
`5
`
`
`
`ii
`
`TABLE OF AUTHORITIES
`
`Page
`
`CASES
`Basic Inc. v. Levinson,
`485 U.S. 224 (1988) ......................................... passim
`Cammer v. Bloom,
`711 F. Supp. 1264 (D.N.J. 1989) ..................... passim
`Caremark, Inc. v. Coram Healthcare Corp.,
`113 F.3d 645 (7th Cir. 1997) .................................... 33
`Castillo v. Envoy Corp.,
`206 F.R.D. 464 (M.D. Tenn. 2002) .......................... 36
`Cheney v. CyberGuard Corp.,
`213 F.R.D. 484 (S.D. Fla. 2003) .............................. 10
`Dura Pharms., Inc. v. Broudo,
`544 U.S. 336 (2005) ......................... 32, 33, 34, 35, 37
`Eckstein v. Balcor Film Investors,
`8 F.3d 1121 (7th Cir. 1993) ................................ 13, 15
`Freeman v. Laventhol & Horwath,
`915 F.2d 193 (6th Cir. 1990) ................. 10, 11, 13, 14
`Gariety v. Grant Thornton, LLP,
`368 F.3d 356 (4th Cir. 2004) ....................... 10, 13, 19
`Hayes v. Gross,
`982 F.2d 104 (3d Cir. 1992) ............................... 10, 19
`In re Accredo Health, Inc., Sec. Litig.,
`No. 03-2216 DP,
`2006 U.S. Dist. LEXIS 97621
`(W.D. Tenn. Mar. 7, 2006) ....................................... 15
`In re Alstom SA Sec. Litig.,
`253 F.R.D. 266 (S.D.N.Y. 2008) ............................... 30
`
`
`
`iii
`
`TABLE OF AUTHORITIES – Continued
`
`Page
`
`In re Boston Scientific Corp. Sec. Litig.,
`604 F. Supp. 2d 275 (D. Mass. 2009) ...................... 37
`In re Countrywide Fin. Corp. Sec. Litig.,
`Lead Case No. CV-07-05295-MRP (MANx),
`2009 U.S. Dist. LEXIS 129807
`(C.D. Cal. Dec. 9, 2009) ..................................... 17, 31
`In re Dura Pharms., Inc. Sec. Litig.,
`No. 99cv0151-L(NLS),
`2001 U.S. Dist. LEXIS 25907
`(S.D. Cal. Nov. 2, 2001), rev’d,
`Broudo v. Dura Pharms., Inc.,
`339 F.3d 933 (9th Cir. 2003), rev’d,
`544 U.S. 336 (2005) ................................................. 34
`In re DVI Inc. Sec. Litig.,
`249 F.R.D. 196 (E.D. Pa. 2008) ............................... 14
`In re HealthSouth Corp. Sec. Litig.,
`257 F.R.D. 260 (N.D. Ala. 2009) .............................. 18
`In re Mills Corp. Sec. Litig.,
`257 F.R.D. 101 (E.D. Va. 2009) ............................... 10
`In re Nature’s Sunshine Prods. Inc. Sec. Litig.,
`251 F.R.D. 656 (D. Utah 2008) ............................... 14
`In re NetBank, Inc., Sec. Litig.,
`259 F.R.D. 656 (N.D. Ga. 2009) ........................ 27, 30
`In re New Motor Vehicles Canadian Exp.
`Antitrust Litig.,
`522 F.3d 6 (1st Cir. 2008) ........................................ 16
`In re PolyMedica Corp. Sec. Litig.,
`432 F.3d 1 (1st Cir. 2005) ................................ passim
`
`
`
`iv
`
`TABLE OF AUTHORITIES – Continued
`
`Page
`
`In re Res. Am. Sec. Litig.,
`202 F.R.D. 177 (E.D. Pa. 2001) ............................... 15
`In re VeriFone Sec. Litig.,
`784 F. Supp. 1471 (N.D. Cal. 1992), aff ’d,
`11 F.3d 865 (9th Cir. 1993) ...................................... 16
`In re Xcelera.com Sec. Litig.,
`430 F.3d 503 (1st Cir. 2005) ............................ passim
`Krogman v. Sterritt,
`202 F.R.D. 467 (N.D. Tex. 2001) ....................... 23, 24
`Lehocky v. Tidel Techs., Inc.,
`220 F.R.D. 491 (S.D. Tex. 2004) ............ 17, 22, 29, 31
`Lentell v. Merrill Lynch & Co.,
`396 F.3d 161 (2d Cir. 2005) ..................................... 33
`Levinson v. Basic Inc.,
`786 F.2d 741 (6th Cir. 1986)
` vacated on other grounds,
`485 U.S. 224 (1988) ................................................... 6
`Menkes v. Stolt-Nielsen S.A.,
`270 F.R.D. 80 (D. Conn. 2010) ................................ 24
`Miller v. Thane Int’l, Inc.,
`615 F.3d 1095 (9th Cir. 2010) ..................... 18, 35, 36
`O’Neil v. Appel,
`165 F.R.D. 479 (W.D. Mich. 1995) ........................... 22
`Peil v. Speiser,
`806 F.2d 1154 (3d Cir. 1986) ............................... 7, 15
`
`
`
`
`
`
`v
`
`TABLE OF AUTHORITIES – Continued
`
`Page
`
`RMED Int’l, Inc. v. Sloan’s Supermarkets, Inc.,
`No. 94 Civ. 5587 (PKL) (RLE),
`2000 U.S. Dist. LEXIS 3742
`(S.D.N.Y. Mar. 24, 2000), aff ’d,
`2000 U.S. Dist. LEXIS 4892
`(S.D.N.Y. Apr. 17, 2000) .......................................... 25
`Robbins v. Koger Props., Inc.,
`116 F.3d 1441 (11th Cir. 1997) ................................ 34
`Ross v. Abercrombie & Fitch Co.,
`257 F.R.D. 435 (S.D. Ohio 2009) ............................. 37
`Schaaf v. Residential Funding Corp.,
`517 F.3d 544 (8th Cir. 2008) ................................... 33
`Schleicher v. Wendt,
`618 F.3d 679 (7th Cir. 2010) ................... 9, 10, 13, 37
`Simpson v. Specialty Retail Concepts, Inc.,
`823 F. Supp. 353 (M.D.N.C. 1993) .......................... 23
`Stoneridge Inv. Partners, LLC v. Scientific-
`Atlanta, Inc.,
`552 U.S. 148 (2008) ................................................... 6
`Teamsters Local 445 Freight Div. Pension Fund
`v. Bombardier Inc.,
`546 F.3d 196 (2d Cir. 2008) ............................... 18, 28
`Teamsters Local 445 Freight Div. Pension Fund
`v. Bombardier, Inc.,
`No. 05 Civ. 1898 (SAS),
`2006 U.S. Dist. LEXIS 52991
`(S.D.N.Y. Aug. 1, 2006), aff ’d,
`546 F.3d 196 (2d Cir. 2008) ..................................... 22
`
`
`
`vi
`
`TABLE OF AUTHORITIES – Continued
`
`Page
`
`STATUTES
`Securities Exchange Act of 1934 ........................ passim
`Section 10(b) of the Securities Exchange Act of
`1934, 15 U.S.C. § 78j(b) ............................ 2, 5, 32, 33
`
`
`RULES
`Federal Rule of Civil Procedure 23 .......... 2, 4, 5, 16, 37
`FED. R. CIV. P. 23(b)(3) ................................................ 10
`SUP. CT. RULE 37.3(a) ................................................... 1
`SUP. CT. RULE 37.6 ........................................................ 1
`Securities and Exchange Commission Rule
`10b-5, 17 C.F.R. § 240.10b-5 ......................... 2, 5, 7, 8
`17 C.F.R. § 239.13 ....................................................... 22
`
`TREATISES
`4 ALAN R. BROMBERG & LEWIS D. LOWENFELS,
`BROMBERG AND LOWENFELS ON SECURITIES
`FRAUD AND COMMODITIES FRAUD § 8.6 (1988) ......... 20
`
`
`OTHER AUTHORITIES
`BLACK’S LAW DICTIONARY (8th ed. 2004) ..................... 21
`Richard A. Booth, The Efficient Market, Portfo-
`lio Theory, and the Downward Sloping De-
`mand Hypothesis, 68 N.Y.U. L. REV. 1187
`(1993) ....................................................................... 15
`
`
`
`vii
`
`TABLE OF AUTHORITIES – Continued
`
`Page
`
`Burton G. Malkiel, The Efficient Market Hy-
`pothesis and Its Critics, 17 J. ECON. PERSP.
`59 (2003) ............................................................ 12, 14
`Madge S. Thorsen, et al., Rediscovering the
`Economics of Loss Causation, 6 J. BUS. &
`SEC. L. 93 (2005/2006) ................................. 25, 26, 27
`
`
`
`
`
`1
`
`INTEREST OF AMICUS CURIAE
`I.
`The National Association of Shareholder and
`
`Consumer Attorneys (“NASCAT”) is a nonprofit mem-
`bership organization founded in 1988. NASCAT’s
`member law firms represent both institutional and
`individual investors in securities fraud and share-
`holder derivative cases throughout the United States.
`NASCAT and its members are committed to repre-
`senting victims of corporate abuse, fraud and white
`collar criminal activity in cases with the potential to
`advance the state of the law, educate the public,
`modify corporate behavior and improve access to
`justice and compensation for those who have suffered
`injury at the hands of corporate wrongdoers.
`NASCAT advocates the principled interpretation and
`application of the federal securities laws – including
`the Securities Exchange Act of 1934, 15 U.S.C. § 78a
`et seq. (“Exchange Act”) – to protect investors from
`manipulative, deceptive and fraudulent practices and
`to ensure this nation’s capital markets operate fairly
`and efficiently.1
`
`Comprised of attorneys whose practice focuses in
`
`substantial part on the application of the federal
`
`
`1 In accordance with Supreme Court Rule 37.3(a), counsel
`
`for NASCAT represent that all parties in this case have filed
`letters with the Clerk giving blanket consent to the filing of
`amicus curiae briefs. Additionally, pursuant to Rule 37.6 of this
`Court, counsel for NASCAT represent that no counsel for a party
`authored this brief in whole or in part and no one other than
`NASCAT, its members or its counsel made a monetary contribu-
`tion to the preparation or submission of this brief.
`
`
`
`2
`
`securities laws, NASCAT has a deeply-rooted interest
`in the central issue this case presents: whether
`securities class plaintiffs attempting to invoke a
`classwide presumption of reliance premised on the
`fraud-on-the-market doctrine must, in addition to
`showing the market in which the subject security
`traded was “efficient” during the relevant period,
`demonstrate loss causation at the class certification
`stage, as the Fifth Circuit Court of Appeals demands.
`NASCAT agrees with Petitioner’s arguments against
`adoption of the Fifth Circuit’s misguided and doctri-
`nally unsound standard. NASCAT writes separately
`to inform this Court of the serious burden plaintiffs
`already face, even without the errant loss causation
`requirement the Fifth Circuit has created, to trigger
`the fraud-on-the-market presumption at the class
`certification stage. Additionally, this brief emphasizes
`the important distinction between reliance – which,
`in class cases arising under Section 10(b) of the
`Exchange Act, 15 U.S.C. § 78j(b), is necessarily en-
`twined with the fraud-on-the-market presumption –
`and loss causation, which is not.
`
`
`II. SUMMARY OF ARGUMENT
`
`For class plaintiffs asserting claims under Sec-
`tion 10(b) of the Exchange Act and Rule 10b-5, 17
`C.F.R. § 240.10b-5, promulgated thereunder by the
`Securities and Exchange Commission (“SEC”), satis-
`fying the predominance requirement of Rule 23 of
`the Federal Rules of Civil Procedure would prove a
`
`
`
`
`
`3
`
`virtually insurmountable hurdle without the class-
`wide presumption of reliance afforded by the fraud-
`on-the-market doctrine, which this Court endorsed in
`Basic Inc. v. Levinson, 485 U.S. 224 (1988). Commen-
`surate with the evidentiary benefit the presumption
`provides, investors bear the burden of demonstrating
`the availability of the presumption for class certifica-
`tion purposes. To do so, they must show the security
`at issue traded in an “efficient” market. The purpose
`of the market efficiency inquiry is to assess whether
`the market for the subject security possesses charac-
`teristics rendering it logical and reasonable to pre-
`sume that defendants’ material misrepresentations
`were disseminated to investors through the price of
`the security and that investors, in relying on the
`integrity of the market price to purchase or sell the
`security, inherently relied on the misrepresentations.
`
`Establishing market efficiency requires a fact-
`
`intensive analysis of some or all of the following well-
`accepted factors: (1) average weekly trading volume
`of the stock during the proposed class period; (2)
`number of securities analysts following and reporting
`on the stock during the proposed class period; (3) the
`existence of “market makers” and arbitrageurs, who
`react quickly to company-specific disclosures and
`drive the stock price accordingly; (4) whether the
`company was eligible to file a Form S-3 short-form
`securities registration statement, generally limited to
`corporations whose stock is actively traded and
`widely followed; (5) a causal relationship between
`new or unexpected company-related disclosures and
`a reaction of the price of the company’s stock; (6) the
`company’s market capitalization; (7) the “bid-ask
`
`
`
`4
`
`spread,” or the difference between the price investors
`are willing to pay for the stock and the price at which
`current shareholders are willing to sell their shares;
`and (8) the company’s “float,” or the percentage of
`shares not owned by company insiders.
`
`Given the complexity involved in evaluating
`market efficiency, parties attempting to establish or
`refute its existence with respect to a particular secu-
`rity often proffer expert analysis – in the form of
`reports or affidavits – regarding the efficiency factors.
`Indeed, parties commonly rely on expert “event
`studies” assessing the causal relationship (or lack
`thereof) between new or unexpected company-related
`disclosures and reaction of the stock price – which
`comprises the keystone of the market efficiency
`analysis. Plaintiffs thus face a serious task and
`meaningful burden to justify the availability of the
`presumption of reliance.2
`
`In light of the nature and function of the market
`efficiency inquiry, the Fifth Circuit’s requirement
`that, to trigger the fraud-on-the-market presumption,
`plaintiffs must make a factual showing sufficient to
`demonstrate loss causation is improper. The Fifth
`Circuit’s approach contravenes this Court’s jurispru-
`dence regarding reliance and loss causation and
`imposes an unduly restrictive standard for plaintiffs
`to establish predominance under Rule 23. This Court
`
`
`
`
`2 While this brief generally refers to “stock,” the use of that
`
`term is not intended to suggest the market efficiency analysis
`does not, or cannot, apply to other securities.
`
`
`
`5
`
`therefore should reject the Fifth Circuit’s draconian
`standard and reverse that court’s decision overturn-
`ing class certification in the case at bar.
`
`
`III. ARGUMENT
`A. This Court Has Endorsed A Rebuttable
`Presumption Of Reliance Premised On
`The Fraud-On-The-Market Doctrine,
`Which Allows Securities Class Plain-
`tiffs To Meet The Predominance Re-
`quirement Of Rule 23.
`In Basic, this Court endorsed the fraud-on-the-
`
`market doctrine as a mechanism for securities class
`plaintiffs to establish a rebuttable presumption of
`reliance for Section 10(b) claims. Drawing on, inter
`alia, its prior jurisprudence regarding reliance in the
`securities context as well as considerations of policy
`and fairness, the Court upheld the lower courts’
`application of the presumption of reliance in that
`case, declaring: “An investor who buys or sells stock
`at the price set by the market does so in reliance on
`the integrity of that price. Because most publicly
`available information is reflected in market price, an
`investor’s reliance on any public material misrepre-
`sentations, therefore, may be presumed for purposes
`of a Rule 10b-5 action.” 485 U.S. at 247.3
`
`
`3 The Court has since reaffirmed its recognition of a rebut-
`
`table presumption of reliance based on the fraud-on-the-market
`(Continued on following page)
`
`
`
`6
`
`Plaintiffs in Basic alleged defendants’ material
`
`misrepresentations in failing to properly apprise
`investors of a proposed merger transaction had
`created a “depressed” market for Basic stock and
`plaintiffs sold their shares in reliance on those mis-
`representations. 485 U.S. at 228, 242. In granting
`class certification, the district court applied the fraud-
`on-the-market presumption of reliance, concluding
`“that with reference to each public statement and its
`impact upon the open market for Basic shares, com-
`mon questions predominated over individual ques-
`tions.” Id. at 242. The Sixth Circuit, inter alia,
`affirmed the district court’s order granting class
`certification. The Court of Appeals observed that the
`fraud-on-the-market theory “is based on two assump-
`tions: first, that in an efficient market the price of a
`stock will reflect all information available to the
`public; and, second, that an individual relies on the
`integrity of the market price when dealing in that
`stock.” Levinson v. Basic Inc., 786 F.2d 741, 750 (6th
`Cir. 1986)
`(citation omitted), vacated on other
`grounds, 485 U.S. 224 (1988). The court concluded,
`“Here, the defendants made public, material misrep-
`resentations and the plaintiffs sold Basic stock in an
`impersonal, efficient market. Thus the class . . . has
`established the threshold facts for proving their loss.”
`Id. at 751.
`
`
`doctrine. See Stoneridge Inv. Partners, LLC v. Scientific-Atlanta,
`Inc., 552 U.S. 148, 159 (2008).
`
`
`
`7
`
`On certiorari, this Court echoed the pronounce-
`
`ments of lower courts that had adopted the fraud-on-
`the-market presumption. The Court stated, “Requir-
`ing proof of individualized reliance from each member
`of the proposed plaintiff class effectively would have
`prevented [the named plaintiffs] from proceeding
`with a class action, since individual issues then would
`have overwhelmed the common ones.” Basic, 485 U.S.
`at 242; accord Peil v. Speiser, 806 F.2d 1154, 1160 (3d
`Cir. 1986) (“many courts have come to realize that, in
`certain situations, the requirement of showing direct
`reliance ‘imposes an unreasonable and irrelevant
`evidentiary burden’ ”) (quoting Blackie v. Barrack,
`524 F.2d 891, 907 (9th Cir. 1975)). This Court further
`reasoned “our understanding of Rule 10b-5’s reliance
`requirement must encompass” the differences be-
`tween “modern securities markets, literally involving
`millions of shares changing hands daily,” and “the
`face-to-face transactions” early fraud cases contem-
`plated. Basic, 485 U.S. at 243-44.
`
`The Court observed that the fraud-on-the-market
`
`doctrine “is based on the hypothesis that, in an open
`and developed securities market, the price of a com-
`pany’s stock is determined by the available material
`information regarding the company and its business”;
`misleading statements therefore will “defraud pur-
`chasers of stock even if the purchasers do not directly
`rely on the misstatements.” Id. at 241-42 (citation
`and internal quotation marks omitted). The Court
`further explained:
`
`
`
`8
`
`In face-to-face transactions, the inquiry into
`an investor’s reliance upon information is in-
`to the subjective pricing of that information
`by that investor. With the presence of a mar-
`ket, the market is interposed between seller
`and buyer and, ideally, transmits infor-
`mation to the investor in the processed form
`of a market price. Thus the market is per-
`forming a substantial part of the valuation
`process performed by the investor in a face-
`to-face transaction. The market is acting as
`the unpaid agent of the investor, informing
`him that given all the information available
`to it, the value of the stock is worth the mar-
`ket price.
`
`Id. at 244 (citation and internal quotation marks
`omitted). This Court therefore determined a pre-
`sumption was warranted given the realities of open-
`market securities transactions, as requiring a plain-
`tiff “to show . . . how he would have acted if omitted
`material information had been disclosed” or “if the
`misrepresentation had not been made” would “place
`an unnecessarily unrealistic evidentiary burden on
`the Rule 10b-5 plaintiff who has traded on an imper-
`sonal market.” Id. at 245.
`
`The Court also found the presumption “is con-
`
`sistent with, and, by facilitating Rule 10b-5 litigation,
`supports, the congressional policy embodied in the
`1934 [Exchange] Act,” as Congress had “expressly
`relied on the premise that securities markets are
`affected by information, and enacted legislation to
`facilitate an investor’s reliance on the integrity of
`
`
`
`9
`
`those markets.” Id. at 245-46. Furthermore, observ-
`ing that empirical studies “have tended to confirm
`Congress’[s] premise that the market price of shares
`traded on well-developed markets reflects all publicly
`available information, and, hence, any material
`misrepresentations,” the Court noted the general
`acceptance of the fraud-on-the-market theory by
`courts considering it as well as by commentators. Id.
`at 246-47.
`
`Based on its acceptance (for securities law pur-
`
`poses) of the general economic principles underlying
`the fraud-on-the-market doctrine and the policy
`considerations favoring a presumption of reliance,
`this Court endorsed the application of the presump-
`tion where the market for a security is “impersonal”
`and “well-developed” and the security price reflects
`“most publicly available information.” Id. at 247. In
`other words, to trigger the fraud-on-the-market
`presumption of reliance, investors must demonstrate
`the market for the subject security was “efficient”
`during the period relevant to the litigation.
`
`
`
`B. Availability Of The Basic Presumption
`Turns On Whether The Security At Is-
`sue Traded In An “Efficient” Market.
`Courts generally regard a showing of market
`
`efficiency – i.e., that the security at issue traded in an
`“efficient” market – as the central factor in deeming
`the presumption of reliance available to plaintiffs at
`class certification. See, e.g., Schleicher v. Wendt, 618
`
`
`
`10
`
`F.3d 679, 688 (7th Cir. 2010) (Easterbrook, C.J.) (“The
`district court assured itself that the market for Con-
`seco’s stock was thick enough to transmit defendants’
`statements to investors by way of the price. That
`finding supports use of the fraud-on-the-market
`doctrine as a replacement for individual reading and
`reliance on defendants’ statements.”); In re Mills
`Corp. Sec. Litig., 257 F.R.D. 101, 106 (E.D. Va. 2009)
`(“[T]o be entitled to the presumption, Plaintiffs need
`only demonstrate that the company’s shares traded in
`an efficient market.”); Cheney v. CyberGuard Corp.,
`213 F.R.D. 484, 496-502 (S.D. Fla. 2003) (finding
`predominance under Rule 23(b)(3) via application of
`fraud-on-the-market doctrine, “since the evidence
`support[ed] the position that CyberGuard stock was
`traded in an efficient market”). Only where market
`efficiency exists “may a court presume reliance and
`avoid individualized inquiries.” Gariety v. Grant
`Thornton, LLP, 368 F.3d 356, 368 (4th Cir. 2004); see
`also Schleicher, 618 F.3d at 684; In re Xcelera.com
`Sec. Litig., 430 F.3d 503, 507 (1st Cir. 2005); Hayes v.
`Gross, 982 F.2d 104, 107 (3d Cir. 1992); Freeman v.
`Laventhol & Horwath, 915 F.2d 193, 198 (6th Cir.
`1990).
`
`This Court in Basic did not define an “efficient”
`
`market – beyond indicating it is “impersonal” and
`“well-developed” (or “open and developed”)4 – nor did
`
`
`4 485 U.S. at 241, 246-47 (citation and internal quotation
`
`marks omitted).
`
`
`
`11
`
`the Court endorse any particular method of determin-
`ing market efficiency. See 485 U.S. at 246 n.24 (“We
`need not determine by adjudication what economists
`and social scientists have debated through the use of
`sophisticated statistical analysis and the application
`of economic theory. For purposes of accepting the
`presumption of reliance in this case, we need only
`believe that market professionals generally consider
`most publicly announced material statements about
`companies, thereby affecting stock market prices.”);
`id. at 248 n.28 (“By accepting this rebuttable pre-
`sumption, we do not intend conclusively to adopt any
`particular theory of how quickly and completely
`publicly available information is reflected in market
`price.”).5 Federal appellate courts, however, have
`expounded on the efficient market concept and its
`application in securities cases.
`
`The First Circuit has observed that the efficient
`
`market hypothesis began as “an academic attempt” to
`determine whether “an ordinary investor” can “beat
`
`5 An “open” market “is one in which anyone, or at least a
`
`large number of persons, can buy or sell.” Freeman, 915 F.2d at
`198 (citation and internal quotation marks omitted). A “devel-
`oped” market “is one which has a relatively high level of activity
`and frequency, and for which trading information (e.g., price and
`volume) is widely available.” Id. (citation and internal quotation
`marks omitted). A developed market is “principally a secondary
`market in outstanding securities” and “usually, but not neces-
`sarily, has continuity and liquidity (the ability to absorb a
`reasonable amount of trading with relatively small price chang-
`es).” Id. at 198-99 (citation and internal quotation marks
`omitted).
`
`
`
`12
`
`the stock market,” i.e., “can such an investor make
`trading profits on the basis of new information?” In re
`PolyMedica Corp. Sec. Litig., 432 F.3d 1, 8 (1st Cir.
`2005). Where a market is efficient, “the answer is ‘no,’
`because the information that would have given the
`investor a competitive edge and allowed the investor
`to ‘beat’ the market is already reflected in the market
`price.” Id. Consequently, there is “no ‘bargain’ from
`which an investor can benefit.” Id.; see also Burton G.
`Malkiel, The Efficient Market Hypothesis and Its
`Critics, 17 J. ECON. PERSP. 59, 60 (2003) (defining
`“efficient financial markets” to mean “such markets
`do not allow investors to earn above-average returns
`without accepting above-average risks”).
`
`Echoing other courts and commentators, the
`
`First Circuit further explained that the concept of
`market efficiency contemplates three “competing”
`versions: “weak, semi-strong, and strong,” each of
`which “makes a progressively stronger claim about
`the kind of information that is reflected in stock
`price.” PolyMedica, 432 F.3d at 10 n.16. The weak
`form holds “an efficient market is one in which histor-
`ical price data is reflected in the current price of the
`stock, such that an ordinary investor cannot profit by
`trading stock based on the historical movements in
`stock price.” Id. The semi-strong form conceives an
`efficient market as “one in which all publicly avail-
`able information is reflected in the market price of
`the stock, such that an investor’s efforts to acquire
`and analyze public information (about the company,
`the industry, or the economy, for instance) will not
`
`
`
`13
`
`produce superior investment results.” Id. The strong
`form views an efficient market as “one in which stock
`price reflects not just historical price data or all
`publicly available information, but all possible infor-
`mation – both public and private.” Id.
`
`Lower courts have observed that the fraud-on-
`
`the-market doctrine endorsed in Basic rests on the
`semi-strong form, which comprises the “prevailing
`definition of market efficiency.” Id. Under the semi-
`strong market efficiency standard, in an efficient
`market, “the market price has integrity[;] . . . it
`adjusts rapidly to reflect all new information.”
`Gariety, 368 F.3d at 367 (alteration and ellipsis in
`original) (citation and internal quotation marks
`omitted); see also Eckstein v. Balcor Film Investors, 8
`F.3d 1121, 1129-30 (7th Cir. 1993) (Easterbrook, J.)
`(“We call a market ‘efficient’ because the price reflects
`a consensus about the value of the security being
`traded – not necessarily because the price captures
`the true value of the firm’s assets but because the
`price is the best available device to assess the signifi-
`cance of additional bits of information.”).
`
`To trigger the Basic presumption of reliance, then,
`
`plaintiffs must demonstrate that the market price of
`the security at issue reflects publicly available infor-
`mation – in other words, the market for the security
`possesses “ ‘informational efficiency.’ ” PolyMedica,
`432 F.3d at 19; see also Schleicher, 618 F.3d at 682
`(“Basic concluded that the price of a well-followed and
`frequently traded stock reflects the public infor-
`mation available about a company”); Freeman, 915
`
`
`
`14
`
`F.2d at 197 (“The fraud on the market theory rests on
`the assumption that the price of an actively traded
`security in an open, well-developed, and efficient
`market reflects all the available information about
`the value of a company.”). Moreover, in an infor-
`mationally efficient market, the price of a security
`“rapidly reflects new information in price.” Freeman,
`915 F.2d at 199 (emphasis added) (citation and inter-
`nal quotation marks omitted); see also In re Nature’s
`Sunshine Prods. Inc. Sec. Litig., 251 F.R.D. 656, 661
`(D. Utah 2008) (the fraud-on-the-market theory
`“assumes that in an efficient market, all the available
`information about the company is quickly reflected in
`the price at which people are willing to buy and sell
`the stock”); In re DVI Inc. Sec. Litig., 249 F.R.D. 196,
`210 (E.D. Pa. 2008) (“In considering the efficiency of
`the market for a security, courts often focus on
`whether the security’s price reacted quickly to signifi-
`cant corporate events and disclosures.”).
`
`Notably, the viability of the fraud-on-the-market
`
`doctrine does not turn on “perfect” efficiency, an
`unrealistic notion. Rather, the core principle underly-
`ing the efficient market hypothesis – that the market
`price of a security reflects available public infor-
`mation and therefore possesses “integrity” – reasona-
`bly allows for a presumption of reliance regardless of
`market imperfections because whatever anomalies
`exist in the market are insignificant and do not allow
`market participants to exploit them effectively. See
`Malkiel, Efficient Market Hypothesis, 17 J. ECON.
`PERSP. at 72 (“Any truly repetitive and exploitable
`pattern that can be discovered in the stock market
`
`
`
`15
`
`and can be arbitraged away will self-destruct.”);
`Eckstein, 8 F.3d at 1129 (“The price in an open and
`developed market usually reflects all available
`information, because the price is an outcome of com-
`petition among knowledgeable investors.”) (emphasis
`added); Peil, 806 F.2d at 1161 n.10 (“The ‘fraud on the
`market’ theory rests on the assumption that there is a
`nearly perfect market in information, and that the
`market price of stock reacts to and reflects the avail-
`able information.”) (emphasis added); In re Res. Am.
`Sec. Litig., 202 F.R.D. 177, 190 (E.D. Pa. 2001)
`(“Commentators have noted that an efficient market
`cannot be perfectly efficient.”) (citing Richard A.
`Booth, The Efficient Market, Portfolio Theory, and the
`Downward Sloping Demand Hypothesis, 68 N.Y.U. L.
`REV. 1187, 1195 (1993)). Moreover, that “[i]t takes
`some amount of time for new information to get
`incorporated into the price of a security” does not
`render a market inefficient. Res. Am., 202 F.R.D. at
`190.
`
`Similarly, consistent with courts’ acceptance of
`
`the “informational efficiency” approach to defining
`whether a market is efficient, plaintiffs need not
`make a more demanding showing that the market for
`the security at issue embodies “ ‘fundamental value
`efficiency.’ ” PolyMedica, 432 F.3d at 19 (rejecting
`fundamental value approach). The latter standard
`would require that the market “respond to infor-
`mation not only quickly but accurately, such that the
`market price of a stock reflects its fundamental
`value.” Id.; accord In re Accredo Health, Inc., Sec.
`
`
`
`
`
`16
`
`Litig., No. 03-2216 DP, 2006 U.S. Dist. LEXIS 97621,
`at *30-31 (W.D. Tenn. Mar. 7, 2006) (“the few cases
`that have addressed this issue have squarely rejected
`this fundamental value app