Presumption of Reliance: Basic v. Levinson, 485 U.S. 224 (1988): Officers denied merger negotiations, though they were in fact taking place. Ps sold shares before merger announcement. Fraud on the Market Theory: informationally efficient markets rapidly incorporate all publicly available info about the asset being traded. Inaccurate info is likely to yield an inaccurate stock price. Elements: Defendant made a public misrepresentation Misrepresentations were material Shares were traded on an efficient market Plaintiff traded the shares between the time the misrepresentation was made and the time the truth was revealed Fraud on the market presumption of reliance (FOTM presumption): procedural innovation of Basic court. (“In Basic v. Levinson, we held that investors could satisfy this reliance requirement by invoking a presumption that the price of stock traded in an efficient market reflects all public, material information—including material misstatements. In this case, we concluded, anyone who buys or sells the stock at the market price may be considered to have relied on those misstatements.” Halliburton II (S.Ct. 2014)) Individual proof of reliance was unnecessary in an informationally efficient market because the misstatement was transmitted to the investor “in the processed form of market price”. The court concluded “an investor who buys or sells stock at the price set by the market does so in reliance on the integrity of that price”. [BUT J. White’s concurrence in part notes that some investors buy because they don’t think market price is accurate (short sellers or long investors) … Majority opinion of Basic does not focus on such investors.] Efficient Market Hypo Weak Semi-Strong Strong All info concerning Current prices Prices incorporate all historical prices fully incorporate all info whether publicly reflected in current historical info and available or not price current public info. Implication: Prices Implication: Investors Implication: If true, change only in can’t expect to profit no identifiable group response to new info from studying available can earn systematic info bcz mkt already positive abnormal incorporated it into returns from secs price trading (i.e. Can’t beat the mkt)
Presumption of Reliance: Basic v. Levinson, 485 U.S. 224 (1988): Officers denied merger negotiations, though they were in fact taking place. Ps sold shares before merger announcement. Fraud on the Market Theory: informationally efficient markets rapidly incorporate all publicly available info about the asset being traded. Inaccurate info is likely to yield an inaccurate stock price. Elements: Defendant made a public misrepresentation Misrepresentations were material Shares were traded on an efficient market Plaintiff traded the shares between the time the misrepresentation was made and the time the truth was revealed Fraud on the market presumption of reliance (FOTM presumption): procedural innovation of Basic court. (“In Basic v. Levinson, we held that investors could satisfy this reliance requirement by invoking a presumption that the price of stock traded in an efficient market reflects all public, material information—including material misstatements. In this case, we concluded, anyone who buys or sells the stock at the market price may be considered to have relied on those misstatements.” II (S.Ct. 2014)) Individual proof of reliance was unnecessary in an informationally efficient market because the misstatement was transmitted to the investor “in the processed form of market price”. The court concluded “an investor who buys or sells stock at the price set by the market does so in reliance on the integrity of that price”. [BUT J. White’s concurrence in part notes that some investors buy because they don’t think market price is accurate (short sellers or long investors) … Majority opinion of Basic does not focus on such investors.] Efficient Market Hypo Weak Semi-Strong Strong All info concerning historical prices fully reflected in current price Current prices incorporate all historical info and current public info. Prices incorporate all info whether publicly available or not Implication: Prices change only in response to new info Implication: Investors can’t expect to profit from studying available info bcz mkt already incorporated it into price Implication: If true, no identifiable group can earn systematic positive abnormal returns from secs trading (i.e. Can’t beat the mkt) Halliburton
SurveyofSecurities_Choi_2016.docx