Fraud on the Market,

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"Fraud on the Market," "Mathematicians for Martha," "Notes from a Little Fish," "The Big Wells Fargo Picture: Can we discourage white collar crime without jailing the criminal?" and "SEC Charges Martha Stewart, Broker Peter Bacanovic with Illegal Insider Trading."

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What the Wells Fargo Scandal Teaches Us About Deterring White-Collar Crime | Economic Intelligence | US News 11/6/16, 1&21 PM The Big Wells Fargo Picture Can we discourage white collar crime without jailing the criminal? http://www.usnews.com/opinion/economic-intelligence/articles/2016-11…he-wells-fargo-scandal-teaches-us-about-deterring-white-collar-crime Page 2 of 23 What the Wells Fargo Scandal Teaches Us About Deterring White-Collar Crime | Economic Intelligence | US News 11/6/16, 1&21 PM (Win McNamee/Getty Images) (https://www.facebook.com/sharer/sharer.php? u=http%3A%2F%2Fwww.usnews.com%2Fopinion%2Feconomicintelligence%2Farticles%2F2016-11-02%2Fwhat-the-wells-fargo-scandal-teaches-us-aboutdeterring-white-collar-crime%3Fsrc=usn_fb) (https://twitter.com/share?url=http%3A%2F%2Fwww.usnews.com%2Fopinion%2Fe intelligence%2Farticles%2F2016-11-02%2Fwhat-the-wells-fargo-scandal-teaches-us-about-dete crime%3Fsrc=usn_tw&text=What%20the%20Wells%20Fargo%20Scandal%20Teaches%20Us%20Abou Collar%20Crime%20%7C%20Economic%20Intelligence%20%7C%20US%20New (http://www.reddit.com/submit? url=http%3A%2F%2Fwww.usnews.com%2Fopinion%2Feconomicintelligence%2Farticles%2F2016-11-02%2Fwhat-the-wells-fargo-scandal-teaches-us-aboutdeterring-white-collar-crime%3Fsrc=usn_rd) http://www.usnews.com/opinion/economic-intelligence/articles/2016-11…he-wells-fargo-scandal-teaches-us-about-deterring-white-collar-crime Page 3 of 23 What the Wells Fargo Scandal Teaches Us About Deterring White-Collar Crime | Economic Intelligence | US News 11/6/16, 1&21 PM MORE By David Brodwin (/topics/author/david-brodwin) | Contributor Nov. 2, 2016, at 10:55 a.m. The Wells Fargo Bank scandal has been driven from the headlines by the presidential election next week, but like the Terminator, it will be back. Wells Fargo's conduct in fraudulently opening two million (http://fortune.com/2016/10/12/wells-fargo-fake-accounts-scandal/) retail bank accounts was so foul that both political parties felt compelled to join in castigating the company and its CEO John Stumpf. Stumpf soon resigned; even his offer to disgorge $41 million in pay was not enough to save his job. While all eyes are on the election, Democrats and Republicans skirmish over the lessons that the public will draw from Wells Fargo. They're bghting over whether the event will lead people to think that regulations are too strong, or not strong enough. And they will bght over what kind of punishments are needed to deter further corporate crime on this scale. Is the CFPB a hero or villain? The Consumer Financial Protection Bureau, or CFPB, is at the center of the bght. Established in response to the 2007-08 bnancial crisis, the CFPB protects consumers from fraudulent bnancial brms and abusive products and services. Democrats pushed for its creation, while Republicans tried to kill it and, failing that, to limit its powers. The CFPB was one of the brst government entities to dig into the mess at Wells, and it ultimately bned the bank $100 million. Yet Rep. Jeb Hensarling (R-TX) – who has long sought to cripple the CFPB – faulted it for not moving more quickly and aggressively and argued for restricting it even further. "Hensarling reminds me of the kid who kills his parents and then wants to collect orphan benebts," said Sen. Sherrod Brown (D-Ohio) recently (http://www.latimes.com/business/la-bwells-fargo-regulators-20160927-snap-story.html). [RELATED: Wells Fargo's Big Scam (//www.usnews.com/opinion/articles/2016-09-09/wellsfargo-record-fake-account-Pne-shows-worth-of-cfpb)] RELATED CONTENT RELATED CONTENT http://www.usnews.com/opinion/economic-intelligence/articles/2016-11…he-wells-fargo-scandal-teaches-us-about-deterring-white-collar-crime Page 4 of 23 What the Wells Fargo Scandal Teaches Us About Deterring White-Collar Crime | Economic Intelligence | US News 11/6/16, 1&21 PM Wells Fargo's Big Scam (//www.usnews.com/opinion/articles/201609-09/wells-fargo-record-fake-account-bneshows-worth-of-cfpb) The consumer protection bureau got its biggest win yet, but Republicans still want to demolish it. (//www.usnews.com/opinion/articles/201609-09/wells-fargo-record-fake-account-bneshows-worth-of-cfpb) To jail or not to jail? The Wells Fargo case is going to bring new attention to what punishments and sanctions are needed to deter corporate crime. Notwithstanding the catastrophe of 2007-08, the SEC and other federal entities have not brought criminal charges against senior executives in the largest bnancial institutions involved. The reasons for "too big to jail" have been extensively documented (http://billmoyers.com/2013/09/17/hundreds-of-wall-street-execs-went-to-prisonduring-the-last-fraud-fueled-bank-crisis/), yet the root causes for this massive failure to prosecute remain unaddressed. ADVERTISING Replay Learn more But the Wells Fargo case stands as a testament that the kid gloves treatment is not enough. And in response, some commentators have stepped forward to persuade us that jail is never the answer. For example, Adrian Wooldridge writes the usually-sensible "Schumpeter" column for The http://www.usnews.com/opinion/economic-intelligence/articles/2016-11…he-wells-fargo-scandal-teaches-us-about-deterring-white-collar-crime Page 5 of 23 What the Wells Fargo Scandal Teaches Us About Deterring White-Collar Crime | Economic Intelligence | US News 11/6/16, 1&21 PM Economist. He tells us that "we should resist the temptation to single people out for harsh punishment simply because they are rich and successful (http://www.economist.com/news/business/21709331-lock-em-up-mentality-white-collar-crimemisguided-jail-bait)." Apparently he sees no difference between a brilliant entrepreneur like Bill Gates using too much computer time while he was an undergraduate at Harvard, and John Stumpf creating a business incentive system that led to two million fraudulent accounts. CARTOON GALLERY 1 of 146 Hide Caption | Full Screen KEN CATALINO/CREATORS SYNDICATE 1 of 146 http://www.usnews.com/opinion/economic-intelligence/articles/2016-11…he-wells-fargo-scandal-teaches-us-about-deterring-white-collar-crime Page 6 of 23 What the Wells Fargo Scandal Teaches Us About Deterring White-Collar Crime | Economic Intelligence | US News 11/6/16, 1&21 PM Prosecute the corporation or its leaders? A crucial question in all this is whether sanctions should target the corporation as a whole or the people who lead it. It's tempting to say the corporation should be the target (and this has been the SEC's tendency in recent years) because in most major failures of this kind the problem is systemic rather than individual. But an approach that targets the corporation and spares the leaders is hard to get right. The penalties must be big enough to sting, yet not so big as to destroy the business. If penalties are too low, the corporation considers them a wrist slap, just part of the cost of doing business. If the penalties are too high, a corporation gets crushed, employees lose jobs and shareholders lose their savings. The best example is Arthur Andersen – a mostly honest and well-run brm that was destroyed by a small handful of partners doing faulty auditing at Enron and WorldCom. To solve this problem, perhaps penalties could be tied to a percent of the amount of income earned while a fraud was in progress, or to the amount of stock appreciation that occurred during the period. [RELATED: The Real Wells Fargo Problem (//www.usnews.com/opinion/articles/2016-0919/wells-fargo-problem-is-fake-accounts-were-part-of-the-proPt-system)] RELATED CONTENT RELATED CONTENT The Real Wells Fargo Problem (//www.usnews.com/opinion/articles/201609-19/wells-fargo-problem-is-fakeaccounts-were-part-of-the-probt-system) The bank's internal systems didn't fail, they worked exactly as intended. (//www.usnews.com/opinion/articles/201609-19/wells-fargo-problem-is-fake-accountswere-part-of-the-probt-system) http://www.usnews.com/opinion/economic-intelligence/articles/2016-11…he-wells-fargo-scandal-teaches-us-about-deterring-white-collar-crime Page 7 of 23 What the Wells Fargo Scandal Teaches Us About Deterring White-Collar Crime | Economic Intelligence | US News 11/6/16, 1&21 PM Are boards and CEOs suf>ciently accountable to investor's pain? Even if bnancial penalties were improved so they innict enough (but not too much) pain on investors, other problems remain. Sadly, investors don't actually have that much control over the directors and senior executives who nominally represent them. Elections for boards of directors heavily favor incumbents and their hand-picked replacements. A competitive board election is extremely rare; it almost never happens unless an activist investor wields a big block of stock. Similarly, investors have no way to punish CEOs in the wallet for destroying value through corporate mischief. The "Say on Pay" resolutions established under Dodd-Frank are largely nonbinding. Even if a corporation is successfully prosecuted for fraud or other wrong-doing, and even if the penalties are properly calibrated, it's by no means clear that the shareholders can toss the execs who led the wrong-doing or the board members who let it go unchallenged. It won't be easy to upgrade the regulator and criminal justice system to stop what just happened at Wells Fargo. But realistically, sanctions against corporations rather than individuals will not do the job without major improvements in CEOs and director accountability. Until then, we still need deterrence at the individual level. Tags: Wells Fargo (//www.usnews.com/topics/organizations/wells_fargo), crime (//www.usnews.com/topics/subjects/crime), investing (//www.usnews.com/topics/subjects/investing), executives (//www.usnews.com/topics/subjects/executives), prison sentences (//www.usnews.com/topics/subjects/prison_sentences), Consumer Financial Protection Bureau (//www.usnews.com/topics/organizations/consumer_Pnancial_protection_bureau), banking (//www.usnews.com/topics/subjects/banking), Pnancial regulation (//www.usnews.com/topics/subjects/Pnancial-regulation) http://www.usnews.com/opinion/economic-intelligence/articles/2016-11…he-wells-fargo-scandal-teaches-us-about-deterring-white-collar-crime Page 8 of 23 Home > News & Statements > Press Releases SEC Charges Martha Stewart, Broker Peter Bacanovic with Illegal Insider Trading FOR IMMEDIATE RELEASE 2003-69 Washington, D.C., June 4, 2003 -- The Securities and Exchange Commission today filed securities fraud charges against Martha Stewart and her former stockbroker, Peter Bacanovic. The complaint, filed in federal court in Manhattan, alleges that Stewart committed illegal insider trading when she sold stock in a biopharmaceutical company, ImClone Systems, Inc., on Dec. 27, 2001, after receiving an unlawful tip from Bacanovic, at the time a broker with Merrill Lynch, Pierce, Fenner & Smith Incorporated. The Commission further alleges that Stewart and Bacanovic subsequently created an alibi for Stewart's ImClone sales and concealed important facts during SEC and criminal investigations into her trades. In a separate action, the United States Attorney for the Southern District of New York has obtained an indictment charging Stewart and Bacanovic criminally for their false statements concerning Stewart's ImClone trades. The Commission seeks, among other relief, an order requiring Stewart and Bacanovic to disgorge the losses Stewart avoided through her unlawful trades, plus civil monetary penalties. The Commission also seeks an order barring Stewart from acting as a director of, and limiting her activities as an officer of, any public company. Stewart has been Chairman and Chief Executive Officer of Martha Stewart Living Omnimedia, Inc. Stephen M. Cutler, the SEC's Director of Enforcement, said: "It is fundamentally unfair for someone to have an edge on the market just because she has a stockbroker who is willing to break the rules and give her an illegal tip. It's worse still when the individual engaging in the insider trading is the Chairman and CEO of a public company." Wayne M. Carlin, Regional Director of the Commission's Northeast Regional Office, said: "The Commission simply cannot allow corporate executives or industry professionals to profit illegally from their access to nonpublic information. The coordinated action announced today by the U.S. Attorney's Office shows that the consequences for those individuals will be even greater if we uncover evidence that they obstructed our investigation." Stewart's Dec. 27, 2001, ImClone sales came as ImClone and the market anxiously awaited an imminent decision from the Food and Drug Administration on one of ImClone's key products, a cancer treatment called "Erbitux." Bacanovic's unlawful inside tip was that other Bacanovic clients — ImClone's CEO, Samuel Waksal, and Waksal's daughter — had just placed orders to sell all the ImClone stock they held at Merrill Lynch. At the time, Waksal secretly knew that the FDA was about to reject ImClone's Erbitux application. Information about the Waksals' efforts to sell was confidential under Merrill Lynch policies, which prohibited employees from disclosing client transactions or effecting client trades on the basis of other client transactions. Had information about the Waksals' efforts to sell been known publicly, it would have signaled insider pessimism at ImClone about the FDA decision, the prospects for Erbitux, and the future of the company, according to the complaint. The Commission alleges that, during the morning of Dec. 27, 2001, Bacanovic instructed his assistant, Douglas Faneuil, to tell Stewart that Waksal and his daughter were selling all the ImClone stock held in their Merrill Lynch accounts. During a subsequent telephone call, Faneuil conveyed that information to Stewart, who promptly instructed Faneuil to sell all 3,928 shares of her ImClone stock. The next day, Dec. 28, 2001, ImClone announced that the FDA had decided not to accept ImClone's Erbitux application for filing. By the close of the next trading day, Monday, Dec. 31, 2001, the price of ImClone stock dropped 16% to $46 per share. By selling when she did, Stewart avoided losses of $45,673. The Commission alleges that Stewart and Bacanovic went on to lie when the Commission staff and criminal authorities questioned them about the facts surrounding Stewart's sale of ImClone stock. Stewart and Bacanovic fabricated an alibi for Stewart's trades, stating that she sold her ImClone stock because she and Bacanovic had decided earlier that she would sell if ImClone's stock price fell below $60 per share. In addition, Stewart told the government that she did not recall anyone telling her that day that any of the Waksals were selling their ImClone stock. Pursuant to a separate Commission order issued this morning, the Commission has barred Faneuil from association with a broker, dealer, or investment adviser. The Commission acknowledges the assistance of the U.S. Attorney's Office for the Southern District of New York and the Federal Bureau of Investigation in the investigation of this matter. Contact: Wayne M. Carlin (646) 428-1510 Barry W. Rashkover (646) 428-1856 See Also: Litigation Release 18169; Complaint Last modified: 6/4/2003 Notes From aLtttle Fish By R. Foster Winans Vn I I I I A I E}OYLESTOWN, PA was Prosecuted and convicted of fraud for trading 1985, on the stock market in advance of mv "Heard on the Street" colu6ns in The'Walt Street Journal My share S75,000 of the in illegal profiB amounted to I admiited my role, apologized for violattung the ethics of my profession, and served nine months in a federal prison in Danbury, Conn. My case was brought bY an ambl- $30,000. tiouJ unitcO States attorney, Rudolph Giuliani, then cultivating a rePutation. for being tough on whitecollar cilme. The public was iust becoming inter- ested in bustness news, and suddenly here was a sordid, inside look at how Wall Street reallY worked' By the time tlte stock market scan' aaf U the mid-1980's had PlaYed oug a few rich guYs had Paid heftY fines, done a year or two in iail, and re entered society with their fortunes intact. Tbe scandals crippled several brokerage houses so badly they had to be sold off, or they simply imploded. But the big fish got awaY, as big fish tend to. Insider trading vas epidemic at the time, thanks to a buoYant mar' ket and a merger manla tlat R. Foster Winsns is outhor of gave "Trad' ing Secrets.' Seduction and Scandol at The Wall Street Joumal." investment bankers control over the fates of large corporations. Nobody complains when Prices are going uP, andbusiness crimes are'hard to d+ tect and harder still to Prosecute successfully. So the cop on the beat Mr. Giuliani - grabbed the slowest and dimmest-witted miscreants, like me, and came out a hem. Two decades later, history may not be repeating itself, blt it is rhyming: an ambitious New York State attorney general Eliot SPitzer, grins br6adly for the cameralt as he seals the $1.{ billion deal that brings wall Sffeet to justice. A handful of this cycle's bad guys will be drummed out of the business, and a few will do time- . ,.'i harvested and exploited inside infor' mation ahut analysts' recommendations to reward their most profitaHe acoounts, the institutimal investGs like mutual and penslon funds. Amolrg the thousands of documents that reEF lators made public this week was this email inessage from an analyst toan institutional investor: "Yes, ttre 'little guy' who isn't sm?{ about the nu: ! ances may get misled." A subcrilture sprung up iust to cash in on corporate "whisper numbers," those salacious-sounding quarterly profit forecasts leaked to analysts he' iore the rest of the investing public' Eandouts of surething initiai public stock oflerings to favored clients hatrE been well documented, but don't ex' pertbilliondollarsettlements. - Why Wall Street scandals never nab the big guy. 'The fines being Paid stagger the imagination but, in the context of Wall Street, they're nuisance fees' Some reports suggest that ll billion of it may even be tax deductible. Research analYsts were Just the pawnbrokers for a much larger scamTrading desks at major brokerage houses, where the real money is made, :r For the moment, Mr. SPitzer is ttre hero of the little guy. The most obvio.us ;iliain; - ;ce"powerful, now coPoletelv discredited anatysts like Henraci drubmarL afi rfre corr:upt system of stock resear'ch ;liffi;i-;J * ii *"i pricticed in the 1990's ''jC have been vanquishdd. But don't tE lulled by a tew public hangings into thinking the bubble ahd its aftermath were their fault, or that -Wall Stree] has been reformed and it won't haP pen again. It maY take a few Yeary [9; the public to forget how it was thot ougily misled, but you can bet that thq next greedy market will produce 4lr- otherirop of scandals, another would; be hero, and a fresh supply of dimwits, like me, to make them look good- .B i )' Mathematicians Fior Marthat 7/z/ry ) you'll make $1,ffi0 and, if not, you'll lose Once again, your chances of winning are l By John Allen Paulos : I Martha Stewart, if consider p price of the stock the next week. Given this information, you must decide whether to buy or sell (or short) the stock. If you guess correetly, in In each of these pairs of situations the seeming unfairness of the second is illusory. lnsider trading, whiclt is thC iszue of coiuse, is hard to coherenff define or condemn. It's illegal for a company lnsider to buy stock after learning of a simple pair of situations irvoMng colored balls in urns. ' In the first situation you arc told that you must pick a ball at random from an trn containing 10 green balls and 10 red balls. Picking a Sreen one wins S1,000, picking a red one loses $1,000. In the second scenario, someone you disEust places an indeterminate number of green and red balls in the urn and tells a few other people you disEust what ie's done- You must decide whether to bet on green or red and then pick a ball at random. If you pick the eolor you bet on, yott win $1,000 and,, if not, you lose $1,000. Although the second situation may be psyctto logically unpleasant, a little thought tells you tbat pur chances of winning are 507o in both $hntions. Now consider a second pair of situations involving stocks, entities whose behavior is also subject to chance. In the frrst situation you buy a randomly fluctuating stock just as likely, in the up as to go down. Further asshort run, to sume that you'll either earn $1,0fi) il it rises during the next week or lose $1,000 if it falls. In the second, you're told that there is evidence that insider traders, in possession of new inforrnation, will bring about-you have no idea which-either a $1,000 rise or a $1,000 fall in the 5070 both situations. you're reading this, in- dulp a matbematician aad $1,000. . his company's secret technical advances. But if this same person changes his intent to sell the stock after finding out about the breaEthrough, he has violated no rule. lnsider trading may smell bad for other rtasons (a decline in investor confidence or excesisiye returns t,o insiders). But for most purToses it can be viewed iN one autong the many unantic' ipatable factors a.ffecting the price of a stock' which, depending on investors' artions, can cut either way. Insider tradlng may be a crime, but it is a rather anomalous one, Normal people don't daydream about committing murders, robberies or accounting fraud. Many investors do, however, fantasize about overhearing a hush-hush conver' sation on an elevator or seeing papers on an upcoming business deal al a copy center, and the yearning for such information, the angling for such an edge, is very close to what makes the market work Mr. Paulos, a professor ol mathematics at Tetn' ple tlniaersity, is the author, most recmtlg, ol "A Mathematicicn Plogs the Stock Market" (Basic Books, N03). U.S. Supreme Court Reaffirms the Fraud-on-the-Market Presumption of Reliance in Securities Class Actions hy !{illlamr A. Sespr n Halliburton Co. v. Erica P. lohn Fund, Inc.l (Halliburton IP), thre U.S. Supreme Court was presented the opportunity to reexamine its ruling in Basic v. Levinson3 that permits a securities class action plaintiff to use the presumption of fraud- on-the-market in order to satisfy the element of reliance in Section 10(b) claims against defendants. The Basic presumption applies class wide and discharges a plaintiff from establishing actual proof of common reliance among all class members. It presumes that all class members purchased their shares at a mislead- ing price due to alleged misrepresentations by the defendant. The plaintiff must establish four elements in order to apply the presumption: 1) the alleged misrepresentation was publicly known; 2) the misrepresentation was material; 3) the stock was traded in an efficient market; and 4) the plaintiff traded the stock between the time the misrepresentation was made and when the truth was revealed. The Supreme Court declined to overturn Basic, but resolved a circuit conflict by confirming that, under Basic, defendants can challenge and defeat the presumption at the class certifi- cation state, while raising new issues for lower courts to resolve. The Details of the Case John Fund, Inc. was the lead plaintiff in a securities class action against Halliburton Co, Inc. The fund alleged Erica 66 P. NEw IERSET LAwyER I April 2015 Halliburton misrepresented certain financial results. Following the release of negative news, the price of its stock dropped. The district court certified the class action, and the Fifth Circuit affirmed the district court's ruling to certify the fund's class. The district court declined to consider 'price impact' evidence at the certification stage, and found common issues predominated under Rule 23(b)(3).a Hal- liburton argued before the Fifth Circuit that the district court should not have certified the class because the alleged fraud did not affect the market price of the stock, and that the fund was not entitled to rely on the fraud-on-themarket presumption. The Fifth Circuit reasoned that price impact evidence does not bear on the question of common predominance, and should be considered only at the merits stage.s Baslc addressed a public policy concern that defrauded purchasers of common stock in the open market transac- tion should be permitted to employ class actions in order to recover for losses incurred as a result of the fraud by a public company. Purchasers of common stock can bring private securities action under federal law to recover for fraudulent losses.u Section 10(b) of the Securities Exchange Act of 1934, as amended,'and the Securities Exchange Commission Rule 10(b)-58 prohibit false material statements in connection with the purchase or sale of a security. A private securities plaintiff needs to establish six elements in a 10b-5 cause of action: 1) a material misrepresent ation, Z) NJSBA.COM scienter, 3) a connection with the pur- defendants in other securities actions, chase or sale of a security, 4) reliance, 5) the Court also ruled that Halliburton economic loss, and 6) loss causation.e The Basic Court considered that too much burden would be placed on a securities fraud plaintiff who purchased stock on an impersonal stock market to prove reliance, without some accommodation. Proof of direct reliance by each plaintiff would significantly hin- could rebut the presumption at the certification stage by showing a lack of price impact. The Court interpreted Halliburton's argument that some markets for securities are more efficient than the market der certification of securities inefficient. The Court noted that the debate about an efficient market is not new and that the Basic Court acknowledged the disagreement and refused to be the iudge of the debate. The Court reasoned it was not equipped to make a determination of the various views debated among the economists and class actions. Fraud-on-the-market presumption was the accommodation in Basic. The presumption assumes an open and developed market that reflects available information about a company.'o Baslc presumed the market "acts 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 market price."11 Analysis Since the Basic decision, academic research has questioned whether the capital market is fundamentally efficient. The Halliburton 1I Court was asked by Halliburton to overturn the premise espoused in Basic; namely, that if an efficient market exists, a securities fraud plaintiff can meet the evidentiary burden of reliance with the fraud-on-themarket theory. Halliburton asserted that Baslc should not be followed because academic research shows that Basic was premised on a faulty assumption that markets operate efficiently. The fund argued that Basic is well settled, and that without Baslc class actions could not be brought in 10(b) and 10(b)-5 cases. Congress also had the opportunity to overturn Basic, but failed to do so in enact- ing the Private Securities Litigation Reform Act of 1995.t'z II Court was not persuaded by Halliburton's arguments, and affirmed Basic's fraud-on-the-market presumption. However, importantly for The Halliburton Halliburton and for similarlv situated NJSBA.COM for others, and that Halliburton was not suggesting capital markets are always remains the predominance element of Rule 23(b)(3). Basic did not relieve the securities plaintiff of the burden of proving predominance. However, Basic provided another roadmap under the fraudon-the-market theory to prove predominance by establishing publicity, market efficiency, and market timing at the class certification stage. While the fraud-on-the-market presumption does not require the plaintiff to prove the alleged misrepresentation impacted the price of the stock, the plaintiff still must establish that the defendant's misrepresentation was pubIic, material and that the stock traded on an efficient market, through expert testimony." social scientists, and that Basic adopted a middle ground in adopting a rebuttable presumption that the market oper- Conclusion The Court confirmed that, at the ates efficiency. class certification stage, the defendant The Court also declined to espouse Halliburton's argument that investors do not invest based on the integrity of may present rebuttal evidence to the the market, such as value investors. The Court noted Basic did not deny the existence of such investors, and had concluded that most investors rely on the integrity of the market price. Howeveq the right to rebut the presumption provides a means to address the issue, and Halliburton can challenge specific plaintiffs. The Court found Baslc did not contradict recent Supreme Court decisions that require strict compliance with Rule 23, and does not provide an "escape hatch" for 10b-5 plaintiffs. Halliburton had argued that in the Dukes matter':' the Court required a class action plaintiff to prove issues were in common for effect that the alleged misrepresentation did not impact the price of the stock. Since Basic's fundamental premise is that the misrepresentation impacted the price of the stock, price impact evidence goes to the predominance issue at the class certification stage. Consequently, the certification stage will involve more intensive discovery, experts for price impact, and a more rigorous inquiry by the court. To what extent Halliburton 1I impacts other aspects of securities class actions, such as loss causation,ls remains a ques- tion for the future. sumption does away with common proof of reliance. According to the Nonetheless, Hclliburton represents a significant decision for defendants in that it provides defendants another argument to defeat a class certification motion and an incentive to seek an early class certification determination. The practical effect of Halliburton on plaintiffs is increased costs due to the need to evaluate price impact and addi tional discovery costs. Nevertheless, the actual application of Halliburton II may Court, in securities class actions the crucial requirement in class certifications be more theoretical because plaintiffs' burden at the class certification stage is the entire class. However, the Court reasoned that Basic does not require proof of common reliance among class members, since the fraud-on-the-market pre- NEW IERiEY LAwvER I April 2015 67 23(a) that a plaintiff must demonstrate modest/ and depends on the nature of the price movement of the stock at the and adequacy of representation. time of the misrepresentation and at the time the truth is disclosed.,6 d4 predominate. l3l Also referred to as the efficient market 11. 1s u.s.c. s 78i(b). 17 C.F.R. S 240.10b-5. Basic, 485 U.S. at 244. Pub.L. No. 704-67, 109 Stat. 737i Amgen 13. to settle. t6. Luis Aranaz v. Catalyst Pharmaceutical Partuers, Inc, et al. (No. 13-23878 (S.D. FI.) (Oct. 29,2014) (granting class certifi- (2013). cation). The presumption of price impact may not be indirectly rebutted by showing the misrepresentation was immateri- 131 S. Ct. 2s47 (2071). was already known Inc. v. Connecticut Retirement Plans and Trust Funds, 133 S. Ct. 1,784, 1207 al in that the truth of the information in the market. 74. Factors to be considered for the efficient market include: 1) the average weekly trading volume during the class period: 2) the number of security analysts who followed the company; 3) the number of market markers; 4) whether the compa- 485 U.S. 224 (7988). Federal Rule of Civil Procedure 23(b)(3) provides, in part, that a class action may class members predominate. ny is entitled to file an S-3 registration statement: and 5) proof of cause and Halliburton had conceded that the fund had met the conditions of F.R.C.P. Rule effect relationship between unexpected corporate events and the response in the Provident's BusinessAdvantage Checking rewards you with unlimited cash back on the total amount of your signature-based debit cardr transactions, Use your card for purchases or expenses like meals, travel, office supplies, insurance, lease payments and more. :tgi FBEE 1,000 transactions per month, FREE Online Banking & Bill Payment3 Fie No minimum balance requirementsa if,l $* FREE, lnstant-lssue Provident Business Debit Mastercard@ ProvidentsnNK Commitment you can count on; For more information, call 866.4NJ.B|ZZ or visit ProvidentNJ.com Cash l\,4amgement 68 NEw acounts JERSEr . iiircnffi ffi tr 87 branches in NJ & PA to serve you. and seryices. Ask for details LAwyER I April 2O1S S. 10. 12. be maintained if the court finds that questions of law or fact common to the 5. lohn, Inc. v. Halliburton Co., Dura Pharmaceuticals, Inc. v. Broudo, 544 u.s. 336, 347-42 (2OOs). Blue Chip Stamps v. Manor Drug theory. liburton I). 3. 4. P. 9. ENDNOTES Halliburton II is the second time the Supreme Court decided an issue in this case. In 2011, the Court reversed the Fifth Circuit finding that the loss causation is not required to be shown for certification. 131 S. Ct. 2779 (2017) (Hal- Erica often is relevant for the purpose of 7. 134 S. Ct. 2398 (2014). A plaintiff is not required to establish loss causation at the certificate stage. establishing loss causation at the merits stage and, to the extent that the defendant is unsuccessful at the certification stage, in establishing a lack of price impact will have unpleasant ramifications later in the case when attempting 8. ticing lawyer for over 35 years. Supp. Ct. 2779 (2011). Price impact evidence 421, U . S. 723 (197 s). defense and litigation. He has been a prac- 15. F. Stores, 6. 1.. 2. The only issue remaining in the certification stage was whether common questions Willtam A. Despo focuses his practice on corporate, securities, governmental stock price. Cammer y. Bloom, 77 1264, 1286-87 (D.NJ. 1989). numerosity, commonalit, typicality, NJSBA.COM
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Frauds in stock market

Wells Fargo which fraudulently opening a two million retail account affected the
reputation of the company to the point where the CEO John Stump had to resign. Just like the
Wells Fargo case, another top management official called Martha Stewart and is Broker Peter
Bacanovic faced with fraud charges by conducting illega...


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