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
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).
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
)'
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
Purchase answer to see full
attachment