What Comes Down Did Not Necessarily Go Up: Price Impact In Securities Class Actions

The Columbia Law School Center on Corporate Governance recently hosted a conference on M&A and Corporate Governance at which Columbia Law Professors Merritt B. Fox and Joshua Mitts presented a working paper entitled "Event-Driven Suits and the Rethinking of Securities Litigation." The paper raises many interesting issues concerning the analysis of price impact in securities class actions, but I was struck most by the discussion at the end of the article on class certification. The authors state that the United States Supreme Court "has been less willing to look through to the economic substance behind doctrinal labels than we are, and as a result has stumbled around somewhat. It has now landed, however, at a spot not too far from what we recommend here." I believe that the article is correct in this statement concerning the class certification decisions by the Supreme Court, but district courts (and courts of appeal) attempting to implement the Supreme Court's rulings seem to have stumbled further. Contrary to the teachings of the article, most district courts (and courts of appeal) have found that alleged misrepresentations have had a price impact based almost exclusively on evidence of a stock price drop at the time of a "corrective disclosure" without much if any analysis as to whether the stock price drop actually reflects artificial inflation in the stock price as a result of any alleged misrepresentation of omission. Given that a securities lawsuit is not filed unless there has been a stock price drop, the analysis by these courts has incorrectly resulted in class certification being granted in nearly every securities class action where a class certification motion is filed. I hope that the forthcoming publication of this article helps district courts and courts of appeal to rethink the approach that they have taken so that they actually scrutinize whether an alleged misrepresentation or omission actually inflated the price of a company's stock.

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