Securities Regulation -- 2011

Apollo Group, Inc. v. Policemen's Annuity and Benefit Fund   (U.S. Supreme Court)

Effect of efficient market theory on proof of reliance requirement in securities litigation

The Ninth Circuit ruled that a company can be held liable to its shareholders for a drop in the company's stock price after two analyst reports downgraded the stock. The reports included an evaluation of various factors, including recent corrective disclosures from the company published in the Wall Street Journal, the Arizona Republic and the Chicago Tribune. The court found that the jury could have found that the reports were "corrective disclosures" under the law.

The Supreme Court is being asked to review the case, and the company argues that analyst reports several days after a company makes corrective disclosures should not subject the company to additional liability when they affect the stock price. The efficient market theory in securities litigation allows plaintiffs to sue without having to prove that they relied on false or deceptive actions by the company, since courts assume that the securities markets are efficient and assimilate company statements rapidly into the price of the stock. The company argues that the same efficient market principle should prevent a plaintiff from benefiting from third-party analyst reports published well after corrective disclosures about previous false or deceptive actions have been made.

The NAM filed an amicus brief 12/17 supporting Supreme Court review. We argued that defendants should get the benefit of the efficient market theory after corrective disclosures occur. Plaintiffs get the benefit of the theory by not having to prove reliance, and there is no rational basis for applying different standards of market efficiency for false statements and true statements. According to one appeals court, "An efficient market for good news is an efficient market for bad news."

We supported Supreme Court review of this case to help eliminate the uncertainty and unpredictability of securities litigation, and the resulting heavy costs of defending fraud claims. On March 7, 2011, the Court declined to review this appeal.

Related Documents:
NAM brief  (December 17, 2010)


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