Law Times

Page 11 Law Times • September 2, 2013 Securities class actions U.S. ruling casts doubt on fraud-on-the-market theory BY Julius Melnitzer For Law Times C anadian securities legislation governing misrepresentation in both the initial public offering and secondary markets generally allows investors to sue whether or not they relied on an alleged misrepresentation. That makes it unnecessary for plaintiffs to rely on the fraud-on-the-market theory that forms the underpinnings of securities class actions in the United States. That theory, rejected by lower courts in Canada but not yet directly addressed by an appellate court, permits judges to presume that plaintiffs have relied on an impugned misrepresentation or disclosure. The economic foundation of the theory, however, can still come into play in Canada. "The bedrock way in which plaintiffs try to prove materiality is through efficient market theory economics," says Andrew Gray of Torys LLP. As it turns out, market theory economics provide the rationale for the fraud-on-themarket presumption. "The economic theory behind this presumption is that in an efficient market, all publicly available information is rapidly incorporated into the market price of a security and thus transmitted to investors," says Gray. "Therefore, the theory holds, investors indirectly rely on all publicly available information by relying on the price of a security and because immaterial information is unlikely to affect the price of a security, investors are presumed not to rely on such information." But even in the United States, there's controversy over the validity of the presumption. That's why the U.S. Supreme Court's recent decision in Amgen Inc. v. Connecticut Retirement Plans & Trust Funds is of interest to Canadians. In that case, Amgen relied on economic evidence that questioned the basis of the fraudon-the-market presumption. But Justice Ruth Bader Ginsburg, who wrote the majority opinion, didn't find it necessary to rule on the validity of the presumption. In a concurring opinion, however, Justice Samuel Alito opined that the theory "may rest on a faulty economic premise." Justices Clarence Thomas and Anthony Kennedy, in dissent, expressed similar doubts. Observers expect these comments in Amgen will encourage the U.S. defence bar to directly challenge the economics behind the fraud-on-the-market presumption. "In light of the questions raised by the dissent and concurrence, the defence bar is likely to soon mount a challenge to the 'economic premise' of the fraud-onthe-market theory in an effort to avoid incurring the expense of litigating class actions which relate to non-material disclosures and omissions," write the authors of a recent update on the issue by law firm Bracewell & Giuliani LLP. Amgen is also interesting because it interrupts a recent trend in the Supreme Court that made it harder for plaintiffs to institute class actions. In its main ruling, the majority held that proof of materiality motions in Canadian seisn't a prerequisite to cercurities class actions even tifying a class. if it is no longer a feature While agreeing of certification motions that materiality is a in U.S. securities fraud core component of the class actions," says Gray. fraud-on-the-market The economics betheory, the majority hind the fraud-on-the concluded that provmarket presumption ing it wasn't necessary could also have an imat the certification stage pact on common law because it was an obas opposed to statutory jective issue that could claims for misreprebe proven through evisentation. dence common to the "Arguably, our courts class. The court also have certified common ruled that the absence of proof of materiality 'The difficulty with Amgen is that it raises law securities claims on wouldn't create a situ- questions about the validity of the efficient- the basis of evidence regarding the efficiency of ation where individual market hypothesis,' says Dimitri Lascaris. markets," says Dimitri issues predominated. If the plaintiffs failed to prove materiality at Lascaris of Siskinds LLP in London, Ont. "This has allowed them to conclude that a later stage, the court would dismiss the case without any need to try the individ- reliance is a common issue and that plainual issues. The upshot is that materiality is tiffs must not prove individual reliance. The now a matter for trial or summary judg- difficulty with Amgen is that it raises quesment in the United States and need not be tions about the validity of the efficient-market hypothesis." addressed at the certification stage. Rejection of the efficient-market hyThe situation in Canada, however, is pothesis also raises issues regarding the different. "Because of the merits-based leave test proof of damages in securities class actions. "Under the statutory regime, any stock that plaintiffs must satisfy to commence a secondary-market case under provincial se- drop that occurs at the time a disclosure curities legislation and because of the some- is corrected is presumed to be entirely the evidence test that must be met by plaintiffs result of the correction and the burden is for each component of the test for certifica- on the defendant to prove otherwise," says tion, economic evidence intended to prove Lascaris. "But if the efficient-market theoor disprove materiality will likely continue ry is discredited, how will the defendants LT to be a component of leave and certification rebut the presumption?" Welcome to a new legal powerhouse. Announcing the new partnership between two of Canada's best known and highly regarded criminal lawyers, Marie Henein and Scott Hutchison. Having litigated against each other for years, they have combined their wins into one impressive column. Both are members of the American College of Trial Lawyers and Supreme Court Advocacy Institute and authors of frequently cited texts. They have been recognized for their excellence in trial and S O M E T I M E S T H E B E ST D E F E N C E IS EVEN MORE DEFENCE. appellate advocacy, appearing frequently at the Supreme Court of Canada and the Ontario Court of Appeal. Their entire team of outstanding lawyers offers experience in criminal, quasicriminal, regulatory and cross-border litigation. More experience. More defence. www.hhllp.ca Untitled-2 1 www.lawtimesnews.com 13-08-27 8:38 AM

• Cover