This article is sponsored by Kessler Topaz Meltzer & Check, LLP.
In our previous article concerning legal developments affecting shareholder litigation, we mentioned the Halliburton v. Erica P. John Fund, a case which could potentially upend 25 years of jurisprudence and make it much more difficult for shareholders to recover investment losses that occur as a result of corporate fraud and abuse. The Supreme Court heard oral arguments on March 5, 2014 and the Supreme Court Justices are currently deliberating the issues. A decision is anticipated by early June of 2014.
The Erica P. John Fund (“the Fund”), seeking to represent a class of Halliburton shareholders, brought suit against Halliburton alleging that the company falsified its financial records and misled investors about potential liabilities. The case is still at the class certification stage but has now been presented to the Supreme Court twice. In its second round at the Supreme Court, the Court is tasked with deciding whether to overturn or modify the “fraud-on-the-market” presumption of reliance (the “presumption”) established in Basic v. Levinson. The presumption allows shareholders to proceed in a securities fraud class action lawsuit without proving they actually relied on a particular fraudulent or misleading statement made by a corporation when purchasing a given security. Instead, shareholders’reliance can be presumed if the shares were trading on an efficient market and the statements and corrective disclosures result in a change in the particular security’s price.
Prior to oral argument in Halliburton, there was significant concern among institutional investors that the Supreme Court would completely eliminate the presumption. Four of the nine Supreme Court Justices (Thomas, Scalia, Kennedy, and Alito) indicated in 2013 that they were willing to consider overturning the presumption, and even though four other Justices (Kagan, Sotomayor, Ginsburg, and Breyer) had all indicated they were not interested in overturning the presumption, the vote appeared to be in the hands of Chief Justice John Roberts, who had given no earlier indication as to his opinion.
At oral argument, Halliburton argued that the presumption should be overturned and plaintiffs should be required to show actual reliance or that, in the alternative, defendants should be allowed to present evidence at the class certification stage to rebut the presumption. Halliburton contended that the presumption is based on flawed economic theory. The Fund argued that the presumption should remain available because it is a substantive part of U.S. securities law, Congress has legislated assuming the existence of the presumption, and the presumption was not based on economic theory but instead on the premise that markets react reasonable and promptly to news and events regarding particular companies. The U.S. Securities and Exchange Commission (“SEC”) lent further credence to the Fund’s arguments by explaining that if the presumption was overruled and “people were told, if you buy without doing this sort of research into primary sources, you will have no potential recovery at the end of the day…certainly the consequences are potentially dramatic.”
Based on the questions asked by the Justices at oral argument, it does not appear likely that the presumption will be completely abolished. Only a small portion of oral argument focused on the idea of overturning the presumption and, by and large, the Justices’ questions and comments did not seem receptive to the idea. Instead, some of the Justices seemed interested in modifying the presumption and requiring plaintiffs to provide an event study that demonstrates price impact at the class certification stage. However, there appeared to be substantial disagreement among the Justices as to whether that would be appropriate. Justice Kennedy referred to the idea of an event study as the “midway position” while Justice Sotomayor made clear that she did not “see how this is a midpoint.” Ultimately, Justices Alito, Scalia, and Kennedy expressed some enthusiasm for modifying the presumption while Justices Kagan, Ginsburg, Sotomayor, and Breyer did not appear to be as convinced. As Justice Breyer summarized, “what reason is there for purposes of certification to go beyond the efficient market? …They all bought on the exchange. It’s not an irrelevancy. Everybody would have to say it’s certainly relevant to the case and they all have the issue in common.”
Ultimately, Chief Justice Roberts may be the deciding vote and his questions at oral argument provided little insight into his views. Chief Justice Roberts noted that it would not be that difficult to demonstrate that markets were efficient (suggesting he might agree with the Fund that an event study should not be required) but he also made comments suggesting he may have concerns that cases rarely reach the merits stage after a class is certified (suggesting he might want to make it more difficult for a class to be certified).
The Justices are now in deliberations and they likely have three options before them: (1) leaving the presumption intact and allowing securities fraud class actions to proceed as before; (2) overturning the presumption and requiring plaintiffs to prove actual reliance; (3) requiring evidence of price impact to be presented by plaintiffs at the class certification stage; or (4) allowing defendants to rebut the presumption with evidence showing no price impact at the class certification stage.
If the Court overturns the presumption or modifies the evidence required or allowed at the class certification stage, the impact could potentially be, in the words of the SEC, “dramatic.” Shareholders would need to reevaluate their litigation strategies. While the overturning of the presumption seems less of a likelihood based on the tenor of oral arguments,the absence of the presumption may force shareholders to routinely document the material they rely upon when purchasing or selling shares in a particular company. If the Supreme Court instead modifies the presumption,shareholders can expect it to likely be more difficult, costly, and time consuming to recover investment losses. Whatever the outcome may be, Kessler Topaz is monitoring the legal developments and working with institutional investors of all sizes to ensure their continued ability to recover investment losses.
Since 1987, Kessler Topaz has specialized in the prosecution of securities class actions and has grown into one of the most successful shareholder litigation firms in the field. Kessler Topaz is committed to not only serving as legal counsel to its clients, but also to being an educator on all issues related to shareholder activism and asset protection and recovery. To learn more about our Firm, our services, and the investor education opportunities we offer, please visit www.ktmc.com.
Transforming Saudi Arabia’s Capital Markets
This article is sponsored by State Street.
– Vision 2030 and the Aramco privatization mark a decisive point to advance Saudi Arabia’s financial sector — a critical ingredient to the country’s economic transformation
– Saudi’s “Financial Triad” remains partially incomplete with a sound banking system and a rapidly emerging equity market, but an immature bond market.
– The privatization of Saudi state assets (including Aramco) could deliver a boost to the depth and sophistication of the Saudi equity market and — if cleverly designed— have positive spillover effects into other areas of finance and policy.
– The timing is ideal to launch an accompanying systematic drive to build local currency bond markets, which is a prerequisite for achieving the broader economic goals of Vision 2030.
Saudi Arabia’s Vision 2030 is remarkable in its aspiration to engineer far-reaching economic transformation. As a global asset manager, we note that one of the three pillars of this vision sets out the aim to make the country a “global investment powerhouse.” 1
While Saudi Arabia has a strong legacy as a sovereign investor in foreign markets, this ambition also requires its local financial system to deepen across all sectors. Strong capital markets work together with a banking system to channel investment and ensure efficient capital allocation across the economy. In the absence of such channels, many worthwhile business ventures never take place, capital is misallocated and underutilized, and economic growth remains below its potential.
To read the full study please click here.
1 Foreword to Vision 2030, http://vision2030.gov.sa/en/foreword.
Sovereign Wealth Funds as a Driver of African Development
This article is sponsored by Quantum Global.
Sovereign wealth funds (SWFs) are becoming important sources of development in many countries. African SWFs have been growing in recent years, as many countries joined the international trend in establishing SWFs, while many others are preparing to join. Growth of SWFs has been driven by rising commodity prices until 2014 and improving economic growth rates. At the same time, Africa continues to face a number of development challenges, raising the question of whether SWFs can play a role in fostering economic development on the continent. This paper analyses the dynamics and role of SWFs in promoting development in Africa. The paper notes that SWFs can play a more active role in Africa’s development by bridging the infrastructure funding gap, supporting industrial development and economic diversification, reducing macroeconomic volatility and enhancing intergenerational equity. For SWFs to be effective in delivering their mandates and supporting economic development, they need to have clear goals and objectives, improve their governance and transparency frameworks, improve their risk management frameworks and embrace the Santiago Principles. African governments need to develop more attractive frameworks and climates for SWFs to invest in the continent, especially in sectors that contribute more directly to addressing Africa’s development needs.
To read the full study please click here.
Collateral: The New Performance Driver
This article is sponsored by BNY Mellon.
In 2017, the global buy-side community faces considerable liquidity and funding pressures, stemming from market and regulatory reforms that are causing disruption. As a result, access to high-quality collateral, funding and liquidity is not only a pressing concern but has emerged as the essential new performance driver for the buy-side.
This disruption is the result of two opposing forces. Stringent regulatory requirements are forcing market participants to seek collateral — generally of high quality — in order to secure trading exposures. At the same time, the sell-side — or dealer-sponsored financial plumbing used to supply liquidity and collateral to the market — is experiencing challenges due to Basel III capital and liquidity constraints.
A major concern among multiple buy-side firms is that the next market-stress event will occur not because of a lack of collateral in the financial system but rather due to the inaccessibility of this collateral.¹ This scenario is forcing firms to reevaluate their collateralized trading portfolios, recalibrate asset allocation strategies and in some cases review the investment products offered to end clients.
This paper presents the findings from BNY Mellon–PwC outreach to senior buy-side executives from over 120 global firms conducted during the first quarter of 2017. It provides insights on demand-supply imbalances that are being experienced by buyside firms and the possible solutions they are exploring in response to fears that ready access to liquidity and high-quality collateral may become scarce in the years ahead.
The picture that emerged from these discussions was one of a buy-side community both grappling to adjust to its new collateralized trading obligations as well as striving to secure access to sustainable sources of funding and liquidity.
To read the full study please click here.
1. Collateral can be inaccessible due to decreasing velocity of collateral, which indicates how much, on average, a single dollar of collateral is reused over a period of time. This is analogous to the concept of “velocity of money.”
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