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.
How Do Public Pension Funds Invest?
This article is sponsored by State Street.
Public Pension Funds (PPFs) are highly idiosyncratic and distinct from other types of institutional investors. The universe of investors that fall within our definition of a PPF is numerous and varied. We count 115 institutions in 70 jurisdictions, diverse in geography and economic development. For the purposes of our study, we examined the top 16 funds whose assets constitute just over two-thirds of the total universe. Despite all the idiosyncrasies of PPFs, we have found some shared characteristics in the evolution of their asset allocation over the past decade.
According to our definition, PPFs held around $5.9 trillion in total assets of 2016 and over 4% of all publicly traded assets, making them a significant global investor group. In particular, given their preferences for specific asset classes, their share is disproportionate in some segments. For example, we estimate that by year-end 2016, PPFs owned over 7% of global tradeable fixed income assets (including 8% government bonds and over 13% of inflation-linked bonds) and over 3% of listed public equities.
Similar to other asset owners, PPFs have undertaken a major reallocation of assets over the past decade. However, the motivating driver has not only been the low yield environment, but also changing regulatory and macro policy settings, which either permitted or encouraged greater diversification along asset classes and geographical exposure.
In detail, the most dominant trend has been the move away from holding domestic (local currency) bonds; in their place, PPFs have redeployed assets towards equities and alternatives, with a small share also diverted into foreign bonds. These allocation trends have been almost universal despite a huge diversity of geography and economic development.
It is important to acknowledge how much this investor group has changed over the past decade, with the asset pool growing by over 40% in dollar terms, and even more if measured in local currencies. While some funds are still predominantly captive buyers of government debt, the bulk of PPFs have been transforming into financial institutions with independent firepower and income-generating capacity. The long-term trend towards more diversified fixed income portfolios is likely to continue, as is the shift towards taking on more risk via equity allocations, subject as ever to changes in market cycles. In this context, we expect most PPFs to not only continue taking on more risk overall, but to further internationalise their portfolios.
Finally, one consideration is that maturing funds catering for aging populations will have to make further adjustments to their asset allocations to account for changing cash flow directions and seek greater contributions and investment returns to bridge any funding gaps.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
This document may contain certain statements deemed to be forward-looking statements. All statements, other than historical facts, contained within this document that address activities, events or developments that SSGA expects, believes or anticipates will or may occur in the future are forward-looking statements. Please note that any such statements are not guarantees of any future performance and that actual results or developments may differ materially from those projected in the forward-looking statements.
Tracking Code: 2172159.1.1.GBL.RTL
By clicking on the link to view the report, you acknowledge you are an institutional investor or other accredited investor.
Elliot Hentov, Ph.D. Head of Policy and Research, Official Institutions Group Elliot_Hentov@ssga.com
Alexander Petrov Policy and Research, Official Institutions Group Alexander_Petrov@ssga.com
Sejal Odedra Business Analyst, Client Strategy, Official Institutions Group Sejal_Odedra@ssga.com
The Slings and Arrows of Passive Fortune
This article is sponsored by S&P DJI.
If a tale were to be written regaling us with the popular exploits of the modern day active manager in his quest for alpha across the many peaks and valleys of the financial world, passive investment would likely feature prominently in the telling. Passively managed assets have grown tremendously since their introduction in the 1970s to command some 20% of the U.S. stock’s market total-float adjusted capitalization, drawing a deluge of criticism in recent years from proponents of a more traditional, active approach who charge indexers with all manner of supposed ills – from encouraging collusive behavior and exacerbating pricing inefficiencies, to indifference on matters of corporate governance.
But are passive assets and their purveyors really the threat to markets that active management makes them out to be? Or are the problems attributed to their rise merely a reflection of the market forces all participants must face? These are the questions posed by Anu Ganti and Craig Lazzara at S&P Dow Jones Indices (S&P DJI) in their new paper, titled “The Slings and Arrows of Passive Fortune,” which seeks to unravel some of the most pervasive myths surrounding the growing role of index funds, highlight the immense value they bring to asset owners, and posits a future of asymmetric equilibrium between the old and the new that puts each in their proper place based on relative – rather than absolute – performance.
Nobody – including the paper’s authors – denies that index-based investment has made life more challenging for active managers, who count alpha as their very lifeblood; but so too would it be foolish to argue its advancement as one of the most important developments in modern financial history is without merit, or somehow Thucydidean in nature. If anything, active management can and should expect its portion of the pie (which, it must be pointed out, constitutes the majority of assets by a wide margin) to remain subject to nibbles from their passive counterparts – nibbles that may, with time, diminish. The market always has room for more players at the table, after all, and we all play by its rules.
As Director and Managing Director of index investment strategy team at S&P DJI, Ganti and Lazzara provide research and commentary on the firm’s entire product set – covering U.S. and global equities, commodities, fixed income, and economic indices. Both are chartered financial analysts and regular contributors to Indexology, S&P DJI’s appropriately named blog covering developments in the world of indexing.
Battea: 2017 Securities Class Action Industry Lookback and Observations
This article is sponsored by Battea.
There has been incredible growth in securities and antitrust class action litigations and settlements, particularly as they have unfolded in 2016 and 2017. The number of new cases and settlements from traditional securities litigation to antitrust rate rigging, spread inflation and other forms of collusion are at an all time high and shows no signs of slowing down.
With several multi-billion dollar litigations related to Libor, Euribor and Tibor rates, and spread manipulations, the securities, foreign exchange and antitrust class and collective actions litigation space rose exponentially in 2017.
View Whitepaper Here
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