November 14, 2006
Spindler on Corporations' Release of Information After Dura Pharmaceuticals' Securities Damages Rule
Posted by Alan Childress
James Spindler (Southern Cal., Law) has posted on bepress Legal Repository the article, "Why Shareholders Want Their CEOs to Lie More after Dura Pharmaceuticals." It will be published next year in the Georgetown Law Journal. Despite the provocative title, it seems primarily about the timing and "bundling" of release of corporate information and, in any event, raises some implications for proper counseling of corporations after the Supreme Court, per Justice Breyer, decided Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005). The abstract:
The Supreme Court's recent Dura Pharmaceuticals decision requires a plaintiff to show a market decline (ex post losses), as opposed to price inflation at the time of purchase (ex ante losses), in order to maintain an action for securities fraud. Since fraud is actionable only where a market decline attributable to the fraud occurs under the ex post loss rule, firms that can bundle together disclosures or business projects are under-deterred by the antifraud regime: the success of one project may compensate for the failure of another, the firm can time the release of good and bad news to mask fraud's effect on price, and "other factors" that would have caused a loss of investment value even without the fraud can disallow a claim for damages. Strategically, firms may bundle to minimize exposure to liability. On the other hand, firms that value transparency may wish to unbundle. In this sense, the credibility of disclosure under an ex post loss rule depends on the extent to which firms can and do unbundle, whereas an ex ante regime is theoretically perfect in any case. This analysis also reveals two additional problems with an ex post rule: market tests for ex post damages awards (a chief purported benefit) are generally not available for bundled firms, and awarding ex post damages may over-punish small frauds but reward big ones.
Spindler had previously posted on analysts' conflicts of interest in "Conflict or Credibility: Analyst Conflicts of Interest and the Market for Underwriting Business." It was published in volume 35 of the Journal of Legal Studies (June 2006).
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