Saturday, September 9, 2023

Can AI detect puffery?

Earlier this week, Matt Levine used his column to highlight this paper on SSRN, “Executives vs. Chatbots: Unmasking Insights through Human-AI Differences in Earnings Conference Q&A”

The authors find that on earnings calls, some executives’ responses are so predictable that they are indistinguishable from responses given by a chatbot, and others are unexpected, in the sense that a chatbot would have predicted different answers.  The unexpected/novel responses are associated with stock price reactions because they communicate new information to the market.

Anyway, this interests me because I frequently blog about the issue of puffery, and how courts go about determining whether a statement was material to investors, and I wonder whether something like this method can be useful.  I.e., is it possible shareholders could use it to show that a particular statement at a particular time was unexpected and therefore informative, in the face of a claim that it was immaterial? 

I imagine this exact method will not always be helpful – in a lot of cases, the claim is that the language remained the same even as underlying conditions changed, and so then of course, the statement would not be found to convey new information, and presumably there would be no dispute about that.  But there could be situations (like claims involving earnings calls or news interviews) where this method could assist with the materiality inquiry, especially if stock price evidence is equivocal.  It might also assist with loss causation, in situations involving “bundled” disclosures where it isn’t clear what is exerting an effect on prices.

And two other quick hits this week:

First, there’s a cert petition pending regarding whether omissions of required information in a securities filing can give rise to 10(b) liability.  The Supreme Court granted on this issue once before, and DIG’d when the parties settled, so we might see a grant this time.  Which is why I was glad to see the opinion in Phoenix Insurance Co., Ltd. v. ATI Physical Therapy, Inc., 2023 U.S. Dist. LEXIS 157803 (N.D. Ill. 2023).  The court holds that failure to disclose required information can give rise to liability, but what stood out to me was the clarity of the analysis, which is rare in these things.

Second, if you haven't seen VC Laster’s opinion denying specific performance of a SPAC merger agreement in 26 Capital Acquisition Corp v. Tiger Asia, you are in for a treat.  Don’t even worry about the legal issues; the facts alone are worth the read.  Matt Levine will be so, so happy to see someone trapped by their own euphemism for bribes.  Also, you can’t write about specific performance in a merger these days without thinking of Twitter v. Musk, and that’s as true for Laster as it is for anyone else, so, look for the Easter egg.

Ann Lipton | Permalink


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