Price Impact Possibilities

Abstract

In Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (“Halliburton II”), the Supreme Court held that defendants could rebut the fraud-on-the-market presumption of reliance at class certification by showing the absence of “price impact.” In the wake of Halliburton II, courts and scholars have wrestled with the focus of the price impact inquiry: assuming that the case involves an unduly positive statement, does the price impact inquiry focus on the existence of a price increase at the time of the statement, a price drop upon the disclosure of the truth, or both?

In this essay, I seek to provide guidance on the appropriate focus of the price impact analysis. First, I argue that “price impact” is best understood as “price distortion,” such that it requires a comparison with the no-fraud counterfactual scenario. Second, I propose a taxonomy to aid in the identification of the appropriate counterfactual. I argue that the price impact analysis depends on (1) whether the alleged misrepresentation is classified as a Misdirecting, Inflating, Aggrandizing, Confirming, or Soft-Landing Misrepresentation; and (2) whether the alleged misrepresentation is Type A (because the defendant had a duty to speak) or Type B (because the defendant could merely have remained silent). Third, combining these variables, I contend that there are ten price impact possibilities and that the focus of the price impact inquiry depends on which scenario is alleged.

Keywords: Securities Fraud, Reliance, Fraud-on-the-Market, Price Impact, Basic, Halliburton