For more evidence of Judge Alito’s strong support of the efficient capital market hypothesis, read this recently released Third Circuit opinion in the Merck & Co. Sec. Lit. that Alito joined (Ambro was the writing judge). The relevant discussion is on pages 15-20. The opinion follows Burlington and Oran, which (as I noted in the past) Alito did write. Obviously, this isn’t as useful evidence of the Judge’s views as his own work, but any product released in this highly sensitive period is surely something he gave a careful look at.
Merck interprets Oran and Burlington to mean that price movement must occur in the period “immediately following disclosure”. Plaintiff had argued that the market failed to appreciate the nature of the disclosure at issue until the Wall Street Journal had added up some figures that revealed (allegedly) $4.6 billion in inflated revenue.
The court, conscious of its status as having one of the “clearest commitments” to the ECMH of the appellate courts, applied what I’ve called in my work the “understand consequences materiality technique”* and dismissed plaintiff’s allegations out of hand. It noted that multiple analysts followed Merck, and queried:
“If these analysts-all focused on revenue-were unable for two months to make a handful of calculations, how can we presume an efficient market at all. [Plaintiff] is trying to have it both ways: the market understood all the good things that Merck said about its revenue but was not smart enough to understand the co-payment disclosure. An efficient market for good news is an efficient market for bad news.”
This is an interesting claim. It might not actually be true – there is evidence that individuals are significantly more resistant to incorporating evidence of bad news than evidence that confirms the optimism they naturally feel, which suggests that it is possible that market irrationality, if it exists, may not go in both directions. But, on the other hand, Ambro’s basic theory – that disclosure of underlying facts about a well-known stock followed by dozens of analysts should be curative – makes intuititve sense.
In any event, another data point suggesting that securities plaintiffs may not win lots of battles with (a Justice) Alito, but on the big, class-enabling, issue, he’s solid.
(Hat Tip: Naturally, Howard B.)
1. Hoffman, Alito and Securities Law: Part II;
2. Hoffman, Alito: The Business Friendly Justice?
*No, it wasn’t my most catchy and inspired naming day.