Market Efficiency Not Demonstrated


The judge in this Rule 10b-5 securities case ruled that being listed on NASDAQ and satisfying only some of the Cammer factors were not sufficient grounds for showing that a stock traded in an efficient market.

Retained by Schulte Roth & Zabel

Defense counsel retained Cornerstone Research and Senior Vice President Allan Kleidon to address class certification issues and respond to the report of the plaintiff’s expert in this Rule 10b-5 putative securities class action. The U.S. district judge denied the plaintiff’s motion for class certification.

The plaintiff alleged that misrepresentations by the defendants inflated stock prices during the putative class period, and investors suffered losses when the truth purportedly was revealed and the stock price fell. The plaintiff’s expert filed a report that claimed that the stock at issue traded in an efficient market based on the fact that the stock was listed on NASDAQ and on his analysis of the Cammer factors.

Dr. Kleidon demonstrated that the analysis of the plaintiff’s expert suffered from serious conceptual flaws.

Dr. Kleidon noted that while certain market characteristics (such as trading on NASDAQ) might indicate conditions that could give rise to market efficiency, these characteristics alone are not sufficient to establish market efficiency. He also demonstrated that the analysis of the plaintiff’s expert suffered from serious conceptual flaws and presumed market efficiency rather than testing for market efficiency. Dr. Kleidon also concluded that the plaintiff’s own allegations that the stock price did not fully and rapidly respond to the information at issue were inconsistent with the concept of market efficiency.

The court rejected the plaintiff’s claim that a presumption of market efficiency can be based solely on trading on a particular market, including NASDAQ. The judge further concluded that the plaintiff did not meet its burden of showing that the market for the stock was efficient because, “Plaintiff has not demonstrated sufficient evidence of the fifth Cammer factor” [the cause-and-effect relationship between unexpected corporate events or financial releases and an immediate response in the stock price]. The court agreed that the analysis performed by the plaintiff’s expert presumed market efficiency, and noted the failure of the plaintiff’s expert to explain how the alleged delayed price reaction could be consistent with an efficient market. In addition, the court observed that defendants had no obligation to conduct their own event study, because it is the plaintiff’s burden to establish market efficiency in order to invoke the fraud-on-the-market presumption.

The court concluded that “Plaintiff has not met its burden to generate a presumption that the market…is efficient.”