We are discussing the oral argument in Halliburton from Wednesday, March 5. The transcript is here.
Perhaps one of the most unusual observations was by Justice Alito. He seemed to suggest that there were a meaningful number of investors who knew about the possibility of fraud but purchased the shares anyway.
- JUSTICE ALITO: I didn't understand what you just said. Are you saying there are not categories of investors who might say to themselves, "You know what? There is a possibility that the price of this stock on this particular day might be artificially inflated by some statement that was made in the past that isn't true, but I'm going to buy it anyway because I still think it's either, it's undervalued or because there are some other statistics regarding the market that tell me that this price is going to go up." You tell me that there are--there are not large categories of investors who think that way?
There are no doubt investors of all stripes who acquire shares under every set of circumstances, not all of them rational. The group of investors posited by Justice Alito would either have to know the extent of the fraud, in which case there would be insider trading implications, or would have to believe the stock was undervalued absent any knowledge of the extent of the fraud.
In those circumstances, there could be no way of knowning that the anticipated gain would exceed the fraud. What the investor would know, however, was that once the fraud was exposed, shares would likely fall. In other words, the strategy would amount to a gamble that any gain would be greater than the inevitable fall.
Counsel for Respondent had this to say:
- MR. BOIES: I think there are not large categories of investors that think that way, and I think there is absolutely no empirical evidence at all that there are large categories of investors that think that way. Could there be somebody who says, "I know this is fraudulent, but I think I can buy; I know it's artificially inflated, but I think I can buy and ride it up and I can get out before the market knows that there is an artificial inflation." There might be somebody like that and that's why Basic provides for a rebuttable presumption.
Experiences with companies such as Enron suggest that when the accuracy of the disclosure, particularly the financial disclosure, becomes uncertain because of fraud, the approach does not attract investors but drives them away.