Nathan Analysis Notes Rise of Alleged Investor Losses in Securities Fraud Lawsuits News Feed

April 29, 2016—Nathan Associates Inc. today released its latest Rule 10b-5 Assessment Report. Since the U.S. Supreme Court's June 2014 decision in Halliburton Co. v. Erica P. John Fund Inc., Nathan Associates has been tracking financial and economic data on securities class action cases alleging fraud in violation of Securities and Exchange Commission Rule 10b-5. This semiannual report estimates aggregate investor losses stemming from those alleged violations.

This issue of the Rule 10b-5 Assessment Report covers cases filed from July 2014 through December 2015, with detail for each half-year. Some key findings:

  • ­   Complaints alleging Rule 10b-5 violations were filed against 69 companies in the 2nd half of 2015, compared with 66 a year earlier.
  • ­   Total market capitalization losses relating to the alleged violations rose to $114.8 billion, from $29.5 billion in the 2nd half of 2014.
  • ­   Not all market capitalization losses are attributable to the alleged securities fraud violations. Just 22.1 percent ($25.4 billion) of the $114.8 billion potentially qualifies as Rule 10b-5 losses—i.e., investor losses from buying defendant-company stock at allegedly inflated prices.
  • ­   The portion of market capitalization losses that may qualify as Rule 10b-5 losses varied substantially from case to case—from less than 5 percent to nearly 90 percent, depending on other market factors affecting the stock price and the portion of company stock affected by the alleged fraud. Estimates of Rule 10b-5 fraud-related losses were derived using professionally accepted statistical and econometric-scientific methods.

"A particularly noteworthy finding since 2014 is that losses that might be truly attributable to Rule 10b-5 violations are usually much less than the market capitalization losses," said Doug Young, a Principal Economist at Nathan and a coauthor of the report. "This is the case for two reasons. The first is that, usually, not all of the price decline can be attributed to the alleged fraud. Often other market forces at that time also affected a company’s stock. The second reason is that not all of the company’s outstanding stock is affected by the alleged violation. We apply the appropriate statistical and econometric methods to estimate investor losses attributable to alleged fraud. Having realistic measures is critical for anyone making decisions related to this kind of litigation."

"The $114.8 billion of market capitalization losses and $25.4 billion of potential fraud-related losses that we estimated for the 69 cases filed in the 2nd half of last year are very large losses," Young said. "They highlight the importance of securities class acDoug Youngtion litigation in recovering investor losses from alleged securities violations."

"However, as large as these numbers are, the Rule 10b-5 losses represent a very small fraction, just one-tenth of a percent (0.1%), of the approximately $22 trillion market capitalization of U.S.-listed companies," he said. "One might argue that the litigation of these losses is a small price to pay if these cases, by holding firms accountable, help ensure fair and efficient markets for all investors."

Nathan Associates Inc., founded in 1946, provides consulting and economic analysis in support of litigation, international trade and development, project financing, ports and other infrastructure planning, and numerous industries including gaming and telecommunications. Clients include businesses, governments, law firms, trade associations, and multilateral lenders. In addition to its headquarters in Arlington, Virginia, the firm has a major U.S. office in Irvine, California, and overseas offices in Chennai and Delhi (India), and London.

For a copy of the report, or more information, contact Doug.

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