Efficient Market Hypothesis and Fraud on the Market Theory A New Perspective for Class Actions

30 Pages Posted: 19 Dec 2018

See all articles by Franck Jovanovic

Franck Jovanovic

TELUQ University

Stelios Andreadakis

Brunel University London

Christophe Schinckus

University of Leicester

Date Written: December 2, 2018

Abstract

Following recent judgement of the Supreme Court of US (June 2014), several commentators had declared that “Securities class actions are here to stay” (insidecounsel.com – September 2014, 11). This paper provides a critical perspective on this judgement, which “implicates substantive issues at the intersection of economic theory, financial markets, and securities regulation” (128 Harv. L. Rev. 291 2014-2015, 291), and shows that we must be much more careful. This recent judgement is based on the Fraud on the Market Doctrine, which was introduced in 1973 in order to preserve the class action procedure in securities fraud litigation. The characteristic of the Fraud on the Market Doctrine is to have been structured from one of the most popular financial theory: Efficient Market Hypothesis. In this paper, by analysing the implementation of the Efficient Market Hypothesis in Fraud on the Market Theory, we argue that if the Supreme Court had to take position for a second time about the Fraud on the Market Doctrine it is due to the practical difficulties inherited from Efficient Market Hypothesis and that have raised several problems to the US courts, including the Supreme Court. This issue is illustrated by the definition of Efficient Market Hypothesis lawyers used (“most” vs “all”/“fully”). As this paper shows, if “Securities class actions are here to stay”, the opportunity to open such a class action is strongly reduced in the facts.

Keywords: Efficient Market Hypothesis, Fraud on the Market Theory, law and finance, critical perspective on EMH

JEL Classification: G1, K0

Suggested Citation

Jovanovic, Franck and Andreadakis, Stelios and Schinckus, Christophe, Efficient Market Hypothesis and Fraud on the Market Theory A New Perspective for Class Actions (December 2, 2018). Available at SSRN: https://ssrn.com/abstract=3294555 or http://dx.doi.org/10.2139/ssrn.3294555

Franck Jovanovic (Contact Author)

TELUQ University ( email )

5800 St Denis
Montreal, QC H2S 3L4
Canada

HOME PAGE: http://https://www.teluq.ca/siteweb/univ/fjovanov.html

Stelios Andreadakis

Brunel University London ( email )

Kingston Lane
Elliott Jaques Building
Uxbridge, Middlesex UB8 3PH
United kingdom
01895 65528 (Phone)

Christophe Schinckus

University of Leicester ( email )

University Road
Leicester, LE1 7RH
United Kingdom

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