The Efficient Market Theory—§ 10(b)’s Double-Edged Sword
The Eleventh Circuit in Sappssov Deploys Meyer in Affirming Dismissal of Securities Fraud Suit
On May 11, 2015, the Eleventh Circuit, relying on the “efficient market theory” as explained in Meyer v. Greene, 710 F.3d 1189, 1195 (11th Cir. 2013), affirmed the dismissal of a shareholder class action for failing to allege adequately loss causation. A concurring judge questioned the vitality of the Meyer precedent.
The efficient market theory provides that “the market price of shares traded on well-developed markets reflects all publicly available information, and hence, any material misrepresentations.” Meyer, 710 F.3d at 1195. Shareholder plaintiffs in securities fraud class actions often use the theory to allege reliance. The Meyer court, noting the theory’s Delphic nature when affirming dismissal of a securities class action, held that the plaintiff, at the pleading stage, must allege loss causation by showing that the corrective disclosure is not merely confirmatory information, i.e., information already known by the market, or merely an announcement of an investigation without more.
This week, the Eleventh Circuit deployed that same reasoning in Sapssov v. Health Mgmt., Assocs., Inc.(HMA), 2005 WL 2168322 (11th Cir. May 11, 2015) (per curiam), showing that the efficient market theory is not just a tool for plaintiffs. Instead, it is a double-edged sword that defendant companies and individuals may wield when seeking dismissal.
In Sappssov, the plaintiffs had alleged that HMA, which operates acute-care hospitals in non-urban areas across the United States, failed to disclose to investors a scheme to defraud Medicare by improperly admitting and billing patients for unnecessary emergency treatment. Plaintiffs attempted to plead corrective disclosures as showing loss causation by relying on (1) HMA’s disclosures of two subpoenas from the U.S. Department of Health Human Services, Office of Inspector General (OIG) relating to emergency room practices, and (2) an investment company’s report informing the market of a wrongful termination lawsuit relating to the emergency room.
The court upheld the district court’s dismissal for failure to plead loss causation, reaffirming its analysis in Meyer. The unpublished opinion held that the mere repackaging of already-public information is insufficient to allege corrective disclosures because, in an efficient market, that information was easily obtainable and already assimilated without the assistance of repackaging.
Relying on Meyer, the Eleventh Circuit rejected both of the alleged corrective disclosures, noting corrective disclosures “must disclose new information, and cannot be merely confirmatory.” First, the court found that the OIG investigation, similar to the investigation in Meyer, did not show any actual wrongdoing and thus could not constitute a corrective disclosure. Second, regarding the investment company’s report, the court noted that the report relied on the wrongful termination suit, which is not proof of liability. That suit’s facts, which were easily accessible in the court’s dockets for three months prior to the report, were already assimilated into the market without the report’s assistance, and thus the report was a mere repackaging of already-public information. Concluding, the court reiterated its rationale in Meyers that if an analyst’s report “based on already-public information could form the basis for a corrective disclosure, then every investor who suffers a loss in the financial markets could sue under §10(b) using an analyst’s negative analysis.”
In a concurrence acknowledging the binding Meyer precedent, one member of the panel argued that Meyer was wrongly decided because it foisted an inquiry into plaintiff’s proof at the pleading stage. As such, the concurrence claimed the 2013 precedent applies too stringent of a standard for loss causation in the dismissal context. The concurrence relied on Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 125 S.Ct. 1627 (2005), which was cited in Meyer, and noted four other jurisdictions that had rejected the rule in Meyer relating to disclosure of investigations.
As the Eleventh Circuit and other jurisdictions continue to refine the reasoning in Meyer, the efficient market theory will continue to be sharpened on both edges.
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