April 16, 2010

Idiosyncratic Reactions

In In re Omnicom Group, Inc. Sec. Litig., 597 F.3d 501 (2d Cir. 2010), the company had announced in 2001 that it was placing certain investments into a separate holding company. There was no statistically significant movement in the company's stock price following the disclosure. In June 2002, however, there was a flurry of negative news reports about Omnicom and the transaction, leading to a stock price decline. In particular, a June 12 article reported on the resignation of the Chair of Omnicom's Audit Committee and noted concerns about the company's aggressive accounting strategy.

The lower court granted summary judgment for the defendants based on the plaintiffs' failure to proffer evidence sufficient to support a finding of loss causation. On appeal, the Second Circuit affirmed on two grounds. First, the June 2002 news reports were not a "corrective disclosure" of the fraud because they failed to provide the market with any new facts. Second, the resignation of the director (and the accompanying negative publicity) was not a "materialization of the risk" that was supposedly concealed by the fraudulent statements. A mere concern over the company's accounting practices cannot satisfy that standard.

Holding: Grant of summary judgment affirmed.

Quote of note: "The securities laws require disclosure that is adequate to allow investors to make judgments about a company's intrinsic value. Firms are not require by the securities laws to speculate about distant, ambiguous, and perhaps idiosyncratic reactions by the press or even by directors. To hold otherwise would expose companies and their shareholders to potentially expansive liabilities for events later alleged to be frauds, the facts of which were known to the investing public at the time but did not affect share price, and thus did no damage at that time to investors. A rule of liability leading to such losses would undermine the very investor confidence that the securities laws were intended to support."

Posted by Lyle Roberts at April 16, 2010 11:15 PM | TrackBack
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