An event study is a statistical regression analysis that merely provides one method of examining the effect of an event, such as a disclosure of information on the market price of a security. Yet the law governing event studies has become inseparable from the substantive law governing securities fraud litigation. Courts have effectively collapsed securities fraud actions into a single question: Whether the defendant's misrepresentation or omission created a disparity between the transaction price of a security and its true value measured by the precise reaction of the market price to the disclosure of the concealed information. A misrepresentation or omission that creates that disparity is material. Plaintiffs who invest at a market price that communicates that disparity have shown reliance by the fraud on that market price. The disclosure of the previously concealed information alters the market price to create economic loss, so plaintiffs can establish loss causation. The measure of damages then quantifies that precise alteration or correction in the market price. The interrelated questions of materiality, reliance, loss causation, and damages all require an event study for their resolution. As such, an investor who fails to offer an event study performed by a qualified expert has little chance of prevailing. The dispositive role now played by event studies, however, is inconsistent with the Seventh Amendment and the federal securities laws. Rather, an event study requirement poses an unconstitutional and unwarranted barrier to meritorious securities fraud suits.
Copyright 2010 Michael J. Kaufman