If Matt Levine has a mantra in his “Money Stuff” column on Bloomberg, it’s this: everything is securities fraud. “You know the basic idea,” he often says in his most acerbic voice,
“A company does something bad, or something bad happens to it. Its stock price goes down, because of the bad thing. Shareholders sue: Doing the bad thing and not immediately telling shareholders about it, the shareholders say, is securities fraud. Even if the company does immediately tell shareholders about the bad thing, which is not particularly common, the shareholders might sue, claiming that the company failed to disclose the conditions and vulnerabilities that allowed the bad thing to happen. And so contributing to global warming is securities fraud, and sexual harassment by executives is securities fraud, and customer data breaches are securities fraud, and mistreating killer whales is securities fraud, and whatever else you’ve got. Securities fraud is a universal regulatory regime; anything bad that is done by or happens to a public company is also securities fraud, and it is often easier to punish the bad thing as securities fraud than it is to regulate it directly.” (Money Stuff, 6/26/19)
(See this PubCo post.) But should everything really be securities fraud? An interesting new paper examines the phenomenon.
Much securities fraud litigation involves allegations of company conduct such as cooking the books or inflating the company’s prospects—conduct that, if true, causes direct harm to shareholders. Some securities litigation, however, is based on events such as oil spills or product defects—conduct that causes direct injury primarily to a different set of constituents, but only indirect injury to shareholders. Yet, when the stock drops after the event, shareholders sometimes sue the company, contending that the company provided inadequate disclosure about the risks related to the event. This type of litigation, often referred to as “event-driven securities litigation,” has become increasingly common.