July 22, 2015

A Nathan Associates analysis of investor lawsuits filed in the first six months of this year finds that Rule 10b-5 losses that may be attributed to companies corrective disclosures of alleged fraud accounted for little more than one-fifth of the companies' decline in market capitalization after the corresponding disclosures. 

For the first two quarters of 2015, Nathan Associates analyzed 58 class-action lawsuits brought by investors against publicly traded companies, alleging they violated the Exchange Act's anti-fraud section, 10(b). The total\ loss in market value that occurred surrounding the corrective disclosures alleged in the lawsuits' disclosures revealing past misinformation that had artificially inflated stock prices reached $44.7 billion, according to Nathan's analysis.

In the final two quarters of 2014, of the 66 cases analyzed, the estimated loss in market capitalization of companies being sued amounted to $29.5 billion. Lawsuits against IBM and drug retailer the Walgreen Co. contributed to the relatively high level of market capitalization losses in cases filed so far this year.  But the so-called Rule 10b-5 losses that Nathan's analysis found could be directly tied to alleged corrective disclosures of fraud were roughly the same in both periods: $9.3 billion in the final two quarters of 2014, and $9.4 billion in the first two quarters of 2015.

In other words, 21.1 percent of market capitalization declines in cases filed in the initial two quarters of 2015 and 31.4 percent in the last two quarters of 2014 may be reliably attributed to the alleged corrective disclosures. 

Second Issue of Pioneering Report

 The information is contained in the second issue of Nathan Associates Inc. Rule 10b 5 Assessment Report, a semiannual estimate of aggregate investor losses stemming from alleged violations of Section 10(b). Nathan initiated the report after the U.S. Supreme Court's ruling last year in Halliburton v. Erica P. John Fund. Because of the decision, investors can continue to recover losses that result from public misstatements and misrepresentations by directors and officers of U.S.-listed companies.

The Nathan analysis rigorously screens for stock price fluctuations that exhibit statistically significant declines and that occur around the trading periods corresponding to alleged corrective disclosures of fraud. The report also takes into account the impact of overall market and industry-specific forces on share prices.

The report uses three measures to gauge investor losses stemming from alleged violations of Section 10(b): aggregate marke capitalization losses, aggregate Rule 10b-5 losses, and the Rule 10b-5 market capitalization ratioor RMC ratio. (Rule 10b 5 refers to the SEC rule corresponding to the Section 10(b) of the Exchange Act.) 

RMC Ratio

To calculate aggregate market capitalization losses, Nathan researchers isolate the stock price declines between the trading day(s) of alleged corrective disclosures and the trading day(s) immediately preceding them so that losses are tied as closely as possible to when a company makes a corrective disclosure regarding previous misrepresentations or misstatements that artificially inflated share prices.

To calculate aggregate Rule 10b-5 losses, Nathan researchers evaluated the statistical significance of the residual return of each alleged corrective disclosure found in the first filed class action complaint and applied a matrix-based multi-trader equity trading model to estimate the number of damaged shares. The third measure, the RMC ratio, is a ratio of the Rule 10b-5 losses and market capitalization losses.

The RMC ratio for the first two quarters of 2015 was 21.1 percent, compared with 31.4 percent in the final two quarters of 2014.  Nessim Mezrahi, Nathan's principal for financial litigation, and Dr. Stephen E. Christophe, a Nathan academic affiliate and finance professor at George Mason University, wrote the report. Nathan Associates conducts economic nresearch for litigants in numerous matters, including antitrust actions.