(Market) Timing Is (Not) Everything

Mon Oct 20 16:24:38 EDT 2003
By Dr. Chudozie Okongwu with former NERA Senior Vice President Dr. Fred Dunbar

Recent litigation by the New York Attorney General against alleged "market timers" has raised interesting and complex new issues in litigation affecting financial intermediaries, including if and how market timing - a strategy that opportunistic investors use to exploit the short-run predictability of certain mutual fund returns - damages long-term investors and if so, how damages in market timing cases should be calculated. In this article, NERA Senior Vice President Dr. Chudozie Okongwu and former NERA Senior Vice President Dr. Fred Dunbar propose that market timing, although neither a new nor secret strategy nor one that is illegal, has become the new front in the expanding range of securities litigation. They outline the issues and challenges ahead for practitioners involved in market timing cases in the face of little historical guidance and the lack of legal precedents for liability.

According to the State of New York complaint, any trading strategy that outperforms a buy-and-hold strategy causes market dilution. However, the authors argue that any trading strategy that outperforms a buy-and-hold strategy must be due to the timing of trades, and therefore if liability is based on dilution caused by a trader then any fund where a trader does better than a buy-and-hold investor risks liability. To further complicate the task of identifying market timers, there is no clear line separating market timing from active trading. Many strategies may look like market timing but are different. Furthermore, once identified, the processes for calculating damages in market timing cases will depend to some extent on the liability issues that have not yet been resolved by the courts.

This article was published in Wall Street Lawyer, Volume 7, Number 5, (c) 2003 Glasser LegalWorks. All rights reserved.