U.S. District Court Judge Jed S. Rakoff Cites NERA Methodology in Granting Class Certification in In re Petrobras Securities Litigation

16 February 2016

On 2 February 2016, in granting class certification In re Petrobras Securities Litigation, U.S. District Court Judge Jed S. Rakoff cited and relied upon a paper co-authored by NERA economist Dr. David Tabak as the basis for the test used by plaintiffs to demonstrate that Petrobras’ securities reacted to new information.

This test was the primary issue in contention in the analysis of market efficiency, as is often the case as certain defense experts argue that this is the primary, or even the only, real test of market efficiency. Judge Rakoff’s ruling, which granted class certification based in part on the finding that Petrobras’ securities traded in efficient markets, included the following:

Both sides refer to Feinstein's methodology as an "FDT" test because use of z-test to evaluate market efficiency was first proposed in a law review article by three well-known securities econometric experts, whose combined initials were "FDT." See Paul A. Ferrillo, Frederick C. Dunbar, and David Tabak, The "Less Than" Efficient Capital Markets Hypothesis: Requiring More Proof from Plaintiffs in Fraud-on-the-Market Cases, 78 St. John's L. Rev. Bl, 119-22 (2004).

The Court noted that the FDT test is a specific application of well-accepted statistical tests that “compar[e] the proportions of statistically significant observations in two samples[.]” The FDT test compares the proportion of statistically significant stock price movements on days with news events of a certain type to the proportion of statistically significant stock price movements on days without such news events. The Court ruled that “[i]n this case, where the indirect Cammer factors lay a strong foundation for a finding of efficiency, a statistically significant showing that statistically significant price returns are more likely to occur on event dates is sufficient as direct evidence of market efficiency and thereby to invoke Basic's presumption of reliance at the class certification stage.”

NERA Senior Vice President Dr. Tabak, former NERA Senior Vice President Frederick C. Dunbar, and Paul A. Ferrillo published this article in 2004 to help establish a more rigorous test to be used in assessing market efficiency in securities cases. The paper codified and built on work by many NERA economists in this area. Since the paper was published, the FDT test has been used in numerous securities class action cases by both plaintiffs and defendants. (For purposes of full disclosure, Dr. Tabak consulted with counsel for the class in Petrobras in the class certification stage, and Dr. Tabak and other NERA economists may consult or testify on behalf of plaintiffs in litigation against Petrobras.)

Dr. Tabak stated, “I am very pleased that Judge Rakoff approved the use of the FDT test in this high-profile litigation. It is gratifying to see such a thorough, and I believe accurate, analysis of how the FDT test is relevant in assessing market efficiency for purposes of securities litigation. I enjoyed reading the Court’s discussion of the FDT test and of one of my later publications on the strengths and also the potential limitations of the test. Ultimately, I think this is a very instructive decision.”

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