Do Courts Count Cammer Factors?

Article by Dr. David Tabak*

One of the key stages in many securities class actions is class certification. The most common path for plaintiffs to obtain certification includes showing that the market in which the securities at issue traded was efficient, leading to what, in 1988, the Supreme Court in Basic v. Levinson termed a "rebuttable presumption" of reliance common to all class members.

The following year, the court in Cammer v. Bloom listed five factors that would help establish that a security traded in an efficient market. Since then, dozens of courts have relied on these "Cammer factors" in evaluating market efficiency. The rulings do not state, however, how the court reached an overall opinion on market efficiency when different factors point in different directions. To help shed light on this issue, we have examined identifiable cases from 2002 through 2011 in which a court ruled on market efficiency after reviewing some or all of the Cammer factors.

Our review of the data yields a perhaps remarkable conclusion: in over 98 percent of the cases, the ultimate ruling on efficiency can be predicted by the number of factors that the court found favored efficiency less the number of factors that the court said argued against efficiency. When this figure was positive, the court found the security at issue to have traded in an efficient market in all but one instance, while when the figure was zero, the court always found the security to have traded in an inefficient market. Moreover, just limiting the analysis to a review of three Cammer factors (turnover, analysts, and market makers) yields similar results.

Data Collection and Coding Methodology

A list of potential cases for review was obtained from two searches of Westlaw on decisions from 2002 through 2011 using "Cammer" and "market efficiency" as keywords. The search results were then reviewed to determine if they included a ruling on market efficiency through the use of the Cammer and potentially other factors. Cases that relied solely on factors outside of Cammer were not included in the analysis, though the reasoning was still included in the resulting database of judicial statements about the factors related to market efficiency (e.g., a stock that traded on the New York Stock Exchange was deemed in one case to be efficient with an explicit notation that due to its trading market there was no need to undertake a Cammer analysis). Other opinions were excluded when they did not provide an overall review of efficiency factors (e.g., an appellate decision that analyzed only one factor and affirmed the district court's ruling on that factor or an opinion that ruled that...