under or over valuation of the security's market price.
When, as in Apple Computer and Convergent Technologies, courts can with the level of confidence required by FRCP 56 find no reasonable possibility of systematic bias by examining certain news accounts, analyst reports or other such evidence, a truth on the market defense may be appropriate. Where such evidence is not so persuasive, as here, a defendant must attempt a more convincing demonstration that the misstatements or omissions alleged did not bias the market. Such demonstration may take the form of a time event or comparable index study, both of which are commonly used in securities fraud cases. Just as the fraud on the market theory itself subsumes the inquiry into reliance, materiality, causation and damages, so too the truth on the market defense telescopes the traditional view of materiality, causation and damages as separate elements of a securities fraud case. Proof of investors' losses or the lack thereof, in the form of a comparison between the actual market price of a security and its expected unbiased price, necessarily provides credible evidence whether the alleged omissions could have been material.
Hence, this order should not be read as concluding that Seagate is incapable of compiling its evidence in such a way as to prevail on summary judgment in this case. Similarly, plaintiffs' prospects of prevailing on summary judgment in this case are not diminished by this order. Although the contradictory news accounts cannot establish what the market knew, either party might still be able to demonstrate whether the nondisclosures systematically affected the market price of Seagate common stock. The hard data available, in the form of Seagate's stock price and comparable stock price indices, should probably be conclusive with respect to the remaining issues in this case. For these reasons, Seagate's motion for summary judgment is DENIED WITHOUT PREJUDICE.
That said, the court can resolve as a matter of law two issues raised by the parties in connection with Seagate's summary judgment motion. First, plaintiffs incorrectly contend that "the precipitous drop in the price of Seagate stock * * * alone establishes materiality." As discussed above, under the fraud on the market theory a significant change in the market price of a security is a necessary element in a case where plaintiff alleges a misleading omission, for if there is no difference between the market price before and after disclosure of the omitted information, that information cannot be material. Flamm v. Eberstadt, 814 F.2d 1169, 1179-80 (7th Cir 1987). However, a change in market price is not sufficient by itself to establish materiality, because the change in price may be caused by new information.
Brealey and Myers, Principles of Corporate Finance at 294.
Second, plaintiffs contend that Seagate's Chairman, Mr. Shugart, made misleading public disclosures in order to inflate the market price of Seagate's common stock. Seagate attempts to disprove this contention by introducing evidence that Seagate's stock price actually declined the day after each allegedly inflating statement. But the direction of stock price movement by itself does not establish whether the statements had an inflating influence on the stock price. One can easily imagine that the market price for Seagate common stock would have fallen even further on those days but for Mr. Shugart's allegedly misleading statements. The issue is the magnitude of the price change, and the measure of the price change relative to the unbiased price which would have prevailed in the absence of Mr. Shugart's statements. This Seagate has not even attempted to show.
Seagate's motion for summary judgment is GRANTED with respect to P 61(b) of the complaint, and in all other respects DENIED WITHOUT PREJUDICE.4
IT IS SO ORDERED.
DATED: September 8, 1992
VAUGHN R. WALKER
United States District Judge