Betting against the market on lawsuits

Cite this Article
Larry Ribstein, Betting against the market on lawsuits, Truth on the Market (June 05, 2011),

Ted Frank’s making a big play on Wal-Mart.  He’s

very confident that Wal-Mart v. Dukes will result in a reversal of the class certification in the enormous multi-billion dollar class action against it. But the things that make me confident in that result—the briefs, the tenor of the oral argument, the language in AT&T Mobility v. Concepcion about the importance of protecting the rights of unnamed class members—did not produce movement in the market price of Wal-Mart stock. This leads me to suspect that the market is undervaluing the probability of reversal, and will be surprised when the Supreme Court does reverse later this month.

So, criticizing “economists [who] make clever predictions but aren’t willing to bet on them,” Ted’s

put my money where my mouth is: with the dip in stock prices last week, I invested a bit over 10% of my net worth in a leveraged bet that WMT stock will bounce this month when the Supreme Court releases its decision through purchases of July and September out-of-the-money call contracts.

He admits he could be wrong about the result or about whether the market has priced it in, or be right and be punished anyway because the market could move for other reasons and he’s paying a lot to make the bet.

I agree with Ted about the risks, particularly including the risk the market’s already priced this given Wal-Mart’s huge float and analyst following, and about the costs of making the bet.  On the other hand, Ted’s post illustrates the costs of arbitrage, and therefore why markets could be wrong. It also illustrates how making betting against the market cheaper would increase market efficiency (and, as Ted notes, counteract a trial lawyer strategy).

But my main point here concerns my views about a potentially expanded role for legal information experts in capital markets. Here’s an excerpt from Kobayashi & my Law’s Information Revolution (footnotes omitted):

Law-related matters generate many types of information which can have significant market value because of the potentially high stakes of legal outcomes. In particular, litigation significantly affects asset values.  All firms have some litigation risk, and some firms have a lot riding on actual or potential tort or intellectual property litigation.  * * * This suggests a market demand for legal analysis in connection with firm valuation. 

So if Ted survives his Wal-Mart gambit, he might consider bundling this sort of activity with his main gig.