January 15, 2009
Falling Apple & the Law of Securities
Posted by Christine Hurt

OK, bad pun.  If the laws of gravity are fairly predictable and obvious, the law of securities regulation is anything but in certain cases.  For example, much has been said lately about Steve Jobs' health, his statements about his health, the Apple, Inc. stock price, and what the law says or doesn't about the relationship between these things.  Gordon posted last week when Steve Jobs issued a statement saying that his recent weight loss was due to a treatable hormone imbalance, a statement that made his health seem to be stable, even though he has had a diagnosis of pancreatic cancer.  Gordon cited to articles by our Glom friends Jayne Barnard and Joan Heminway that explore whether CEOs have to disclose health issues, and the general answer seems to be not really. 

But in the case of Apple, on January 5, Jobs released the letter and the stock price of Apple increased from a close of $90.75 on Friday, January 2 to a close of $94.58 on Monday, January 5.  Yesterday, on January 14, Jobs released another letter announcing he was taking medical leave until June saying that his health issues were "more complex" than he had originally thought.  He is taking the leave, not because his energy is low or he is in pain, but because the "curiosity" over his health is a distraction to the company.  Very interesting wordsmithing.  Predictably (but not as predicatable as gravity), the stock price went down this morning from a close on Tuesday, January 13 of $87.71 to a close yesterday of $85.33 to a price right now (noon-ish EST) of $81.04.

So, what if you're an investor who bought Apple on January 5?  What are you thinking right now?  Here is the 10-day stock chart for Apple, and you seem a dip today.  Apple10day

But, the price has been falling on average since the 5th.  Under loss causation rules, can you say that the revelation that Jobs' health situation may be more serious than it was disclosed (presuming the January 5 statement was knowingly misleading when made) caused the price drop from the purchaser's January 6 price?  Or did the market become suspicious the past week or so as much was written about Jobs and the statement?  Does loss causation cover situations where the truth comes to the market slowly like air out of a balloon, or does loss causation just cover the dip after the revelation?  It seems to be the latter, even though we know that's not really how truth works.  So, is the loss a $4 loss from yesterday, a $13.50 loss or no loss at all because the revelation didn't cause the price decline?

And, of course, other things have been going on this week in the economy -- earnings reports, unemployment numbers, layoffs at well-loved firms like Google, TARP discussions.  A lot of tech companies opened down today, according to the WSJ.  Is the whole $4 dip due to Job's revelation that the January 5th letter does not hold true today?

Another wrinkle for loss causation, especially for long-term investors:  Apple's stock has been falling all year.  The chart almost looks like there was a stock split that just seemed to take up the late summer, but that's no stock split.  That's something like gravity.  Stock price movement this year may be based on rumors since the summer about Jobs' weight loss and health outlook, or it may be based on the horrible economy as a whole (remember October?  Shiver).  This is what makes securities lawsuits so mind-boggling -- even if you get all the way to damages, calculation is, as Steve Jobs would say, "more complex" than it would originally seem.


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