THIS CASEBOOK contains a selection of 80 U. S. Supreme Court and U. S. Court of Appeals decisions that analyze and discuss the fraud-on-the-market theory as set forth in Basic Inc. v. Levinson. The selection of decisions spans from 2004 to the date of publication.
In Basic, 485 U.S. at 245, the Supreme Court observed that requiring each investor to prove individual reliance on an alleged fraudulent misrepresentation "would place an unnecessarily unrealistic evidentiary burden on the Rule 10b-5 plaintiff who has traded on an impersonal market," because each investor would have to prove "how he would have acted . . . if the misrepresentation had not been made." Concluding this would be contrary to the statutory purpose of protecting investors trading on well-developed securities markets, the Court held that Rule 10b-5 plaintiffs may invoke a rebuttable fraud-on-the-market presumption of reliance. IBEW Local 98 Pension Fund v. Best Buy Co., Inc., (8th Cir. 2016).
The presumption is based on the theory "that the market price of shares traded on well-developed markets reflects all publicly available information," and therefore "[a]n investor who buys or sells stock at the price set by the market does so in reliance on the integrity of that price." Id. at 246-47. The presumption applies if a Rule 10b-5 plaintiff demonstrates "(1) that the alleged misrepresentations were publicly known, (2) that they were material, (3) that the stock traded in an efficient market, and (4) that the plaintiff traded the stock between the time the misrepresentations were made and when the truth was revealed." Halliburton II, 134 S. Ct. at 2408; see Basic, 485 U.S. at 248-50. If a defendant rebuts the presumption, "a Rule 10b-5 suit cannot proceed as a class action" because individual questions of reliance will predominate over common questions of law and fact. Halliburton II, 134 S. Ct. at 2416. Thus, establishing the Basic presumption is critical to a Rule 10b-5 plaintiff's Rule 23 burden to establish that a class action should be certified. IBEW Local 98 Pension Fund v. Best Buy Co., Inc., ibid.
In Basic, 485 U.S. at 245, the Supreme Court observed that requiring each investor to prove individual reliance on an alleged fraudulent misrepresentation "would place an unnecessarily unrealistic evidentiary burden on the Rule 10b-5 plaintiff who has traded on an impersonal market," because each investor would have to prove "how he would have acted . . . if the misrepresentation had not been made." Concluding this would be contrary to the statutory purpose of protecting investors trading on well-developed securities markets, the Court held that Rule 10b-5 plaintiffs may invoke a rebuttable fraud-on-the-market presumption of reliance. IBEW Local 98 Pension Fund v. Best Buy Co., Inc., (8th Cir. 2016).
The presumption is based on the theory "that the market price of shares traded on well-developed markets reflects all publicly available information," and therefore "[a]n investor who buys or sells stock at the price set by the market does so in reliance on the integrity of that price." Id. at 246-47. The presumption applies if a Rule 10b-5 plaintiff demonstrates "(1) that the alleged misrepresentations were publicly known, (2) that they were material, (3) that the stock traded in an efficient market, and (4) that the plaintiff traded the stock between the time the misrepresentations were made and when the truth was revealed." Halliburton II, 134 S. Ct. at 2408; see Basic, 485 U.S. at 248-50. If a defendant rebuts the presumption, "a Rule 10b-5 suit cannot proceed as a class action" because individual questions of reliance will predominate over common questions of law and fact. Halliburton II, 134 S. Ct. at 2416. Thus, establishing the Basic presumption is critical to a Rule 10b-5 plaintiff's Rule 23 burden to establish that a class action should be certified. IBEW Local 98 Pension Fund v. Best Buy Co., Inc., ibid.
