|  | | 2008 News and Press Releases | | |
HEADLINE NEWS:
Fraud-On-The-Market Presumption: Rebuttable
David L. Comerford and Jeffery A. Dailey
Securities Law 360. December 1, 2008
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EXCERPT: […] The “fraud-on-the-market” theory of reliance, adopted by the Supreme Court in a plurality opinion in Basic Inc. v. Levinson, 485 US 224 (1988), presumes that investors who bought or sold a security did so in reliance on the integrity of the market price of that security. That presumption, however, is rebuttable through “[a]ny showing that severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff or his decision to trade at a fair market price ...” Id. at 248. Different investors use different trading strategies, rely on different information and have different levels of sophistication. Therefore, in securities litigation, discovery aimed at uncovering the investor plaintiff’s sophistication, including investment philosophy and other investment holdings, may be relevant to rebutting the fraud-on-the-market presumption of reliance by showing that the decision to purchase was based on something other than the integrity of the market for a particular security. There is renewed discussion among academics about whether some sophisticated investors’ trading strategies should allow them to benefit from the fraud-on-the-market presumption of reliance. This past summer, the U.S. Chamber Institute for Legal Reform released a study on securities class action litigation that stated: “[w]hile the [fraud-on-the-market] theory may plausibly be defended when it comes to small investors who rely on market pricing and generally may not as a practical matter be able to show actual reliance on any alleged misstatements, it makes no sense when it comes to the large institutional investors who disproportionately benefit from the existing system. Those large investors are sophisticated enough to make trading decisions based on their own market evaluations and, when necessary, to prove actual reliance on any alleged misstatements that may in fact have influenced their evaluations. |
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