In recent months, the legal world has been abuzz over the future of the so-called “fraud on the market” doctrine. This probably has many people asking, “Should I care?” The short answer is yes. The fraud on the market doctrine is the conceptual linchpin used by courts to allow most securities fraud claims to be brought as shareholder class actions. Reflecting the ambiguity with which such claims are viewed, the Supreme Court has described them at times as presenting “a danger of vexatiousness different in degree and in kind” from other cases, and at others as “an essential supplement to [public enforcement].” Now, the Supreme Court recently agreed to take up the issue of whether the doctrine should continue to have any vitality in the United States. In short, the future of the most common form of securities fraud class action may be at stake.
Over a perhaps prescient dissent by Justice Byron White, a plurality of the Supreme Court adopted the fraud on the market doctrine in the seminal case of Basic, Inc. v. Levinson. The essence of the doctrine is that shareholders seeking to pursue a class action for securities fraud under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 may invoke a rebuttable presumption of reliance on public, material misrepresentations regarding securities traded in an efficient market. Without such a presumption, in order to establish their claims, the individual shareholders who purchased the securities in question would be required to prove that they each personally read (or heard) and relied on the alleged misrepresentations. As the Supreme Court recognized in Basic, this would effectively preclude the shareholders from proceeding with a class action, because the individual issues related to reliance would overwhelm any common issues.