Corporations have spent billions of dollars defending, and frequently settling, the inevitable class action litigation brought by shareholders (or more precisely, aggressive counsel) accusing corporations and their boards of securities fraud whenever there is a drop in the corporation’s stock price. For the last three decades, a key driver of those litigations has been the widespread application of the “fraud-on-the-market” presumption of reliance. Under the fraud-on-the-market doctrine, the putative class plaintiff need not demonstrate that any (or all) class members actually relied on an alleged false or misleading statement. Rather, the plaintiff class relies on a rebuttable presumption that, in an efficient market, the company’s stock price reflects all publicly available information. However, a series of recent decisions suggests that courts are actively considering the continued viability of the fraud-on-the-market doctrine.
Earlier this year in Amgen Inc. v. Connecticut Ret. Plans & Trust Funds, the Supreme Court held that proof of materiality is not required to satisfy the “predominance” requirement for class certification under Rule 23(b) (the Court did acknowledge that plaintiffs must prove materiality to prevail on the merits). The flip side of materiality is reliance; in other words, investors can only rely on information if it is material. In that vein, the Court’s majority and dissenters expressed doubts as to the fraud-on-the-market presumption of reliance and, specifically, the notion of market efficiency on which that theory is based. As the Court noted in Amgen, “[t]he fraud-on-the-market theory . . . facilitates class certification by recognizing a rebuttable presumption of classwide reliance on public, material misrepresentations when shares are traded in an efficient market.” Thus, absent an efficient market (i.e., a market in which all relevant information is impounded into the security price), the reliance requirement would ordinarily preclude class certification because individual questions of investor reliance would predominate over common ones.