In a much-anticipated case that slightly modified one of the
most important doctrines in American securities law, the
United States (U.S.) Supreme Court has determined to keep
the "fraud on the market" theory of reliance in U.S.
securities misrepresentation cases.
The U.S. has a private right of action for so-called
"securities fraud," contained in s. 10(b) of the 1934
Securities Exchange Act, which prohibits "deception" in
the sale of securities. Rules of the SEC define such
deception as fraud, untrue statements of material fact or deceptive
practices. Over time a number of factors have developed that
have to be proven in support of a private securities claim,
including that a plaintiff relied on the alleged deception.
It was established in 1988 in Basic Inc. v. Levinson
that a plaintiff can prove reliance inferentially, by use of the
"efficient market hypothesis". The efficient market
theory stipulates that the public market for securities will
reflect all relevant, material and publicly available information
about a company in the price of its security. If the public
market is "lied to" about a company, that misinformation
will cause the price of the security to improperly rise, fall or
hold; the reliance of an anonymous investor on that misinformation
can be presumed by the fact that he or she bought or sold at the
market-determined price. A "fraud on the market"
causes investors to make misinformed investment decisions.
Notably, however, Basic stands only for the proposition
that the fraud on the market theory is a presumption, which can be
disproven. That is, a defendant can always argue that a
plaintiff should have to prove actual reliance
because the various assumptions underlying the economic theory do
not apply to the particular security at issue.
Halliburton v. Erica P. John Fund is actually this
case's second trip to the U.S. Supreme Court. There has
been a remarkable run of recent securities class actions heard by
the U.S.'s highest court, all about evaluating how tests for
certification are to be applied in securities class actions.
The first time Halliburton was heard by the Supreme Court,
it was on the issue of whether a plaintiff has to prove at
certification some nexus between the alleged misrepresentation and
the damages suffered by the class. The Supreme Court
determined that this is an issue for trial, and directed that the
remaining issues on certification be resolved.
The case came back to the Supreme Court, this time on the issue
of whether a defendant can attempt to rebut the presumption of
reliance at the certification stage. That issue was
significant because the defendant wanted to rely on an event study
from an economic expert that the defendant argued demonstrated that
there was no price impact as a result of alleged public
misstatements. The defendant wanted show that study to the
judge at certification, rather wait to show it to a jury at
trial. The Supreme Court decided that it would consider
whether it should overrule the fraud on the market theory
altogether, which has been criticized by certain academics and some
modern economic research suggesting that securities markets are not
as "efficient" as the efficient market hypothesis
The Supreme Court affirmed Basic and the fraud on the
market presumption, and also rejected the defendant's
invitation to make the theory more difficult for a plaintiff to
invoke. The Court reiterated that the theory only supports a
presumption that can be rebutted, so it allowed the defendant to
raise at certification its challenge to the efficient market
Notably for securities litigation in Canada, the U.S. experience
is largely an affirmation of the good sense in having codified the
requirements to bring secondary market securities misrepresentation
cases under legislation such as Part XXIII.1 of Ontario's
Securities Act. That legislation's key feature
is to presume reliance by investors on public misstatements made by
issuers and certain insiders. With reliance presumed in cases
where the court has granted leave to a plaintiff to bring a
secondary market misrepresentation claim, there is no requirement
to prove the validity or veracity of the fraud on the market
theory, either for individual plaintiffs or for a class.
A recent decision of the Ontario Court
of Appeal, D'Onofrio v. Advantage
Car & Truck Rentals Ltd., 2017 ONCA 5,
asks whether a party who takes "no
position" on a summary judgment
motion is later bound by the motion
judge's findings in the ongoing
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