by Jonathan Eisenberg
Plaintiffs in securities fraud
cases rely on the fraud-on-the-market presumption of reliance to obtain class
certification. As the Supreme Court recently stated in Amgen Inc. v.
Connecticut Retirement Plans, No. 11-1085, slip op. at 5-6 (Feb. 27, 2013)
(hereinafter, "Amgen"), "Absent the fraud-on-the-market
theory, the requirement that Rule 10b-5 plaintiffs establish reliance would
ordinarily preclude certification of a class action seeking money damages
because individual reliance issues would overwhelm questions common to the class."
[an enhanced version of this opinion is available to lexis.com
subscribers] See also Basic v. Levinson, 485 U.S. 224, 242 (1988)
(hereinafter, Basic) ("Requiring proof of individualized reliance
from each member of the proposed plaintiff class effectively would have
prevented respondents from proceeding with a class action, since individual
issues then would have overwhelmed the common ones.") [enhanced version]
In Amgen, the Supreme Court held that even though materiality is an
essential element of the fraud-on-the-market presumption of reliance,
plaintiffs need not prove it at the class certification stage and defendants
should not be given an opportunity to rebut it at that stage. In reaching this
conclusion, however, four members of the Court -- the number necessary
to grant certiorari in a future case -- expressed skepticism toward the
fraud-on-the-market theory, which could potentially be far more important than
the Court's limited holding in Amgen itself. The majority neither
embraced nor rejected the theory, but pointed out that Amgen had not challenged
the theory either in the courts below or in the Supreme Court, and thus the
continuing viability of the theory was not at issue before it.
The Court's Skepticism Toward The Fraud-on-the-Market Presumption of
The fraud-on-the-market presumption of reliance, though essential to the
certification of securities fraud class actions over the last 25 years, rests
on a slender thread. Only six Justices participated in the 1988 decision in Basic
and only four (Justices Blackmun, Brennan, Marshall and Stevens) accepted
it. Moreover, the fraud-on-the-market presumption was based in part on the
"efficient market hypothesis" - the hypothesis that "in an open
and developed securities market, the price of a company's stock is determined
by the available material information regarding the company and its
business....Misleading statements will therefore defraud purchasers of stock
even if the purchasers do not directly rely on the misstatements." But
since 1988, the efficient market hypothesis has come under increasing attack
for not reflecting how investors actually act, or the existence of stock market
bubbles, or patterns of stock prices preceding the bankruptcy of firms like
In Amgen, the four Justices who concurred or dissented expressed
skepticism toward Basic's adoption of the fraud-on-the-market theory for
creating a presumption of reliance while the majority highlighted that in the
case before it the Court had not been asked to revisit the doctrine. [footnotes
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Jonathan Eisenberg is the General
Editor of and a contributor to Litigating Securities Class Actions,
first published by LexisNexis in 2010.