Opinion ID: 201963
Heading Depth: 3
Heading Rank: 1

Heading: Basic v. Levinson

Text: While endorsing the fraud-on-the-market presumption of reliance in Basic, the Supreme Court did not explicitly address the meaning of an efficient market. See Gariety, 368 F.3d at 368 (stating that Basic offers little guidance for determining whether a market is efficient). PolyMedica points to various passages in Basic purportedly showing a preference for the prevailing definition of an efficient market, noting the Supreme Court's statements that [t]he market is acting as the unpaid agent of the investor, informing him that given all the information available to it, the value of the stock is worth the market price, and that the market price of shares traded on well-developed markets reflects all publicly available information, and hence, any material misrepresentations. Basic, 485 U.S. at 244, 246 (emphasis added) (internal quotation marks and citation omitted). Elsewhere, however, the Basic decision suggests that something less than all publicly available information may be required, noting that an investor's reliance may be presumed [b]ecause most publicly available information is reflected in market price, id. at 247 (emphasis added). In separate footnotes -23- of the decision, the Court further appeared to resist PolyMedica's suggested definition of an efficient market. As pointed out by the district court, the Supreme Court, after listing several academic articles, noted that: [w]e need not determine by adjudication what economists and social scientists have debated through the use of sophisticated statistical analysis and the application of economic theory. For purposes of accepting the presumption of reliance in this case, we need only believe that market professionals generally consider most publicly announced material statements about companies, thereby affecting stock market prices. Id. at 246 n.24. In addition, the Court noted that by accepting a rebuttable presumption of reliance, it d[id] not intend conclusively to adopt any particular theory of how quickly and completely publicly available information is reflected in market price. Id. at 249 n.28. While the Supreme Court's language in Basic provides support for both the district court's definition of an efficient market as well as the prevailing definition urged by PolyMedica, the cases relied upon by the Supreme Court in Basic favor the latter definition. In Peil, cited extensively in Basic, the Third Circuit noted that [t]he 'fraud on the market' theory rests on the assumption that there is a nearly perfect market in information, and that the market price of stock reacts to and reflects the available information. Peil, 806 F.2d at 1161 n.10. Likewise, in In re LTV Sec. Litig., 88 F.R.D. 134 (N.D. Tex. 1980), which the -24- Supreme Court also cited, the district court stated that [t]he central assumption of the fraud on the market theory [is] that the market price reflects all representations concerning the stock. . . . [E]fficient capital markets exist when security [sic] prices reflect all available public information about the economy, about financial markets, and about the specific company involved. Id. at 144. Other cases cited in Basic, including the decision of the Sixth Circuit under review in Basic, similarly support the prevailing definition. See Levinson, 786 F.2d at 750 (stating that [t]he fraud on the market theory is based on two assumptions: first, that in an efficient market the price of stock will reflect all information available to the public . . . and, second, that an individual relies on the integrity of the market price when dealing in that stock); T.J. Raney, Inc. & Sons v. Fort Cobb Irrigation Fuel Auth., 717 F.2d 1330, 1332 (10th Cir. 1983) (stating that [t]he [fraud-on-the-market] theory is grounded on the assumption that the market price reflects all known material information). Given the Supreme Court's disclaimer that it was not adopting any particular economic theory in applying the fraud-onthe-market presumption of reliance, on the one hand, and its embrace of the holdings of cases adopting the prevailing definition of market efficiency on the other hand, the most that can be said of Basic is that it did not directly address the meaning of an -25- efficient market, choosing instead to leave the development of that concept to the lower courts. See Abell v. Potomac Ins. Co. of Ill., 858 F.2d 1104, 1120 (5th Cir. 1988) (stating that Basic essentially allows each of the circuits room to develop its own fraud-on-the-market rules), vacated on other grounds sub. nom. Fryar v. Abell, 492 U.S. 914 (1989). Basic is therefore not the benchmark for deriving a definition of market efficiency. We must turn to the decisions of the lower courts, post-Basic, for further guidance.