Opinion ID: 1314093
Heading Depth: 2
Heading Rank: 2

Heading: Application of the Fraud-on-the-Market Presumption to Suits against Research Analysts

Text: In Basic, the Supreme Court reaffirmed that reliance is an element of a Rule 10b-5 cause of action. Reliance provides the requisite causal connection between a defendant's misrepresentation and a plaintiff's injury. 485 U.S. at 243, 108 S.Ct. 978 (citation omitted). The Court stressed, however, that there is more than one way to demonstrate the causal connection. Id. The Court noted that, given the millions of shares changing hands daily, in modern securities markets, our understanding of Rule 10b-5's reliance requirement must evolve beyond the traditional concept of individualized reliance that was appropriate to the face-to-face transactions contemplated by early fraud cases.... Id. at 243-44, 108 S.Ct. 978. Looking to the legislative history of the 1934 Securities Act, the Court determined that Congress' premise in drafting the Act was that the market price of shares traded on well-developed markets reflects all publicly available information, and, hence, any material misrepresentations. Id. at 246, 108 S.Ct. 978 (emphases added). Therefore, in an efficient market, an investor's reliance on any public material misrepresentations ... may be presumed for purposes of a Rule 10b-5 action. Id. at 247, 108 S.Ct. 978 (emphasis added). The Basic Court thereby set forth a test of general applicability that where a defendant has (1) publicly made (2) a material misrepresentation (3) about stock traded on an impersonal, well-developed (i.e., efficient) market, investors' reliance on those misrepresentations may be presumed. Id. at 248 n. 27, 108 S.Ct. 978. This is all that is needed to warrant the presumption. [4] Defendants argue that the Basic presumption should be limited to suits involving misrepresentations made by issuers, because misrepresentations by third parties are less likely to materially effect market prices. But they cite no case, and we have found none, that supports such a rule. Moreover, the Basic Court did not so limit its holding and its logic counsels against doing so. The reason is simple: the premise of Basic is that, in an efficient market, share prices reflect all publicly available information, and, hence, any material misrepresentations. Id. at 246, 108 S.Ct. 978 (emphases added). It thus does not matter, for purposes of establishing entitlement to the presumption, whether the misinformation was transmitted by an issuer, an analyst, or anyone else. [5] The Supreme Court's recent decision in Stoneridge Investment Partners, LLC supports this result. In Stoneridge Investment Partners, LLC, the Court held that there is a private right of action under Section 10(b) against entities other than issuers, provided that their conduct satisf[ies] each of the elements or preconditions for liability.... 128 S.Ct. at 769. Significantly, the Court applied the same Basic test to the conduct of non-issuers to determine whether the fraud-on-the-market presumption applied. Id. The Court concluded the presumption did not apply, not because the defendants were not issuers, but rather, because their deceptive acts were not communicated to the public, as required by Basic. Id. Thus, in short, there is no reason in law or logic to apply a bright-line rule prohibiting the application of the Basic presumption in suits against secondary actors such as research analysts. [6]