Opinion ID: 2799870
Heading Depth: 2
Heading Rank: 2

Heading: Fraud on the Market and Loss Causation

Text: “A ‘fraud on the market’ occurs when a material misrepresentation is knowingly disseminated to an informationally efficient market.” FindWhat, 658 F.3d at 1310 (citing Basic Inc. v. Levinson, 485 U.S. 224, 247, 108 S. Ct. 978, 99192 (1988)). In a § 10(b) lawsuit, a plaintiff must show proof of reliance on the alleged misrepresentation. Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179, 2184 (2011). Fraud-on-the-market theory relies on the “efficient market hypothesis, which provides . . . 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.’” FindWhat, 658 F.3d at 1309-10 (quoting Basic, 485 U.S. at 241, 108 S. Ct. at 989). An efficient market transmits information efficiently to prove reliance as well as to prove loss causation. Meyer, 710 F.3d at 1198-99. Fraud-on-the-market theory in class-action, securities-fraud cases creates a rebuttable presumption of reliance, provided the misstatement was material, and the market was informationally efficient. FindWhat, 658 F.3d at 1310 (citing Basic, 485 U.S. at 247, 108 S. Ct. 978, 991-92). Plaintiffs-appellants argue the efficient-market hypothesis to establish a presumption of reliance. Disclosure of information known by the market, confirmatory information, will not cause a change in stock price, because that information already has been assimilated by the market and incorporated in the stock price. Id. 16 Case: 14-12838 Date Filed: 05/11/2015 Page: 17 of 31 If and when the misinformation is finally corrected by the release of truthful information (often called a “corrective disclosure”), the market will recalibrate the stock price to account for this change in information, eliminating whatever artificial value it had attributed to the price. That is, the inflation within the stock price will “dissipate.” Id. But merely showing a security was purchased at a price that was artificially inflated by a fraudulent misrepresentation is insufficient. Hubbard v. BankAtlantic Bancorp, Inc., 688 F.3d 713, 725 (11th Cir. 2012). “[I]n a fraud-on-the-market case, the plaintiff must prove not only that a fraudulent misrepresentation artificially inflated the security’s value but also that ‘the fraud-induced inflation that was baked into the plaintiff’s purchase price was subsequently removed from the stock’s price, thereby causing losses to the plaintiff.’” Id. (quoting FindWhat, 658 F.3d at 1311). Consequently, § 10(b) “is not a prophylaxis against the normal risks attendant to speculation and investment in the financial markets” and only protects against loses attributable to a given misrepresentation. Meyer, 710 F.3d at 1196. Plaintiffs frequently demonstrate loss causation in fraud-on-themarket cases circumstantially, by: (1) identifying a “corrective disclosure” (a release of information that reveals to the market the pertinent truth that was previously concealed or obscured by the company’s fraud); (2) showing that the stock price dropped soon after the corrective disclosure; and (3) eliminating other possible explanations for this price drop, so that the factfinder can infer that it is more probable than not that it was the corrective disclosure—as opposed to other possible depressive factors—that caused at least a “substantial” amount of the price drop. FindWhat, 658 F.3d at 1311-12 (footnote omitted). 17 Case: 14-12838 Date Filed: 05/11/2015 Page: 18 of 31 A corrective disclosure reveals the falsity of a previous representation to the market. Meyer, 710 F.3d at 1197 (citing Lentell v. Merrill Lynch & Co., 396 F.3d 161, 175 n.4 (2d Cir. 2005)); see FindWhat, 658 F.3d at 1311 n.28. “To be corrective, a disclosure need not precisely mirror the earlier misrepresentation, but it must at least relate back to the misrepresentation and not to some negative information about the company.” Id. (citation, internal quotation marks, and alteration omitted). A corrective disclosure can be established by a series of cumulative, partial disclosures. Id.; see Lormand v. U.S. Unwired, Inc., 565 F.3d 228, 261 (5th Cir. 2009). Plaintiffs-appellants allege the combination of two partial disclosures—the OIG investigation and the 2012 Skolnick Report— constitutes a corrective disclosure for the purpose of establishing loss causation.