According to the New York Time Dealbook, Halliburton, the oil company, is asking the Supreme Court to reconsider one of the fundamental tenets of securities fraud litigation: a doctrine known as “fraud on the market.” This doctrine is critical for shareholder protection.
The doctrine has its origins in the 1986 Supreme Court case Basic v. Levinson. To state a claim for securities fraud, a shareholder must show “reliance,” meaning that the shareholder acted in some way based on the fraudulent conduct of the company.
In the Basic case, the Supreme Court held that “eyeball” reliance — a requirement that a shareholder read the actual documents and relied on those statements before buying or selling shares — wasn’t necessary. Instead, the court adopted a presumption, based on the efficient market hypothesis, that all publicly available information about a company is incorporated into its stock price.
Applying this doctrine, the Supreme Court reasoned that any fraud would affect a company’s price. The court held that therefore a shareholder need not prove reliance because the shareholder’s purchase or sale was based on an inaccurate share price, a price that changed as a result of false information.
The New York Times states that 4 out of 5 justices seem to be leaning Halibuton's way---and if successful, securities fraud recoveries will be available to only the largest investors with resources to litigate.
The complete article by Professor Steven M. Davidoff and be found here.