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Prof. George W. Conk Guest lecturer: Wallace Showman, Esq. gconk@law.fordham.edu Room 409 212-636-7446 Adjunct Professor of Law & Senior Fellow Stein Center for Law & Ethics
Fraud on the market - 10 (b)(5) actions 1
(a) Prerequisites. One or more members of a class may sue or be sued as representative parties on behalf of all members only if: (1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class.
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omission)
mind
sale of a security
Fraud on the market - 10 (b)(5) actions 3
causation"
17 CFR 240.10b-5
It shall be unlawful for any person, directly or indirectly (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
Fraud on the market - 10 (b)(5) actions 5
17 CFR 240.10b-5.
Materiality
Reliance
Reliance provides the requisite causal connection between a defendant's misrepresentation and a plaintiff's injury. Basic Falsity, materiality, reliance, damage are the common law elements of fraud
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The modern securities markets, literally involving millions of shares changing hands daily, differ from the face-to-face transactions contemplated by early fraud cases, and our understanding of Rule 10b5's reliance requirement must encompass these differences
Fraud on the market - 10 (b)(5) actions 11
[I]n an open and developed securities market, the price of a company's stock is determined by the available material information regarding the company and
Presumptions typically serve to assist courts in managing circumstances in which direct proof, for one reason or another, is rendered difficult. See, e.g., D. Louisell & C. Mueller, Federal Evidence 541-542 (1977).
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Requiring a plaintiff to show a speculative state of facts, i.e., how he would have acted if omitted material information had been disclosed, ... or if the misrepresentation had not been made... would place an unnecessarily unrealistic evidentiary burden on the Rule 10b-5 plaintiff who has traded on an impersonal market.
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Because most publicly available information is reflected in market price, an investor's reliance on any public material misrepresentations, therefore, may be presumed for purposes of a Rule 10b-5 action.
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Any showing that severs the link between the alleged misrepresentation and either the
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1) Legally cognizable injury is shown by purchase of securities at a market price distorted by the defendants misrepresentations 2) Distortion is presumed if a misrepresentation is material, disseminated to the public, and securities are sold on an efficient market 3) Reliance is presumed but may be rebutted
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In a face-to-face negotiation between strangers, there is no reason necessarily to assume that what the counterparty is saying is the truth. Yet the law creates a right to rely on sufficiently factual misrepresentations to promote efficient economic exchange in the face of palpable uncertainty about honesty, by making it safe to assume honesty
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Ginsburg (6-3) Materiality is an essential element of a 10b-5 action common to entire class.
FOTM is a judge-made rule Materiality essential to class certification Basics economic assumptions flawed Presumption difficult to administer in terrorem effect of certification Class cert places materiality determination in jurys hands Transaction-specific proofs reqd
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Amgen 133 S. Ct. 1184 (2013) Materiality of misrepresentation goes to the merits
[B]ecause materiality is established by evidence common to all plaintiffs...a failure to prove materiality will cause all plaintiffs' individual claims to fail
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2013 - Amgen majority - Class certification does not require proof of materiality
6-3 split - Ginsburg for 5, Alito concurs, Scalia, Thomas, Kennedy dissent "While [a putative class] certainly
Materiality, therefore, must be demonstrated to prove fraud on the market Until materiality of an alleged misstatement is shown there is no reason to believe that all market participants have relied equally on it.
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theory is invoked--i.e., at
certification.
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Halliburton sustained its share price via three misrepresentations * Asbestos liability understated * Cost overrun revenue overestimated * Dresser merger efficiencies knowingly misstated
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Common question predominance is relevant to class certification Only issues bearing directly on common question predominance and propriety of class resolution should be addressed at class certification Proof of price impact or its absence goes only to the merits.
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Questions presented 1. Whether this Court should overrule or substantially modify the holding of
Questions presented 2. Whether, in a case where the plaintiff invokes the presumption of reliance to seek class certification, the defendant may rebut the presumption and prevent class certification by introducing evidence that the alleged misrepresentations did not distort the market price of its stock.
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Implicit in the notion of an efficient marketeven a mechanically efficient market as courts understand the securities market to beis the assumption that the market acts rationally. Fisher, Does 15 the Efficient Market
Theory Help Us Do Justice in a Time of Madness?, 54 Emory L.J. 843, 898 (2005).
Fraud on the market - 10 (b)(5) actions
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But a goodly section of academic thought now challenges this core tenet of Basic, id. at 899, because too many recent events disprove it. E.G. 1998-2001 technology bubblethe market acted irrationally, with stock prices far away from fundamental values
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Posner, On the Receipt of the Ronald H. Coase Medal, 12 Am. L. & Econ. Rev. 265, 278 (2010).
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The Basic presumption reflects the common sense understanding that price reflects available information
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Congress has had many chances to replace the judicially created doctrine and has not done so.
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