The Securities and Exchange Commission's Rule 10b-5, promulgated
under § 10(b) of the Securities Exchange Act of 1934 (Act),
prohibits, in connection with the purchase or sale of any security,
the making of any untrue statement of a material fact or the
omission of a material fact that would render statements made not
misleading. In December 1978, Combustion Engineering, Inc., and
Basic Incorporated agreed to merge. During the preceding two years,
representatives of the two companies had various meetings and
conversations regarding the possibility of a merger; during that
time Basic made three public statements denying that any merger
negotiations were taking place or that it knew of any corporate
developments that would account for heavy trading activity in its
stock. Respondents, former Basic shareholders who sold their stock
between Basic's first public denial of merger activity and the
suspension of trading in Basic stock just prior to the merger
announcement, filed a class action against Basic and some of its
directors, alleging that Basic's statements had been false or
misleading, in violation of § 10(b) and Rule 10b-5, and that
respondents were injured by selling their shares at prices
artificially depressed by those statements. The District Court
certified respondents' class, but granted summary judgment for
petitioners on the merits. The Court of Appeals affirmed the class
certification, agreeing that, under a "fraud-on-the-market" theory,
respondents' reliance on petitioners' misrepresentations could be
presumed, and thus that common issues predominated over questions
pertaining to individual plaintiffs. The Court of Appeals reversed
the grant of summary judgment and remanded, rejecting the District
Court's view that preliminary merger discussions are immaterial as
a matter of law, and holding that even discussions that might not
otherwise have been material become so by virtue of a statement
denying their existence.
Held:
1. The standard set forth in
TSC Industries, Inc. v.
Northway, Inc., 426 U. S. 438,
whereby an omitted fact is material if there is a substantial
likelihood that its disclosure would have been considered
significant by a reasonable investor, is expressly adopted for the
§ 10(b) and Rule 10b-5 context. Pp.
485 U. S.
230-232.
Page 485 U. S. 225
2. The "agreement-in-principle" test, under which preliminary
merger discussions do not become material until the would-be merger
partners have reached agreement as to the price and structure of
the transaction, is rejected as a bright-line materiality test. Its
policy-based rationales do not justify the exclusion of otherwise
significant information from the definition of materiality. Pp.
485 U. S.
232-236.
3. The Court of Appeals' view that information concerning
otherwise insignificant developments becomes material solely
because of an affirmative denial of their existence is also
rejected: Rule 10b-5 requires that the statements be
misleading as to a
material fact. Pp.
485 U. S.
237-238.
4. Materiality in the merger context depends on the probability
that the transaction will be consummated, and its significance to
the issuer of the securities. Thus, materiality depends on the
facts, and is to be determined on a case-by-case basis. Pp.
485 U. S.
238-241.
5. The courts below properly applied a presumption of reliance,
supported in part by the fraud-on-the-market theory, instead of
requiring each plaintiff to show direct reliance on Basic's
statements. Such a presumption relieves the Rule 10b-5 plaintiff of
an unrealistic evidentiary burden, and is consistent with, and
supportive of, the Act's policy of requiring full disclosure and
fostering reliance on market integrity. The presumption is also
supported by common sense and probability: an investor who trades
stock at the price set by an impersonal market does so in reliance
on the integrity of that price. Because most publicly available
information is reflected in market price, an investor's reliance on
any public material misrepresentations may be presumed for purposes
of a Rule 10b-5 action. Pp.
485 U. S.
241-247.
6. The presumption of reliance may be rebutted: Rule 10b-5
defendants may attempt to show that the price was not affected by
their misrepresentation, or that the plaintiff did not trade in
reliance on the integrity of the market price. Pp.
485 U. S.
248-249.
786 F.2d 741, vacated and remanded.
BLACKMUN, J., delivered the opinion of the Court, in which
BRENNAN, MARSHALL, and STEVENS, JJ., joined, and in Parts I, II,
and III of which WHITE and O'CONNOR, JJ., joined. WHITE, J., filed
an opinion concurring in part and dissenting in part, in which
O'CONNOR, J., joined,
post, p.
485 U. S. 250.
REHNQUIST, C.J., and SCALIA and KENNEDY, JJ., took no part in the
consideration or decision of the case.
Page 485 U. S. 226
JUSTICE BLACKMUN delivered the opinion of the Court.
This case requires us to apply the materiality requirement of §
10(b) of the Securities Exchange Act of 1934 (1934 Act), 48 Stat.
881,
as amended, 15 U.S.C. § 78a
et seq., and the
Securities and Exchange Commission's Rule 10b-5, 17 CFR § 240.
10b-5 (1987), promulgated thereunder, in the context of preliminary
corporate merger discussions. We must also determine whether a
person who traded a corporation's shares on a securities exchange
after the issuance of a materially misleading statement by the
corporation may invoke a rebuttable presumption that, in trading,
he relied on the integrity of the price set by the market.
I
Prior to December 20, 1978, Basic Incorporated was a publicly
traded company primarily engaged in the business of manufacturing
chemical refractories for the steel industry. As early as 1965 or
1966, Combustion Engineering, Inc., a company producing mostly
alumina-based refractories, expressed some interest in acquiring
Basic, but was deterred from pursuing this inclination seriously
because of antitrust concerns it then entertained.
See
App. 81-83. In 1976, however, regulatory action opened the way to a
renewal of
Page 485 U. S. 227
Combustion's interest. [
Footnote
1] The "Strategic Plan," dated October 25, 1976, for
Combustion's Industrial Products Group included the objective:
"Acquire Basic Inc. $30 million." App. 337.
Beginning in September, 1976, Combustion representatives had
meetings and telephone conversations with Basic officers and
directors, including petitioners here, [
Footnote 2] concerning the possibility of a merger.
[
Footnote 3] During 1977 and
1978, Basic made three public statements denying that it was
engaged in merger negotiations. [
Footnote 4] On December 18, 1978, Basic asked
Page 485 U. S. 228
the New York Stock Exchange to suspend trading in its shares and
issued a release stating that it had been "approached" by another
company concerning a merger.
Id. at 413. On December 19,
Basic's board endorsed Combustion's offer of $46 per share for its
common stock,
id. at 335, 414-416, and on the following
day publicly announced its approval of Combustion's tender offer
for all outstanding shares.
Respondents are former Basic shareholders who sold their stock
after Basic's first public statement of October 21, 1977, and
before the suspension of trading in December, 1978. Respondents
brought a class action against Basic and its directors, asserting
that the defendants issued three false or misleading public
statements, and thereby were in violation of § 10(b) of the 1934
Act and of Rule 10b-5. Respondents alleged that they were injured
by selling Basic shares at artificially depressed prices in a
market affected by petitioners' misleading statements and in
reliance thereon.
The District Court adopted a presumption of reliance by members
of the plaintiff class upon petitioners' public statements that
enabled the court to conclude that common questions of fact or law
predominated over particular questions pertaining to individual
plaintiffs.
See Fed.Rule Civ.Proc. 23(b)(3). The District
Court therefore certified respondents' class. [
Footnote 5] On the merits, however, the District
Court granted
Page 485 U. S. 229
summary judgment for the defendants. It held that, as a matter
of law, any misstatements were immaterial: there were no
negotiations ongoing at the time of the first statement, and
although negotiations were taking place when the second and third
statements were issued, those negotiations were not "destined, with
reasonable certainty, to become a merger agreement in principle."
App. to Pet. for Cert. 103a.
The United States Court of Appeals for the Sixth Circuit
affirmed the class certification, but reversed the District Court's
summary judgment, and remanded the case. 786 F.2d 741 (1986). The
court reasoned that, while petitioners were under no general duty
to disclose their discussions with Combustion, any statement the
company voluntarily released could not be "
so incomplete as to
mislead.'" Id. at 746, quoting SEC v. Texas Gulf
Sulphur Co., 401 F.2d 833, 862 (CA2 1968) (en banc), cert.
denied sub nom. Coates v. SEC, 394 U.S. 976 (1969). In the
Court of Appeals' view, Basic's statements that no negotiations
were taking place, and that it knew of no corporate developments to
account for the heavy trading activity, were misleading. With
respect to materiality, the court rejected the argument that
preliminary merger discussions are immaterial as a matter of law,
and held that,
"once a statement is made denying the existence of any
discussions, even discussions that might not have been material in
absence of the denial, are material because they make the statement
made untrue."
786 F.2d at 749.
The Court of Appeals joined a number of other Circuits in
accepting the "fraud-on-the-market theory" to create a rebuttable
presumption that respondents relied on petitioners' material
Page 485 U. S. 230
misrepresentations, noting that, without the presumption, it
would be impractical to certify a class under Federal Rule of Civil
Procedure 23(b)(3).
See 786 F.2d at 750-751.
We granted certiorari, 479 U.S. 1083 (1987), to resolve the
split,
see Part III,
infra, among the Courts of
Appeals as to the standard of materiality applicable to preliminary
merger discussions, and to determine whether the courts below
properly applied a presumption of reliance in certifying the class,
rather than requiring each class member to show direct reliance on
Basic's statements.
II
The 1934 Act was designed to protect investors against
manipulation of stock prices.
See S.Rep. No. 792, 73d
Cong., 2d Sess., 1-5 (1934). Underlying the adoption of extensive
disclosure requirements was a legislative philosophy:
"There cannot be honest markets without honest publicity.
Manipulation and dishonest practices of the market place thrive
upon mystery and secrecy."
H.R.Rep. No. 1383, 73d Cong., 2d Sess., 11 (1934). This Court
"repeatedly has described the
fundamental purpose' of the Act
as implementing a `philosophy of full disclosure.'" Santa Fe
Industries, Inc. v. Green, 430 U. S. 462,
430 U. S.
477-478 (1977), quoting SEC v. Capital Gains
Research Bureau, Inc., 375 U. S. 180,
375 U. S. 186
(1963).
Pursuant to its authority under § 10(b) of the 1934 Act, 15
U.S.C. § 78j, the Securities and Exchange Commission promulgated
Rule 10b-5. [
Footnote 6]
Judicial interpretation and application,
Page 485 U. S. 231
legislative acquiescence, and the passage of time have removed
any doubt that a private cause of action exists for a violation of
§ 10(b) and Rule 10b-5, and constitutes an essential tool for
enforcement of the 1934 Act's requirements.
See, e.g., Ernst
& Ernst v. Hochfelder, 425 U. S. 185,
425 U. S. 196
(1976);
Blue Chip Stamps v. Manor Drug Stores,
421 U. S. 723,
421 U. S. 730
(1975).
The Court previously has addressed various positive and common
law requirements for a violation of § 10(b) or of Rule 10b-5.
See, e.g., Santa Fe Industries, Inc. v. Green, supra,
("manipulative or deceptive" requirement of the statute);
Blue
Chip Stamps v. Manor Drug Stores, supra, ("in connection with
the purchase or sale" requirement of the Rule);
Dirks v.
SEC, 463 U. S. 646
(1983) (duty to disclose);
Chiarella v. United States,
445 U. S. 222
(1980) (same);
Ernst & Ernst v. Hochfelder, supra,
(scienter).
See also Carpenter v. United States,
484 U. S. 19 (1987)
(confidentiality). The Court also explicitly has defined a standard
of materiality under the securities laws,
see TSC Industries,
Inc. v. Northway, Inc., 426 U. S. 438
(1976), concluding in the proxy-solicitation context that "[a]n
omitted fact is material if there is a substantial likelihood that
a reasonable shareholder would consider it important in deciding
how to vote."
Id. at
426 U. S. 449.
[
Footnote 7] Acknowledging that
certain information concerning corporate developments could well be
of "dubious significance,"
id. at
426 U. S. 448,
the Court was careful not to set too low a standard of materiality;
it was concerned that a minimal standard might bring an
overabundance of information within its reach, and lead management
"simply to bury the shareholders in an avalanche of trivial
information -- a result that is hardly conducive to informed
decisionmaking."
Id. at
426 U. S.
448-449. It further explained that, to fulfill the
materiality requirement,
"there must be a substantial likelihood that the disclosure of
the omitted fact would have been viewed by the
Page 485 U. S. 232
reasonable investor as having significantly altered the 'total
mix' of information made available."
Id. at
426 U. S. 449.
We now expressly adopt the TSC Industries standard of materiality
for the § 10(b) and Rule 10b-5 context. [
Footnote 8]
III
The application of this materiality standard to preliminary
merger discussions is not self-evident. Where the impact of the
corporate development on the target's fortune is certain and clear,
the
TSC Industries materiality definition admits
straightforward application. Where, on the other hand, the event is
contingent or speculative in nature, it is difficult to ascertain
whether the "reasonable investor" would have considered the omitted
information significant at the time. Merger negotiations, because
of the ever-present possibility that the contemplated transaction
will not be effectuated, fall into the latter category. [
Footnote 9]
A
Petitioners urge upon us a Third Circuit test for resolving this
difficulty. [
Footnote 10]
See Brief for Petitioners 20-22. Under this
Page 485 U. S. 233
approach, preliminary merger discussions do not become material
until "agreement-in-principle" as to the price and structure of the
transaction has been reached between the would-be merger partners.
See Greenfield v. Heublein, Inc., 742 F.2d 751, 757 (CA3
1984),
cert. denied, 469 U.S. 1215 (1985). By definition,
then, information concerning any negotiations not yet at the
agreement-in-principle stage could be withheld or even
misrepresented without a violation of Rule 10b-5.
Three rationales have been offered in support of the
"agreement-in-principle" test. The first derives from the concern
expressed in TSC Industries that an investor not be overwhelmed by
excessively detailed and trivial information, and focuses on the
substantial risk that preliminary merger discussions may collapse:
because such discussions are inherently tentative, disclosure of
their existence itself could mislead investors and foster false
optimism.
See Greenfield v. Heublein, Inc., 742 F.2d at
756;
Reiss v. Pan American World Airways, Inc., 711 F.2d
11, 14 (CA2 1983). The other two justifications for the
agreement-in-principle standard are based on management concerns:
because the requirement of "agreement-in-principle" limits the
scope of disclosure obligations, it helps preserve the
confidentiality of merger discussions where earlier disclosure
might prejudice the negotiations; and the test also provides a
usable, bright-line rule for determining when disclosure must be
made.
See Greenfield v. Heublein, Inc., 742 F.2d at 757;
Flamm
Page 485 U. S. 234
v. Eberstadt, 814 F.2d 1169, 1176-1178 (CA7),
cert.
denied, 484 U.S. 853 (1987).
None of these policy-based rationales, however, purports to
explain why drawing the line at agreement-in-principle reflects the
significance of the information upon the investor's decision. The
first rationale, and the only one connected to the concerns
expressed in
TSC Industries, stands soundly rejected, even
by a Court of Appeals that otherwise has accepted the wisdom of the
agreement-in-principle test. "It assumes that investors are
nitwits, unable to appreciate -- even when told -- that mergers are
risky propositions up until the closing."
Flamm v.
Eberstadt, 814 F.2d at 1175. Disclosure, and not paternalistic
withholding of accurate information, is the policy chosen and
expressed by Congress. We have recognized time and again, a
"fundamental purpose" of the various Securities Acts, "was to
substitute a philosophy of full disclosure for the philosophy of
caveat emptor, and thus to achieve a high standard of business
ethics in the securities industry."
SEC v. Capital Gains
Research Bureau, Inc., 375 U.S. at
375 U. S. 186.
Accord, Affiliated Ute Citizens v. United States,
406 U. S. 128,
406 U. S. 151
(1972);
Santa Fe Industries, Inc. v. Green, 430 U.S. at
406 U. S. 477.
The role of the materiality requirement is not to "attribute to
investors a child-like simplicity, an inability to grasp the
probabilistic significance of negotiations,"
Flamm v.
Eberstadt, 814 F.2d at 1175, but to filter out essentially
useless information that a reasonable investor would not consider
significant, even as part of a larger "mix" of factors to consider
in making his investment decision.
TSC Industries, Inc. v.
Northway, Inc., 426 U.S. at
426 U. S.
448-449.
The second rationale, the importance of secrecy during the early
stages of merger discussions, also seems irrelevant to an
assessment whether their existence is significant to the trading
decision of a reasonable investor. To avoid a "bidding war" over
its target, an acquiring firm often will insist that negotiations
remain confidential,
see, e.g., In re Carnation
Page 485 U. S. 235
Co., Exchange Act Release No. 22214, 33 S.E. C. Docket
1025 (1985), and at least one Court of Appeals has stated that
"silence pending settlement of the price and structure of a deal is
beneficial to most investors, most of the time."
Flamm v.
Eberstadt, 814 F.2d at 1177. [
Footnote 11]
We need not ascertain, however, whether secrecy necessarily
maximizes shareholder wealth -- although we note that the
proposition is at least disputed as a matter of theory and
empirical research [
Footnote
12] -- for this case does not concern the timing of a
disclosure; it concerns only its accuracy and completeness.
[
Footnote 13] We face here
the narrow question whether information concerning the existence
and status of preliminary merger discussions is significant to the
reasonable investor's trading decision. Arguments based on the
premise that some disclosure would be "premature" in a sense are
more properly considered under the rubric of an issuer's duty to
disclose. The "secrecy" rationale is simply inapposite to the
definition of materiality.
Page 485 U. S. 236
The final justification offered in support of the
agreement-in-principle test seems to be directed solely at the
comfort of corporate managers. A bright-line rule indeed is easier
to follow than a standard that requires the exercise of judgment in
the light of all the circumstances. But ease of application alone
is not an excuse for ignoring the purposes of the Securities Acts
and Congress' policy decisions. Any approach that designates a
single fact or occurrence as always determinative of an inherently
fact-specific finding such as materiality must necessarily be
overinclusive or under-inclusive. In
TSC Industries, this
Court explained:
"The determination [of materiality] requires delicate
assessments of the inferences a 'reasonable shareholder' would draw
from a given set of facts and the significance of those inferences
to him. . . ."
426 U.S. at
426 U. S. 450.
After much study, the Advisory Committee on Corporate Disclosure
cautioned the SEC against administratively confining materiality to
a rigid formula. [
Footnote
14] Courts also would do well to heed this advice.
We therefore find no valid justification for artificially
excluding from the definition of materiality information concerning
merger discussions, which would otherwise be considered significant
to the trading decision of a reasonable investor, merely because
agreement-in-principle as to price and structure has not yet been
reached by the parties or their representatives.
Page 485 U. S. 237
B
The Sixth Circuit explicitly rejected the agreement-in-principle
test, as we do today, but in its place adopted a rule that, if
taken literally, would be equally insensitive, in our view, to the
distinction between materiality and the other elements of an action
under Rule 10b-5:
"When a company whose stock is publicly traded makes a
statement, as Basic did, that 'no negotiations' are underway, and
that the corporation knows of 'no reason for the stock's activity,'
and that 'management is unaware of any present or pending corporate
development that would result in the abnormally heavy trading
activity,' information concerning ongoing acquisition discussions
becomes material
by virtue of the statement denying their
existence. . . ."
"
* * * *"
". . . In analyzing whether information regarding merger
discussions is material such that it must be affirmatively
disclosed to avoid a violation of Rule 10b-5, the discussions and
their progress are the primary considerations. However, once a
statement is made denying the existence of any discussions, even
discussions that might not have been material in absence of the
denial are material because they make the statement made
untrue."
786 F.2d at 748-749 (emphasis in original). [
Footnote 15]
Page 485 U. S. 238
This approach, however, fails to recognize that, in order to
prevail on a Rule 10b-5 claim, a plaintiff must show that the
statements were misleading as to a material fact. It is not enough
that a statement is false or incomplete, if the misrepresented fact
is otherwise insignificant.
C
Even before this Court's decision in
TSC Industries,
the Second Circuit had explained the role of the materiality
requirement of Rule 10b-5, with respect to contingent or
speculative information or events, in a manner that gave that term
meaning that is independent of the other provisions of the Rule.
Under such circumstances, materiality
"will depend at any given time upon a balancing of both the
indicated probability that the event will occur and the anticipated
magnitude of the event in light of the totality of the company
activity."
SEC v. Texas Gulf Sulphur Co., 401 F.2d at 849.
Interestingly, neither the Third Circuit decision adopting the
agreement-in-principle test nor petitioners here take issue with
this general standard. Rather, they suggest that, with respect to
preliminary merger discussions, there are good reasons to draw a
line at agreement on price and structure.
In a subsequent decision, the late Judge Friendly, writing for a
Second Circuit panel, applied the
Texas Gulf Sulphur
probability/magnitude approach in the specific context of
preliminary merger negotiations. After acknowledging that
materiality is something to be determined on the basis of the
particular facts of each case, he stated:
"Since a merger in which it is bought out is the most important
event that can occur in a small corporation's life, to-wit, its
death, we think that inside information, as regards a merger of
this sort, can become material at an earlier stage than would be
the case as regards lesser transactions -- and this even though the
mortality rate of mergers in such formative stages is doubtless
high."
SEC v. Geon Industries, Inc., 531 F.2d 39, 47-48
(1976).
Page 485 U. S. 239
We agree with that analysis. [
Footnote 16]
Whether merger discussions in any particular case are material
therefore depends on the facts. Generally, in order to assess the
probability that the event will occur, a factfinder will need to
look to indicia of interest in the transaction at the highest
corporate levels. Without attempting to catalog all such possible
factors, we note by way of example that board resolutions,
instructions to investment bankers, and actual negotiations between
principals or their intermediaries may serve as indicia of
interest. To assess the magnitude of the transaction to the issuer
of the securities allegedly manipulated, a factfinder will need to
consider such facts as the size of the two corporate entities and
of the potential premiums over market value. No particular event or
factor short of closing the transaction need be either necessary or
sufficient by itself to render merger discussions material.
[
Footnote 17]
Page 485 U. S. 240
As we clarify today, materiality depends on the significance the
reasonable investor would place on the withheld or misrepresented
information. [
Footnote 18]
The fact-specific inquiry we endorse here is consistent with the
approach a number of courts have taken in assessing the materiality
of merger negotiations. [
Footnote 19] Because the standard of materiality we
have
Page 485 U. S. 241
adopted differs from that used by both courts below, we remand
the case for reconsideration of the question whether a grant of
summary judgment is appropriate on this record. [
Footnote 20]
IV
A
We turn to the question of reliance and the fraud-on-the-market
theory. Succinctly put:
"The fraud on the market theory is based on the hypothesis 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. . . . Misleading statements
will therefore
Page 485 U. S. 242
defraud purchasers of stock even if the purchasers do not
directly rely on the misstatements. . . . The causal connection
between the defendants' fraud and the plaintiffs' purchase of stock
in such a case is no less significant than in a case of direct
reliance on misrepresentations."
Peil v. Speiser, 806 F.2d 1154, 1160-1161 (CA3 1986).
Our task, of course, is not to assess the general validity of the
theory, but to consider whether it was proper for the courts below
to apply a rebuttable presumption of reliance, supported in part by
the fraud-on-the-market theory.
Cf. the comments of the
dissent,
post at
485 U. S.
252-255.
This case required resolution of several common questions of law
and fact concerning the falsity or misleading nature of the three
public statements made by Basic, the presence or absence of
scienter, and the materiality of the misrepresentations, if any. In
their amended complaint, the named plaintiffs alleged that, in
reliance on Basic's statements, they sold their shares of Basic
stock in the depressed market created by petitioners.
See
Amended Complaint in No. C79-1220 (ND Ohio), �� 27, 29, 35, 40;
see also id. � 33 (alleging effect on market price of
Basic's statements). Requiring proof of individualized reliance
from each member of the proposed plaintiff class effectively would
have prevented respondents from proceeding with a class action,
since individual issues then would have overwhelmed the common
ones. The District Court found that the presumption of reliance
created by the fraud-on-the-market theory provided
"a practical resolution to the problem of balancing the
substantive requirement of proof of reliance in securities cases
against the procedural requisites of [Federal Rule of Civil
Procedure] 23."
The District Court thus concluded that with reference to each
public statement and its impact upon the open market for Basic
shares, common questions predominated over individual questions, as
required by Federal Rules of Civil Procedure 23(a)(2) and
(b)(3).
Page 485 U. S. 243
Petitioners and their
amici complain that the
fraud-on-the-market theory effectively eliminates the requirement
that a plaintiff asserting a claim under Rule 10b-5 prove reliance.
They note that reliance is and long has been an element of common
law fraud,
see, e.g., Restatement (Second) of Torts § 525
(1977); W. Keeton, D. Dobbs, R. Keeton, & D. Owen, Prosser and
Keeton on Law of Torts § 108 (5th ed.1984), and argue that because
the analogous express right of action includes a reliance
requirement,
see, e.g., § 18(a) of the 1934 Act,
as
amended, 15 U.S.C. § 78r(a), so too must an action implied
under § 10(b).
We agree that reliance is an element of a Rule 10b-5 cause of
action.
See Ernst & Ernst v. Hochfelder, 425 U.S. at
425 U. S. 206
(quoting Senate Report). Reliance provides the requisite causal
connection between a defendant's misrepresentation and a
plaintiff's injury.
See, e.g., Wilson v. Comtech
Telecommunications Corp., 648 F.2d 88, 92 (CA2 1981);
List
v. Fashion Park, Inc., 340 F.2d 457, 462 (CA2),
cert.
denied sub nom. List v. Lerner, 382 U.S. 811 (1965). There is,
however, more than one way to demonstrate the causal connection.
Indeed, we previously have dispensed with a requirement of positive
proof of reliance, where a duty to disclose material information
had been breached, concluding that the necessary nexus between the
plaintiffs' injury and the defendant's wrongful conduct had been
established.
See Affiliated Ute Citizens v. United States,
406 U.S. at
406 U. S.
153-154. Similarly, we did not require proof that
material omissions or misstatements in a proxy statement decisively
affected voting, because the proxy solicitation itself, rather than
the defect in the solicitation materials, served as an essential
link in the transaction.
See Mills v. Electric AutoLite
Co., 396 U. S. 375,
396 U. S.
384-385 (1970).
The modern securities markets, literally involving millions of
shares changing hands daily, differ from the face-to-face
Page 485 U. S. 244
transactions contemplated by early fraud cases, [
Footnote 21] and our understanding of Rule
10b-5's reliance requirement must encompass these differences.
[
Footnote 22]
"In face-to-face transactions, the inquiry into an investor's
reliance upon information is into the subjective pricing of that
information by that investor. With the presence of a market, the
market is interposed between seller and buyer and, ideally,
transmits information to the investor in the processed form of a
market price. Thus, the market is performing a substantial part of
the valuation process performed by the investor in a face-to-face
transaction. The 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."
In re LTV Securities Litigation, 88 F.R.D. 134, 143 (ND
Tex.1980).
Accord, e.g., Peil v. Speiser, 806 F.2d at 1161
("In an open and developed market, the dissemination of material
misrepresentations or withholding of material information typically
affects the price of the stock, and purchasers generally rely on
the price of the stock as a reflection of its value");
Blackie
Page 485 U. S. 245
v. Barrack, 524 F.2d 891, 908 (CA9 1975) ("[T]he same
causal nexus can be adequately established indirectly, by proof of
materiality coupled with the common sense that a stock purchaser
does not ordinarily seek to purchase a loss in the form of
artificially inflated stock"),
cert. denied, 429 U.S. 816
(1976).
B
Presumptions typically serve to assist courts in managing
circumstances in which direct proof, for one reason or another, is
rendered difficult.
See, e.g., 1 D. Louisell & C.
Mueller, Federal Evidence 541-542 (1977). The courts below accepted
a presumption, created by the fraud-on-the-market theory and
subject to rebuttal by petitioners, that persons who had traded
Basic shares had done so in reliance on the integrity of the price
set by the market, but because of petitioners' material
misrepresentations that price had been fraudulently depressed.
Requiring a plaintiff to show a speculative state of facts,
i.e., how he would have acted if omitted material
information had been disclosed,
see Affiliated Ute Citizens v.
United States, 406 U.S. at
406 U. S.
153-154, or if the misrepresentation had not been made,
see Sharp v. Coopers & Lybrand, 649 F.2d 175, 188 (CA3
1981),
cert. denied, 455 U.S. 938 (1982), would place an
unnecessarily unrealistic evidentiary burden on the Rule 10b-5
plaintiff who has traded on an impersonal market.
Cf. Mills v.
Electric Auto-Lite Co., 396 U.S. at
396 U. S.
385.
Arising out of considerations of fairness, public policy, and
probability, as well as judicial economy, presumptions are also
useful devices for allocating the burdens of proof between parties.
See E. Cleary, McCormick on Evidence 968-969 (3d ed.1984);
see also Fed.Rule Evid. 301 and Advisory Committee Notes,
28 U.S.C.App. p. 685. The presumption of reliance employed in this
case is consistent with, and, by facilitating Rule 10b-5
litigation, supports, the congressional policy embodied in the 1934
Act. In drafting that Act,
Page 485 U. S. 246
Congress expressly relied on the premise that securities markets
are affected by information, and enacted legislation to facilitate
an investor's reliance on the integrity of those markets:
"No investor, no speculator, can safely buy and sell securities
upon the exchanges without having an intelligent basis for forming
his judgment as to the value of the securities he buys or sells.
The idea of a free and open public market is built upon the theory
that competing judgments of buyers and sellers as to the fair price
of a security brings [
sic] about a situation where the
market price reflects as nearly as possible a just price. Just as
artificial manipulation tends to upset the true function of an open
market, so the hiding and secreting of important information
obstructs the operation of the markets as indices of real
value."
H.R.Rep. No. 1383, at 11.
See Lipton v. Documation,
Inc., 734 F.2d 740, 748 (CA11 1984),
cert. denied,
469 U.S. 1132 (1985). [
Footnote
23]
The presumption is also supported by common sense and
probability. Recent empirical studies have tended to confirm
Congress' premise that the market price of shares traded on well
developed markets reflects all publicly available information, and,
hence, any material misrepresentations. [
Footnote 24] It has been noted that "it is hard to
imagine that
Page 485 U. S. 247
there ever is a buyer or seller who does not rely on market
integrity. Who would knowingly roll the dice in a crooked crap
game?"
Schlanger v. Four-Phase Systems
Inc., 555 F.
Supp. 535, 538 (SDNY 1982). Indeed, nearly every court that has
considered the proposition has concluded that, where materially
misleading statements have been disseminated into an impersonal,
well-developed market for securities, the reliance of individual
plaintiffs on the integrity of the market price may be presumed.
[
Footnote 25] Commentators
generally have applauded the adoption of one variation or another
of the fraud-on-the-market theory. [
Footnote 26] An investor who buys or sells stock at the
price set by the market does so in reliance on the integrity of
that price. 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.
Page 485 U. S. 248
C
The Court of Appeals found that petitioners
"made public, material misrepresentations and [respondents] sold
Basic stock in an impersonal, efficient market. Thus the class, as
defined by the district court, has established the threshold facts
for proving their loss."
786 F.2d at 751. [
Footnote
27] The court acknowledged that petitioners may rebut proof of
the elements giving rise to the presumption, or show that the
misrepresentation in fact did not lead to a distortion of price or
that an individual plaintiff traded or would have traded despite
his knowing the statement was false.
Id. at 750, n. 6.
Any showing that severs the link between the alleged
misrepresentation and either the price received (or paid) by the
plaintiff or his decision to trade at a fair market price will be
sufficient to rebut the presumption of reliance. For example, if
petitioners could show that the "market makers" were privy to the
truth about the merger discussions here with Combustion, and thus
that the market price would not have been affected by their
misrepresentations, the causal connection could be broken; the
basis for finding that the fraud had been transmitted through
market price would be gone. [
Footnote 28] Similarly, if, despite petitioners'
allegedly fraudulent attempt
Page 485 U. S. 249
to manipulate market price, news of the merger discussions
credibly entered the market and dissipated the effects of the
misstatements, those who traded Basic shares after the corrective
statements would have no direct or indirect connection with the
fraud. [
Footnote 29]
Petitioners also could rebut the presumption of reliance as to
plaintiffs who would have divested themselves of their Basic shares
without relying on the integrity of the market. For example, a
plaintiff who believed that Basic's statements were false and that
Basic was indeed engaged in merger discussions, and who
consequently believed that Basic stock was artificially
underpriced, but sold his shares nevertheless because of other
unrelated concerns,
e.g., potential antitrust problems, or
political pressures to divest from shares of certain businesses
could not be said to have relied on the integrity of a price he
knew had been manipulated.
V
In summary:
1. We specifically adopt, for the § 10(b) and Rule 10b-5
context, the standard of materiality set forth in
TSC
Industries, Inc. v. Northway, Inc., 426 U.S. at
426 U. S.
449.
2. We reject "agreement-in-principle as to price and structure"
as the bright-line rule for materiality.
3. We also reject the proposition that "information becomes
material by virtue of a public statement denying it."
Page 485 U. S. 250
4. Materiality in the merger context depends on the probability
that the transaction will be consummated, and its significance to
the issuer of the securities. Materiality depends on the facts, and
thus is to be determined on a case-by-case basis.
5. It is not inappropriate to apply a presumption of reliance
supported by the fraud-on-the-market theory.
6. That presumption, however, is rebuttable.
7. The District Court's certification of the class here was
appropriate when made, but is subject on remand to such adjustment,
if any, as developing circumstances demand.
The judgment of the Court of Appeals is vacated, and the case is
remanded to that court for further proceedings consistent with this
opinion.
It is so ordered.
THE CHIEF JUSTICE, JUSTICE SCALIA, and JUSTICE KENNEDY took no
part in the consideration or decision of this case.
[
Footnote 1]
In what are known as the
Kaiser-Lavino proceedings, the
Federal Trade Commission took the position in 1976 that basic or
chemical refractories were in a market separate from nonbasic or
acidic or alumina refractories; this would remove the antitrust
barrier to a merger between Basic and Combustion's refractories
subsidiary. On October 12, 1978, the Initial Decision of the
Administrative Law Judge confirmed that position.
See In re
Kaiser Aluminum & Chemical Corp., 93 F.T.C. 764, 771,
809-810 (1979).
See also the opinion of the Court of
Appeals in this case, 786 F.2d 741, 745 (CA6 1986).
[
Footnote 2]
In addition to Basic itself, petitioners are individuals who had
been members of its board of directors prior to 1979: Anthony M.
Caito, Samuel Eels, Jr., John A. Gelbach, Harley C. Lee, Max
Muller, H. Chapman Rose, Edmund G. Sylyester, and John C. Wilson,
Jr. Another former director, Mathew J. Ludwig, was a party to the
proceedings below, but died on July 17, 1986, and is not a
petitioner here.
See Brief for Petitioners ii.
[
Footnote 3]
In light of our disposition of this case, any further
characterization of these discussions must await application, on
remand, of the materiality standard adopted today.
[
Footnote 4]
On October 21, 1977, after heavy trading and a new high in Basic
stock, the following news item appeared in the Cleveland Plain
Dealer:
"[Basic] President Max Muller said the company knew no reason
for the stock's activity and that no negotiations were under way
with any company for a merger. He said Flintkote recently denied
Wall Street rumors that it would make a tender offer of $26 a share
for control of the Cleveland-based maker of refractories for the
steel industry."
App. 363.
On September 25, 1978, in reply to an inquiry from the New York
Stock Exchange, Basic issued a release concerning increased
activity in its stock and stated that
"management is unaware of any present or pending company
development that would result in the abnormally heavy trading
activity and price fluctuation in company shares that have been
experienced in the past few days."
Id. at 401. On November 6, 1978, Basic issued to its
shareholders a "Nine Months Report 1978." This Report stated:
"With regard to the stock market activity in the Company's
shares, we remain unaware of any present or pending developments
which would account for the high volume of trading and price
fluctuations in recent months."
Id. at 403.
[
Footnote 5]
Respondents initially sought to represent all those who sold
Basic shares between October 1, 1976, and December 20, 1978.
See Amended Complaint in No. C79-1220 (ND Ohio), � 5. The
District Court, however, recognized a class period extending only
from October 21, 1977, the date of the first public statement,
rather than from the date negotiations allegedly commenced. In its
certification decision, as subsequently amended, the District Court
also excluded from the class those who had purchased Basic shares
after the October, 1977, statement but sold them before the
September, 1978, statement, App. to Pet. for Cert. 123a-124a, and
those who sold their shares after the close of the market on
Friday, December 15, 1978.
Id. at 137a.
[
Footnote 6]
In relevant part, Rule 10b-5 provides:
"It shall be unlawful for any person, directly or indirectly, by
the use of any means or instrumentality of interstate commerce, or
of the mails or of any facility of any national securities
exchange,"
"
* * * *"
"(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. . . ."
"
* * * *"
"in connection with the purchase or sale of any security."
[
Footnote 7]
TSC Industries arose under § 14(a),
as
amended, of the 1934 Act, 15 U.S.C. § 78n(a), and Rule 14a-9,
17 CFR § 240.14a-9 (1975).
[
Footnote 8]
This application of the § 14(a) definition of materiality to §
10(b) and Rule 10b-5 is not disputed.
See Brief for
Petitioners 17, n. 12; Brief for Respondents 30, n. 10; Brief for
SEC as
Amicus Curiae 8, n. 4.
See also McGrath v.
Zenith Radio Corp., 651 F.2d 458, 466, n. 4 (CA7),
cert.
denied, 454 U.S. 835 (1981), and
Goldberg v. Meridor,
567 F.2d 209, 218-219 (CA2 1977),
cert. denied, 434 U.S.
1069 (1978).
[
Footnote 9]
We do not address here any other kinds of contingent or
speculative information, such as earnings forecasts or projections.
See generally Hiler, The SEC and the Courts' Approach to
Disclosure of Earnings Projections, Asset Appraisals, and Other
Soft Information: Old Problems, Changing Views, 46 Md.L.Rev. 1114
(1987).
[
Footnote 10]
See Staffin v. Greenberg, 672 F.2d 1196, 1207 (CA3
1982) (defining duty to disclose existence of ongoing merger
negotiations as triggered when agreement-in-principle is reached);
Greenfield v. Heublein, Inc., 742 F.2d 751 (CA3 1984)
(applying agreement-in-principle test to materiality inquiry),
cert. denied, 469 U.S. 1215 (1985). Citing
Staffin, the United States Court of Appeals for the Second
Circuit has rejected a claim that defendant was under an obligation
to disclose various events related to merger negotiations.
Reiss v. Pan American World Airways, Inc., 711 F.2d 11,
13-14 (1983). The Seventh Circuit recently endorsed the
agreement-in-principle test of materiality.
See Flamm v.
Eberstadt, 814 F.2d 1169, 1174-1179 (describing
agreement-in-principle as an agreement on price and structure),
cert. denied, 484 U.S. 853 (1987). In some of these cases,
it is unclear whether the court based its decision on a finding
that no duty arose to reveal the existence of negotiations or
whether it concluded that the negotiations were immaterial under an
interpretation of the opinion in
TSC Industries, Inc. v.
North,way, Inc., 426 U. S. 438
(1976).
[
Footnote 11]
Reasoning backwards from a goal of economic efficiency, that
Court of Appeals stated: "Rule 10b-5 is about fraud, after all, and
it is not fraudulent to conduct business in a way that makes
investors better off. . . ." 814 F.2d at 1177.
[
Footnote 12]
See, e.g., Brown, Corporate Secrecy, the Federal
Securities Laws, and the Disclosure of Ongoing Negotiations, 36
Cath.U.L.Rev. 93 145-155 (1986); Bebchuk, The Case for Facilitating
Competing Tender Offers, 95 Harv.L.Rev. 1028 (1982);
Elamm v.
Eberstadt, 814 F.2d at 1177, n. 2 (citing scholarly debate).
See also In re Carnation Co., Exchange Act Release No.
22214, 33 S.E. C. Docket 1025, 1030 (1985) ("The importance of
accurate and complete issuer disclosure to the integrity of the
securities markets cannot be overemphasized. To the extent that
investors cannot rely upon the accuracy and completeness of issuer
statements, they will be less likely to invest, thereby reducing
the liquidity of the securities markets to the detriment of
investors and issuers alike").
[
Footnote 13]
See SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 862
(CA2 1968) (en banc) ("Rule 10b-5 is violated whenever assertions
are made, as here, in a manner reasonably calculated to influence
the investing public . . . if such assertions are false or
misleading or are so incomplete as to mislead . . .")
cert.
denied sub nom. Coates v. SEC, 394 U.S. 976 (1969).
[
Footnote 14]
"Although the Committee believes that ideally it would be
desirable to have absolute certainty in the application of the
materiality concept, it is its view that such a goal is illusory
and unrealistic. The materiality concept is judgmental in nature,
and it is not possible to translate this into a numerical formula.
The Committee's advice to the [SEC] is to avoid this quest for
certainty and to continue consideration of materiality on a
case-by-case basis as disclosure problems are identified."
House Committee on Interstate and Foreign Commerce, Report of
the Advisory Committee on Corporate Disclosure to the Securities
and Exchange Commission, 95th Cong., 1st Sess., 327 (Comm. Print
1977).
[
Footnote 15]
Subsequently, the Sixth Circuit denied a petition for rehearing
en banc in this case. App. to Pet. for Cert. 144a. Concurring
separately, Judge Wellford, one of the original panel members, then
explained that he did not read the panel's opinion to create a
"conclusive presumption of materiality for any undisclosed
information claimed to render inaccurate statements denying the
existence of alleged preliminary merger discussions."
Id. at 145a. In his view, the decision merely reversed
the District Court's judgment, which had been based on the
agreement-in-principle standard.
Ibid.
[
Footnote 16]
The SEC in the present case endorses the highly fact-dependent
probability/magnitude balancing approach of
Texas Gulf
Sulphur. It explains:
"The possibility of a merger may have an immediate importance to
investors in the company's securities, even if no merger ultimately
takes place."
Brief for SEC as
Amicus Curiae 10. The SEC's insights
are helpful, and we accord them due deference.
See TSC
Industries, Inc. v. Northway, Inc., 426 U.S. at
426 U. S. 449,
n. 10.
[
Footnote 17]
To be actionable, of course, a statement must also be
misleading. Silence, absent a duty to disclose, is not misleading
under Rule 10b-5. "No comment" statements are generally the
functional equivalent of silence.
See In re Carnation Co.,
Exchange Act Release No. 22214, 33 S.E.C. Docket 1025 (1985).
See also New York Stock Exchange Listed Company Manual §
202.01,
reprinted in 3 CCH Fed.Sec.L.Rep. � 23,515 (1987)
(premature public announcement may properly be delayed for valid
business purpose and where adequate security can be maintained);
American Stock Exchange Company Guide §§ 401-405,
reprinted
in 3 CCH Fed.Sec.L.Rep. �� 23,124A-23,124E (1985) (similar
provisions).
It has been suggested that, given current market practices, a
"no comment" statement is tantamount to an admission that merger
discussions are underway.
See Flamm v. Eberstadt, 814 F.2d
at 1178. That may well hold true to the extent that issuers adopt a
policy of truthfully denying merger rumors when no discussions are
underway, and of issuing "no comment" statements when they are in
the midst of negotiations. There are, of course, other statement
policies firms could adopt; we need not now advise issuers as to
what kind of practice to follow, within the range permitted by law.
Perhaps more importantly, we think that creating an exception to a
regulatory scheme founded on a pro-disclosure legislative
philosophy, because complying with the regulation might be "bad for
business," is a role for Congress, not this Court.
See also
id. at 1182 (opinion concurring in judgment and concurring in
part).
[
Footnote 18]
We find no authority in the statute, the legislative history, or
our previous decisions for varying the standard of materiality
depending on who brings the action or whether insiders are alleged
to have profited.
See, e.g., Pavlidis v. New England Patriots
Football Club, Inc., 737 F.2d 1227, 1231 (CA1 1984) ("A fact
does not become more material to the shareholder's decision because
it is withheld by an insider, or because the insider might profit
by withholding it");
cf. Aaron v. SEC, 446 U.
S. 680,
446 U. S. 691
(1980) ("[S]cienter is an element of a violation of § 10(b) and
Rule 10b-5, regardless of the identity of the plaintiff or the
nature of the relief sought").
We recognize that trading (and profit making) by insiders can
serve as an indication of materiality,
see SEC v. Texas Gulf
Sulphur Co., 401 F.2d at 851;
General Portland, Inc. v.
LaFarge Coppee S.A., [1982-1983] CCH Fed.Sec.L.Rep. 1199, 148,
p. 95,544 (ND Tex.1981). We are not prepared to agree, however,
that,
"[i]n cases of the disclosure of inside information to a favored
few, determination of materiality has a different aspect than when
the issue is, for example, an inaccuracy in a publicly disseminated
press release."
SEC v. Geon Industries, Inc., 531 F.2d 39, 48 (CA2
1976). Devising two different standards of materiality, one for
situations where insiders have traded in abrogation of their duty
to disclose or abstain (or for that matter when any disclosure duty
has been breached) and another covering affirmative
misrepresentations by those under no duty to disclose (but under
the ever-present duty not to mislead), would effectively collapse
the materiality requirement into the analysis of defendant's
disclosure duties.
[
Footnote 19]
See, e.g., SEC v. Shapiro, 494 F.2d 1301, 1306-1307
(CA2 1974) (in light of projected very substantial increase in
earnings per share, negotiations material, although merger still
less than probable);
Holmes v. Bateson, 583 F.2d 542, 558
(CA1 1978) (merger negotiations material although they had not yet
reached point of discussing terms);
SEC v. Gaspar,
[1984-1985] CCH Fed.Sec.L.Rep. � 92,004, pp. 90,977-90,978 (SDNY
1985) (merger negotiations material although they did not proceed
to actual tender offer);
Dungan v. Colt Industries,
Inc., 532 F.
Supp. 832,
837 (ND
Ill.1982) (fact that defendants were seriously exploring the sale
of their company was material);
American General Ins. Co. v.
Equitable General Corp., 493 F.
Supp. 721, 744-745 (ED Va.1980) (merger negotiations material
four months before agreement-in-principle reached).
Cf.
Susquehanna Corp. v. Pan American Sulphur Co., 423 F.2d 1075,
1084-1085 (CA5 1970) (holding immaterial "unilateral offer to
negotiate" never acknowledged by target and repudiated two days
later);
Berman v. Gerber Products Co., 454 F.
Supp. 1310, 1316, 1318 (WD Mich.1978) (mere "overtures"
immaterial).
[
Footnote 20]
The Sixth Circuit rejected the District Court's narrow reading
of Basic's "no developments" statement,
see n 4,
supra, which focused on whether
petitioners knew of any reason for the activity in Basic stock,
that is, whether petitioners were aware of leaks concerning ongoing
discussions. 786 F.2d at 747.
See also Comment, Disclosure
of Preliminary Merger Negotiations Under Rule 10b-5, 62 Wash.L.Rev.
81, 82-84 (1987) (noting prevalence of leaks and studies
demonstrating that substantial trading activity immediately
preceding merger announcements is the "rule, not the exception").
We accept the Court of Appeals' reading of the statement as the
more natural one, emphasizing management's knowledge of
developments (as opposed to leaks) that would explain unusual
trading activity.
See id. at 92-93;
see also SEC v.
Texas Gulf Sulphur Co., 401 F.2d at 862-863.
[
Footnote 21]
W, Keeton, D. Dobbs, R. Keeton, & D. Owen, Prosser and
Keeton on Law of Torts 726 (5th ed.1984) ("The reasons for the
separate development of [the tort action for misrepresentation and
nondisclosure], and for its peculiar limitations, are in part
historical, and in part connected with the fact that in the great
majority of the cases which have come before the courts the
misrepresentations have been made in the course of a bargaining
transaction between the parties. Consequently the action has been
colored to a considerable extent by the ethics of bargaining
between distrustful adversaries") (footnote omitted).
[
Footnote 22]
Actions under Rule 10b-5 are distinct from common law deceit and
misrepresentation claims,
see Blue Chip Stamps v. Manor Drug
Stores, 421 U. S. 723,
421 U. S.
744-745 (1975), and are in part designed to add to the
protections provided investors by the common law,
see Herman
& MacLean v. Huddleston, 459 U. S. 375,
459 U. S.
388-389 (1983).
[
Footnote 23]
Contrary to the dissent's suggestion, the incentive for
investors to "pay attention" to issuers' disclosures comes from
their motivation to make a profit, not their attempt to preserve a
cause of action under Rule 10b-5. Facilitating an investor's
reliance on the market, consistently with Congress' expectations,
hardly calls for "dismantling the federal scheme which mandates
disclosure."
See post at
485 U. S.
259.
[
Footnote 24]
See In re LTV Securities Litigation, 88 F.R.D. 134, 144
(ND Tex.1980) (citing studies); Fischel, Use of Modern Finance
Theory in Securities Fraud Cases Involving Actively Traded
Securities, 38 Bus.Law. 1, 4, n. 9 (1982) (citing literature on
efficient capital market theory); Dennis, Materiality and the
Efficient Capital Market Model: A Recipe for the Total Mix, 25 Wm.
& Mary L.Rev. 373, 374-381, and n. 1 (1984). We 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.
[
Footnote 25]
See, e.g., Peil v. Speiser, 806 F.2d 1154, 1161 (CA3
1986);
Harris v. Union Electric Co., 787 F.2d 355, 367,
and n. 9 (CA8),
cert. denied, 479 U.S. 823 (1986);
Lipton v. Documation, Inc., 734 F.2d 740 (CA11 1984),
cert. denied, 469 U.S. 1132 (1985);
T. J. Raney &
Sons, Inc. v. Fort Cobb, Oklahoma Irrigation Fuel Authority,
717 F.2d 1330, 1332-1333 (CA10 1983),
cert. denied sub nom.
Linde, Thomson, Fairchild, Langworthy, Kohn & Van Dyke v. T. J.
Raney & Sons, Inc., 465 U.S. 1026 (1984);
Panzirer v.
Wolf, 663 F.2d 365, 367-368 (CA2 1981),
vacated and
remanded sub nom. Price Waterhouse v. Panzirer, 459 U.S. 1027
(1982);
Ross v. A. H. Robins Co., 607 F.2d 545, 553 (CA2
1979),
cert. denied, 446 U.S. 946 (1980);
Blackie v.
Barrack, 524 F.2d 891, 905-908 (CA9 1975),
cert.
denied, 429 U.S. 816 (1976).
[
Footnote 26]
See, e.g., Black, Fraud on the Market: A Criticism of
Dispensing with Reliance Requirements in Certain Open Market
Transactions, 62 N. C.L.Rev. 435 (1984); Note, The
Fraud-on-the-Market Theory, 95 Harv.L.Rev. 1143 (1982); Note, Fraud
on the Market: An Emerging Theory of Recovery Under SEC Rule 10b-5,
50 Geo. Wash.L.Rev. 627 (1982).
[
Footnote 27]
The Court of Appeals held that, in order to invoke the
presumption, a plaintiff must allege and prove: (1) that the
defendant made public misrepresentations; (2) that the
misrepresentations were material; (3) that the shares were traded
on an efficient market; (4) that the misrepresentations would
induce a reasonable, relying investor to misjudge the value of the
shares; and (5) that the plaintiff traded the shares between the
time the misrepresentations were made and the time the truth was
revealed.
See 786 F.2d at 750.
Given today's decision regarding the definition of materiality
as to preliminary merger discussions, elements (2) and (4) may
collapse into one.
[
Footnote 28]
By accepting this rebuttable presumption, we do not intend
conclusively to adopt any particular theory of how quickly and
completely publicly available information is reflected in market
price. Furthermore, our decision today is not to be interpreted as
addressing the proper measure of damages in litigation of this
kind.
[
Footnote 29]
We note there may be a certain incongruity between the
assumption that Basic shares are traded on a well developed,
efficient, and information-hungry market and the allegation that
such a market could remain misinformed, and its valuation of Basic
shares depressed, for 14 months on the basis of the three public
statements. Proof of that sort is a matter for trial, throughout
which the District Court retains the authority to amend the
certification order as may be appropriate.
See Fed.Rules
Civ.Proc. 23(c)(1) and (c)(4).
See 7B C. Wright, A.
Miller, & M. Kane, Federal Practice and Procedure 128-132
(1986). Thus, we see no need to engage in the kind of factual
analysis the dissent suggests that manifests the "oddities" of
applying a rebuttable presumption of reliance in this case.
See
post at
485 U. S.
259-263.
JUSTICE WHITE, with whom JUSTICE O'CONNOR joins, concurring in
part and dissenting in part.
I join Parts I-III of the Court's opinion, as I agree that the
standard of materiality we set forth in
TSC Industries, Inc. v.
Northway, Inc., 426 U. S. 438,
426 U. S. 449
(1976), should be applied to actions under § 10(b) and Rule 10b-5.
But I dissent from the remainder of the Court's holding, because I
do not agree that the "fraud-on-the-market" theory should be
applied in this case.
I
Even when compared to the relatively youthful private cause of
action under § 10(b),
see Kardon v. National Gypsum
Co., 69 F. Supp.
512 (ED Pa.1946), the fraud-on-the-market theory is a mere
babe. [
Footnote 2/1] Yet today, the
Court embraces
Page 485 U. S. 251
this theory with the sweeping confidence usually reserved for
more mature legal doctrines. In so doing, I fear that the Court's
decision may have many adverse, unintended effects as it is applied
and interpreted in the years to come.
A
At the outset, I note that there are portions of the Court's
fraud-on-the-market holding with which I am in agreement. Most
importantly, the Court rejects the version of that theory,
heretofore adopted by some courts, [
Footnote 2/2] which equates "causation" with "reliance,"
and permits recovery by a plaintiff who claims merely to have been
harmed by a material misrepresentation which altered a
market price, notwithstanding proof that the plaintiff did not in
any way
rely on that price.
Ante at
485 U. S. 248.
I agree with the Court that, if Rule 10b-5's reliance requirement
is to be left with any content at all, the fraud-on-the-market
presumption must be capable of being rebutted by a showing that a
plaintiff did not "rely" on the market price. For example, a
plaintiff who decides, months in advance of an alleged
misrepresentation, to purchase a stock; one who buys or sells a
stock for reasons unrelated to its price; one who actually sells a
stock "short" days before the misrepresentation is made -- surely
none of these people can state a valid claim under Rule 10b-5. Yet,
some federal courts have allowed such claims to stand under one
variety or another of the fraud-on-the-market theory. [
Footnote 2/3]
Page 485 U. S. 252
Happily, the majority puts to rest the prospect of recovery
under such circumstances. A nonrebuttable presumption of reliance
-- or even worse, allowing recovery in the face of "affirmative
evidence of nonreliance,"
Zweig v. Hearst Corp., 594 F.2d
1261, 1272 (CA9 1979) (Ely, J., dissenting) -- would effectively
convert Rule 10b-5 into "a scheme of investor's insurance."
Shores v. Sklar, 647 F.2d 462, 469, n. 5 (CA5 1981) (en
banc),
cert. denied, 459 U.S. 1102 (1983). There is no
support in the Securities Exchange Act, the Rule, or our cases for
such a result.
B
But even as the Court attempts to limit the fraud-on-the-market
theory it endorses today, the pitfalls in its approach are revealed
by previous uses by the lower courts of the broader versions of the
theory. Confusion and contradiction in court rulings are inevitable
when traditional legal analysis is replaced with economic
theorization by the federal courts.
Page 485 U. S. 253
In general, the case law developed in this Court with respect to
§ 10(b) and Rule 10b-5 has been based on doctrines with which we,
as judges, are familiar: common law doctrines of fraud and deceit.
See, e.g., Santa Fe Industries, Inc. v. Green,
430 U. S. 462,
430 U. S.
471-477 (1977). Even when we have extended civil
liability under Rule 10b-5 to a broader reach than the common law
had previously permitted,
see ante at
485 U. S. 244,
n. 22, we have retained familiar legal principles as our
guideposts.
See, e.g., Herman & MacLean v. Huddleston,
459 U. S. 375,
459 U. S.
389-390 (1983). The federal courts have proved adept at
developing an evolving jurisprudence of Rule 10b-5 in such a
manner. But with no staff economists, no experts schooled in the
"efficient-capital-market hypothesis," no ability to test the
validity of empirical market studies, we are not well equipped to
embrace novel constructions of a statute based on contemporary
microeconomic theory. [
Footnote
2/4]
The "wrong turns" in those Court of Appeals and District Court
fraud-on-the-market decisions which the Court implicitly rejects as
going too far should be ample illustration of the dangers when
economic theories replace legal rules as the basis for recovery.
Yet the Court today ventures into this area beyond its expertise,
beyond -- by its own admission -- the confines of our previous
fraud cases.
See ante at
485 U. S.
243-244. Even if I agreed with the Court that "modern
securities markets . . .
Page 485 U. S. 254
involving millions of shares changing hands daily" require that
the "understanding of Rule 10b-5's reliance requirement" be
changed,
ibid., I prefer that such changes come from
Congress in amending § 10(b). The Congress, with its superior
resources and expertise, is far better equipped than the federal
courts for the task of determining how modern economic theory and
global financial markets require that established legal notions of
fraud be modified. In choosing to make these decisions itself, the
Court, I fear, embarks on a course that it does not genuinely
understand, giving rise to consequences it cannot foresee.
[
Footnote 2/5]
For while the economists' theories which underpin the
fraud-on-the-market presumption may have the appeal of mathematical
exactitude and scientific certainty, they are -- in the end --
nothing more than theories which may or may not prove accurate upon
further consideration. Even the most earnest advocates of economic
analysis of the law recognize this.
See, e.g.,
Easterbrook, Afterword: Knowledge and Answers, 85 Colum.L.Rev.
1117, 1118 (1985). Thus, while the majority states that, for
purposes of reaching its result it need only make modest
assumptions about the way in which "market professionals generally"
do their jobs, and how the conduct of market professionals affects
stock prices,
ante at
485 U. S. 246,
n. 23, I doubt that we are in much of a position
Page 485 U. S. 255
to assess which theories aptly describe the functioning of the
securities industry.
Consequently, I cannot join the Court in its effort to
reconfigure the securities laws, based on recent economic theories,
to better fit what it perceives to be the new realities of
financial markets. I would leave this task to others more equipped
for the job than we.
C
At the bottom of the Court's conclusion that the
fraud-on-the-market theory sustains a presumption of reliance is
the assumption that individuals rely "on the integrity of the
market price" when buying or selling stock in "impersonal, well
developed market[s] for securities."
Ante at
485 U. S. 247.
Even if I was prepared to accept (as a matter of common sense or
general understanding) the assumption that most persons buying or
selling stock do so in response to the market price, the
fraud-on-the-market theory goes further. For, in adopting a
"presumption of reliance," the Court also assumes that buyers and
sellers rely -- not just on the market price -- but on the
"
integrity" of that price. It is this aspect of the
fraud-on-the-market hypothesis which most mystifies me.
To define the term "integrity of the market price," the majority
quotes approvingly from cases which suggest that investors are
entitled to "
rely on the price of a stock as a reflection of
its value.'" Ante at 485 U. S. 244
(quoting Peil v. Speiser, 806 F.2d 1154, 1161 (CA3 1986)).
But the meaning of this phrase eludes me, for it implicitly
suggests that stocks have some "true value" that is measurable by a
standard other than their market price. While the scholastics of
medieval times professed a means to make such a valuation of a
commodity's "worth," [Footnote 2/6]
I doubt that the federal courts of our day are similarly
equipped.
Page 485 U. S. 256
Even if securities had some "value" -- knowable and distinct
from the market price of a stock -- investors do not always share
the Court's presumption that a stock's price is a "reflection of
[this] value." Indeed, "many investors purchase or sell stock
because they believe the price
inaccurately reflects the
corporation's worth."
See Black, Fraud on the Market: A
Criticism of Dispensing with Reliance Requirements in Certain Open
Market Transactions, 62 N. C.L.Rev. 435, 455 (1984) (emphasis
added). If investors really believed that stock prices reflected a
stock's "value," many sellers would never sell, and many buyers
never buy (given the time and cost associated with executing a
stock transaction). As we recognized just a few years ago:
"[I]nvestors act on inevitably incomplete or inaccurate
information, [consequently] there are always winners and losers;
but those who have 'lost' have not necessarily been defrauded."
Dirks v. SEC, 463 U. S. 646,
463 U. S. 667,
n. 27 (1983). Yet today, the Court allows investors to recover who
can show little more than that they sold stock at a lower price
than what might have been. [
Footnote
2/7]
I do not propose that the law retreat from the many protections
that § 10(b) and Rule 10b-5, as interpreted in our prior cases,
provide to investors. But any extension of these laws, to approach
something closer to an investor insurance
Page 485 U. S. 257
scheme, should come from Congress, and not from the courts.
II
Congress has not passed on the fraud-on-the-market theory the
Court embraces today. That is reason enough for us to abstain from
doing so. But it is even more troubling that, to the extent that
any view of Congress on this question can be inferred indirectly,
it is contrary to the result the majority reaches.
A
In the past, the scant legislative history of § 10(b) has led us
to look at Congress' intent in adopting other portions of the
Securities Exchange Act when we endeavor to discern the limits of
private causes of action under Rule 10b-5.
See, e.g., Ernst
& Ernst v. Hochfelder, 425 U. S. 185,
425 U. S.
204-206 (1976). A similar undertaking here reveals that
Congress flatly rejected a proposition analogous to the
fraud-on-the market theory in adopting a civil liability provision
of the 1934 Act.
Section 18 of the Act expressly provides for civil liability for
certain misleading statements concerning securities.
See
15 U.S.C. § 78r(a). When the predecessor of this section was first
being considered by Congress, the initial draft of the provision
allowed recovery by any plaintiff "who shall have purchased or sold
a security the price of which may have been affected by such
[misleading] statement."
See S. 2693, 73d Cong., 2d Sess.,
§ 17(a) (1934). Thus, as initially drafted, the precursor to the
express civil liability provision of the 1934 Act would have
permitted suits by plaintiffs based solely on the fact that the
price of the securities they bought or sold was
affected
by a misrepresentation: a theory closely akin to the Court's
holding today.
Yet this provision was roundly criticized in congressional
hearings on the proposed Securities Exchange Act, because it failed
to include a more substantial "reliance" requirement. [
Footnote 2/8]
Page 485 U. S. 258
Subsequent drafts modified the original proposal and included an
express reliance requirement in the final version of the Act. In
congressional debates over the redrafted version of this bill, the
then-Chairman of the House Committee, Representative Sam Rayburn,
explained that the "bill as originally written was very much
challenged on the ground that reliance should be required. This
objection has been met." 78 Cong.Rec. 7701 (1934). Moreover, in a
previous case concerning the scope of § 10(b) and Rule 10b-5, we
quoted approvingly from the legislative history of this revised
provision, which emphasized the presence of a strict reliance
requirement as a prerequisite for recovery.
See Ernst &
Ernst v. Hochfelder, supra, at
425 U. S. 206
(citing S.Rep. No. 792, 73d Cong., 2d Sess., 12-13 (1934)).
Congress thus anticipated meaningful proof of "reliance" before
civil recovery can be had under the Securities Exchange Act. The
majority's adoption of the fraud-on-the-market theory effectively
eviscerates the reliance rule in actions brought under Rule 10b-5,
and negates congressional intent to the contrary expressed during
adoption of the 1934 Act.
B
A second congressional policy that the majority's opinion
ignores is the strong preference the securities laws display for
widespread public disclosure and distribution to investors of
material information concerning securities. This congressionally
adopted policy is expressed in the numerous and varied disclosure
requirements found in the federal securities
Page 485 U. S. 259
law scheme.
See, e.g., 15 U.S.C. §§ 78m, 780(d) (1982
ed. and Supp. IV).
Yet observers in this field have acknowledged that the
fraud-on-the-market theory is at odds with the federal policy
favoring disclosure.
See, e.g., Black, 62 N.C.L.Rev. at
457-459. The conflict between Congress' preference for disclosure
and the fraud-on-the-market theory was well expressed by a jurist
who rejected the latter in order to give force to the former:
"[D]isclosure . . . is crucial to the way in which the federal
securities laws function. . . . [T]he federal securities laws are
intended to put investors into a position from which they can help
themselves by relying upon disclosures that others are obligated to
make. This system is not furthered by allowing monetary recovery to
those who refuse to look out for themselves. If we say that a
plaintiff may recover in some circumstances even though he did not
read and rely on the defendants' public disclosures, then no one
need pay attention to those disclosures and the method employed by
Congress to achieve the objective of the 1934 Act is defeated."
Shores v. Sklar, 647 F.2d at 483 (Randall, J.,
dissenting).
It is no surprise, then, that some of the same voices calling
for acceptance of the fraud-on-the-market theory also favor
dismantling the federal scheme which mandates disclosure. But to
the extent that the federal courts must make a choice between
preserving effective disclosure and trumpeting the new
fraud-on-the-market hypothesis, I think Congress has spoken clearly
-- favoring the current prodisclosure policy. We should limit our
role in interpreting § 10(b) and Rule 10b-5 to one of giving effect
to such policy decisions by Congress.
III
Finally, the particular facts of this case make it an
exceedingly poor candidate for the Court's fraud-on-the-market
theory,
Page 485 U. S. 260
and illustrate the illogic achieved by that theory's application
in many cases.
Respondents here are a class of sellers who sold Basic stock
between October, 1977, and December, 1978, a 14-month period. At
the time the class period began, Basic's stock was trading at $20 a
share (at the time, an all-time high); the last members of the
class to sell their Basic stock got a price of just over $30 a
share. App. 363, 423. It is indisputable that virtually every
member of the class made money from his or her sale of Basic
stock.
The oddities of applying the fraud-on-the-market theory in this
case are manifest. First, there are the facts that the plaintiffs
are sellers and the class period is so lengthy -- both are
virtually without precedent in prior fraud-on-the-market cases.
[
Footnote 2/9] For reasons I
discuss in the margin, I think these two facts render this case
less apt to application of the fraud-on-the-market hypothesis.
Second, there is the fact that, in this case, there is no
evidence that petitioner Basic's officials made the troublesome
misstatements for the purpose of manipulating stock prices, or with
any intent to engage in underhanded trading of Basic stock. Indeed,
during the class period, petitioners do not
Page 485 U. S. 261
appear to have purchased or sold any Basic stock whatsoever.
App. to Pet. for Cert. 27a. I agree with
amicus, who
argues that "[i]mposition of damages liability under Rule 10b-5
makes little sense . . . where a defendant is neither a purchaser
nor a seller of securities."
See Brief for American
Corporate Counsel Association as
Amicus Curiae 13. In
fact, in previous cases, we had recognized that Rule 10b-5 is
concerned primarily with cases where the fraud is committed by one
trading the security at issue.
See, e.g., Blue Chip Stamps v.
Manor Drug Stores, 421 U. S. 723,
421 U. S. 736,
n. 8 (1975). And it is difficult to square liability in this case
with § 10(b)'s express provision that it prohibits fraud "
in
connection with the purchase or sale of any security."
See 15 U.S.C. § 78j(b) (emphasis added).
Third, there are the peculiarities of what kinds of investors
will be able to recover in this case. As I read the District
Court's class certification order, App. to Pet. for Cert.
123a-126a;
ante at
485 U. S.
228-229, n. 5, there are potentially many persons who
did not purchase Basic stock until
after the first false
statement (October 1977), but who nonetheless
will be able
to recover under the Court's fraud-on-the-market theory. Thus, it
is possible that a person who heard the first corporate
misstatement and
disbelieved it --
i.e., someone
who purchased Basic stock thinking that petitioners' statement was
false -- may still be included in the plaintiff class on remand.
How a person who undertook such a speculative stock investing
strategy -- and made $10 a share doing so (if he bought on October
22, 1977, and sold on December 15, 1978) -- can say that he was
"defrauded" by virtue of his reliance on the "integrity" of the
market price is beyond me. [
Footnote
2/10]
Page 485 U. S. 262
And such speculators may not be uncommon, at least in this case.
See App. to Pet. for Cert. 125a.
Indeed, the facts of this case lead a casual observer to the
almost inescapable conclusion that many of those who bought or sold
Basic stock during the period in question flatly disbelieved the
statements which are alleged to have been "materially misleading."
Despite three statements denying that merger negotiations were
underway, Basic stock hit record-high after record-high during the
14-month class period. It seems quite possible that, like Casca's
knowing disbelief of Caesar's "thrice refusal" of the Crown,
[
Footnote 2/11] clever investors
were skeptical of petitioners' three denials that merger talks were
going on. Yet such investors, the savviest of the savvy, will be
able to recover under the Court's opinion as long as they now claim
that they believed in the "integrity of the market price" when they
sold their stock (between September and December, 1978). [
Footnote 2/12] Thus, persons who bought
after hearing and relying on the
falsity of petitioners'
statements may be able to prevail and recover money damages on
remand.
And who will pay the judgments won in such actions? I suspect
that, all too often, the majority's rule will "lead to large
judgments, payable in the last analysis by innocent investors, for
the benefit of speculators and their lawyers."
Cf. SEC v. Texas
Gulf Sulphur Co., 401 F.2d 833, 867 (CA2 1968) (en banc)
(Friendly, J., concurring),
cert. denied, 394 U.S. 976
(1969). This Court and others have previously recognized that
"inexorably broadening . . . the class of plaintiff[s] who may sue
in this area of the law will ultimately result in more harm than
good."
Blue Chip Stamps v. Manor Drug Stores, supra, at
421 U. S.
747-748.
See also Ernst & Ernst v.
Hochfelder, 425 U.S. at
425 U. S. 214;
Ultramares Corp. v. Touche,
Page 485 U. S. 263
255 N.Y. 170, 179-180, 174 N.E. 441, 444-445 (1931) (Cardozo,
C.J.). Yet such a bitter harvest is likely to be the reaped from
the seeds sewn by the Court's decision today.
IV
In sum, I think the Court's embracement of the
fraud-on-the-market theory represents a departure in securities law
that we are ill-suited to commence -- and even less equipped to
control as it proceeds. As a result, I must respectfully
dissent.
[
Footnote 2/1]
The earliest Court of Appeals case adopting this theory cited by
the Court is
Blackie v. Barrack, 524 F.2d 891 (CA9 1975),
cert. denied, 429 U.S. 816 (1976). Moreover, widespread
acceptance of the fraud-on-the-market theory in the Courts of
Appeals cannot be placed any earlier than five or six years ago.
See ante at
485 U. S.
246-247, n. 24; Brief for Securities and Exchange
Commission as
Amicus Curiae 21, n. 24.
[
Footnote 2/2]
See, e.g., Zweig v. Hearst Corp., 594 F.2d 1261,
1268-1271 (CA9 1979);
Arthur Young & Co. v. United States
District Court, 549 F.2d 686, 694-695 (CA9),
cert.
denied, 434 U.S. 829 (1977);
Pellman v. Cinerama,
Inc., 89 F.R.D. 386, 388 (SDNY 1981).
[
Footnote 2/3]
Cases illustrating these factual situations are, respectively,
Zweig v. Hearst Corp., supra, at 1271 (Ely, J.,
dissenting);
Abrams v. Johns-Manville Corp., [1981-1982]
CCH Fed.Sec.L.Rep. �98,348, p. 92, 157 (SDNY 1981);
Fausett v.
American Resources Management Corp., 542 F.
Supp. 1234, 1238-1239 (Utah 1982).
The
Abrams decision illustrates the particular
pliability of the fraud-on-the-market presumption. In
Abrams, the plaintiff represented a class of purchasers of
defendant's stock who were allegedly misled by defendant's
misrepresentations in annual reports. But in a deposition taken
shortly after the plaintiff filed suit, she testified that she had
bought defendant's stock primarily because she thought that
favorable changes in the Federal Tax Code would boost sales of its
product (insulation).
Two years later, after the defendant moved for summary judgment
based on the plaintiff's failure to prove reliance on the alleged
misrepresentations, the plaintiff resuscitated her case by
executing an affidavit which stated that she "certainly [had]
assumed that the market price of Johns-Manville stock was an
accurate reflection of the worth of the company" and would not have
paid the then-going price if she had known otherwise.
Abrams,
supra, at 92, 157. Based on this affidavit, the District Court
permitted the plaintiff to proceed on her fraud-on-the-market
theory.
Thus,
Abrams demonstrates how easily a
post
hoc statement will enable a plaintiff to bring a
fraud-on-the-market action -- even in the rare case where a
plaintiff is frank or foolhardy enough to admit initially that a
factor other than price led her to the decision to purchase a
particular stock.
[
Footnote 2/4]
This view was put well by two commentators who wrote a few years
ago:
"Of all recent developments in financial economics, the
efficient capital market hypothesis ('ECMH') has achieved the
widest acceptance by the legal culture. . . ."
"Yet the legal culture's remarkably rapid and broad acceptance
of an economic concept that did not exist twenty years ago is not
matched by an equivalent degree of
understanding."
Gilson & Kraakman, The Mechanisms of Market Efficiency, 70
Va.L.Rev. 549, 549-550 (1984) (footnotes omitted; emphasis added).
While the fraud-on-the-market theory has gained even broader
acceptance since 1984, I doubt that it has achieved any greater
understanding.
[
Footnote 2/5]
For example, Judge Posner in his Economic Analysis of Law §
15.8, pp. 423-424 (3d ed.1986), submits that the
fraud-on-the-market theory produces the "economically correct
result" in Rule 10b-5 cases, but observes that the question of
damages under the theory is quite problematic. Notwithstanding the
fact that "[a]t first blush, it might seem obvious," the proper
calculation of damages when the fraud-on-the-market theory is
applied must rest on several "assumptions" about "social costs"
which are "difficult to quantify."
Ibid. Of course,
answers to the question of the proper measure of damages in a
fraud-on-the-market case are essential for proper implementation of
the fraud-on-the-market presumption. Not surprisingly, the
difficult damages question is one the Court expressly declines to
address today.
Ante at
485 U. S. 248,
n. 27.
[
Footnote 2/6]
See E. Salin, Just Price, 8 Encyclopaedia of Social
Sciences 504-506 (1932);
see also R. de Roover, Economic
Thought: Ancient and Medieval Thought, 4 International Encyclopedia
of Social Sciences 433-435 (1968).
[
Footnote 2/7]
This is what the Court's rule boils down to in practical terms.
For while, in theory, the Court allows for rebuttal of its
"presumption of reliance" -- a proviso with which I agree,
see
supra, at
485 U. S. 251
-- in practice, the Court must realize, as other courts applying
the fraud-on-the-market theory have, that such rebuttal is
virtually impossible in all but the most extraordinary case.
See Blackie v. Barrack, 524 F.2d at 906-907, n. 22;
In
re LTV Securities Litigation, 88 F.R.D. 134, 143, n. 4 (ND
Tex.1980).
Consequently, while the Court considers it significant that the
fraud-on-the-market presumption it endorses is a rebuttable one,
ante at
485 U. S. 242,
485 U. S. 248,
the majority's implicit rejection of the "pure causation"
fraud-on-the-market theory rings hollow. In most cases, the Court's
theory will operate just as the causation theory would, creating a
nonrebuttable presumption of "reliance" in future Rule 10b-5
actions.
[
Footnote 2/8]
See Stock Exchange Practices, Hearings on S. Res. 84,
56, and 97 before the Senate Committee on Banking and Currency, 73d
Cong., 2d Sess., pt. 15, p. 6638 (1934) (statement of Richard
Whitney, President of the New York Stock Exchange); Stock Exchange
Regulation, Hearing on H.R. 7852 and 8720, before the House
Committee on Interstate and Foreign Commerce, 73d Cong., 2d Sess.,
226 (1934) (statement of Richard Whitney).
[
Footnote 2/9]
None of the Court of Appeals cases the Court cites as endorsing
the fraud-on-the-market theory,
ante at
485 U. S.
246-247, n. 24, involved seller-plaintiffs. Rather, all
of these cases were brought by purchasers who bought securities in
a short period following some material misstatement (or similar
act) by an issuer, which was alleged to have falsely inflated a
stock's price.
Even if the fraud-on-the-market theory provides a permissible
link between such a misstatement and a decision to purchase a
security shortly thereafter, surely that link is far more
attenuated between misstatements made in October, 1977, and a
decision to sell a stock the following September, 11 months later.
The facts that the plaintiff class is one of sellers, and that the
class period so long, distinguish this case from any other cited in
the Court's opinion, and make it an even poorer candidate for the
fraud-on-the-market presumption.
Cf., e.g., Schlanger v.
Four-Phase Systems Inc., 555 F.
Supp. 535 (SDNY 1982) (permitting class of sellers to use
fraud-on-the-market theory where the class period was eight days
long).
[
Footnote 2/10]
The Court recognizes that a person who
sold his Basic
shares believing petitioners' statements to be false may not be
entitled to recovery.
Ante at
485 U. S. 249.
Yet it seems just as clear to me that one who
bought Basic
stock under this same belief -- hoping to profit from the
uncertainty over Basic's merger plans -- should not be permitted to
recover either.
[
Footnote 2/11]
See W. Shakespeare, Julius Caesar, Act I, Scene II.
[
Footnote 2/12]
The ease with which such a
post hoc claim of "reliance
on the integrity of the market price" can be made, and gain
acceptance by a trial court, is illustrated by
Abrams v.
Johns-Manville Corp., discussed in
485
U.S. 224fn2/3|>n. 3,
supra.