In Basic, the Supreme Court endorsed the fraud-on-the-market theory under which courts can presume that securities prices in an open and developed market reflect all material public information and that investors rely on the integrity of the market price. These two presumptions allow investors to establish that they relied, indirectly, on alleged on the false statements of corporate managers. Similarly, argued amici, materiality is a common question to class members. In addition, the economic proof will be unitary for all members of the class and will also be identical to any showing required of the plaintiff-investors on the merits.
The economic arguments that the company offers to challenge the SSEMH, namely that markets do not process all forms of information in the same way or at identical speeds, do not go to the legal question of materiality defined by the Court. Amici further expounded that SSEMH was not a simply a theory that the Court found helpful in rendering its ruling in Basic, but was actually central to the Court’s interpretation of the intent of Congress. If economic revisionism is to drive a departure from the formula the Court employed in Basic, said amici, that decision should be made by Congress and not the Court.
Federal courts invoke the fraud-on-the-market theory to answer the narrow question of whether the plaintiff’s claims, particularly reliance, can be established on a common and class-wide bases, said the financial economists, not to establish that a misstatement harmed each member of the class. What the
presumed was that a purchaser of a security traded in an efficient market relies
on all material statements because all of those statements will be included in
the stock price. At class certification, explained amici, courts can remain
agnostic as to whether the alleged misrepresentations are material because
materiality is inherently a common question. Basic presumes that if the
misrepresentation is material it will have been incorporated in the stock price
and relied upon, in a unitary way, by each class member.