2nd Circuit: Basic Presumption Could be Available in Suit Against Research Analysts

A 2nd Circuit panel held that the fraud on the market reliance presumption established by the Supreme Court in Basic Inc. v. Levinson is not limited to statements by issuers, and could be available in an action against research analysts. "The reason is simple," stated Judge Pooler, as "the premise of Basic is that, in an efficient market, share prices reflect `all publicly available information, and, hence, any material misrepresentations'. It thus does not matter, for purposes of establishing entitlement to the presumption, whether the misinformation was transmitted by an issuer, an analyst, or anyone else."

The court also held that in order to fall within the Basic presumption, it was not necessary for the plaintiffs to show that the alleged misrepresentations had a measurable effect on the stock price. Judge Pooler wrote the point of Basic is that an effect on market price is presumed based on the materiality of the information and a well-developed market’s ability to readily incorporate that information into the price of securities.

It is important to note that the holding concerning the impact on the stock price was limited only to the question of the availability of the reliance presumption with regard to class certification. Under the Supreme Court's Dura Pharmaceuticals Inc. v. Broudo holding, the plaintiffs would still be required to show a causal connection between the alleged misrepresentations and a decline in the stock price to establish a Rule 10b-5 violation.

In re Salomon Analyst Metromedia Litigation