The integrity of the price: Issues for securities fraud plaintiffs and defendants in US class actions

Abstract

Under US law, class actions are generally forbidden for fraud claims, because individual issues of reliance predominate over class-wide issues. In securities fraud cases, however, the US courts have permitted class actions by employing the ‘fraud-on-the-market’ doctrine. This paper focuses on one limiting aspect of the fraud-on-the-market doctrine, which is under-appreciated but potentially significant in many US securities fraud class actions.The fraud-on-the-market doctrine creates a rebuttable presumption that each investor indirectly relied on the allegedly misleading statements or omissions. The doctrine thus applies rebuttable presumptions; first, that each investor relied on ‘the integrity of the price’ of the security and, second, that in an efficient market any misleading information was impounded into, and distorted, the price.Defendants may reduce the size of the plaintiff class by developing evidence that many investors did, or were willing to, purchase the security despite known, substantial risks of undisclosed fraud — that is, that they did not rely on ‘the integrity of the price’. Such investors often include large index or quantitative investment funds and, in cases of multiple fraud disclosures, investors who buy securities between disclosures of possible fraud, while the issuing company remains under a cloud of suspicion.