Basic Inc. v. Levinson
In Basic Inc. v. Levinson, 485 U.S. 224 (1988), the Supreme Court reaffirmed that reliance is an element of a Rule 10b-5 cause of action. Reliance provides the requisite causal connection between a defendants misrepresentation and a plaintiffs injury. 485 U.S. at 243.
The Court stressed, however, that there is more than one way to demonstrate the causal connection. Id. The Court noted that, given the millions of shares changing hands daily, in modern securities markets, our understanding of Rule 10b-5s reliance requirement must evolve beyond the traditional concept of individualized reliance that was appropriate to the face-to-face transactions contemplated by early fraud cases . . . . Id. at 243-44.
Looking to the legislative history of the 1934 Securities Act, the Court determined that Congress premise in drafting the Act was that the market price of shares traded on well-developed markets reflects all publicly available information, and, hence, any material misrepresentations. Id. at 246.
Therefore, in an efficient market, an investors reliance on any public material misrepresentations . . . may be presumed for purposes of a Rule 10b-5 action. Id. at 247.
The Basic Court thereby set forth a test of general applicability that where a defendant has (1) publicly made (2) a material misrepresentation (3) about stock traded on an impersonal, welldeveloped (i.e., efficient) market, investors reliance on those misrepresentations may be presumed. Id. at 248 n.27.