Prof. George W.

Conk
Guest lecturer: Wallace Showman, Esq.
gconk@law.fordham.edu
Room 409
212-636-7446

Adjunct Professor of Law &
Senior Fellow
Stein Center for Law & Ethics
Remedies
Fall 2014

10b-5 Securities Fraud Actions
Fraud on the market after Halliburton v. Erica P.
John Fund (204)

Fraud on the market - 10 (b)(5) actions 1
Fraud on the Market
the fraud-on-the-market theory, which
holds that the market price of shares
traded on well-developed markets reflects
all publicly available information, and,
hence, any material misrepresentations.
Fraud on the market - 10 (b)(5) actions 2
Fraud on the market - Basic
[I]n 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 defraud purchasers of
stock even if the purchasers do not
directly rely on the misstatements. . .
Fraud on the market - 10 (b)(5) actions 3
Two constituent presumptions
(1) that the public and material
misrepresentation impacted the price of
the security because it was traded in an
efficient market; and
(2) that the plaintiff purchased the
security in reliance on his belief that the
market's valuation of the security would
not reflect fraudulently disseminated
misinformation.
Fraud on the market - 10 (b)(5) actions 4
To invoke the presumption
Plaintiff must show:
Publicity
Materiality
Market efficiency
Market timing
Fraud on the market - 10 (b)(5) actions 5
Langevoort Judgment Day
What Basic does, as much as
anything, is create an entitlement to
an undistorted stock price via, as I
have described it, an act of juristic
grace.
This is no different from what
happens in the common law of fraud.
Fraud on the market - 10 (b)(5) actions 6
Three Presumptions - Goldberg &
Zipursky
1) Legally cognizable injury is shown by
purchase of securities at a market price
distorted by the defendants
misrepresentations
2) Distortion is presumed if a
misrepresentation is material,
disseminated to the public, and securities
are sold on an efficient market
3) Reliance is presumed but may be
rebutted
Fraud on the market - 10 (b)(5) actions 7
Rebuttable Presumption of Reliance
on the Integrity of the Market Price
Requiring a plaintiff to show a speculative
state of facts, i.e., how he would have
acted if omitted material information had
been disclosed, ... or if the
misrepresentation had not been made...
would place an unnecessarily unrealistic
evidentiary burden on the Rule 10b-5
plaintiff who has traded on an impersonal
market.

Fraud on the market - 10 (b)(5) actions 8
Rebutting the presumption
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.
Fraud on the market - 10 (b)(5) actions 9
Markets are imperfect
n28 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.
Fraud on the market - 10 (b)(5) actions 10
The attack on Basic
Basics efficient market thesis flawed
Many investors dont invest in reliance on
the integrity of the market price.
FOTM liability goes too far
Basic wrongly presumes common
issues predominate
Ps extort money via settlement of
weak cases and waste judicial time
FOTM is a judge-made rule
Fraud on the market - 10 (b)(5) actions 11
Halliburton Co. V. Erica P. John Fund
Cert. granted 11/15/ 2013

Questions presented
1. Whether this Court should overrule
or substantially modify the holding of
Basic Inc. v. Levinson to the extent
that it recognizes a presumption of
classwide reliance derived from the
fraud-on-the-market theory.
Fraud on the market - 10 (b)(5) actions 12
Halliburton Co. V. Erica P. John Fund
Cert. granted 11/15/ 2013

Questions presented
2. Whether, in a case where the
plaintiff invokes the presumption of
reliance to seek class certification,
the defendant may rebut the
presumption and prevent class
certification by introducing evidence
that the alleged misrepresentations
did not distort the market price
of its stock.
Fraud on the market - 10 (b)(5) actions 13
13-CV-23878-UU, 2014 WL
4814352 (S.D. Fla. Sept. 29,
2014)
Aranaz v. Catalyst Pharm.
Partners Inc.,
Fraud on the market - 10 (b)(5) actions 17
Rule 23 Class Actions - Fed. R. Civ. Pro.
(a) Prerequisites. One or more members of a class
may sue or be sued as representative parties on
behalf of all members only if:
(1) the class is so numerous that joinder of all
members is impracticable;
(2) there are questions of law or fact common
to the class;
(3) the claims or defenses of the
representative parties are typical of the claims
or defenses of the class; and
(4) the representative parties will fairly and
adequately protect the interests of the class.

Fraud on the market - 10 (b)(5) actions 18
Aranaz v. Catalyst Pharma (2014)
What was the misrepresentation?
What was the alleged price impact?
How did Catalyst respond?
Who is properly in the class?


Fraud on the market - 10 (b)(5) actions 19
Aranaz v. Catalyst Plaintiffs proposed class
All persons or entities that purchased or
otherwise acquired Catalyst
Pharmaceutical Partners Inc. securities
during the period from August 27, 2013,
through October 18, 2013, and who did
not sell such securities prior to October
18, 2013
What is the judges objection to this
definition?



Fraud on the market - 10 (b)(5) actions 20
Entitlement to presumption of reliance
(1) the misrepresentation was material;
(2) the misrepresentation was publicly
known
(3) the plaintiff traded the security after
the misrepresentation was made public
but before the truth was revealed
(4) the security traded in an efficient
market.
What is the truth on the market
defense? To what is it relevant?
Fraud on the market - 10 (b)(5) actions 21
Price impact
What is it and what is its relevance to
class certification?
Who has the burden of rebuttal?
Is it a question for the jury? Or the
judge?
Fraud on the market - 10 (b)(5) actions 22
Superiority
Under Rule 23(b)(3), a movant must show
that a class action is superior to other
available methods for fairly and efficiently
adjudicating the controversy.
The focus of this analysis is on the
relative advantages of a class action suit
over whatever other forms of litigation
might be realistically available to the
plaintiffs.
Why is a class action a superior remedy?
Fraud on the market - 10 (b)(5) actions 23