Hastings Business Law Journal


This article explores a wave of recent federal court decisions addressing the applicability of the "fraud-on-the-market" presumption of reliance in securities fraud cases at the class certification stage. In the two decades since the US Supreme Court first recognized the fraud-on-the-market doctrine in Basic, Inc. v. Levinson, the district and circuit courts have taken somewhat divergent approaches to the question of classwide reliance. The most recent decisions, however, mark an emerging trend, one which signifies heightened judicial scrutiny - in many cases, going beyond the pleadings and involving extensive fact-finding and expert analysis. Among the decisions discussed are the Second Circuit Court of Appeals' decision in In re IPO Securities Litigation, in which the court refined the test for class certification, holding that district judges must receive ample evidence, including expert testimony as required, to be satisfied that reliance can be presumed by a showing that the security at issue traded in an efficient market; the Fifth Circuit's decision in Regents of Univ. of California v. Credit Suisse First Boston (USA), Inc., holding that so-called "scheme" liability for secondary actors in the securities markets, or "nonspeakers" on whom the market does not presumptively rely for information, is fundamentally incompatible with the fraud-on-themarket doctrine; and the Fifth Circuit's ruling in Oscar Private Equity Investments v. Allegiance Telecom, the first circuit court decision to hold that in addition to reliance, a showing of loss causation is required to trigger the fraud-on-the-market presumption for purposes of certifying a shareholder class.