Basic Inc. v. Levinson

Private securities (fraud) litigation is a major industry. Specialized class action law firms drive this litigation. Congress and recently the Supreme Court have tried to reign in some of this litigation, which remains controversial. In 1995, Congress passed the Private Securities Litigation Reform Act, which, among other things, introduced very strict pleading requirements via SEA §21D. In 2005, the Supreme Court handed down Broudo v. Dura Pharmaceuticals, Inc., which held that “an inflated purchase price will not itself constitute or proximately cause the relevant economic loss.”Basic defines the standard of materiality for securities fraud. More importantly, Basic endorses the fraud-on-the-market theory, which is the foundation of most securities fraud class actions. Doctrinally, the fraud-on-the-market theory is an interpretation of the reliance element of the private right of action under rule 10b-5. Notwithstanding the convoluted text of the rule, the elements of a 10b-5 claim appear to be exactly the same as those of common law fraud: (1) a false or misleading statement (2) of a material fact (3) made with scienter that (4) the plaintiff reasonably relied on, (5) causing injury to the plaintiff. As the Basic decision shows, however, these similarities are deceptive. These elements have a special meaning in the context of 10b-5.1. How does the fraud-on-the-market theory relate to reliance? Why is this important for class certification?2. According to the fraud-on-the-market theory, who relies on what? Why do they trade?3. What social good, if any, do private securities fraud class actions generate? In other words, what is the policy justification, if any, for allowing this costly litigation to proceed?