Demystifying Causation in Fraud-on-the-Market Actions

摘要

What must an investor who purchases shares on the open market of an issuer that has made a positive, materially false misstatement in violation of Rule 10b-5 show to establish causation in a "fraud-on-the-market" action for damages? Confusion has arisen in the courts concerning this question because they have analyzed the matter in terms of the twin concepts of "transaction causation" and "loss causation." They initially developed these concepts as a way of deciding causation in actions based on a showing of traditional reliance. Fraud-on-the-market actions involve a fundamentally different kind of causal connection between the defendant's misstatement and the plaintiffs injury, as recognized by the U.S. Supreme Court in Basic v. Levinson. Because of this fundamental difference in causal connection, the twin concepts of transaction causation and loss causation simply do not make sense in fraud-on-the-market actions. The focus in fraud-on-the-market cases should be instead on developing standards for what the plaintiff must plead and prove, and the acceptable forms of evidence, in order to establish that the defendant's misstatement inflated the price at the time of purchase. Analyzing the problem from the ex ante perspective of the economics-based approach to securities law reveals that these are the real issues underlying the causation cases coming before the courts.