Define: Fraud On The Market Theory

The Fraud on the Market Theory is a legal theory that allows investors to bring a securities fraud claim without having to prove that they individually relied on the alleged misrepresentation or omission. Instead, it presumes that investors rely on the integrity of the market price, which is affected by the alleged fraud.

Under the Fraud on the Market Theory, investors can establish reliance on a misrepresentation or omission by showing that the information was publicly available, the market was efficient, and the stock price was affected by the alleged fraud. This allows investors to bring a class action lawsuit on behalf of all affected shareholders.

The Fraud on the Market Theory is significant because it simplifies the burden of proof for investors in securities fraud cases. It recognizes that in an efficient market, investors rely on the integrity of the market price, making it unnecessary to prove individual reliance on the alleged misrepresentation or omission.

No, the Fraud on the Market Theory is not recognized in all jurisdictions. It was established by the United States Supreme Court in the case of Basic Inc. v. Levinson in 1988 and has since been adopted by many U.S. courts. However, its application may vary in different jurisdictions.

The Fraud on the Market Theory is primarily used in cases involving alleged misrepresentations or omissions in the trading of publicly traded securities. It may not be applicable in cases involving private securities or other types of fraud.

No, the Fraud on the Market Theory is a civil legal theory used in securities fraud cases. It does not apply to criminal cases, which require a higher burden of proof and different legal standards.

Yes, individual investors can benefit from the Fraud on the Market Theory by joining or initiating a class action lawsuit. This allows them to pool their resources and share the costs and potential rewards of the litigation.

Defendants in securities fraud cases may argue against the application of the Fraud on the Market Theory by challenging the efficiency of the market, the materiality of the alleged misrepresentation or omission, or the causal link between the fraud and the stock price.

The application of the Fraud on the Market Theory to foreign securities may vary depending on the jurisdiction. It is important to consult with legal experts familiar with the specific jurisdiction’s laws and regulations.

No, the Fraud on the Market Theory is specifically designed for cases involving publicly traded securities. It may not be applicable in cases involving non-publicly traded securities, such as private placements or venture capital investments.