Fraud on the market is at the core of contemporary securities law, permitting 10b-5 class actions to proceed without direct proof of investor reliance on a misrepresentation. Yet the ambiguities of this idea have fractured the Supreme Court from its initial recognition of the doctrine in Basic v. Levinson to its recent decision in Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds.
Amidst divergent views of the coherence and advisability of liability for fraud on the market a fundamental question lurks: is a suit for damages that invokes the fraud-on-the-market theory a claim for common law deceit, such that liability is properly limited by requirements such as scienter and loss causation, or is it an indirect regulatory enforcement action that should be unconstrained by these requirements so that liability can better serve its deterrent and compensatory purposes?
Rejecting both of these options, we argue for a third way. Fraud-on-the-market claims are not private attorney general actions; they are genuine tort claims through which victims seek redress for having been wronged. Yet the wrong differs fundamentally in substance from the wrong of deceit. Building on a careful analysis of Dura Pharmaceuticals, Inc. v. Broudo, Basic v. Levinson, and common law, we articulate the unique character of the fraud-on-the-market tort. Rooted not in deceit but instead in the Congressionally recognized right of investors to trust in the integrity of securities markets, it does not protect investors from being deceived, but rather protects them against economic loss caused by intentional distortions of market prices. This simultaneously explains why fraud-on-the-market plaintiffs are properly freed from having to prove reliance and why the Supreme Court was perhaps justified in imposing restrictions on liability that are foreign to the common law.