Abstract

http://ssrn.com/abstract=224019
 


 



Extending the Fraud on the Market Theory: The Second Circuit's Connection Test for SEC Rule 10b-5


Tonya Smits Rodriguez


University of Iowa College of Law


Journal of Corporation Law, Vol. 25, No. 2, 2000

Abstract:     
The Second Circuit recently expanded the protection afforded to investors under Section 10(b) of the Securities Exchange Act of 1934 by holding that drug advertisements in technical medical journals might create Section 10(b) liability. The court concluded that such advertisements might meet the connection requirement of SEC Rule 10b-5, in light of a 1988 Supreme Court decision allowing courts to presume reliance based on a fraud on the market theory. According to this theory, because fraud affects market price on an open market, investors who rely on market price indirectly rely on fraud. The Second Circuit determined that fraud's effect on the market can also sufficiently establish the connection requirement of Section 10(b).

This comment examines the Second Circuit's extension of fraud on the market and concludes that the new connection requirement does not satisfy two primary reasons for applying fraud on the market to the reliance element of Rule 10b-5. First, while fraud on the market eliminates a difficulty of proof when applied to the reliance requirement of 10b-5, the new connection requirement might actually create a difficulty of proof. Second, unlike the reliance requirement of 10b-5, the connection requirement does not pose a class certification problem. In addition, in this particular case, the broader connection requirement might frustrate drug manufacturer's attempts to communicate with the medical community in a way that furthers valid reasons for delayed disclosures. This comment concludes that while drug companies currently have several potential defenses to this problem, a broader bespeaks caution doctrine would provide the best protection.

Accepted Paper Series





Not Available For Download

Date posted: June 5, 2000  

Suggested Citation

Smits Rodriguez, Tonya, Extending the Fraud on the Market Theory: The Second Circuit's Connection Test for SEC Rule 10b-5. Journal of Corporation Law, Vol. 25, No. 2, 2000. Available at SSRN: http://ssrn.com/abstract=224019

Contact Information

Tonya Smits Rodriguez (Contact Author)
University of Iowa College of Law ( email )
Melrose and Byington
Iowa City, IA 52242
United States
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