The 'Fraud-on-the-Market' Theory for Securities Litigation Arrives in Canada: Two Steps Forward and One Back?

Posted: 7 Jun 2008 Last revised: 5 Mar 2009

See all articles by Michael P. Ilg

Michael P. Ilg

University of Calgary - Faculty of Law


The Fraud-on-the-Market theory holds that high volume markets, such as the New York or Toronto stock exchanges, effectively incorporate all available information of present and expected value into a security's price. As endorsed by the United States Supreme Court, and reflected in a recent amendment to the Ontario Securities Act, fraud on the market serves an important procedural role within the context of securities litigation by providing a general reliance presumption for all investors. For when a market is assumed to be efficient, misinformation is deemed to defraud investors who have relied upon the integrity of the market itself. Although efficiency has been advanced in this recent instance of legal emulation, by encouraging market transparency without the costs and risks of original legislative design, it also has incorporated the problem of over compensation for plaintiffs inherent to the copied original. For the soundness of market information to be encouraged through a reliance presumption, the effect should not become counter-distorting through the double compensation of litigation loss. If fraud on the market is to be applied with consistent logic, then one must assume that the instant a misrepresentation is made public that rational investors will automatically discount the stock price to account for the inevitable class action suit that will arise. Though a subsequent, post misrepresentation fall in share price has traditionally been the basis of loss claims (as confirmed in the Ontario Act), a class of investors should not be able to recover on an amount that includes the market's anticipated cost of their future litigation. The following paper draws upon methods of alternative company valuation to arrive at a simple formula for filtering out anticipated litigation loss from securities damages.

Keywords: Securities Law

Suggested Citation

Ilg, Michael P., The 'Fraud-on-the-Market' Theory for Securities Litigation Arrives in Canada: Two Steps Forward and One Back?. CLEA 2008 Meetings Paper, Available at SSRN:

Michael P. Ilg (Contact Author)

University of Calgary - Faculty of Law ( email )

Murray Fraser Hall
2500 University Dr. N.W.
Calgary, Alberta T2N 1N4

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