Damages and Reliance under Section 10(b) of the Exchange Act
Stanford University Law School
August 28, 2013
Rock Center for Corporate Governance at Stanford University Working Paper No. 150
A textualist interpretation of the implied private right of action under Section 10(b) of the Exchange Act concludes that the right to recover money damages in an aftermarket fraud can be no broader than the express right of recovery under Section 18(a) of the Exchange Act. The Act’s original legislative history and recent Supreme Court doctrine are consistent with this conclusion, as is the Act’s subsequent legislative history.
Section 18(a), however, requires that plaintiffs affirmatively demonstrate actual “eyeball” reliance as a precondition to recovery and does not permit a rebuttable presumption of reliance. Accordingly, if the Exchange Act is to be interpreted as a “harmonious whole,” with the scope of recovery under the implied Section 10(b) private right being no greater than the recovery available under the most analogous express remedy, Section 18(a), then Section 10(b) plaintiffs must either demonstrate actual reliance as a precondition to recovery of damages, or the Court should revisit Basic, as suggested by four justices in Amgen, and overturn Basic’s rebuttable presumption of reliance. A textualist approach thus provides a rationale for reversing Basic that avoids the complex debate over the validity of the efficient market hypothesis, an academic dispute that the Supreme Court is not optimally situated to referee.
Experience also demonstrates that Basic’s presumption of reliance, which is nominally rebuttable, is effectively irrebuttable once it attaches. This observation provides a further basis upon which to challenge Basic’s continuing vitality.
The implications of this analysis are potentially profound. If plaintiffs must affirmatively demonstrate actual reliance, then many Section 10(b) securities fraud class actions become uncertifiable because individual questions will predominate. Private securities fraud litigation would then likely be dominated by class actions asserting violations of Section 11 of the Securities Act as well as by a scrum of individual actions brought by larger investors with significant damage claims in major cases. The battle would then likely move to Congress which could legislate a rebuttable presumption of reliance, or otherwise amend the statute to reform the securities litigation process.
Number of Pages in PDF File: 78
Keywords: Securities fraud, reliance, presumption of reliance, Basic v. Levinson, Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, damages, Section 10(b), Rule 10b-5, Section 18
JEL Classification: K22, K41, K42
Date posted: August 30, 2013 ; Last revised: October 25, 2013