Fraud-on-the-Market Liability in the ESG Era

Abstract

This Article argues for change to the fraud-on-the-market (FOTM) litigation framework in light of the current emergence of environmental, social, and governance disclosure. In particular the Article argues that, for claims targeting non-financial disclosure, a showing by the plaintiff to the district court that the market for the securities at issue is efficient (along with some basic pleadings) should no longer be sufficient to trigger a dual FOTM presumption of price impact and reliance. Instead, for these claims, the sorting accomplished by this market-efficiency showing at the class-certification stage of the litigation (and the lack-of-price-impact rebuttal available to defendants at that same stage) should be condensed into a single threshold inquiry into price impact (burden on the plaintiff to be evaluated by an independent panel of financial economists). Under this approach, to receive the FOTM presumption of reliance, a representative plaintiff targeting a non-financial disclosure would thus need to prove to that panel at the outset of the litigation that the misstatement at issue affected market prices. Accordingly the Article (1) critiques the unified application of the existing FOTM screening framework to financial disclosure and non-financial disclosure alike and (2) sets forth the appeal of the aforementioned approach for FOTM claims targeting the latter type of disclosure at this time.

Keywords: securities litigation, ESG, Fraud-on-the-Market Liability