The Fifth Circuit recently issued this opinion that examines the investor reliance presumption under the fraud on the market theory in securities litigation. Under that theory, investors are entitled to a presumption that they relied on a misrepresentation so long as the company’s shares were traded on an efficient market. An interesting twist to that theory is that the investors are not entitled to the presumption if they cannot establish that the misrepresentation actually affected the market price of the stock.
In this particular case, the plaintiffs apparently could not prove that the defendants’ positive public statements regarding the company (which turned out to be false) had increased the company’s stock price. Accordingly, the Fifth Circuit reasoned that the plaintiffs were entitled to the presumption of reliance only to the extent that they could tie the earlier false positive statements to the subsequent decline in stock price after the true negative public statements hit the media. The Fifth Circuit observed:

We are satisfied that plaintiffs cannot trigger the presumption of reliance by simply offering evidence of any decrease in price following the release of negative information. Such evidence does not raise an inference that the stock?s price was actually affected by an earlier release of positive information. To raise an inference through a decline in stock price that an earlier false, positive statement actually affected a stock?s price, the plaintiffs must show that the false [positive] statement causing the increase was related to the statement causing the decrease. Without such a showing there is no basis for presuming reliance by the plaintiffs.

This is yet another in a long line of Fifth Circuit decisions that require strong proof of reliance in fraud cases. Hat tip to the Rule 10b-5 Daily for the link to this decision.