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18.5 Securities—Justifiable Reliance—Fraud-on-Market Case

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The plaintiff does not have to prove that [he] [she] [it] justifiably relied on the alleged misrepresentation or omission in deciding to engage in the [purchase] [sale] of the [security] [securities] in question if [he] [she] [it] proves by a preponderance of the evidence that there was an active open market in the [security] [securities] at the time of the transaction[s] in question. An "active open market" means that there were a large number of traders, a high level of activity, and frequent trades, such that buyers and sellers could rapidly obtain current information about the price of the security.

If you find that the plaintiff has proved by a preponderance of the evidence that (1) an active, open market for the [security] [securities] existed and (2) investors reasonably relied on that market as an accurate reflection of the current market value of the [security] [securities], you may find that the plaintiff has proved that [he] [she] [it] relied on the defendant’s statements.

If, however, the defendant proves by a preponderance of the evidence that (1) the plaintiff did not actually rely on the integrity of the market or (2) the alleged misrepresentation or omission did not affect the market price of the security, then the defendant has rebutted any presumption that the plaintiff relied on the market. In that event, the plaintiff must then prove that [he] [she] [it] justifiably relied directly on the alleged misrepresentation or omission.


Use this instruction when a theory of fraud on the market is involved. See Simpson v. AOL Time Warner, Inc., 452 F.3d 1040, 1051 (9th Cir.2006) (the fraud-on-the-market theory applies to all three classes of Rule 10b-5: (1) scheme to defraud, (2) misrepresentation or omission, and (3) fraudulent course of business)), petition for cert. filed, 75 USLW 3236 (Oct. 19, 2006) (No. 06-560). That theory is based on the premise that when persons buy or sell publicly-traded shares, they rely on the marketplace to assure the integrity of the price, to the extent that price is a consideration in their decision. Basic, Inc. v. Levinson, 485 U.S. 224, 245–49 (1988). In such circumstances, the law presumes that the market itself has factored in relevant information and the plaintiff need not prove that he or she individually or the class of purchasers whom the plaintiff seeks to represent relied on the statements or omissions on which the action is based. In re Convergent Technologies Sec.Litig., 948 F.2d 507, 512 n.2 (9th Cir.1991) (in a fraud-on-the-market case, the plaintiff need not show actual reliance on any misrepresentation or omission; instead the plaintiff must show reliance on the integrity of the price established by the market, which was in turn influenced by the misleading information or the omission of information). However, the defendant may rebut evidence giving rise to the presumption of reliance. In re Apple Sec. Litig., 886 F.2d 1109, 1115 (9th Cir.1989), cert. denied, 496 U.S. 943 (1990). The defendant may do so in a variety of ways too numerous to list here, and always dependent on the facts of the given case. In general, however, to rebut the presumption of reliance the defendant must show that there was no link between the plaintiff’s decision to trade at a fair market price and the alleged misrepresentation or omission. See Basic, Inc., 485 U.S. at 248. See also Kaplan v. Rose, 49 F.3d 1363, 1376 (9th Cir.1994) (presumption can be rebutted by showing that information tending to refute the misrepresentation had entered market through other channels), cert. denied, 516 U.S. 810 (1995). But even if some information was "out there," corporate insiders "are not relieved of their duty to disclose material information where the information has received only brief mention in a few poorly-circulated, lightly-regarded publications." In re Apple Computer Securities Litig., 886 F.2d at 1116.

If the jury finds in a fraud-on-the-market case that the defendant rebutted the presumption of reliance, use Instruction 18.4 (Securities—Justifiable RelianceGenerally) to instruct the jury on what the plaintiff must prove.