1. Basic v. Levinson 1934 Securities The 1934 Act was designed to protect investors against manipulation of stock prices. Underlying the adoption of extensive disclosure requirements was a legislative philosophy: "There cannot be honest markets without honest publicity. Manipulation and dishonest practices of the market place thrive upon mystery and secrecy." pg. 5

2. Basic v. Levinson Fraud on the Market FOM is a Theory of Recovery in Litigation Involving Rule 10b-5

3. Rule 10b-5 “It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, … to make any untrue statement of a material fact or to omit … a material fact …in connection with the purchase or sale of any security. (footnote 6, Basic v. Levinson)

4. Basic v. Levinson Fraud on the Market (1) The modern securities markets, literally involving millions of shares changing hands daily, differ from the face-to-face transactions contemplated by early fraud cases, and our understanding of Rule 10b-5's reliance requirement must encompass these differences. (18)

5. Basic v. Levinson Fraud on the Market (2) Recent empirical studies have tended to confirm Congress's premise that the market price of shares traded on well-developed markets reflects all publicly available information, and hence, any material misrepresentations

6. Basic v. Levinson Fraud on the Market (3) Because most publicly available information is reflected in market price, an investor's reliance on any public material misrepresentations, therefore, may be presumed for purposes of a Rule 10b-5 action. (20)

7. Hurdles in Proving Fraud Harm Materiality Scienter Reliance

8. Harm Plaintiff must show financial harm Can’t sue a company for fraud because you were simply “offended” by their actions.

9. Materiality Mis-statement by a defendant must be of a material, or substantive nature and be related to the complaint.

10. Scienter Plaintiff must show the defendant intended to mislead.

11. Reliance Plaintiff must show he he relied on defendant’s alleged false or misleading statement. This might not be easy in the case of alleged misleading statements that affect the stock market.

12. Bright Line Rule BLR from TSC Industries Managers need not disclose merger discussions until merger agreement is signed.