LAW 3111H Study Guide - Final Guide: Rebuttable Presumption, Punitive Damages, Scienter
9.3 Fraud Elements of Private 10b-5 Action
9.3.3 Reliance and Causation
Nondisclosure:
When a defendant fails in a duty to speak, the courts dispense with proof of reliance if the
undisclosed facts were material
Omitted information: courts undecided
Fraud on the Market Theory:
For false or misleading statements in publicly traded companies:
●Courts created a rebuttable presumption of reliance:
●The defendant has to prove the alleged misstatements did not affect the
stock market
●Or that the plaintiff would have traded regardless of alleged misstatements
Causation:
Transaction causation
But for the material misstatements the plaintiff would not have traded in the stock
Loss causation:
Requires plaintiff to show that alleged misrepresentations or omissions foreseeably resulted
in a price decline and thus in the losses claimed by plaintiff
- This can be done by showing a change in the stock prices from when misrep. Was
made and then an opposite change when disclosure of correcting false or misleading
statements was made
Damages:
1. Damages are limited to actual damages, no punitive damages allowed in 10b-5
2. Recession: plaintiff is allowed to basically cancel the contract
3. Out of pocket damages: plaintiff is allowed to recover difference between what she
paid and the true value of stock at the time of purchase
State Law Remedies
1. Duty of honesty
a. The company has a duty of honesty to its shareholders which it breached
b. Therefore shareholders can sue corporate managers for violating this duty of
honesty if they knowingly disseminate false information that results in
corporate injury or damage to individual shareholders
c. Absence or purchase or sale requirement
2. Sate Law of deceit
a. Relaxed scienter requirements
b. Permit punitive damages
c. Statue or limitations is longer
Document Summary
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