Basic at Twenty: Rethinking Fraud-on-the-Market

Twenty years after being decided, Basic Inc. v. Levinson is being interpreted and applied in interesting, sometimes jarring, ways. This paper looks at Basic's presumption of reliance in fraud-on-the-market cases and the ways in which contemporary courts are addressing such issues as (1) the level of efficiency that is necessary for the presumption to apply; (2) the role of market price distortion and loss causation in the class certification decision; and (3) the connections between materiality and reliance (Basic's two separate issues) in both class certification and on the merits. Basic set in motion much of the resulting confusion by making more of reliance - and market efficiency - than was needed, and then paying too little attention to the joint risks of indeterminacy and disproportionality in the liability threat created by fraud-on-the-market lawsuits. Had it taken a different route, or better explained the route it was taking, we might have seen early on that class recovery is better suited as a deterrence mechanism than a compensatory device. That makes a stringent approach to reliance, causation or class certification unnecessary, but also calls into question the idea that each investor has a "right" to recovery by trading at a distorted price. Instead, the law headed in precisely the opposite direction.