Use of Economic Analysis in Fraud on the Market Cases
Hiller, Janine S. & Ferris, Stephen P.
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- 2015Prairie Capital III, L.P. v. Double E Holding Corp. Del. Ch.
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Abstract
In 1988, in Basic, Inc. v. Levinson,1 (Basic), the United States Supreme Court adopted the fraud on the market theory in order to create a presumption of reliance in a Security & Exchange Commissions Rule 10(b) securities fraud case. This article first explains the economic and legal background behind the fraud on the market presumption. Then, the landmark case of Basic is examined for guidance in applying the presumption and proving defenses to that presumption. Lastly, it is shown how economic analysis can be used in proving or disproving fraud on the market, including an empirical study of the events in Basic.
The Court's decision in Basic invites the use of economic/financial analysis, without recognition or guidance concerning that use. This article illustrates the importance of financial analysis in pursuing and defending a securities fraud case based on the fraud on the market presumption.