The Oregon Supreme Court recently ruled that securities fraud claims made under Oregon securities law require a showing of reliance, but that reliance can be established through an assertion of “fraud-on-the-market.” The Court then remanded to consider the constitutional questionsof whether misstatements must be made knowingly. The case follows on the heels of the U.S. Supreme Court’s consideration of the fraud-on-the-market presumption under federal securities laws in Amgen Inc. v. Conn. Retirement Plans & Trust Funds. That case had oral argument on November 5, 2012; an opinion is pending.
In the Oregon Case, the Oregon Public Employee Retirement fund purchased fifteen million dollars of stock in Marsh & McLennan Companies Inc. (MMC) between 2003 and 2004. The state asserted that it lost ten million dollars on the value of the purchased stock because of false and misleading statements made by MMC. Traditionally, reliance in fraud cases is satisfied only when a buyer directly relies on the misstatements of the seller- as in a physical exchange in the marketplace. Following Basic Inc. v. Levinson, however, the Supreme Court granted a presumption of reliance for “fraud-on-the-market” when a buyer does not rely directly on the misstatements, but rather relied on a stock price traded on an open and efficient market as reflecting the true value of the company. Thus, were it not for the fraudulent misstatements, the stock price would have accurately reflected the value of the security and the sale would not have transpired.
In this case, the state conceded that it had no reason to know of the misstatements made by MMC, and had it known, it would not have purchased the stock. The trial and appellate courts both affirmed the need to prove reliance in securities fraud claims, but rejected the “fraud-on-the-market” presumption for establishing reliance. The appeal challenged the need for reliance under Oregon Securities Law, and in the alternative, whether reliance could be established by “fraud-on-the-market.”
The court held that reliance was a necessary element to prove causation. Fraud exists only if a seller made a misstatement, the purchaser of a security suffered a harm (in this case lost stock value), and the harm was caused by the misrepresentations of the seller. Causation establishes that the specific misrepresentations, and not some other factors, contributed to the buyer’s harm. In the Court’s view, the causal link is the reliance that must be proven in other fraud cases. Though other state statutes do not directly establish a reliance requirement, the Court dismissed these points as unpersuasive and inconsistent with the legislative intent of the securities fraud statute.
Legislative intent also formed the basis for allowing “fraud-on-the-market” as a rebuttable presumption of reliance. The Court consulted the transcript from the floor debate of the bill establishing the law. The court stated that the bill was passed in 2003 in an effort to bring the law of Oregon into accord with the federal securities law. Following past precedent, when the state adopts a statute from another jurisdiction, it applies the highest rulings on the statute within that jurisdiction. In this case, Basic Inc. is folded into the interpretation of Oregon Securities Law allowing for “fraud-on-the-market” claims.
For more information on the pending U.S. Supreme Court case, see SCOTUS Blog’s coverage here. We’ve also written on Berkeley Law Professor Robert Bartlett’s participation in an amicus brief here.