Direct Evidence of Price Impact and Fraud-on-the-Market Doctrine Don’t Necessarily Go Hand-in-Hand
Investors brought a securities fraud class action against a financial services provider and three of its senior officers asserting violations of the Securities Exchange Act by secretly advantaging high frequency traders over other clients who used the company's “dark pool” or alternative trading system. In affirming class certification, the Second Circuit ruled claims based on a presumption of reliance under the fraud-on-the-market theory were not required to offer direct evidence of market efficiency when other indicia are present. Defendants in such actions seeking to rebut the presumption of reliance on misrepresentations based upon this theory must demonstrate a lack of stock price impact by a preponderance of evidence at the class certification stage rather than merely meet the burden of production. This opinion, when viewed in light of recent case law developments, is widely believed to removed certain obstacles to shareholder class actions.