Ann Lipton writes:
I just recently came across the Ninth Circuit’s decision in In re Atossa Genetics Inc Securities Litigation, 868 F.3d 78 (9th Cir. 2017), and it struck me because it highlights an ongoing tension between the reliance/materiality distinction in fraud-on-the-market cases in general, and in the Supreme Court’s jurisprudence in particular….One might describe truth-on-the-market as a reliance doctrine, in just the same way that fraud-on-the-market is so described, so that if defendants can make the appropriate truth-on-the-market showing, the plaintiffs’ claim fails for lack of reliance. Yet truth-on-the-market is often discussed as a doctrine of materiality, i.e., that given the truthful countervailing information, the false information is no longer material. Or, to put in in Basic-speech, the truthful information renders the false information no longer significant in light of the “total mix.”
But that phrasing masks a real distinction between the two concepts. Suppose a defendant publicly lies, but the truth is known to a select group of wealthy, professional investors. They might, with their informed trades, offset the pricing impact of the lie. At the same time, some smaller number of uninformed retail investors might still hear the lie, believe it, and invest on that basis. What then? Certainly, the information only known to the professionals cannot reasonably be considered part of the “total mix” of information available to the retail investor.
As a doctrinal matter, then, you would expect that the retail investors would still be able to establish both materiality and reliance on an individualized basis, if not under the fraud-on-the-market doctrine. (Basic itself even contemplated such a scenario; it held the fraud-on-the-market presumption of reliance might be rebutted if “‘market makers’ were privy to the truth.”)
And that’s exactly what the Ninth Circuit made clear in Atossa. There, one defendant was alleged to have made a statement in a press release that falsely described the FDA-approval status of a new drug. Among other things, he argued that the truth was evident from language in the company’s IPO documents. The Ninth Circuit reject that argument – it held the documents were not sufficiently clear – but further pointed out that the plaintiffs were alleging reliance both under a fraud-on-the-market theory, and under a direct reliance theory. For the latter, it was irrelevant if the truth was revealed in some other place.
Source: Business Law Prof Blog