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Basic Inc. v. Levinson, revisited

Michigan lawprof Adam Pritchard, in the NLJ, argues that the Supreme Court went astray in its 1988 adoption of the "fraud on the market" theory, and proposes a perhaps unexpected workaround:

...Shareholders effectively take a dollar from one pocket, pay about half of that dollar to lawyers on both sides, and then put the leftover change in their other pocket.

The U.S. Supreme Court set the groundwork for this circular and costly exercise 20 years ago in Basic Inc. v. Levinson. The court effectively eliminated the reliance requirement for plaintiffs suing large companies whose stock is actively traded -- and unwittingly released the floodgates for securities class actions....

Billions are being passed around in securities fraud class actions, to no apparent purpose other than the enrichment of lawyers. Shareholders have waited too long for Congress or the high court to fix this mess; they have the power to make the necessary reform themselves. The U.S. Securities and Exchange Commission's proxy proposal rule allows shareholders to recommend amendments to a company's articles of incorporation. An amendment limiting damages in secondary market cases and requiring actual reliance for claims of compensation would undo the harm caused by the Supreme Court in Basic. Corporations would face billion-dollar lawsuits only if they had been fraudulently selling billions of dollars in securities.

More: Beck and Herrmann are impressed with the proposal.

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.