Public Company Alert: “Fraud-on-the-Market” Presumption Adopted in Oregon Securities Case

With the recent Oregon Supreme Court case State of Oregon v. Marsh & McLennan Companies and Marsh Inc., Oregon is among the first states to recognize the “fraud-on-the-market” theory in securities cases. This development may make it easier for some purchasers of securities to assert securities fraud claims in Oregon.

Many people are familiar with the requirements to prove a securities claim, and although the standards vary to some degree depending on the type of claim and the jurisdiction in which the claim is brought, each jurisdiction generally requires that a plaintiff prove a misstatement of a material fact (or the omission of a material statement), reliance by the plaintiff on the statement or omission, a loss suffered by the plaintiff, and a causal relationship between the misstatement or omission and the loss. Under federal securities law, the “reliance” element required to support a securities fraud claim may be established in certain circumstances through the “fraud-on-the-market” theory. The theory is based upon the notion that, in an efficient market, the price of a given security reflects the information publicly available about that security and its issuer. Thus, where material information is misstated or omitted, and that information would alter the total mix of information available to the trading public, then the impact on price is sufficient to establish reliance even if the purchaser was unaware of the specific information reflected in the price. Thus, if a plaintiff can demonstrate that the marketplace as a whole reflected incomplete or misleading information, and if that reflection affected the price of a publicly traded class of securities, then the plaintiff may prove reliance by establishing a rebuttable presumption of reliance—even if the purchaser may not have relied directly on the misrepresentations.

Now, under Marsh, the fraud-on-the-market presumption may allow a plaintiff to establish reliance under Oregon securities law as well. Marsh involved a civil damages claim (rather than an enforcement action) by the state of Oregon against Marsh & McLennan Companies, Inc. (“MMC”) and Marsh, Inc. (collectively “Marsh”) arising out of the state’s purchase of $15 million of common stock in MMC. The state treasurer, in his capacity as trustee for the Oregon Public Employees Retirement Fund, alleged that Marsh made material misrepresentations in violation of Oregon securities law. The plaintiff contended that these representations artificially inflated MMC’s stock price and resulted in a $10 million loss to the state once the misrepresentations were disclosed and the stock price fell.

The primary issues in Marsh were whether the state had to prove reliance under Oregon securities law, and if so, whether that reliance could be established through the fraud-on-the-market presumption. Although the trial court and the Court of Appeals held that reliance is required but cannot be established through the fraud-on-the-market presumption, the Oregon Supreme Court reversed in part, holding that when securities are purchased in an open market, reliance can be established through the fraud-on-the-market presumption. In order to meet this standard, the Supreme Court held, the plaintiff must have purchased in an open, efficient market; thus investors in privately held or thinly traded securities may have limited success in utilizing the fraud-on-the-market presumption.

After Marsh, there are numerous open issues pertaining to the application of the fraud-on-the-market doctrine in Oregon. For example, one of the more controversial assumptions underscoring the fraud-on-the-market doctrine is that markets are rational, meaning that “the market price of shares traded on well-developed markets reflects all publicly available information, and, hence any misrepresentations.” Although the Court indicated that purchasers seeking to invoke the fraud-on-the-market presumption must establish as a question of fact that the stock was purchased “in an open and efficient market” (emphasis added), it did not address to what extent purchasers will need to affirmatively prove the efficiency of the market prior to relying on the fraud-on-the-market presumption—or how they might go about doing so. Nor did the Court decide whether the fraud-on-the-market presumption applies in material omission cases or what standard of proof a defendant must satisfy in order to rebut the fraud-on-the-market presumption. Likewise, the Court did not address the question of whether a plaintiff must prove scienter, or fraudulent intent, in fraud-on-the-market claims.

Although the Court did not address all of the intricacies of the fraud-on-the-market presumption, given Marsh’s emphasis on bringing Oregon law more in line with federal law, federal law will likely continue to influence how Oregon courts interpret Oregon securities law. Importantly, unless Oregon courts begin to diverge from the influence of federal law going forward, public companies should be aware that, just as the federal fraud-on-the-market presumption made it easier for plaintiff’s to assert securities fraud cases against public companies, so, too, might the doctrine’s introduction in Oregon expose public companies to more successful securities fraud claims under Oregon securities law.