Basic, Inc. v. Levinson, 485 U.S. 224 (1988)

Facts

Basic was a publicly traded company which made three public statements denying that it was engaged in merger negotiations.  Basic’s board approved the merger between them and Combustion.

Procedural History

Respondents, who were shareholders prior to the merger, sued, asserting Basic made false or misleading statements.  The trial court granted summary judgment.

Issue(s)

Did the lower courts properly apply a presumption of reliance in certifying the class, rather than requiring each class member to show direct reliance?

Holding(s)

No.

Reasoning/Analysis

The Court found that to fulfill the materiality requirement, there must have been a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as significantly altering the total mix of available information.  Whether merger discussions are material therefore depend on the facts.  The fraud on the market theory is that in an open ended market, the price of stock is determined by available information.  Requiring a plaintiff to show speculative facts would place an unreal burden on the plaintiff.  Any showing that severs the link between alleged misrepresentation and either the price received by plaintiff, or his decision to trade at a fair market price, will be sufficient to rebut the presumption of reliance.

Judgment/Outcome

The Court vacated the judgment of the Court of Appeals.