Oregon Adopts Fraud-On-The-Market Theory

In Basic Inc. v. Levinson, 485 U.S. 224 (1988), the U.S. Supreme Court adopted the “fraud-on-the-market” theory of reliance, which presumes that investors who bought or sold a security did so in reliance on the integrity of the market price of that security:

The fraud on the market theory is based on the hypothesis that, in an open and developed securities market, the price of a company’s stock is determined by the available material information regarding the company and its business…Misleading statements will therefore defraud purchasers of stock even if the purchasers do not directly rely on the misstatements…The causal connection between the defendants’ fraud and the plaintiffs’ purchase of stock in such a case is no less significant than in a case of direct reliance on misrepresentations.

Id. at 241-42 (citation omitted).  The fraud-on-the-market doctrine dispenses with the requirement that an investor prove that he or she was aware of a particular misstatement, or that he or she directly relied on it.  Id. at 246-47.

Recently, Oregon became the first state to adopt the fraud-on-the-market theory.  On December 13, 2012, the Oregon Supreme Court issued an opinion finding that a stock purchaser who brings a claim for damages based on misrepresentations under Oregon Securities Laws can rely on the “fraud-on-the-market” doctrine.  State of Oregon v. Marsh & McLennan Cos., Inc., Nos. CC050808454, CAA139453, SC S059386, 2012 WL 6212518 (Or. Sup. Ct. Dec. 13, 2012).  A copy of the opinion can be found here.

In Marsh, The State of Oregon, acting on behalf of the Oregon Public Employee Retirement Fund (collectively, the “State”), asserted state law claims against Marsh & McLennan Companies, Inc. and Marsh, Inc. alleging that the insurance companies engaged in a scheme perpetrated by false and misleading statements that caused the State to lose approximately $10 million on investments in Marsh stock.  The trial court determined that the provisions of ORS 59.135 and ORS 59.137 require proof of reliance, that the State had failed to establish proof of actual reliance, and that a stock purchaser under Oregon’s securities laws was prohibited from establishing reliance through the fraud-on-the-market doctrine. The Court of Appeals affirmed the trial court’s determination.

In a unanimous opinion, the Oregon Supreme Court reversed the decision of the Court of Appeals and remanded.  After reviewing the text, context, and legislative history, surrounding ORS 59.137, the Court determined that:

For the Oregon Securities Law to be consistent with the corresponding federal securities law, the 2003 Oregon legislature must have intended that fraud-on-the-market claims that had been recognized since 1988 by the United States Supreme Court under federal securities law be incorporated into Oregon law.


We conclude that, in recognizing claims under Oregon law for damages to open market stock purchasers “caused by” misrepresentations by companies whose stock is sold on the open market, the Oregon Legislative Assembly intended that the causal connection in such sales could be established through the use of the fraud-on-the-market doctrine. In other words, we understand that in recognizing claims by open market stock purchasers, the Oregon legislature also provided the means of proving such claims when the stock purchases were made in non-face-to-face transactions on the open market – and we further understand that the Oregon legislature intended to adopt as one of the available means the fraud-on-the-market doctrine that the federal courts had provided under federal securities law since 1988. To conclude otherwise would be to interpret the terms of ORS 59.137 enacted by the Legislative Assembly in a restrictive manner when the unquestioned intent of the legislature was to expand the reach of the Oregon Securities Law to make it consistent with federal securities law.

Id. at *11.

Recognizing that other state courts have not endorsed the fraud-on-the-market doctrine under their state securities laws, the Oregon Supreme Court noted that, “Each state court, of course, must address the issue as a matter of statutory interpretation under its particular statutory scheme using its own method of statutory interpretation…The fact that other state courts have not determined that the fraud-on-the-market doctrine applies under their own state laws provides little reason for us to follow that same path here in Oregon.”  Id. at *12

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