The Halliburton v. Erica P. John Fund case now before the Supreme Court involves the validity of the “fraud on the market” principle, which relieves a plaintiff of the obligation to prove reliance on a false statement—a legally required element of securities fraud—by creating a presumption of reliance based on economic theories regarding the assumed efficiency of securities markets.

Defenders of that judicially-created legal rule—perhaps recognizing that its legal and economic justifications have been undermined significantly by more recent scholarship and experience— contend that fraud-on-the-market should nevertheless be maintained, apparently even if the rule cannot actually be justified as a legitimate substitute for proving reliance, because eliminating it “would mean the demise of private securities actions and the deterrent and compensatory role they serve.”

But that contention rests on two fundamental assumptions: first, that these private lawsuits do in fact benefit investors by serving an important “deterrent and compensatory role”; and, second, that eliminating the fraud-on-the-market presumption would really mean “the demise of private securities actions.” As this paper will show, both assumptions are simply wrong. 

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