Developments in United States Securities Class Actions: The Status of ‘Fraud on the Market’ Causation and Implications for Australia

Abstract

In 1988 the United States Supreme Court handed down the judgment of Basic Inc v Levinson which recognized the ‘fraud on the market’ theory of causation of investor loss in a securities class action. More recently, legislative reform and the US Supreme Court's decision in Dura Pharmaceuticals v Broudo have circumscribed somewhat the permissive approach to such claims by creating more stringent requirements at the pleading and certification stage. The development of behavioural finance also questions somewhat the theory of efficient capital markets on which the ‘fraud on the market’ causation theory partly rests. In Australia meanwhile, market based causation has not been tested yet in their courts. To the extent that causation of loss through the effects of non-disclosures on the market is accepted by Australian courts it is not clear that the gloss developed in Dura would necessarily have application here.