Back to Basics: Regulating How Corporations Speak to the Market

Abstract

On Monday October 19, 1987, the Dow Jones Industrial Average of New York Stock Exchange Listings dropped 508 points, a decline of more than twenty-two percent of its value in a single day. Two weeks later, on Monday, November 2, the United States Supreme Court heard argument in Basic Inc. v. Levinson. Arguing that stock markets efficiently reflect all public information concerning price, former shareholders of Basic claimed that they had sold their shares at an artificially depressed price because management had denied falsely that the corporation was engaged in merger negotiations. Although the shareholders did not know of the corporation's statements at the time they sold their shares, and therefore could not prove reliance in the traditional sense, they argued they could rely on the integrity of the market to reflect such information. In the chaos and continued fall in the stock market following Black Monday, it is not surprising that at oral argument the defendant directors described stock market efficiency as "a hypothesis that many people have questioned in light of the events of the last few weeks." Notwithstanding the market crash, a plurality of the Supreme Court ultimately accepted the "fraud-on-the-market" basis for plaintiff standing under Rule 10b-5.