Halliburton and the Integrity of the Public Corporation

When a market for a stock is efficient, the fraud-on-the-market presumption requires courts to initially assume that investors who bought the stock relied on the integrity of the market price. This presumption is critical in establishing the common reliance necessary to certify a class when such investors assert a securities fraud claim under SEC Rule 10b-5. The validity of the fraud-on-the-market presumption rests on two related propositions. The first is descriptive: a company’s stock price in an efficient market will incorporate publicly released information about the company and its economic prospects; thus securities fraud will inflate the price investors pay for the stock. The second is normative: investors can reasonably rely on the integrity of public stock markets when purchasing stock. This Article primarily assesses the second proposition. Because stock prices are often inaccurate, critics commonly argue that markets do not have integrity. Rather than resting the reasonableness of investor reliance on what I will refer to as “market price integrity,” this Article argues that the integrity of public markets is best grounded in the regulatory structure governing which corporations can be publicly traded. Put another way, the fraud-on-the-market presumption is best justified not because of an expectation that stock market prices are precisely accurate, but on what I will call the “integrity of the public corporation.” Even if investors cannot reasonably believe that fraud in an efficient market is uncommon, securities laws increasingly seek to create public markets in which investors can reasonably expect that severe frauds will be rare. Such