THE TRUTH-ON-THE-MARKET DEFENSE AND ITS RELEVANCE IN SEC ENFORCEMENT ACTIONS

The efficient capital market hypothesis -- a financial theory that posits that security prices reflect all relevant information available to the market -- first found its way into Supreme Court jurisprudence in Basic Inc. v. Levinson. The securities antifraud provisions of the Securities Exchange Act have long been recognized to authorize both official Securities and Exchange Commission (SEC) enforcement as well as private litigation. Although key elements of a successful cause of action under the securities antifraud provisions -- such as material misrepresentation, a connection between the misrepresentation and the purchase or sale of a security, and scienter -- remain the same, the full requirements for SEC enforcement actions and private suits differ in certain aspects. In this note, Chang considers the efficient market hypothesis as adopted by the Court and its application in the securities-fraud context, particularly through the development and application of the truth-on-the-market defense.