Theories of Causal Nexus in Rule 10b-5 Claims: A Critical Reassessment

Investors are entitled to assume that issuers comply with regulatory disclosure requirements and have therefore purchased or sold a security at a price expected to have been set without being affected by untrue statements or omissions. That is, investor reliance should be presumed in a regulated market in which the issuer statements in SEC filings are truthful and at least not seriously misleading. This article argues that the source of reliance lies in the credibility of the regulators committed to promoting market integrity and investor protection. In this regard, the basic presumption per se remains valid but needs some revision. Furthermore, in assessing claims of causation of loss and damages, it should be taken into account whether any significant price distortion occurred at the precise moment when defrauded investors made investment decisions, not at a later date. Such ex-ante analysis is theoretically sound and consistent with legislative intent.