In today's society, with the advent of the "information superhighway," federal and state legislation and regulations, as well as information regarding industry trends, are easily accessed. A reasonable investor is presumed to have information available in the public domain, and therefore Whirlpool is imputed with constructive knowledge of this information. 1
The integrity of securities markets in the United States has long been enhanced by a regulatory system that mandates disclosure of material information by the large number of public companies that offer their securities for sale to the investing public. However, the market also has available to it a tremendous amount of information about such companies from non-company, or third-party, sources, including business news periodicals, newspapers, and investment analyst reports. The recent explosive growth in the availability of information over the Internet has led to, for the first time in the history of securities law, the widespread availability of a veritable treasure trove of public company-related information. Over the last few decades, courts in the United States have found that, in certain circumstances under a theory known as "truth-on-the-market," third-party sources of information may help absolve a company of securities law liability arising from misstatements made by the company or outright failures by such companies to provide material information. This Article sets forth the legal framework under which the truth-on-the-market doctrine has developed, describes some of the circumstances under which courts have addressed the doctrine, and examines how much "truth" is represented by such third-party, company-related information now widely available on the Internet's World Wide Web.
A. Issuer-Related Information Available on the Internet
Public companies have a duty to disclose information to the marketplace under the statutes, rules, and regulations of the U.S. Securities and Exchange Commission (SEC). These information vehicles include annual, quarterly, and current reports on Forms 10-K, I O-Q, and 8-K, respectively, and the various forms for registration statements,2 which are now available on the Internet via the SEC's EDGAR database.3 In these reports, issuers supply investors with historic financial information4 and also disclose, among other things, "trends, demands, commitments, events or uncertainties that are both presently known to management and reasonably likely to have material effects on the registrant's financial condition or results of operation."5
Issuer-related information on the Internet's World Wide Web includes: (i) company home pages with factual product information, marketing materials, financial information, press releases, and links to external, third-party sources of information;6 and (ii) thirdparty Websites7 that make available, either on the third-party site itself or through hyperlink, specific company news, generally relevant business and industry news, stock prices, financial information, analyst estimates and reports, SEC filings, regulatory agency and self-regulatory organization information,8 and extremely active message boards and chatrooms with postings by largely anonymous market participants.9
Approximately ninety-two million people in the United States over the age of sixteen presently have access to these sources of information on the Internet. I() An earlier version of a well-respected survey demonstrated that in 1998, twenty-two million people utilized the Web to access financial information to make investment decisions.11 Additionally, twelve million investors actually used the Web to purchase their investments.12
B. Efficient Market Integration of Information Disclosure
To understand why certain information is critically important to an assessment of securities law liability, it is first necessary to explain the way some commentators have described the effect such information has on particular aspects of that market, especially the setting of security prices. In recent decades, commentators have postulated the "efficient market theory," which states, in general, that public information, from whatever source, affecting the market price of a security is rapidly reflected in the price if the market on which the security trades is well-developed.13 Therefore, the average investor in such a stock would not be expected to profit from the use of such information.14 There are three views of efficiency: "weak" (prices only reflect historic price patterns), "semi-strong" (all public information is reflected in price), and "strong" (prices reflect all public and privately available information).15 However, the efficient market theory has also been criticized as counter-intuitive and not reflective of the behavior of actual market participants. 16 A veritable cottage industry of commentary has sprung up regarding the validity and applicability of the theory in different contexts, especially after the Supreme Court's decision in Basic v. Levinson,17 which essentially adopted the theory.
C Issuer Securities Law Liability
Under certain circumstances, the U.S. securities laws impose liability on issuers, their directors, officers, and employees for information made public by them or for their failure to disclose such information. One source of this liability is Section 10(b) of the Securities Exchange Act of 1934(18) and Rule 10b-5 promulgated thereunder. 19 Rule 10b-5 forbids fraudulent conduct in connection with the purchase or sale of securities, including security price manipulation, the making of materially misleading statements, and the failure to disclose certain kinds of material information.20 Specifically, Rule 10b-5 ties liability to information that rises to a certain level of importance by making it unlawful to "make any untrue statement of material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading."21 To prevail on a claim involving a violation of this section, plaintiffs must establish that they relied upon, in connection with their purchase or sale of a security, an issuer's misstatement or omission of a material fact that was made by the issuer with scienter,22 and which proximately caused the plaintiff's injury.23
D. Materiality of Information
The character of the information provided to the marketplace must obviously be of a type that would affect a stock's price determination in order for the securities laws to be implicated. Therefore, not all misstatements or omissions are unlawful under the federal securities laws, only misstatements or omissions of material fact. A fact is material if there is a "substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available."24 With regards to future events, a balance must be struck between the indicated probability that an event will occur and the anticipated magnitude of the event in light of the totality of the company actiVity.25
Investors are not entitled to all of the information they might like to have about a company; specific wishes of particular investors do not necessarily determine materiality.26 In certain situations, issuers may not even be required to disclose certain information that has been deemed material27 or to even subsequently update all of the details, especially if it is in the nature of a continuing event, the existence of which has been previously disclosed.28
In order to assess the development of truth-on-the-market theory, it is necessary to first understand the fraud-on-the-market theory of reliance utilized by plaintiffs in securities fraud actions. The fraud-on-the-market theory basically represents the importation into legal jurisprudence of the financial theory that stock prices in efficient markets reflect all information available to the market.29 Fraud-on-the-market theory creates a rebuttable presumption of reliance that a particular market price would reflect any alleged misrepresentation made by the issuer.30 Therefore, a plaintiff-investor in a federal securities action would not normally be required to establish reliance on specific, allegedly fraudulent statements made by an issuer in order to satisfy the reliance prong of a 10b-5 securities fraud claim.31
The fraud-on-the-market theory was adopted by the Supreme Court in Basic Inc. v. Levinson.32 The Basic Court based its analysis, in part, on the Third Circuit's prior decision in Peil v. Speiser.33 In detailing the effect the Basic decision had regarding the reliance prong of a securities fraud action, a court in the Third Circuit later stated that Basic created a three-fold presumption of reliance where the court presumes: (i) that the misrepresentation affected the market price; (ii) that a purchaser relied on the price as an indication of value and thereby relied on the misrepresentation in the purchase; and (iii) that the reliance was reasonable.34 A defendant then could attempt to rebut the fraud-onthe-market presumption of reliance by showing, among other things, that the market did not respond to the misrepresentation.35
1. The Doctrine
The truth-on-the-market theory is an essential corollary of the fraud-on-the-market theory.36 The truth-on-the-market theory finds its origin in Basic, in which the Court stated that the presumption of reliance under the fraud-on-the-market theory may be rebutted by -[a]ny showing that severs the link between the alleged misrepresentation and either the price received (or paid) by the plaintiff, or his decision to trade at a fair market price."37 The Court in Basic also stated that, "[flf 'market makers' were privy to the truth... the market price would not have been affected by [the] misrepresentations [and) the causal connection could be broken: the basis for finding that the fraud had been transmitted through the market price would be gone."38
The truth-on-the-market theory stands for the proposition that when a sufficient amount of truthful information has entered the market, the presumption of reliance generated by the fraud-on-the-market theory may be rebutted.39 A defendant's failure to disclose material information may be excused where that information has been made credibly available to the market by other sources.40 Brief mention in a "few poorlycirculated or lightly-regarded publications" is not sufficient.41 Material information not disclosed by insiders must be otherwise transmitted with a "degree of intensity and credibility sufficient to effectively counter-balance any misleading impression created by the insiders' one-sided representations."42
2. The Evidentiary Burden
Some courts that have allowed the truth-on-the-market defense have "emphasized the strict evidentiary standards a defendant must meet to rebut the reliance presumption in this manner."43 Because the determination is fact intensive, defendants have an onerous burden on summary judgment, accomplishing an almost de facto conversion of a rebuttable presumption into an irrebuttable one.44 A court in the Northern District of California stated that it is rare when a defendant can carry its "staggering burden" under this defense at summary judgment.45 Another court suggested that when the evidence is not that persuasive, the court must be convinced that the market was not biased by the company's misstatements or omissions, which might be proven by a time event or comparable index study.46 Regarding the appropriate standard for summary judgment, the In re Apple Securities Litigation court stated that the issue was whether, in light of press reports about the company's product's risks, a rational jury could find it substantially likely that full disclosures would have significantly altered the "total mix" of information available to the market.47
To assert the truth-on-the-market defense, counsel for defendants must sometimes undertake to gently educate a court on the basics of efficient market theory. At least one court has demonstrated a somewhat foggy notion of the efficient market theory and chosen to almost ignore its practical potential for ameliorating the effect of misleading or omitted issuer statements.48 The defendants in that case argued that they rebutted the presumption of reliance by pointing to other accurate information released by the company and reporting by the national media on the true state of the company and its markets.49 The court found that their argument seemed to concede that the documents were misleading, found the argument lacking,50 and then asserted that some curative information would not eliminate the effect of the alleged misrepresentations, which the court felt could have effected an artificial market price.51
The Western Union court's statement that it "is unreasonable to charge prospective purchasers with access to every bit of information which could have some impact on their decision" is arguably indicative of a less-than-complete understanding of the efficient market theory implicit in the fraud-on-the-market theory of reliance, and is somewhat more problematic.52 In fact, that is exactly what the fraud-on-the-market theory does say, i.e., that the stock price paid to or received by an investor reflects available information in an efficient market.53 The Western Union court also impliedly appeared to apply a strict liability standard to such statements or omissions by stating that the "true" issue was whether false statements or misleading omissions were made by the defendants in contravention of federal securities law.54 However, it is established law that more than negligent conduct must be shown in establishing scienter, which is an indispensable element of securities fraud liability.55
The truth-on-the-market theory has also been used by the courts in analyzing whether a statement has altered the "total mix" of information. Many decisions that recognize the truth-on-the-market theory use its analytical framework to support their decisions to, at least in part, grant defendants' summary judgment motions on the basis of a lack of materiality. One court found a remaining material issue of fact as to whether statements or omissions made by a corporation's press releases regarding future prospects misled the stock market.56 However, the court affirmed the trial court's holding that summary judgment was appropriate for claims after a certain date because the market was fully apprised of the risk via newspaper articles.57 Another court found a jury could infer that a defendant, who held himself out as an expert in municipal bonds, could have misled investors by not revealing the true nature of the bonds, despite certain publicity in the marketplace describing the risks of these bonds.58
The court in Kaplan v. Rose" cited Apple in support of the truth-on-the-market theory and analyzed sixty articles submitted by the defendants in their attempt to rebut the presumption.60 The court stated that fourteen articles discussed the company specifically; most were positive about the clinical trials which were the subject of plaintiffs' claims, there were few cautionary notes, and none predicted the low rate of success of the system.61 The court found that two analyst reports expressed serious reservations regarding FDA approval.62 In a limited analysis, another court found that because plaintiffs introduced contradictory evidence "to prove that the truth about... results and the alleged omissions did not credibly enter the market," a genuine dispute existed regarding market knowledge.63 The court found this to be true despite the fact that the defendants submitted guarded analysts' and news reports, authored by, among others, Merrill Lynch, Prudential Securities, Smith Barney, Robertson Stephens & Company, and Investors Business Daily.64
Conversely, some decisions that deny such motions appear to do so because of the fact-intensive nature of the truth-on-the-market defense to the fraud-on-the-market theory of reliance. Criticism of a company, although significant, was not found to be "so overwhelming and so credible that it overcame the exuberant assurances of the insiders during that same period and dispelled any misstatements and omissions allegedly made by the defendants."65 In addressing certain defendants' contentions that fraud-on-themarket reliance was not applicable, one court reviewed the then-present state of the truthon-the-market defense.66 Although the defendants in that case offered a report by a noted economic expert concluding that the market was aware of the risks of the bonds at an early date, plaintiffs maintained that such curative information did not enter the market until much later.67 The court declined to defer to the defendants' expert and relied on its own review of the articles and other materials submitted.68 The court found that for every source "cited by defendants as disclosing a particular risk during the relevant period, an article or statement exists in which insiders vehemently deny the criticism and defend the loan programs," and found that the negative news came from anonymous sources or competitors.69
Quite a few courts appear to be fighting a battle to sustain the legitimacy of the truth- on-the-market theory in the face of the interpretation of fraud-on-the-market that the dissent in Basic felt was inevitable, i.e., that fraud-on-the-market created, for all practical purposes, an irrebuttable presumption of reliance, thereby, in effect, reading out of existence the reliance prong of 10b-5 liability.70 Some courts that support a more legitimate and reasoned approach have therefore felt compelled to strongly highlight the underlying rationale of their approach. A district court in Massachusetts, Rand v. Cullinet Software, Inc., granted a defendant's motion for summary judgment and cited Ped as representative of the adoption by the Third Circuit of the truth-on-the-market defense.71 The Rand court also cited Cooke v. Manufactured Homes, Inc.,72 Raab v. General Physics Corp.,73 Associated Randall Bank v. Griffin, Kubik, Stephens & Thompson, Inc.,74 and Sailors v. Northern States Power Co. 75 to evidence other circuits' adoption of the theory.76 The court found the truth-on-the-market defense to be a corollary of the court's observation in a prior case that "[r]eliance on the market also includes reliance on statements of third parties [such as brokers] that merely reiterated, digested or reflected the misstated [market] information that forms the basis of the securities frauds claims,,77 and that "such a rule is necessary if the salutary purposes of the 'fraud-on-the-market' theory are not to be gutted, for it is likely that many investors rely upon information digested by others and not simply on the market."78 The Rand court stated that:
[I]f the explicit or implicit dissemination of a defendants' statements by third parties constitutes a source of liability under the fraud-on-the-market theory, statements by third parties should also be assessed to determine the materiality of a defendant's statements or omissions. As the Court of Appeals for the Fourth Circuit said, the "presumption that the market price has internalized all publicly available information cuts both ways." While statements made by corporate insiders may be accorded greater weight then those of third parties, the essence of this defense is that the source of information is not dispositive of the issue of liability.79
The Rand court analyzed certain company statements regarding competition and stated they could not be viewed in isolation.80 Citing twenty reports published over eight months, the court found that seventeen of them explicitly discussed competition and cited four analyst reports and an article in the Wall Street Journal.81 The court held that, regarding the impact of competition, the case before it was similar to Apple, and "no reasonable jury could find that additional disclosures by Cullinet would have had any material impact upon the total mix of information available to a reasonable investor on the issue of competition."82
Arguably such an analysis necessarily blurs the line between an assessment of reliance and of materiality, or at least acknowledges the overlapping nature of the inquiry. However, it is clear that an investor cannot be held to have relied, impliedly, on immaterial information. It could be argued that an assessment of materiality in the context of fraud-on-the-market reliance is colored by the fact that the impersonal market tangibly reflects materiality inasmuch as an issuer's stock price may be affected. This provides an allegedly demonstrable measurement of the total-mix test outside and separate from a court's assessment of a hypothetical reasonable investor's view of such information having significantly altered the total mix. Thus, a clear demonstration that the market price was not affected by the alleged misstatements may aid in successfully asserting such a defense. The Third Circuit recently cited approvingly to fraud-on-themarket in general and found it to be undisputed in the case before it because the plaintiffs met the burden of alleging that the "[s]tock in question traded on an open and efficient market,"83 In a later discussion regarding the materiality of certain information, the court held that because the release of the information did not affect the company's stock price, the information in question was not material.84
The availability of information to the market prior to the making of alleged misleading statements has been held to be a contributing factor in finding that there is sufficient truth on the market. In one court's analysis of the effect of certain analyst and press reports regarding a delay in getting a product to the market, the court stressed that such information was publicly available prior to certain of the defendants' statements.85 The court felt that because this information had already entered the market, the facts allegedly omitted by defendants in a press release would already have been reflected in the stock's price.86
Analyst reports may be the most helpful source of information since they are often the most detailed coverage of the specific risks that an issuer faces and are often relied upon by market participants when buying and selling an issuer's stock. Certain courts have emphasized, in their analysis of the available evidence supporting truth on the market, the important role that analyst and other reports play in asserting such a defense. The Steiner v. Tektronix, Inc.87 court inserted into its decision excerpts from analyst reports by Shearson Lehman, Fahnestock, First Boston, Dain Bosworth, and Piper Jaffray, and news reports from the Wall Street Journal and The Business Journal.88 The court held that the undisputed evidence showed that these accounts chronicled the company's troubles in detail and that the plaintiffs' evidence would not cause a "reasonable juror to find that a reasonable investor would view information allegedly withheld by defendants as significantly altering the total mix of information available to investors."89
A defendant's motion for summary judgment was granted in Wells v. HBO & Co. where it was found that, in relevant part, "the contemporary statements of analysts may indicate that the market possessed accurate information. "90 In Wells, the plaintiffs: point[ed] out that some analysts... had different opinions about certain information released by HBO [and argued that] [a]ny divergence of views between analysts... demonstrates the lack of clear disclosure by the Company as to the effects on the financial results, and the underlying economics, of the discounting practice (at issue].91
The court cited Apple for the proposition that not all participants in the market need to have all relevant information.92 The court held that the market, because of reporting by analysts, understood "the obvious: that if HBO recognized all its revenues from discounted SA's immediately upon discounting, HBO would not be reporting those revenues later. Because the market clearly understood this effect, this effect of discounting did not deceive the market nor misrepresent Defendant's finances."93
In another important decision, the Ninth Circuit, in affirming a lower court's decision to grant summary judgment, cited analyst reports stating that new products would hurt demand for older, less technologically-advanced products.94 The district court's decision in that case supplies some of the factual details not set forth in the appellate decision.95 Liability was claimed for certain alleged misrepresentations in defendants' prospectuses.96 The plaintiffs asserted, among other things, that defendants did not disclose the existence of a "trend" of declining sales of certain products.97 The defendants countered by stating that one prospectus described 1983 as a transition year and that the "transition to new products... presented a 'substantial marketing' risk."98 The court noted that securities analysts recognized this transition even before that prospectus came out, having stated that a product line was going to be replaced and that anticipation of new products might cause major new customers to wait for them to arrive, instead of ordering from the old product line.99 The district court went on to note that there were several other analyst reports that also noted similar risks.100 Thus, specific disclosure by third-party sources of information served at least to buttress a defendant's assertions that the market was already aware of the risk. A large quantity of analyst reports may sometimes be sufficient,101 but the content of those reports must directly address the information allegedly concealed or misrepresented by the issuer in its disclosures. 102
The court in Seagate II admonished the reader not to read the decision as setting forth a framework in which a defendant could never prevail on a truth-on-the-market defense on summary judgment, and cited to the sufficiency of the twenty news accounts in Apple and the sixty analyst reports and articles in In re Convergent Technologies Sec. Litigation 103 The court in Kaplan described mostly positive coverage in general market estimates and general articles. 104 However, the court held that a genuine issue of fact remained whether cautionary information was "transmitted to the public with a degree of intensity and credibility sufficient to effectively counterbalance [defendants'] allegedly misleading statemqnts."105 This court found that the negative articles were not as numerous as the "at least" twenty articles cited in the Apple decision that were from Business Week and The Wall Street Journal and cited specific problems with a new computer. 106 By contrast, the court also stated that a significant number of the articles in the case at bar came from "obscure" sources and "only a few mentioned specific problems. " 107
In another decision, even though a company submitted extensive evidence of coverage in the general media and by analysts of the risks of the company's business, and the plaintiffs countered with apparently many fewer such reports contradicting defendants' reports, a court in the Northern District of California stated that the evidence provided no basis for determining "what information credibly entered the market, and shows merely what individual market observers knew."108 Besides various information that one company itself made about certain risks it faced, the district court in Convergent stated that defendants had submitted sixty-three research reports and articles which analyzed the issuer's "business, products, strategy, and competitive environment."109 These analysts "reported on the continuing pressure on Convergent's margins, resulting from price concessions, . . . competitive product offerings, and the anticipation of ... new ... workstations." 110 The district court then detailed certain representative statements made by such analysts.111 The court stated that the defendant argued that these statements were part of the "total mix" of information and must be considered in a "fraud on the market." 112
A distinction has also been drawn between reports that supplement disclosure made by an issuer and those that contradict statements made by the issuer. The plaintiffs in Convergent cited In re Western Union for the proposition that some curative information available to the public does not eliminate alleged misrepresentations. 113 The court, however, stated that the case before it was not where misrepresentations needed to be corrected and that investors were not going to wonder who to believe-the issuer or the analysts. 114 Instead, the court felt that the statements supplemented risk disclosures already made by the issuer. 115 The court did not feel that the issuer was attempting to discount the analyst reports. 116
The defendants in In re Regeneron Pharmaceutical Securities Litigation contended that their public statements were not misleading because full disclosure of its drug's side effects were made by a doctor at a medical conference. 117 The court stated that "in determining whether adequate disclosure of material facts has been made, a court must consider information 'reasonably available to the shareholders."' 118 The court found that none of the company's "filings, reports, press releases or other widely disseminated documents... disclosed the seriousness of the drug's side effects."119 The defendants contended that the medical conference was "heavily attended by securities analysts."120 The court in Regeneron held that a "factual question remained whether the truthful information entered the market place to sufficiently cure any misleading statements."121
When information is present in the market and demonstrably affects the price of a security, a case could be made that, no matter what its source, such information should reasonably be considered in assessing the legal liability that may be imposed on an issuer due to its own omissions or misstatements. It appears obvious that in any cogent fraudon-the-market analysis, statements coming from such potentially self-interested parties as issuers of stock must be balanced by the inclusion of other, possibly less-biased, thirdparty information. Also, it appears that, in practice, the active market pricing decisions of a security do not await a court's later assessment that issuer information is in fact biased or just plain wrong. Some stocks are well-covered by the media and investment analysts and, at least for these companies, efficiency may demonstrably obtain.122 Issuers awash in this sea of information even derive possible liability for such third-party statements.123 Therefore, investors should correspondingly have the responsibility to take into account all information reasonably available, including information widely available over the Internet.
When analyzing how information in the marketplace plays a role in assigning liability to issuers of stock, such information must first be traced to its source. A determination should be made as to whether interested parties, on the long or the short side, might have incentive to skew or distort that information. Investors may already discount stock prices for the effect of information from potentially biased sources, such as issuers, especially when credible and well-followed, third-parties' Internet information sources exist and are, in fact, providing the allegedly omitted contradictory or "more complete" information.
The recognition of the benefit to issuers, in assessing securities law liability, of third-party supplementary disclosure, the effect of which could be to foster issuer information flow to such parties, is laudable and appropriate. Such a theory acknowledges that issuer information disclosure can and does come from many sources. Issuers should, in certain circumstances, have the benefit of the effect that at least noncontradictory third-party information present in the marketplace may have vis-a-vis issuer securities law liability. This may be especially valid when an issuer's stock prices have historically been affected not only by the information it discloses, but by especially credible and uncontradicted information relevant to securities pricing, whatever the source.
As we have seen, an assessment of the credibility of third-party information, including the source's neutrality or lack thereof, and the extent, ie., intensity, of the information's dissemination into the information marketplace are several factors in assessing the securities law liability of an issuer. Such an analysis is closely based on the real-world behavior of actual market participants intended to be benefited by regulation, both investors and issuers alike. However, as can be seen by the case law, fraud-on-themarket has been treated as something more than a rebuttable presumption after Basic and Apple. 124 Rebuttal evidence consisting of news and analyst reports containing information about an issuer's current state of affairs that actually contradicts an issuer's previous and contemporaneous, or lack thereof, disclosures, i.e., truth-on-the-market, has been treated with various levels of deference by courts around the country.125 Additionally, quite a few courts appear to require a fairly substantial amount of counterbalancing reports that specifically address the subjects covered by the alleged misrepresentations or omissions, especially in the summary judgment context. 126 There appears to be a much higher likelihood of success for defendants when they use the truthon-the-market theory to attack the materiality of the alleged misrepresentations or omissions and ignore the theory's alleged utility as a defense to reliance. 127
In the bracing new information environment of the Internet and its World Wide Web, the amount and availability of issuer information has increased exponentially. Fortunately, although there are still growing pains, such information is now often organized and accessible in a fairly logical and easy-to-use way. An assessment of the impact of third-party issuer information on the Internet should be guided by similar standards as those utilized by the courts in the truth-on-the-market cases where information is in paper form. The only difference between these media is the form of distribution: the publicly accessible Internet, as opposed to the less-accessible newsstand, subscription, or proprietary electronic database modality.
The question of how widespread such information is disseminated may be problematic regarding Web-based information. When a simple search of an issuer's name on one of the widely-recognized search engines returns an extensive number of references to a company, but not the extent to which such information has been accessed by investors, the problem is highlighted.128 There is, at first blush, a certain "equality of dissemination" of information on the Internet, because a widespread search will turn up an extensive list of information sometimes apparently listed in no particular order of importance, relevance, or breadth of dissemination. 129 Nonetheless, third-party supplied, material information listed far down a search result list of thousands may not have the same market effect as that with demonstrably extensive usage.
A comparison of distribution breadth of financial magazines, for instance, although arguably complicated by the availability on proprietary electronic databases, thus could be seen as being more easily analyzed under the "dissemination" prong than the publicly available information retrievable through Web search engines. The plethora of free, Webbased financial Websites that provide not only stock quotes, but also links to third-party news sources and other relevant company information, may provide a "gatekeeper" role, the assessment of which helps solve that analytical problem, at least for those sources included on the larger, more extensively accessed financial portal Websites. 130
One source of the extent of Web site access is the information supplied by Web counter software. This software counts the number of times a Web page is accessed and how often specific information is accessed.131 Unfortunately, in the absence of the voluntary production of such information by third-party providers of Websites, a court may have to get involved in compelling the production of such information. Additionally, the extent to which information is passed along from investor to investor in e-mail or via chatrooms is difficult to measure, although arguably a measure of the breadth of market dissemination.
Determining a framework for the analysis of the "credibility" prong also seems an intractable problem, but it may also have a resolution. Issuer information on the Web comes from an incredible myriad of sources, all with widely varying levels of credibility, and assessable, in part, only by more complete identification of sometimes obscure sources. An analysis of the credibility of the Web-based information provider could include, among other things, an assessment of the extent to which such pages are cited or linked to by both purely Web-based and Web versions of paper forms of financial media, a determination which could be made by searching both the Web and propriety electronic databases. 132 Additionally, certain sites could be deemed more credible, if not necessarily as widely accessed as other Intemet-only sites, if they are branded with the same name as a paper version. Thus, the Forbes, Barron, or Money magazine Websites 133 could be assessed as having a similar level of credibility as their paper versions, and thus of more potential effect on the market price of an efficiently traded security, as opposed to sites that have no comparable, real-world doppelganger.
The actual identification of original sources of information on the Web may also be problematic sometimes, especially in the context of the proliferation of bulletin boards and chat rooms dedicated to specific issuers and general business discussions, 134 and the deliberately fraudulent promotional activities brought to light by recent SEC enforcement actions.135 The anonymity of the participants of such forums and their often grandiose claims of insider sources might, to some, support an almost irrebuttable presumption that such information can never be "truth" on the market. Nonetheless, the comments of such participants may reach such a consistency in terms of the nature of the industry or company-specific risks to an issuer asserted and the redundant and repetitious manner in which they are posted, that such information may, in fact, reach and be incorporated into market participants' assessment of the ongoing value of the securities of an issuer. This type of recurrent presence of "truth," which may, in fact, be false and misleading, should be distinguished from other types of posts to such boards. In the sometimes speculative and volatile nature of trading inherent in thinly-traded (especially Internet company) securities, such volatility is possibly enhanced by the froth and hype often present in those forums, and actual stock prices appear to sometimes be affected, albeit on a sometimes short-term basis. 136 It must be stressed that fraud-on-the-market obtains, and thus, truth-on-the-market is only available as a defense where an efficient market exists. 137 Such a market may not exist in illiquid issues whose trading behavior evidences a possibility of manipulation such as scalping and "painting the screen,"138 or a naivete on the part of that stock's shareholder population, short-term though it might sometimes be.
Additionally, it should be understood that the potential benefit of third-party sources of information does not mean that issuers should now rush out to hyperlink their home pages to such sources. Such hyperlinking may give rise to a court finding that such hyperlinks mean that the issuer has adopted such information as its own and is therefore liable for material misstatements and omissions in such third-party sources. 139 Finally, it appears that a newly-revitalized, Web-based version of truth-on-the-market might implicate the formation of a moral hazard in the current regime of SEC-mandated disclosure, inasmuch as certain companies might be incentivized and encouraged to reduce adverse disclosure if they begin to receive the benefit of efficiently disseminated, third-party generated, adverse information.
Although there has been much analysis by the lower courts regarding the truth-onthe-market defense to the fraud-on-the-market presumption of reliance, it appears that there is little uniformity in the various courts' approaches, and little guidance is provided regarding Internet sources of information. Nevertheless, an evolution of the law is to be expected, given the relatively recent, massive growth in impersonal, international market mechanisms and the recent explosion in information liquidity on the Internet's World Wide Web.
1. Whirlpool Financial Corp. v. GN Holdings, Inc., 67 F.3d 605,610 (7th Cir. 1995).
2. 15 U.S.C. 77a-77mm (1996) (amending the Securities Act of 1933); 15 U.S.C. 78a-78kk (1996) (amending the Securities Exchange Act of 1934). The U.S. federal securities regulatory regime is built on a cornerstone of mandated disclosure, both in registration statements for the offer and sale of securities and continuing reporting documents filed with the SEC, of information relating to the company and the securities outstanding. This information includes facts about the company, its officers and directors, and certain types of risk and accounting disclosure. For an overview of the types of information required, see HAROLD S. BLOOMENTHAL, HOLmE ROBERTS & OWENS, SECURITIES LAW HANDBOOK 529-56 (1997).
3. Search EDGAR Archives (visited Sept. 15, 1999)
4 17 C.F,R Sec. 249.310 (1996) (Form 10-K Annual Report).
5. Information Outside of Financial Statements 7 Fed. Sec. L. Rep. (CCH) 173,191, at 73,193 (June 7, 1989); see also 17 CY.R. 249.308 (19%) (regarding 8-K current event disclosures).
6. See, eg., Intel Corporation
7. See, eg., Yaboo
8. See, e.g, The Securities and Exchange Commission
9. See, eg., Yahoo Chat
10. CommerceNet, Women Shoppers Head to the Web in Force as the Number of Internet Buyers Jumps 40% in Nine Months (visited Oct. 31, 1999)
11. 24% of the respondents to the survey used the Web on a daily basis to access financial information (44% on a weekly basis). GVV's 10th WWW User Survey, Internet Shopping (Oct- 1998) (visited Nov. 30, 19,99)
12, GVV's 10th User Survey, supra note 11.
13. Ronald J. Gilson & Reimer H. Kraakman, The Mechanisms of Market Efficiency, 70 VA. L, REv. 549 (1984) (detailing fundamental aspects of the market efficiency theory).
14. Lynn A. Stout, Are Takeover Premiums Really Premiums? Market Price, Fair Value, and Corporate Law, 99 YALE LJ. 1235, 124041, n.32 (1990) (citing Gilson & Kraakman, supra note 13, at 549) (explaining certain practical policy considerations underlying the efficient market theory).
15. Stout, supra note 14.
16, Id. at 124344.
17, 485 U.S. 224, 246-47 (1988). For such commentary regarding the efficient market theory, see, for example, Brad M. Barber et al., The Fraud-on-the-Market Theory and the Indicators of Common Stocks' Efficiency, 19 J@ CORP. L. 285 (1994); Jack A. Newman et al., Basic Truths: The Implications of the Fraud-onthe-Market Theory for Evaluating the "Misleading - and "Materiality - Elements of Securities Fraud Claims, 20 J. CORP. L. 571 (1995); L. Brett Lockwood, Comment, The Fraud-on-the-Market Theory: A Contrarian View, 38 EMORY L.J. 1269 (1989); Robert G. Newkirk, Comment, Sufficient Efficiency: Fraud on the Market in the Initial Public Offering Context, 58 U. CHI. L. REv. 1393 (1991); Zachary Shulman, Note, Fraud-on-the-Market Theory After Basic v, Levinson, 74 CORNELL L. REv. 964 (1989).
18, 15 U,S.C. 17j (1996). Section 10(b) makes it unlawful for any person, directly or indirectly, in interstate commerce, through the mails, or through a national securities exchange, to use or employ in connection with the purchase or sale of any security "any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors," 17 C.F.R. 240.10b-5 (1996).
19. Id. Rule lOb-5 also makes it unlawful for "any person, directly or indirectly ... (in interstate commerce or the mails or any national exchange] . . . to employ any device, scheme or artifice to defraud... or , . . to engage in any act, practice, or course of business which Operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sake of any security," Id.
20. Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 474-76 (1977) (indicating the types of conduct for which Rule lOb-5 was intended to create liability).
21 17 C.F.R. 240.10b-5(b).
22. Scienter is a "mental state embracing intent to deceive, manipulate or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976), rehg denied, 425 U.S. 986 (1976). Scienter may be proven by evidence that a defendant's actions presented "a danger of misleading buyers or sellers that [was] either known to the defendant or [was] so obvious that the [defendant] must have been aware of it." In re Software Toolworks Sec. Litig., 50 F.3d 615, 626 (9th Cir. 1995).
23. Huddleston v. Herman & MacLean, 640 F.2d 534, 543 (5th Cir. 1981), rev'd on other grounds, 459 U.S. 375 (1983).
24. Basic Inc. v. Levinson, 485 U.S, 224, 231-32 (1988) (citing TSC Indus. v. Northway, 426 U.S. 438, 449 (1976)). The Supreme Court in TSC Industries analyzed materiality in the context of a proxy statement. It has been noted that this formulation "has become the preferred judicial standard for determining whether misstated or omitted facts are material." BLOOMENTHAL, supra note 2, at 795. The Supreme Court, in Basic, analyzed materiality in the context of merger negotiations and the Court took pains to indicate that it was not addressing "other kinds of speculative information." Basic, 485 U.S. at 232.
25. Basic, 485 U.S. at 238 (quoting SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2d Cir. 1968)). The Supreme Court in Basic felt that it was necessary to add this test because the "total mix" test could not be applied in a "straightforward" manner in the merger context; see BLOOMENTHAL, supra note 2, at 805.
26. In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 267 (2d Cir. 1993) (finding that an investor's preference for certain types of information does not mean that information must be disclosed by an issuer).
27. Glazer v. Formica Corp., 964 E2d 149, 157 (2d Cir. 1992) (noting a difference between the concept of materiality and the duty to disclose such information in the course of exploration of merger or leveraged buy out possibilities).
28. See In re Abbott Lab. Sec, Litig., 813 F. Supp. 1315, 1319 (N.D. 111. 1992) (holding that no duty exists to update statements that are not forward-looking); In re Convergent Techs. Sec. Litig., 948 F.2d 507, 516 (9th Or. 1991) (holding that an issuer's previous risk disclosures regarding its ability to manufacture a new product were sufficient to release a company from a duty to update the public on the progress of the factory's retooling).
29. Basic, 485 U.S. at 247; see also supra Part 11. R.
30. Basic, 485 U.S. at 247.
33. Id. at 24142 (citing Peil v. Speiser, 806 F.2d 1154, 1160-61 (3d Cir. 1986) (affirming the district court's directed verdict on a claim of individual misstatements or omissions and its judgment on a jury verdict for the defendants on claims of a scheme to defraud).
34. In re Phillips Petroleum Sec, Litig., 738 F. Supp. 825, 835 (D. Del. 1990) (citing Zlotnick v. TIE Communications, 836 F.2d 818, 822 (3d Cir. 1988)).
35. Phillips, 738 F. Supp. at 836 (citations omitted); see also Zlotnick, 836 F.2d at 822.
36. Bell Atlantic Sec. Litig., [1997 Transfer Binder] Fed. Sec. L. Rep. (CCH) Tj 99,467, at 97,110 (E.D. Pa. 1997) (citing Weiglos v. Commonwealth Edison, 892 F.2d 509 (7tb Cir. 1989)); see also Associated Randall Bank v. Griffin, Kubik, Stephens & Thompson, Inc., 3 F.3d 208, 213 (7th Cir. 1993); Rand v. Cullinet Software, Inc., 847 F. Supp. 200,206-07 (D. Mass. 1994).
37. Basic, 485 US. at 24&
39. In re Apple Sec. Litig, 886 F.2d 1109,1116 (9th Cir. 1989) (affirming in part and reversing in part the trial court's grant of the defendants' motion for summary judgment).
40. Id. at 1115.
42, Id (citations omitted).
43. In re Taxable Municipal Bonds Litig, Civ. A. No. MDL 863,1994 WL 532079, at *3 (E.D. La. Sept. 26.1994).
45. In re Seagate Tech. 11 Sec. Litig., 802 F. Supp. 271, 274 (N.D. Cal. 1992) (citing the dissent in Basic Inc. v. Levinson, 485 U.S. 224, 256 n.7, in which Justice White notes that "rebuttal is virtually impossible in all but the most extraordinary case," and Apple, 886 F.2d at 1116, in which the court stated that the market "could not have been more aware of [the] risks").
46. Seagate, 802 F. Supp. at 277.
47. Apple, 886 F.2d at 1115.
48. In re Western Union Sec. Litig., 120 F.R.D. 629 (D.N.J. 1988).
50. Id. at 638.
53. Basic v. Levinson, 485 U.S. 224,247 (1988).
54. Western Union, 120 F.R.D.at639.
55. Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976).
56. Cooke v.Manufactured Homes, Inc., 998 F.2d 1256, 1259,1261-62 (4th Cir. 1993) (reversing, in part, a trial court's grant of summary judgment).
57. Id. at 1263.
58. Associated Randall Bank v. Griffin, Kubik, Stephens & Thompson, Inc., 3 F-3d 208, 210-12 (7th Cit. 1993) (reversing the trial court's grant of the defendant's motion for summary judgment).
59. Kaplan v. Rose, 49 F.M. 1363 (9th Cit. 1994).
60. Id. at 1376 (reversing in part and affirming in part the lower court's grant of the defendants' summary judgment motion).
61. Id. at 1376-77.
62. Zd at 1377
63. In re Synergen, Inc. Sec. Litig., 863 F. Supp. 1409, 1421 (D. Colo. 1994) (denying the defendants' motion for summary judgment).
65. In re Taxable Municipal Bonds Litig., Civ. A. No. MDL 863, 1994 WL 532079, at *5 (E.D. La. Sept. 26, 1994) (denying the defendants' motion for summary judgment) (citing In re Seagate Tech. II Sec. Litig, 802 F. Supp. 271, 275-76 (N.D. Cal. 1992)).
66. Seagate 11, 802 F. Supp. at 275-76. 67. Id.
68. Taxable Municipal Bonds, 1994 WL 532079, at *4. 69. Id.
70. See Basic v. Levinson, 485 U.S. 224,248 (1998).
71. Rand v. Cullinet Software, Inc,, 847 F. Supp. 200,206(D. Mass. 1994). 72. 99$F.2d 1256,1262(4th Cir.1993)
73. 4 F.3d 286, 289 (4th Cir. 1993). 74. 3 F.3d 208, 213-14 (7th Cir. 1993). 75. 4 F.3d 610, 613 (8th Cir. 1993). 76. Rand, 947 F. Supp. at 206:
77. Id. 78. Id.
79. Id. at 207 (citations omitted). 80. Id. at 209.
81. Rand, 847 F. Supp. at 209.
82. Id. (citing Cooke v. Manufactured Homes, Inc., 998 F-2d 1256, 1262 (4th Cir. 1993) (stating that the market "was so overwhelmed with [pertinent] information . - . that no reasonable trier of fact could conclude otherwise")).
83. In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1419, n.8 (3d Cir. 1997) (granting a defense motion to dismiss).
84. Id. at 1425.
85. In re Tseng Labs Sec, Litig., 954 F. Supp. 1024, 1029 (E.D. Pa. 1996) (granting the defendants' motion for summary judgment by, in part, analyzing materiality in the context of information already in the marketplace and alleged omissions of material facts).
86. Id. (citing In re Apple Sec. Litig., 886 F.2d 1109, 1114 (9th Cir. 1989)). 87. Steiner v. Tektronix, Inc., 817 F. Supp. 867 (D. Or. 1992).
88. Id. at 880-82 (granting a defendants' motion for summary judgment). 89. Id. at 882.
90. Wells v. HBO & Company, Civ. A. No. 1:87-CV-657A-JTC, 1994 WL 228842, at *8 (N.D. Ga. Apr. 19, 1994), affd, 67 F.3d 314 (11 th Cir. 1995) (citing Capri Optics Profit Sharing v. Digital Equip. Corp., 760 F. Supp. 227, 232 (D. Mass. 1991)); see also In re Convergent Tech. Sec. Litig., 721 F. Supp. 1133, 1138-39 (N.D. Cal. 1988).
91. Wells, 1994WL228842,at*9n.8. 92. Id. (citing Apple, 886 F.2d at 1114). 93, Wells, 1994 WL 228842, at *9.
94, In re Convergent Tech. See. Litig., 948 F.2d 507, 513 (9th Cir. 1991).
95. In re Convergent Tech. Sec. Litig., 721 F. Supp. 1133, 1135-39 (N.D. Cal. 1988). 96, Id,
97. Id.atl]35. 98. Id. at 1136.
99. Id. (citation omitted).
100. Convergent, 721 F . Supp. at It 36. 101. Id.
102. See, e.g., In re Seagate Tech. It See. Litig., 802 F. Supp. 271, 276 (N.D. Cal. 1992).
103. Id. 104. Id.
105. Kaplan v. Rose, 49 F.3d 1363, 1377 (9th. Cir. 1994) (quoting In re Apple Computer Sec. Litig., 886 F.2d 1109, 1116 (9th Cir. 1989)).
106. Kaplan, 49 F.3d at 1377 (citing Apple, 886 F.2d at 1116).
107. Kaplan, 49 F.3d at 1377 (citing Apple, 886 F.2d at 1116, in which the court stated that it was not enough to refute fraud-on-the-market theory when omitted information has received only brief mention in a few poorly circulated or lightly-regarded publications),
108. In re Seagate Tech. 11 Securities Litigation, 802 F. Supp. 271, 276 (NID. Cal. 1992) (denying defendants' motion for summary judgment without prejudice).
109. In re Convergent Tech. Sec. Litig., 721 F. Supp. 113 3, 1138 (N.D. Cal. 1988).
110. Id. III. Id. 112. Id. 113. Id.
114. Convergent,721 F.Supp.atI 138-39, 115. Id.atII39.
117. In re Regeneron Pharm. See. Litig., [1995 Decisions] Fed. Sec. L. Rep. (CCH) $ 98,637, at 91,912 (S.D.N.Y. 1995) (denying a defendants' motion for summary judgment).
118. Regeneron, [1995 Decisions] Fed. Sec. L. Rep. (CCH) at 91,912 (citing United Paperworkers Int'l. Union v. International Paper Co., 985 F.2d 1190, 1198 (2d Cir. 1993), which rejected a claim that "total mix" included a 10-K report not distributed to its shareholders).
119. Regeneron, [ 1995 Decisions] Fed. Sec. L. Rep. (CCH) at 91,912. 120, Id. at 91,912-13.
121. Id. at 91,90 (citing Breard v. Sachnoff & Weaver, Ltd., 941 F.2d 142, 144 n.3 (2d Cir. 1991) (stating that a question as to "[w1hether the subsequent disclosure ... in the supplemental offering memorandum 'cured' the original omission is one of fact that should not be resolved an the pleading.")).
122. In fact, the SEC, in its recent Aircraft Carrier Release, admitted as much by proposing possible reduced registration statement disclosure for larger "seasoned issuers" who are well-covered by analysts, and stating that price discovery is demonstrably more efficient in these types of issuers. The Regulation of Securities Offerings, 63 Fed. Reg. 67,174, 67,185 (1998) (to be codified at 17 C.F.R. pts. 200, 202, 210, 228, 229, 230, 232, 239, 240 and 249) (proposed Nov. 3, 1998).
123. See generally Robert Norman Sobol, The Tangled Web of Issuer Liability for Analyst Statements: In Re Cirrus Logic Securities Litigation, 22 DEL. J. CoRp. L. 1051, 1073-80 (1997) (analyzing the evolution of the adoption and entanglement doctrines and noting the SEC's position that might be interpreted to mean that Web hyperlinks may be included in the "electronic envelope" delivering prospectuses).
124. See supra text accompanying notes 43-45. 125. Id.
126. See supra text accompanying note 60. 127. See supra text accompanying note 56-65.
128. A simple search for IBM on the Yahoo Web search engine
130. See supra note 7 (examples of financial Websites).
131. Eg., Web Counter, a Web-based service that trucks usage of Web pages by counting the number of times Web pages have been accessed
132. Such proprietary databases include Lexis-Nexis and Westlaw. 133. See supra note 7.
134. See supra note 9.
135. See SEC Conducts First Ever Nationwide Internet Securities Fraud Sweep, Charges 44 Stock Promoters in 23 Enforcement Actions (last modified Oct. 28, 1998)
136. Id, A recent report issued by a commissioner of the Securities and Exchange Commissions analyzing the regulatory environment surrounding on-line trading and recommending certain approaches to the challenges presented by it, cited to a draft study by a University of Michigan Business School professor into the effects of postings on on-line discussion forums which found a strong positive correlation between overnight message postings and next-day trading volume and stock price volatility. See Laura S. Unger, On-Line Brokerage: Keeping Apace of Cyberspace," (last modified Nov. 22, 1999)
PETER D. WYSOCKI, CHEAP TALK ON THE WEB: THE DETERMINANTS OF POSTINGS ON STOCK MESSAGE
BOARDS (Univ. of Mich. Working Paper No. 98025, 1998), available at taf?ABSTRACT_ID= 160170>). 137. See supra notes 13 and 14 and accompanying text. 138. "Painting the screen" is a coordinated practice of daytraders where a large number of trades are generated in a short period of time so as to "paint the screen" of a list of prices of the securities as displayed to investors on a computer screen and to attempt to influence the price of a security upward or downward by misleading other investors into thinking there is "real" investor activity. 139. See supra note 123 and accompanying text. [Author Affiliation] Robert Norman Sobol* [Author Affiliation] * The author is an attorney with the law firm of Morgan, Lewis & Bockius, LLP in Philadelphia. The author would like to thank his wife Linda, his mother and father Alice and Norman, and his daughters Stephanie, Rachel, and Lauren, for their patience and understanding. The views expressed herein are solely those of the author and do not in any way express the views of the attorneys of Morgan, Lewis & Bockius, LLP or other attorneys in that firm.
137. See supra notes 13 and 14 and accompanying text.
138. "Painting the screen" is a coordinated practice of daytraders where a large number of trades are generated in a short period of time so as to "paint the screen" of a list of prices of the securities as displayed to
investors on a computer screen and to attempt to influence the price of a security upward or downward by misleading other investors into thinking there is "real" investor activity.
139. See supra note 123 and accompanying text.
Robert Norman Sobol*
* The author is an attorney with the law firm of Morgan, Lewis & Bockius, LLP in Philadelphia. The author would like to thank his wife Linda, his mother and father Alice and Norman, and his daughters Stephanie, Rachel, and Lauren, for their patience and understanding. The views expressed herein are solely those of the author and do not in any way express the views of the attorneys of Morgan, Lewis & Bockius, LLP or other attorneys in that firm.…