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Kaufman v. i-Stat Corp.

165 N.J. 94, 754 A.2d 1188 (2000)

FRAUD; SECURITIES—State law will not recognize the reliance through presumption of a fraud on the market theory in a securities case, leaving such claimants to seek a federal remedy only.

The issue in this case was whether a class of plaintiffs in a common-law action for fraud can prove the element of reliance through the presumption of a fraud on the market theory. The U.S. Supreme Court held in 1988 that under federal securities law, plaintiffs may establish their reliance claim by showing that they purchased securities in the secondary market at attractive prices that had been artificially affected by an issuer’s misrepresentations and omissions. Here, an individual investor purchased 100 shares of a small medical equipment manufacturing concern at $21-3/4 for a total investment of $2,175. Over the next year, negative articles were being written on the company’s financial reporting and the stock price was adversely affected. The investor sold 50 shares at a $1.50 per share loss and subsequently filed suit as putative class representative on behalf of all purchasers of the company’s stock during the previous year. The investor alleged common law fraud and negligent misrepresentation, contending that the company’s deliberately false and misleading statements regarding its financial status and deceptive sales practices inflated the stock price during the class period. The parties stipulated to the following: 1) the investor did not actually or directly receive or rely on any communication containing any misrepresentation . . . nor . . . actually receive or rely on any communication which omitted material facts, 2) the investor purchased her stock through a brokerage firm and did not directly receive or rely on any communication from the brokerage firm regarding the stock purchase, and 3) the investor relied exclusively on the integrity of the market price of the company at the time of her purchase. Based on these stipulations, the investor’s claim for fraud depended entirely on a fraud on the market theory. The lower court dismissed both of the investor’s claims but the Appellate Division reversed the judgment for the claim of common law fraud. The New Jersey Supreme Court granted certification and held that in a common law action for fraud, a plaintiff may not establish the element of reliance on a misrepresentation or omission through the presumption of fraud on the market. The Court recognized that no state in the 12 years since the U.S. Supreme Court accepted the fraud on the market theory had chosen to apply it to claims arising under its own state’s laws. It held that “accepting fraud on the market as proof of reliance in a New Jersey common-law fraud action would undercut the public interest in preventing forum shopping, weaken our law of indirect reliance, and run contrary to the policy direction of the Legislature and Congress. We decline to expand our law regarding satisfaction of the reliance element of a fraud action on the basis of a complex economic theory that has not been satisfactorily proven. In so holding, we note that the investor had available to her an adequate federal remedy perfectly suited to her complaint.”

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