Legal Definitions - fraud-on-the-market principle

Definition: The fraud-on-the-market principle is a legal doctrine that allows a plaintiff to establish reliance on a misstatement about a security's value without proving actual knowledge of the fraudulent statement. This is possible if the stock is purchased in an open and developed securities market. The doctrine recognizes that the market price of an issuer's stock reflects all available public information. The presumption is rebuttable.

Examples: If a company makes a false statement about its financial health, investors who purchased the company's stock in an open and developed securities market can sue the company for securities fraud. They can use the fraud-on-the-market principle to establish reliance on the false statement without proving that they knew the statement was false. The presumption is that the investors relied on the market price of the stock, which reflected the false statement. The company can rebut this presumption by showing that the investors did not rely on the false statement.

Explanation: The fraud-on-the-market principle is a legal tool that helps investors seek compensation for securities fraud. It recognizes that investors rely on the market price of a stock to make investment decisions. If a company makes a false statement that affects the stock price, investors who purchased the stock can sue the company for securities fraud. The fraud-on-the-market principle allows them to establish reliance on the false statement without proving that they knew the statement was false. This makes it easier for investors to seek compensation for securities fraud.