In Basic Inc. v. Levinson, which statement best describes how reliance can be established under fraud-on-the-market theory?

• A. The plaintiff must prove the defendant acted with scienter.
• B. The defendant can rebut the presumption of reliance by showing the material misrepresentation did not actually have an effect on the stock price.
• C. Reliance cannot be presumed in securities cases.
• D. The misrepresentation must be contemporaneous with the sale.

Answer: (B)

In fraud-on-the-market, public stock price reflects all publicly available information, so investors who traded in the market rely on the integrity of that price. This creates a presumption of reliance for plaintiffs in a class action. But that presumption is rebuttable: the defendant can show that the misrepresentation did not actually affect the stock price. If the price wasn’t moved by the misrepresentation, the basis for presumed reliance collapses, and individual reliance would need to be shown in another way. While scienter is a separate element required for a 10b-5 claim, the idea here is about establishing (or rebutting) reliance through the market-price mechanism.