One way to rebut the fraud-on-the-market theory is to demonstrate that the alleged misrepresentations could not have affected the market price of the stock because the truth of the matter was already known to investors. The “truth-on-the-market” defense is fact-specific, and courts have only rarely found it to be an appropriate basis for dismissing a securities fraud complaint for failure to adequately plead that the alleged misrepresentations were material.
As the court in White v. H.R. Block, Inc., 2004 WL 1698628 (S.D.N.Y. July 28, 2004) recently noted, however, “‘rarely appropriate’ is not the same as ‘never appropriate.'” In that case, the plaintiffs alleged that H.R. Block had concealed important facts about more than 20 class action lawsuits filed against the company over its refund anticipation loan program. The court found that the “litigation involved public lawsuits brought by public filings in public courts, and the litigation was the subject of extensive press coverage . . . as well as press releases and SEC filings from Block itself.” Not surprisingly, the court rejected the plaintiffs’ argument that this information did not enter the market with sufficient intensity to counter-balance any alleged misrepresentations. “In short, the truth was all over the market.”
Holding: Motion to dismiss granted with prejudice.
Quote of note: “Plaintiffs claim that investors should not be obligated to ‘scour county court houses across the country.’ But, as defendants point out, the market is comprised of more than ordinary investors; it is also comprised of market professionals, such as Avalon, and Avalon apparently had little trouble scouring those courthouses to gather information for its report on the RAL litigation which sparked this lawsuit against Block.”