Truth On The Market

If the market were aware during the class period of the allegedly omitted information, could the investors later argue that they were defrauded? Some courts have declined to consider a “truth on the market” defense raised as part of a motion to dismiss because it presents factual issues. Other courts, however, have been willing to examine public documents available to investors and conclude that any failure on the part of the defendants to disclose material information was excused by its availability from other sources. Two recent decisions have taken the latter approach and dismissed securities fraud claims.

In Ley v. Visteon Corp., 2006 WL 2559795 (E.D. Mich. Aug. 31, 2006), the court considered whether claims based on “Visteon’s Ford-related operational issues” should be dismissed because these issues were discussed in analyst reports and newspaper articles during the class period. Although the plaintiffs argued that a truth on the market defense would be premature at the motion to dismiss stage of the case, the court disagreed, finding that it could “consider publications by market analysts in determining if the market had sufficient knowledge of Defendants’ various deficiencies.” The court concluded that it was clear from these publications that the market was aware of “Visteon’s inability to shed unprofitable business lines inherited from Ford, high labor costs, price reductions owed to Ford, and general reliance upon Ford.”

Similarly, in In re Discovery Laboratories Sec. Litig., 2006 WL 3227767 (E.D. Pa. Nov. 1, 2006), the court examined whether certain statements related to the FDA-approval process for a drug product were materially misleading in light of the public information available to the market. The court held that the “‘truth on the market’ defense does not require that any investor should be capable of finding the information and understanding its significance based on a single click for a simple Web search.” Instead, the standard is “reasonable investors, those who we can assume exercise due investment diligence.” Based on public reports of facility problems and the widely known fact that the company would need to comply with FDA regulations to obtain approval for the drug, the court found that the alleged misstatements related to those issues were inactionable.

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