Basic Inc. v. Levinson
United States Supreme Court
485 U.S. 224 (1988)
Basic Inc. (defendant) had merger discussions with Combustion Engineering starting in 1976, but over the next two years made three public statements denying it was engaged in any merger negotiations. Levinson and other former shareholders (plaintiffs), allegedly relying on those denials, sold their Basic stock at prices depressed by the false statements. They brought a class action alleging the statements violated SEC Rule 10b-5. The district court certified the class but granted summary judgment for Basic, finding statements about preliminary merger talks immaterial as a matter of law; the court of appeals affirmed class certification based on the fraud-on-the-market theory but reversed the summary judgment. The Supreme Court granted certiorari on both the materiality standard and the reliance presumption.
Whether a company's statements denying preliminary merger negotiations can be material under Section 10(b) and Rule 10b-5, and whether, under a fraud-on-the-market theory, individual members of a plaintiff class may be presumed to have relied on false statements affecting the company's stock price.