BASIC INCORPORATED, ET AL., PETITIONERS V. MAX L. LEVINSON, ET AL. No. 86-279 In the Supreme Court of the United States October Term, 1986 On Petition for a Writ of Certiorari to the United States Court of Appeals for the Sixth Circuit Brief for the United States as Amicus Curiae TABLE OF CONTENTS Question Presented Statement Discussion Conclusion QUESTIONS PRESENTED 1. Whether a corporation's merger negotiations are material to investors, for purposes of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5, solely by virtue of the corporation having made a statement denying the existence of such negotiations. 2. Whether a plaintiff who traded in a corporation's stock on a securities exchange after the issuance of a materially false statement by the corporation is entitled to a rebuttable presumption that he relied on the integrity of the market price in so trading. This brief is filed in response to the Court's invitation to the Solicitor General to express the views of the United States. STATEMENT 1. This is a class action brought by respondents, former shareholders of Basic Incorporated (Basic), against petitioners, the corporation and certain of its officers and directors (Pet. App. 2a). Respondents claim that they sold shares of Basic stock in a market artificially affected by three allegedly false or misleading public statements made by petitioners in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. 240.10b-5. The first allegedly false public statement, made on October 21, 1977, followed unusual trading activity in the company's stock. Basic released a statement that "'the company knew no reason for the stock's activity and that no negotiations were under way with any company for a merger'." Pet. App. 5a. Respondents claim that when that public statement was issued Basic was in fact engaged in merger negotiations (which ultimately led to a merger) with Combustion Engineering, Inc. (Combustion). See Pet. App. 4a-5a. The second and third allegedly false statements, made on September 25, 1978, and November 6, 1978, stated that Basic's management was "'unaware of any present or pending corporate development(s)'" that would account for a recent upsurge in trading activity in Basic stock. Respondents contend that these statements were false or misleading because Basic in fact continued to be engaged in merger negotiations with Combustion (see Pet. App. 5a-7a). On December 20, 1978, after respondents had sole their shares of Basic stock, allegedly as a result of one or more of the three statements, Basic announced its approval of a tender offer by Combustion to acquire all of Basic's outstanding shares at a price substantially in excess of that at which respondents sold (Pet. App. 8a). The district court certified the action as a class action (Pet. App. 127a). The court stated that the "fraud on the market theory" alleged by respondents permitted reliance by each class member to be presumed and eliminated the need for individual plaintiffs to prove subjective reliance. Based on that determination the court held that class certification was appropriate under Fed. R. Civ. P. 23 because common class issues predominated over individual issues (Pet. App. 119a). Without such a presumption of reliance, the court said, individual issues would so predominate that class certification would not be appropriate (id. at 118a). The district court subsequently granted petitioners' motion for summary judgment (Pet. App. 112a). The court ruled that Basic's second and third statements were false or misleading, /1/ because Basic was engaged in merger negotiations at the time it issued public statements denying the existence of significant corporate developments. But, relying on a modified version of the test for the materiality of merger negotiations announced by the Third Circuit in Staffin v. Greenberg, 672 F.2d 1196 (1982), the court ruled that although they were false the statements were not material and thus did not violate Section 10(b) and Rule 10b-5 (see Pet. App. 101a, 104a). Under the test enunciated in Staffin, as subsequently reaffirmed and refined by the Third Circuit in Greenfield v. Heublein, Inc., 742 F.2d 751 (1984), cert. denied, 469 U.S. 1215 (1985), merger negotiations are not material until an agreement in principle (defined as agreement on price and structure) has been reached. In this case, the district court held that the negotiations were not material because at the time the statements were made, negotiations had not reached the stage where they were "destined, with reasonable certainty," to result in an agreement in principle (Pet. App. 103a). 2. The Sixth Circuit reversed the district court's order granting summary judgment. The court of appeals concluded that all three of Basic's statements were false or misleading and held that, where a corporation issues a statement denying the existence of merger negotiations or other significant corporate developments, "information concerning ongoing acquisition discussions becomes material by virtue of the statement denying their existence" (Pet. App. 13a) (emphasis in original). The court distinguished the present case, where the corporation made false or misleading statements, from situations where a corporation remains silent in the face of a duty to disclose material information. The court stated (id. at 14a-15a) footnote omitted)): In analyzing whether information regarding merger discussions is material such that it must be affirmatively disclosed to avoid a violation of Rule 10b-5, the discussions and their progress are the primary considerations. However, once a statement is made denying the existence of any discussions, even discussions that might not have been material in absence of the denial are material because they make the statement made untrue. /2/ The court below expressly disagreed with the Third Circuit's decision in Heublein. It held that at least where corporate statements are involved, merger negotiations need not reach the point of agreement in principle before they become material (Pet. App. 13a-15a). /3/ With respect to class certification, the Sixth Circuit agreed with the district court that under the fraud on the market theory respondents were entitled to a presumption of reliance, that common class issues therefore predominated over individual issues, and that class certification therefore was appropriate (Pet. App. 19a). DISCUSSION The question when merger negotiations are material is a recurring question under the federal securities laws. Because a conflict exists among the courts of appeals, review by this Court is warranted with respect to this question. In our view, neither the standard enunciated by the court below nor the standard adopted by the Third Circuit is the appropriate standard for determining the materiality of merger negotiations. With respect to the second question presented -- the presumption of reliance under the fraud on the market theory -- there is no conflict among the lower courts or with any decision of this Court. Nor is review of this issue necessary, as petitioners contend, to limit abuse of class actions. Accordingly, further review of that issue by this Court is not warranted. 1. a. The proper standard for assessing the materiality of merger negotiations under the federal securities laws is an issue of great importance to companies involved in such negotiations and to their shareholders. /4/ On the one hand, the timing of disclosure of ongoing merger negotiations is a matter of great sensitivity since premature disclosure may affect or scuttle the negotiations. On the other hand, shareholders have a right not to be misled about ongoing negotiations that are material to their investment decisions. As the court below recognized, there is no general duty to disclose ongoing negotiations, even if the information would be material to investors (see Pet. App. 9a). Disclosure is required only in certain limited circumstances, such as where a company is trading in its own stock, and thus has a duty to disclose all material information, /5/ where the information has leaked from the company into the market /6/ or where regulations promulgated by the Securities and Exchange Commission require disclosure. /7/ This case and the Third Circuit cases -- Staffin and Heublein -- all involve not a mere failure to disclose but one or more affirmative statements alleged to be false or misleading. In each case the company was questioned about unusual market activity in its stock and responded by denying that merger negotiations were occurring or by stating that it knew of no corporate development that would account for the unusual market activity. While the federal securities laws do not impose upon a company any general obligation to issue a statement, even in the face of unusual trading activity, a company that chooses to speak cannot make a materially false or materially misleading statement about ongoing negotiations. The courts below found that at least the second and third statements made by Basic were false or misleading. The courts reached that conclusion because Basic's statements disclaiming knowledge of any corporate development that would account for the stock's unusual market activity were tantamount to denials of ongoing merger negotiations while such negotiations were in fact underway. /8/ b. In general, information about a corporation is material "if there is a substantial likelihood that a reasonable shareholder would consider it important," in the context of the "total mix" of information available, in making an investment decision regarding the corporation's stock. See TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). /9/ Where a corporate development is certain, its significance to investors depends on its importance to the company's fortunes. But, where an event is not certain to occur, as is the case with a possible merger, the traditional rule is that the materiality of the event "will depend at any given time upon a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company(s) activity." SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2d Cir. 1968) (en banc), cert. denied, 394 U.S. 976 (1969). In applying this "probability/magnitude" standard, courts generally have held that the materiality of merger discussions must be judged on the facts in each case, /10/ and that even where agreement is far from certain, merger negotiations may be material to investors. "Many cases have held that the serious possibility of the sale of a corporation is material to the value of the corporation's stock in certain situations." Grigsby v. CMI Corp., 765 F.2d 1369, 1373 (9th Cir. 1985) (citations omitted). In SEC v. Geon Industries, Inc., 531 F.2d 39, 47-48 (2d Cir. 1976) -- a case in which "embryonic" merger talks were held to be material -- Judge Friendly stated that since "(a) merger in which it is bought out is the most important event that can occur in a small corporation's life, to wit, its death," negotiations "can become material at an earlier stage than would be the case as regards lesser transactions -- and this even though the mortality rate of mergers in such formative stages is doubtless high." /11/ c. In contrast to the discerning inquiry in which other courts have engaged, neither the standard adopted by the court below nor the standard adopted by the Third Circuit in Staffin and Heublein is a proper basis for determining when merger negotiations cross the threshold of materiality. The Third Circuit's test, under which merger negotiations are not material until an agreement in principle is reached, could be read to permit corporations freely to issue intentionally false or misleading statements denying merger talks that any reasonable investor would consider important to his investment decision, /12/ misleading investors into making investment decisions on the basis of incorrect information. /13/ As the Commission has stated in discussing this issue (In re Carnation Corp., 33 S.E.C. Dkt. at 1030): The importance of accurate and complete issuer disclosure to the integrity of the securities markets cannot be overemphasized. To the extent that investors cannot rely upon the accuracy and completeness of issuer statements, they will be less likely to invest, thereby reducing the liquidity of the securities markets to the detriment of investors and issuers alike. /14/ Moreover, if merger negotiations are deemed immaterial until an agreement in principle is reached, the corporation, or its insiders who are privy to the negotiations, could acquire the corporation's securities, taking advantage of uninformed shareholders by trading without making any disclosure of the negotiations. /15/ While the Third Circuit standard is erroneous, the Sixth Circuit's test does not remedy its deficiencies. Read literally, the opinion below states that a company's false denial of merger discussions is material solely because it is untrue. /16/ For example, the court stated that "information concerning ongoing acquisition discussions becomes material by virtue of the statement denying their existence" (Pet. App. 13a), and that "once a statement is made denying the existence of any discussions, even discussions that might not have been material in absence of the denial are material because they make the statement made untrue" (id. at 14a (footnote omitted)). This equating of falsehood and materiality has no basis under Northway, and would appear to render any false statement, regardless of how trivial, per se material. The decision below can be read instead to mean merely that merger negotiations that might not otherwise be material are heightened in significance, and may become material, when the corporation denies them. Even read this way, however, the decision conflicts with decisions of the Third Circuit and does not provide a satisfactory standard for assessing materiality in particular cases. Read this way the decision does not specify what test of materiality is to be applied to merger negotiations or even what factors are significant in determining materiality or what weight the company's statement is to be given in relation to other factors. /17/ The proper standard of materiality of merger negotiations is the probability/magnitude test articulated by the Second Circuit and applied in practice by many other courts. Review is warranted to resolve the conflict among the lower courts on this issue and to provide a uniform standard of materiality that furnishes guidance to corporations in this important area and protects investors from false or misleading statements. 2. a. The second question presented in the petition is whether a plaintiff alleging fraud under Rule 10b-5 may, in circumstances where a materially false or misleading corporate statement has been disseminated into the trading market, meet the reliance requirement of the cause of action by invoking a presumption of reliance upon the integrity of the market price. The reliance requirement, derived from the common law of deceit and misrepresentation, is part of the logical chain necessary to establish that the misrepresentation or omission in fact caused the plaintiff's injury. See List v. Fashion Park, Inc., 340 F.2d 457, 462 (2d Cir.), cert. denied, 382 U.S. 811 (1965). Although the requirement is commonly met by showing the plaintiff's subjective reliance on the defendant's statements, see 3 L. Loss, Securities Regulation 1430-1432 (2d ed. 1961), courts have held that proof of actual reliance is not necessary in certain cases, including those alleging a "fraud on the market." As the court below explained, the fraud on the market theory, which has been adopted by seven other circuits, /18/ "is based on two assumptions: first, that in an efficient market the price of a stock will reflect all information available to the public," so that public misrepresentations cause the market price to be distorted up or down, and "second, that an individual relies on the integrity of the market price when dealing in that stock" (Pet. App. 17a). These two assumptions combine to allow a rebuttable presumption that investors who traded relied "indirectly on the misrepresentation" that caused a price distortion in the market (ibid.). See Blackie v. Barrack, 524 F.2d 891, 907 (9th Cir. 1975), cert. denied, 429 U.S. 816 (1976). /19/ b. There is no conflict on this issue in the lower courts. /20/ Every court that has addressed the issue has sustained the fraud on the market theory (see note 18, supra), which rests on a valid chain of causation between the misrepresentation and the plaintiff's action. Furthermore, while the burden of proof in a fraud on the market case could be placed on the plaintiff, requiring him to prove his reliance on the integrity of the market price, every court applying the theory in the context (as in this case) of an active secondary market has also applied a presumption of reliance on the market price, recognizing that the overwhelming majority of traders do rely on market price in making investment decisions. /21/ Nor is certiorari warranted, as petitioners contend (Pet. 27-28), to limit the potential abuse of class actions. Contrary to petitioners' assertion, the presumption of reliance in a fraud on the market case is grounded in characteristics of securities markets and investor behavior that are present in both class actions and individual actions. See Blackie v. Barrack, 524 F.2d at 988. The presumption is not applied to facilitate class actions in cases that would not otherwise be amenable to prosecution as class actions. /22/ The presumption of reliance also is not, as petitioners contend (Pet. 22-26), an unwarranted extension of the Court's decision in Affiliated Ute Citizens v. United States, 406 U.S. 128 (1972). The fraud on the market theory is not based on that case at all. In Affiliated Ute, the Court held that in Rule 10b-5 cases where a person in a relationship of trust fails to disclose material facts, "positive proof of reliance is not a prerequisite to recovery." 406 U.S. at 153. In this case the Sixth Circuit cited Affiliated Ute as an illustration of another type of case where reliance may be presumed, but the court below did not ground its holding in Affiliated Ute. Indeed, the rationales for presuming reliance in the two types of cases are wholly different. /23/ Affiliated Ute justifies a presumption of reliance because of the difficulties a plaintiff would face in affirmatively proving reliance on a nondisclosed fact of which he was unaware. /24/ The fraud on the market theory presumes reliance because of assumptions about the efficient nature of secondary securities markets and actual investor reliance on the integrity of those markets. CONCLUSION The petition for a writ of certiorari should be granted limited to the first question presented. Respectfully submitted. CHARLES FRIED Solicitor General LOUIS R. COHEN Deputy Solicitor General JERROLD J. GANZFRIED Assistant to the Solicitor General DANIEL L. GOELZER General Counsel PAUL GONSON Solicitor JACOB H. STILLMAN Associate General Counsel ERIC SUMMERGRAD Senior Special Counsel KATHARINE B. GRESHAM Attorney Securities and Exchange Commission JANUARY 1987 /1/ The court held that the first statement was not false or misleading (Pet. App. 65a). /2/ The court added that it was "'inconceivable' that Basic stockholders would not find the fact that discussions were occurring between Combustion and Basic, in light of Basic's statements, to be important and, therefore, material to making normal reasonable investment decisions" (Pet. App. 13a). /3/ The court did not articulate a standard of materiality of merger negotiations in cases involving nondisclosure in the face of a duty to disclose. It suggested, however, that "the discussions and their progress are the primary considerations" in assessing materiality in that context (Pet. App. 14a). /4/ The standard of materiality of merger negotiations has been the subject of significant recent attention among legal commentators. See, e.g., Brodsky, Disclosure of Merger Negotiations, N.Y.L.J., Nov. 6, 1985, at 1; Brown, Corporate Communications and the Federal Securities Laws, 53 Geo. Wash. L. Rev. 741, 782-792 (1985); Goldstein, Donnelly & Wurczinger, Disclosure of a Potential Change in Corporate Control, 19 Rev. of Sec. & Comm. Reg. 133 (1986); Greene, Public Disclosure of Merger Negotiations, N.Y.L.J., Oct. 24, 1985, at 1; Olson, Revealing Merger Talks: When, How Are Critical, Legal Times, Oct. 14, 1985, at 11; Poser, Surprise. The SEC Says You Shouldn't Tell Lies About Merger Negotiations, Investment Dealers' Digest, Aug. 26, 1985, at 36. /5/ See, e.g., Staffin v. Greenberg, 672 F.2d at 1205; Arber v. Essex Wire Corp., 490 F.2d 414, 418 (6th Cir.), cert. denied, 419 U.S. 830 (1974). See generally Dirks v. SEC, 463 U.S. 646 (1983); Chiarella v. United States, 445 U.S. 222 (1980). /6/ See, e.g., State Teachers Retirement Board v. Fluor Corp., 654 F.2d 843, 850 (2d Cir. 1981). /7/ For example, a company may be required to disclose merger negotiations on Schedule 14D-9, which mandates disclosure of merger negotiations undertaken in response to a tender offer. 17 C.F.R. 240.14d-101, Item 7. See In re Revlon, Inc., Exchange Act Release No. 23320, 35 S.E.C. Dkt. 1541, 1550-1552 (June 16, 1986). /8/ The Third and Sixth Circuits disagree about whether such statements are false or misleading, as well as about the standard of materiality. In Heublein, the Third Circuit held, over a strong dissent, that a statement denying knowledge of corporate developments that would account for unusual market activity was literally true and was not misleading because the company, even though it "clearly knew of information that might have accounted for the increase in trading," 742 F.2d at 759, did not know that word of merger discussions had leaked out, and thus did not know the reason for the market activity. In the decision below, the Sixth Circuit found that such statements are misleading, since they will be read not in such a narrow literal way but as a denial of any significant corporate developments (Pet. App. 11a). Accord, In re Carnation Corp., Exchange Act Release No. 22214, 33 S.E.C. Dkt. 1025, 1032 n.8 (July 8, 1985). /9/ Northway arose under the proxy solicitations provisions of the Securities Exchange Act, but subsequent decisions have applied its test of materiality in cases arising under Section 10(b) and Rule 10b-5, involving purchases and sales of securities. See, e.g., McGrath v. Zenith Radio Corp., 651 F.2d 458, 466 n.4 (7th Cir.), cert. denied, 454 U.S. 835 (1981); Goldberg v. Meridor, 567 F.2d 209, 218 (2d Cir. 1977), cert. denied, 434 U.S. 1069 (1978). /10/ See Grigsby v. CMI Corp., 765 F.2d 1369, 1373 (9th Cir. 1985); SEC v. Shapiro, 494 F.2d 1301, 1306 (2d Cir. 1974). See also Michaels v. Michaels, 767 F.2d 1185, 1195 (7th Cir. 1985), cert. denied, No. 85-752 (Jan. 13, 1986) ("a number of cases do not apply a 'bright line' rule of materiality for merger negotiations"). /11/ See also SEC v. Shapiro, 494 F.2d 1301, 1306-1307 (2d Cir. 1974); Chris-Craft Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 341, 368 (2d Cir.), cert. denied, 414 U.S. 910 (1973); Holmes v. Bateson, 583 F.2d 542 (1st Cir. 1978) (merger negotiations that had not yet reached the point of discussing terms were nonetheless material); Rogen v. Ilikon Corp., 361 F.2d 260, 266 (1st Cir. 1966) (negotiations, "(e)ven with the possibility of (their) collapse," could be material); Dungman v. Colt Industries, Inc., 532 F. Supp. 832, 837 (N.D. Ill. 1982) (fact that the defendants were seriously exploring the sale of their company was material); American General Insurance Co. v. Equitable General Corp., 493 F. Supp. 721, 744-745 (E.D. Va. 1980) (merger negotiations were material four months before agreement in principle was reached); Levin v. Marder, 343 F.Supp. 1050, 1058 (W.D. Pa. 1972) ("'preliminary proposal'" of merger "may well be material"); Schlanger v. Four-Phase Systems, Inc., 582 F. Supp. 128, 131-132 (S.D.N.Y. 1984) (a "no corporate developments" statement issued by a company in the face of unusually heavy market activity in its stock could be materially false or misleading in that it failed to disclose pending merger negotiations that had not reached the point of agreement); In re Carnation Corp., Exchange Act Release No. 22214, 33 S.E.C. Dkt. 1025, 1031-1034 (July 8, 1985) (concluding that it was materially misleading for Carnation to issue two "no corporate developments" statements in response to unusual market activity at a time when it was engaged in preliminary merger discussions that were far from certain to result in an agreement). The probability/magnitude test does not supplant, but must be considered part of, the Northway test of materiality. Thus, the potential merger must not be so remote as to preclude a finding of "a substantial likelihood that a reasonable (investor) would consider (the negotiations) important." 426 U.S. at 449 (emphasis added). For example, a number of courts have held that, on the facts of the cases before them, mere overtures or inquiries about possible mergers were immaterial because the overtures were so tentative as to make a merger a highly remote prospect. See, e.g., Susquehanna Corp. v. Pan American Sulphur Co., 423 F.2d 1074, 1085 (5th Cir. 1970); List v. Fashion Park, Inc., 340 F.2d 457 (2d Cir.), cert. denied, 382 U.S. 811 (1965); Bucher v. Shumway, (1979-1980 Transfer Binder) Fed. Sec. L. Rep. (CCH) Paragraph 97,142, at 96,302 (S.D.N.Y. Oct. 11, 1979), aff'd without opinion, 622 F.2d 572 (2d Cir.), cert. denied, 449 U.S. 841 (1980); Berman v. Gerber Products Co., 454 F. Supp. 1310, 1316, 1318 (W.D. Mich. 1978); Scott v. Multi-Amp Corp., 386 F. Supp. 44, 65 (D.N.J. 1974). /12/ Respondents disagree with this reading of Heublein and argue that there is no conflict between the circuits over materiality in an affirmative statement context (Br. in Opp. 14). They contend that Heublein holds only that (1) until an agreement in principle is reached there is no affirmative duty to disclose negotiations and (2) while a corporation may not make false or misleading statements about the negotiations, Heublein's "no developments" statement was not false or misleading. Respondents argue that because the Heublein court did not hold that the "no developments" corporate statement was false or misleading (see note 8, supra), the court never considered whether it was material. Had the court reached that issue, respondents suggest, the Third Circuit might have held, as did the Sixth Circuit here, that in a corporate statement context the negotiations were a material event and that the statement was materially misleading. Petitioners correctly point out (Reply Br. 4) that Heublein has not been read, and was not read by the Sixth Circuit, in so limited a fashion. Indeed, the decision itself does not allow such a reading. In the concluding portion of the decision (742 F.2d at 759-760), the court held that the company had no duty to correct its statement because "as a matter of law, it never became materially misleading on the basis of subsequent events" (id. at 759 (emphasis added)). The reason for this, the court said, was "because, as previously shown, Heublein was never under a duty to disclose" the merger negotiations prior to agreement in principle. In short, the court held that even if a misleading corporate statement is outstanding, it is not material until agreement in principle is reached, a result in conflict with the decision below. /13/ Petitioners contend that Reiss v. Pan American World Airways, Inc., 711 F.2d 11 (2d Cir. 1983), supports the Third Circuit's view that merger negotiations never become material until there is an agreement in principle. But there is no indication that the Second Circuit in Reiss abandoned that court's traditional approach (see Geon and Shapiro) of declining to adopt a rigid test. Reiss must be read in light of its facts, which involved mere overtures that were not disclosed by a potential acquiror to its shareholders, in a situation where the company had not issued a statement, was not leaking word to the market, and was not trying to induce shareholders to sell securities, but rather was trying to induce noteholders to convert their notes to common stock. The court did not purport in Reiss to overrule its clear statements in Shapiro and Geon that merger talks may in some circumstances become material well before their fruition. Indeed, the Reiss court did not even cite Geon, Shapiro or Texas Gulf Sulphur. The lower courts in the Second Circuit have not read Reiss as overruling the earlier cases and have continued to hold that preliminary merger discussions can be material. See SEC v. Gaspar, (1984-1985 Transfer Binder) Fed. Sec. L. Rep. (CCH) Paragraph 92,004 (S.D.N.Y. Apr. 15, 1985); Schlanger v. Four-Phase Systems, Inc., 582 F. Supp. 128, 133 (S.D.N.Y. 1984). /14/ The Third Circuit has articulated two policy rationales for its materiality test: (1) that disclosure of early negotiations could itself be misleading, by inflating hopes of a merger that may not come to pass; and (2) that requiring disclosure of early negotiations may scuttle the negotiations. See Heublein, 742 F.2d at 757; Staffin, 672 F.2d at 1206-1207. The first of these propositions -- that the English language is incapable of supplying words that disclose merger negotiations without overstatement or understatement -- is a frontal assault on the disclosure philosophy of the securities laws. In any event, with respect to both propositions, if a corporation is concerned about misleading investors or upsetting negotiations, it can simply remain silent. Allowing a corporation to issue false or misleading statements is not a proper solution. /15/ In Staffin, the disclosure obligations were triggered not by a corporate statement, but by the company's decision to trade in its own stock. 672 F.2d at 1205. In Jordan v. Duff & Phelps, Inc., (Current) Fed. Sec. L. Rep. (CCH) Paragraph 92,724 (N.D. Ill. Mar. 17, 1986), appeals pending, Nos. 86-1611 & 86-1727 (7th Cir.), the court adopted the Staffin/Heublein test and held that a corporation had no duty to disclose pending merger negotiations to an employee who was leaving the company and from whom it was buying back stock. In fact, the court held that even though the negotiators might have reached an agreement in principle prior to the purchase, the negotiations did not become material until six days after the purchase, when the boards of directors of the companies approved the agreement. /16/ While the opinion below may be read this way, the court may not have intended such a result. Indeed, one of the judges on the Basic panel, concurring in the denial of rehearing en banc, expressly took the position that the decision does not stand for this result (Pet. App. 145a-146a). The other members of the original panel did not join that statement, and thus the possibility remains that the panel intended the result this literal reading would produce. In that event there would be no need for further factual development on remand, the court of appeals having concluded as a matter of law that the corporation's statements are false and material. /17/ The interlocutory posture of the case need not dissuade this Court from granting certiorari. If the decision below is read literally, the court below has finally determined that the statements are false and material as a matter of law. Accordingly, the issue warranting this Court's review would not be affected by any proceedings on remand. Even if the panel's opinion is not read so literally, a conflict still exists on an important and recurring question under the federal securities laws. /18/ See Peil v. Speiser, No. 85-1360 (3d Cir. Nov. 28, 1986), slip op. 12-16; Harris v. Union Electric Co., 787 F.2d 355, 367 & n.9 (8th Cir. 1986); Lipton v. Documation, Inc., 734 F.2d 740 (11th Cir. 1984), cert. denied, 469 U.S. 1132 (1985); T.J. Raney & Sons, Inc. v. Fort Cobb, Oklahoma Irrigation Fuel Authority, 717 F.2d 1330 (10th Cir. 1983), cert. denied, 465 U.S. 1026 (1984); Shores v. Sklar, 647 F.2d 462 (5th Cir. 1981) cert. denied, 459 U.S. 1102 (1983); Panzirer v. Wolf, 663 F.2d 365 (2d Cir. 1981), vacated as moot after cert. granted, 459 U.S. 1027 (1982); Ross v. A.H. Robins Co., 607 F.2d 545, 553 (2d Cir. 1979); Blackie v. Barrack, 524 F.2d 891 (9th Cir. 1975), cert. denied, 429 U.S. 816 (1976). See also, Wachovia Bank & Trust Co. v. National Student Marketing Co., 650 F.2d 342, 358 (D.C. Cir. 1980), cert. denied, 452 U.S. 954 (1981); In re LTV Securities Litigation, 88 F.R.D. 134, 142 (N.D. Tex. 1980); Schlanger v. Four-Phase Systems, Inc., 555 F. Supp. 535, 538 (S.D.N.Y. 1982). /19/ The court below stated that a defendant can rebut the presumption of reliance by showing (1) that an insufficient number of traders relied on the misrepresentation to cause a distortion of the stock price or (2) that an individual plaintiff traded in spite of knowing the falsity of the representation or that he would have traded even if he had known the falsity (Pet. App. 18a n.6, citing Blackie v. Barrack, 524 F.2d at 906). /20/ Petitioners suggest (see Pet. 24-25) that there is a conflict in the circuits over the fraud on the market theory by citing the Second Circuit's decision in Wilson v. Comtech Telecommunications Corp., 648 F.2d 88 (1981). Wilson v. Comtech was not brought as a fraud on the market case and the theory is not discussed in the court's opinion; rather, the plaintiff attempted to establish a presumption of reliance on wholly different grounds. See id. at 93-94. The Second Circuit has adopted the fraud on the market theory in other cases (see note 18, supra). /21/ See, e.g., Peil v. Speiser, supra at 15; Lipton v. Documation, Inc., 734 F.2d at 742; Panzirer v. Wolf, 663 F.2d at 367; Ross v. A.H. Robins Co., 607 F.2d at 553; Blackie v. Barrack, 524 F.2d at 906; In re LTV Securities Litigation, 88 F.R.D. at 143; Schlanger v. Four-Phase Systems, Inc., 555 F. Supp. at 538. Petitioners also suggest (Pet. 26-27), as an alternative position, that even if a presumption of reliance is appropriate in a fraud on the market case brought by purchasers, it is inappropriate in a case, as here, brought by sellers of securities. They argue that, even assuming persons might make decisions to purchase securities in the open market based on the "relatively common basis" of market price, there is no reason to make the same assumption regarding decisions to sell, which might be made for a broader variety of reasons. But petitioners point to no authority for this distinction, and we suggest that it is not an appropriate issue for the Court to consider as a matter of first impression. /22/ The district court in this case expressly disclaimed an intention of seeking to facilitate class actions (Pet. App. 129a). The court of appeals, while it noted that the presumption would facilitate the class action, did not state that that was a reason for invoking the presumption (id. at 16a-20a). /23/ In Blackie v. Barrack the Ninth Circuit permitted a presumption of reliance under two distinct rationales: (1) that that case involved a failure to make a required disclosure, and (2) that the fraud on the market theory permitted such a presumption. The Ninth Circuit relied on Affiliated Ute only with respect to the first rationale; it drew no connection between Affiliated Ute and the fraud on the market theory. 524 F.2d at 906. /24/ See, e.g., Chelsea Associates v. Rapanos, 527 F.2d 1266, 1271 (6th Cir. 1975); Titan Group, Inc. v. Faggen, 513 F.2d 234, 238-239 (2d Cir.), cert. denied, 423 U.S. 840 (1975); Note, The Reliance Requirement in Private Actions Under SEC Rule 10b-5, 88 Harv. L. Rev. 584, 590 n.32 (1975).