Market Efficiency and Securities Fraud Litigation

The economic doctrine of market efficiency plays an essential role in securities fraud litigation. In lawsuits alleging violations of SEC Rule 10b-5, the plaintiffs typically must argue that the market for the relevant security is efficient, and therefore that the “fraud on the market” doctrine applies. However, the term “market efficiency” is often applied imprecisely. In this chapter, we discuss properties of efficient markets that have been proposed in academic research, legal scholarship, and case law. We explore what must be assumed about capital markets for each of these properties to hold. We then ask how, in practice, each property could be rebutted.