The fraud-on-the-market theory creates a presumption of securities fraud based on plaintiff's reliance on defendant's misrepresentations which affected the market price of the company's shares.

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The fraud-on-the-market theory is based on the premise that in an efficient market, the market price of a security reflects all publicly available information, including material misrepresentations made by the company. As such, any investor who purchases or sells the company's shares during the period of the misrepresentation can be presumed to have relied on the integrity of the market price, and therefore, can assert a claim for securities fraud. This presumption of reliance facilitates class action lawsuits under federal securities laws, such as Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.

The Fraud-On-The-Market Theory Creates a Presumption of Securities Fraud Based