"Fraud on the Market" theory holds that:
A) The auditor need not be liable for damages if the market ignored the audit report.
B) The auditor is liable for damages to those who relied on financial statements it audited that contained a material misstatement.
C) The plaintiffs do not have to show they relied on the financial statements, but merely that the market used the information contained in the financial statements to affect the stock price.
D) Both a and b.

Question

Quizplus · Accepted Answer

Fraud on the Market theory allows plaintiffs to recover damages without having to prove individual reliance on financial statements, but rather that the market as a whole relied on the information to affect the stock price. This puts the burden of proof on the defendant to show that the misstatements did not cause the stock price to be affected. The theory has been accepted by the Supreme Court in Basic v. Levinson (1988).

"Fraud on the Market" Theory Holds That