In a recent decision, State v. Marsh & McLennan Companies, Inc., 2012 WL 6212518 (Or. Dec. 13, 2012), the Oregon Supreme Court gave birth to a state law based “fraud-on-the-market” theory of liability previously available only in federal securities claims alleging Rule 10b-5 violations.  The court based its ruling on its assumption that the state legislature intended its law, which became effective in 2003, to be consistent with earlier adopted federal law expressed in Basic, Inc. v. Levinson, 485 U.S. 224 (1988), although there was no legislative intent supporting the assumption.  For the securities industry, the court’s ruling breathes life into state-based claims plaintiffs’ lawyers had abandoned, and its confirmation of the justifiable reliance element of its securities law presents little solace. 

The State of Oregon, on behalf of its employee retirement fund, sued Marsh & McLennan Company (“Marsh”) in state court, alleging that Marsh had made false and misleading statements regarding its financial performance in public disclosures.  The State had purchased $15 million of Marsh’s stock on the New York Stock Exchange.  After an investigation by the New York Attorney General’s Office raised issues about Marsh’s disclosures, the price of Marsh’s stock declined, causing the State to recognize a $10 million loss. 

The State alleged fraud claims against Marsh under Oregon’s securities fraud statutes.  The trial court granted Marsh summary judgment, expressly finding that securities fraud claims pursued under Oregon’s statutes required proof that the plaintiff had justifiably relied on the alleged misrepresentations or omissions, that the State had not proven reliance, and that therefore the state could not use the “fraud-on the-market” theory to establish a presumption of reliance.  The Court of Appeals affirmed.  

The Oregon Supreme Court reversed in part, holding that a plaintiff bringing claims under the Oregon securities fraud statutes for purchases made on the open market could establish a presumption of reliance based on the defendant’s misrepresentations or omissions that caused a fraud on the market.  The court noted that the fraud-on-the-market doctrine had been part of federal securities law since it was adopted by the United States Supreme Court in Basic, Inc. v. Levinson, 485 U.S. 224 (1988) and that because the Oregon statute at issue was enacted 15 years thereafter, in 2003, the legislature likely intended it to be consistent with the federal law.

The court did affirm the Appellate Court's rejection of the State’s contention that it was not required to establish reliance on Marsh’s alleged misrepresentations or omissions because the words “rely” or “reliance” could be not found in the Oregon securities fraud statutes.  The court noted that the state statute made sellers of securities liable to purchasers for damages “caused” by violations of the statute, which the court construed to encompass a showing of reliance by a purchaser of securities on misrepresentations or omissions made by the defendant.  The court also found that the statute’s legislative history supported a reliance requirement. 

The Marsh decision is significant because it expands the applicability of the fraud-on-the market theory.  The Oregon Supreme Court’s ruling also likely will be used as a road map by plaintiffs in other states, particularly where a plaintiff cannot prove reliance but his or her state securities fraud statutes resemble federal law and were enacted or amended since the Basic, Inc.decision in 1988.