Third Circuit Dismisses “Fraud-Created-the-Market” Theory for Auditor
The Third Circuit Court of Appeals declined to certify a class action against an auditor alleged to have provided deficient audits in connection with the public issuance of subprime notes. The Court rejected the plaintiffs’ “fraud-created-the-market” theory of reliance, which would allow for a presumption of reliance based solely on the fact that the securities were brought to market. In other words, the plaintiffs argued that the securities would not have been marketed without the auditor’s opinions. The Court distinguished this argument from the “fraud-on-the-market” theory that allows a presumption of reliance when securities are purchased in an efficient market affected by fraud or misrepresentation. The Court argued that parties involved in the issuance “such as the underwriter, the auditor, and legal counsel…cannot be reasonably relied upon to prevent fraud” because of their inherent self-interest in marketing the securities.