Basic, Inc., was a publicly traded company. Combustion
Engineering, Inc., and Basic began discussions concerning the
possibility of a merger of the two companies. During the next
two years, Basic made three public statements denying that it
was engaged in merger negotiations. In December of the sec-
ond year, Basic publicly announced its approval of Combus-
tion’s offer for all its outstanding shares. Former owners of
Basic stock who sold their shares after Basic publicly denied
that it was engaged in merger negotiations brought a class
action suit against Basic and its directors for having released
false or misleading information in violation of Section 10(b)
of the 1934 Act and Rule 10b-5. The plaintiffs claimed that
they were injured by selling their shares at prices that were
artificially depressed as a consequence of Basic’s misleading
public statements. The defendants claimed that the plaintiffs
had not proven that the plaintiffs had, in fact, relied upon the
misleading statements in selling their stock.
a. What are the arguments that the plaintiffs have satisfied
the reliance requirement of Section 10(b) of the 1934 Act
and Rule 10b-5?
b. What are the arguments that the plaintiffs have not satis-
fied the reliance requirement of Section 10(b) of the 1934
Act and Rule 10b-5?
c. Which side should prevail?
