Introduction
On 8 October 2025, Fideres hosted an evening seminar exploring the latest developments relating to claims under s.90A of the Financial Services and Markets Act 2000 (“FSMA”). The session featured a panel discussion with Mungo Wilson, Professor of Financial Economics at the Saïd Business School, University of Oxford. During the panel, Professor Wilson gave an overview of the Efficient Market Hypothesis (“EMH”).
The EMH and its Relevance to Securities Litigation
The development of the EMH is closely associated with Eugene Fama of the University of Chicago who in 1965 wrote that:
“An “efficient” market is defined as a market where there are large numbers of rational profit-maximizers actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants. In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which as of now the market expects to take place in the future. In other words, in an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value”.1
In short, the EMH concerns the manner and extent to which prices incorporate available information. As Fama wrote in 1970, a “market in which prices always “fully reflect” available information is called efficient”.2 Fama categorised market efficiency into three forms, each involving a greater amount of information. In the weak form, prices incorporate only historic prices. In the semi-strong form, prices incorporate publicly available information and in the strong form, prices incorporate both public and private information.3
In the context of securities litigation, the EMH stipulates that new information is incorporated into market prices, and hence value-relevant false or misleading statements or the omission of value-relevant information will distort prices. For example, if an issuer falsely overstates its revenue, the share price will trade at an artificially inflated level from that point on. Once the truth is revealed, however, according to the EMH, there will be an (almost) instant price drop and associated materialisation of loss for shareholders. The EMH is therefore an important link in the causative chain between a misstatement or omission by an issuer and the loss ultimately suffered by a shareholder.
In US and other jurisdictions, claimants in non-prospectus securities litigation must show not only that the alleged fraud caused them harm, but also that they relied on the alleged misrepresentations when making their investment decisions. This is a potentially burdensome hurdle. The US “fraud-on-the-market doctrine,” however, has all but eliminated this burden on claimants. Under this doctrine, introduced in Basic, claimants are entitled to a presumption of reliance if they can show that the security at issue traded efficiently over the relevant period.4,5 The underlying argument is that all investors effectively rely on a misrepresentation to the extent that the misrepresentation affected their transaction prices – which is by definition true under the EMH.
In Australia, courts have accepted the concept of “market-based causation” provided the market in question is efficient. Investors need then only prove causation by demonstrating that the price they paid for shares was artificially inflated as a result of a misstatement (for example, see Myer). 5,6
In securities litigation before the English courts, by contrast, the correct approach to the issue of reliance remains hotly debated. Paragraph 3 of Schedule 10A to FSMA states that a “loss is not regarded as suffered as a result of the statement or omission unless the person suffering it acquired, continued to hold or disposed of the relevant securities (a) in reliance on the information in question, and (b) at a time when, and in circumstances in which, it was reasonable for him to rely on it”.
In Barclays7, certain investors advanced claims based on price or market reliance which depends, in part, on the assumption that Barclays’ shares traded in an efficient market (the “Category C Claimants”). Mr Justice Leech struck out those claims, holding that they would be unable to establish individual reliance. The case subsequently settled. Mr Justice Leech held that Parliament intended the courts to apply the common law test to claims under Paragraph 3 of FSMA, Schedule 10A. As summarised in a subsequent judgment by Mr Justice Green, Leech J “considered what that common law test was and concluded that it required a claimant to prove that they read or were aware of at least the gist (possibly through their agent) of the representation and understood it in the sense in which it was alleged to be false and that it caused them to act in a way which caused them loss”.8 It should be noted that in a recent case the Judicial Committee of the Privy Council found that conscious awareness is not a requirement for a claim in deceit.9 In the subsequent judgment to Barclays referred to above, Green J refused to strike out the equivalent of Category C claims against Standard Chartered. Both Barclays and Standard Chartered settled prior to consideration by the Court of Appeal.
In a conventional misrepresentation scenario, the representee relies upon the statement and takes some action and reliance upon the statement is a key element of causation. However, when a market participant purchases shares at a price that has been artificially inflated, it is transacting at that inflated price that causes the loss. In the context of s.90A, and under the EMH, therefore, applying the common law test of reliance risks disqualifying Category C Claimants even though they were clearly harmed by the alleged misconduct.10
Testing the EMH
On the Fideres panel, Professor Wilson noted some empirical challenges in testing the EMH, primarily the joint hypothesis issue. As noted by Eugene Fama, the EMH is only testable jointly with an asset pricing model of what constitutes a ‘fair’ return adjusted for risk. However, Professor Wilson stressed that available evidence strongly suggests that new and relevant information usually appears to be quickly incorporated into share prices.11
In the US, where the fraud-on-the-market doctrine has been established for several decades, courts commonly refer to the Cammer and Krogman factors when considering whether a market is efficient.
In Cammer12 the Court identified a number of factors that could give rise to an inference that a security traded in an efficient market. The first four factors identified by the Court were average trading volume, analyst coverage, the presence of market makers and arbitrageurs and eligibility to file a Form S-3 Registration Statement. When identifying the fifth factor, the Court highlighted the fundamental importance of showing cause and effect stating “it would be helpful to a [claimant] seeking to allege an efficient market to allege empirical facts showing a cause and effect relationship between unexpected corporate events or financial releases and an immediate response in the stock price. This, after all, is the essence of an efficient market and the foundation for the fraud on the market theory”. In Krogman13, the Court additionally considered market capitalisation, bid-ask spread and the size of the company’s public float.
The Cammer factors have also been applied outside the US, for example by the Australian Federal Court in Myer and very recently by the Grand Court of the Cayman Islands in 51Job Inc14 where after consideration of the Cammer factors, the Courts in both cases concluded that the relevant markets were semi-strong form efficient.
Conclusion
While the EMH can be difficult to test as a general proposition, courts around the world have become increasingly comfortable with the Cammer framework to test whether a market is sufficiently efficient to found a claim without additional proof of investor reliance.
While the significance of the EMH to securities litigation before the English courts remains to be determined, there is little doubt that from an economic perspective, what began as an academic theory at the University of Chicago in the mid-1960s, underpins the causal chain between a statement made (or omitted) by an issuer and the resulting losses suffered by an investor.
Sources
1 Fama, Eugene F. “Random Walks in Stock Market Prices.” Financial Analysts Journal 21, no. 5 (1965): 55–59.
2 Fama, Eugene F. “Efficient Capital Markets: A Review of Theory and Empirical Work.” The Journal of Finance 25, no. 2 (1970): 383–417. https://doi.org/10.2307/2325486.
3 The EMH is the basis of the notion that it is not possible to beat the market because the movement of stock market prices is random. In his bestselling book, A Random Walk Down Wall Street, Burton Malkiel wrote that “the efficient-market hypothesis does not imply, as some critics have proclaimed that stock prices are always correct. What the EMH implies is that no one knows for sure if stock prices are too high or too low. Nor does EMH state that stock prices move aimlessly and erratically and are insensitive to changes in fundamental information. On the contrary, the reason prices move randomly is just the opposite. The market is so efficient -prices move so quickly when information arises -that no one can buy or sell fast enough to benefit. Any real news develops randomly, that is, unpredictably. It cannot be predicted by studying either past technical or fundamental information”.
4 Basic Inc. v. Levinson, 485 U.S. 224 (1988)
5 TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Limited [2019] FCA 1747
6 In Myer, Beach J differentiated market-based causation and fraud on the market on the basis of the requirement to show reliance in the US: In shareholder class actions, applicants have typically advanced a market-based or indirect causation theory. This is different from the US “fraud on the market” theory. The latter recognises that reliance given the US statutory elements must be proved, but comes up with the device of the rebuttable presumption to ensure in the first instance that individual issues do not swamp common issues relating to reliance. The former does not require reliance at all, whether one is considering either or both of factual causation and normative causation.
7 Allianz Funds Multi-Strategy Trust & Ors v Barclays Plc [2024] EWHC 2710 (Ch)
8 Persons Identified in Schedule 1 v Standard Chartered Plc [2025] EWHC 698 (Ch)
9 Credit Suisse Life (Bermuda) Ltd v Ivanishvili [2025] UKPC 53
10 For example, a typical index fund invests fund inflows across publicly listed companies in proportion to each company’s market capitalization. If Company X makes a value-relevant positive misstatement, its share price (and market capitalization) will instantly increase under the EMH. From that point on, therefore, the index fund will invest more in Company X than it would have otherwise. Moreover, under the EMH, the Company X’s share price will fall as soon as the truth emerges, causing a loss for the fund that it would not have incurred absent the misconduct.
11 For example, Eugene Fama has noted that “…on average, stock prices seem to adjust within a day to event announcements. This result is so common that this work now devotes little space to market efficiency.” See, Eugene F. Fama, “Efficient Capital Markets: II,” The Journal of Finance 46, no. 5, 1991, pp. 1575−1617, at p. 1601.
12 Cammer v Bloom 711 F Supp 1264 (DNJ 1989)
13 Krogman v Sterritt, 202 F.R.D. 467, 478 (N.D. Tex. 2001)
14 In the Matter of 51Job, Inc [2025] CIGC (FSD) 112
