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 second year, Basic publicly announced its approval of Combustion'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 satisfied the reliance requirement of Section 10(b) of the 1934 Act and Rule 10b-5?
(c) Which side should prevail?