Ruling on an issue that has split the federal circuits, the 3rd U.S. Circuit Court of Appeals on Monday flatly rejected the so-called “fraud-created-the-market” theory in securities fraud cases, declaring that it lacks any basis in common sense.

In Malack v. BDO Seidman (pdf), a unanimous three-judge panel said the theory would extend a “presumption of reliance” by investors in thinly marketed and newly issued securities — effectively eliminating that element of proof — without any showing that the presumption was logically justified.

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