Basic, Inc. was a publicly graded 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.

Questions:

(1) What are the arguments that the plaintiffs have satisfied the reliance requirement of

Section 10(b) of the 1934 Act and Rule 10(b)-5?

(2) What are the arguments that the plaintiffs have

not

satisfied the reliance requirement

of Section 10(b) of the 1934 Act and Rule 10(b)-5?

(3) Which side should prevail?