In securities fraud class actions, plaintiffs must prove that a stock was traded in an efficient market in order to invoke a presumption that—under the fraud-on-the-market theory articulated in Basic Inc. v. Levinson, 485 U.S. 224, 247 (1988)—issues of reliance on defendant’s misrepresentation predominate. But if a stock is traded in an inefficient market, then courts cannot presume that the market price of defendant’s stock reflects all publicly available information (including defendant’s alleged misrepresentations), and thus cannot presume that all class members relied on defendant’s misstatements when they bought or sold defendant’s stock.

In Bozorgi v. Cassava Sciences, Inc., 2026 WL 3160284 (5th Cir. Oct. 16, 2026), the Fifth Circuit overturned a class certification ruling for failing to consider whether defendant’s stock was actually a “meme stock” that was traded in an inefficient market. The plaintiffs alleged that defendant Cassava defrauded investors by misrepresenting the success of its Alzheimer’s drug simufilam. The district court declined to consider defendant’s argument and expert’s analysis that Cassava’s stock was a meme stock traded in an inefficient market, rather than an efficient market that accurately incorporated publicly available information into Cassava’s stock price.

The Fifth Circuit vacated the class certification ruling, finding that the district court abused its discretion “by declining to evaluate defendants’ evidence of market inefficiency.” As the Fifth Circuit explained, “courts must assess evidence of both market efficiency and market inefficiency” when assessing if the fraud-on-the-market theory applies. The Fifth Circuit therefore remanded the case back to the district court to make a “‘rigorous’ assessment of all the evidence required when assessing market efficiency,” including the evidence presented by both plaintiffs’ and defendant’s experts.

Bozorgi offers an important reminder that parties and courts should not simply tick through factors that courts often consider when evaluating if a given stock traded in an efficient market. Instead, the court must rigorously assess “factors both for and against market efficiency” before presuming classwide reliance on an alleged misrepresentation under the fraud-on-the-market theory. Further, given the rise in the phenomenon of meme stocks since 2020, one key argument for defendants in shareholder litigation regarding such stocks will likely be that a meme stock is not traded in an efficient market and plaintiffs therefore cannot presume that defendant’s stock price accurately reflected defendant’s alleged misstatements.