## Facts

- i-Stat Corporation, a New Jersey public company traded on NASDAQ, made public statements reporting improved quarterly sales and financial results in 1995.
- Susan Kaufman bought 100 shares in May 1995 at $21.75 per share and later experienced a rise in the stock price.
- In early 1996, press reports stated that i-Stat’s sales practices were under scrutiny, including claims that some reported “sales” were trial loans of equipment.
- i-Stat publicly confirmed an SEC investigation into its sales practices; the stock price dropped amid heavy trading volume.
- Kaufman later sold part of her holdings at a lower price and claimed she was harmed by an artificially inflated market price.
- Kaufman did not allege that any misrepresentation was communicated to her; she claimed reliance on the integrity of the market price.
- She filed a putative class action asserting common-law fraud and negligent misrepresentation and sought to prove reliance through a fraud-on-the-market presumption.

## Issues

1. Whether a plaintiff asserting New Jersey common-law fraud or negligent misrepresentation involving publicly traded securities may satisfy reliance by invoking a fraud-on-the-market presumption based on an efficient market price.
2. Whether adopting fraud-on-the-market reliance is consistent with New Jersey common-law reliance requirements and the State’s securities-law scheme.

## Decision

- The New Jersey Supreme Court reversed the Appellate Division and reinstated summary judgment for defendants.
- The court held that fraud-on-the-market may not be used to prove reliance in New Jersey common-law fraud or negligent misrepresentation.
- Because Kaufman did not allege direct or indirect communication of a misrepresentation to her, her claims failed for lack of reliance.

## Legal Principles

- New Jersey common-law fraud requires proof of reasonable reliance by the plaintiff on a misrepresentation made to the plaintiff, either directly or through genuine indirect communication.
- Indirect reliance requires that the misrepresentation be communicated to the plaintiff via a third party and that the plaintiff relied on that communicated statement; reliance cannot be satisfied solely by reliance on market price integrity.
- Fraud-on-the-market reliance, as developed in federal securities litigation, is not incorporated into New Jersey common-law fraud or negligent misrepresentation.
- Courts should not expand common-law reliance rules where the Legislature has adopted a securities-regulatory scheme with defined elements and remedies that do not include a market-wide reliance presumption.

## Conclusion

The court refused to extend New Jersey common-law fraud and negligent misrepresentation to permit fraud-on-the-market reliance, requiring instead proof that the plaintiff actually relied—directly or through communicated indirect reliance—on the defendant’s misrepresentation.


Kaufman v. i-Stat Corp., 165 N.J. 94, 754 A.2d 1188 (N.J. 2000)