Is the fraud-on-the market theory applicable to the state law causes of action alleged in the complaint?

We disagree with plaintiffs' assertion that the fraud-on-the-market theory is a procedural device which is prescribed in rule 23 of the Federal Rules of Civil Procedure. The theory, if applied, would eliminate California's reliance requirement and thus work a change in our substantive law. Application of the theory under Rule 23 would be contrary to the purpose of the rule, which "was not intended to make a change in the substantive law." (City of San Jose v. Superior Court (1974) 12

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We are not persuaded by plaintiffs' policy argument that if we refuse to apply the fraud-on-the-market theory, defendants will escape liability for fraud, leaving the average investor without a remedy. As plaintiffs acknowledged below, they could have brought a Rule 10b-5 action in federal court and obtained the benefit of the fraud-on-the-market theory. It appears that plaintiffs may have forsaken their Rule 10b-5 remedy because they perceived "certain advantages to pursuing their class action in state court. ¹⁸ The substantive requirements of some of their state law causes of action are less burdensome than those for a 10(b)-5 claim. For example, plaintiffs must establish 'scienter' under a 10(b)-5 claim [citation], while a cause of action for negligent misrepresentation requires only a showing of negligence. [Citation.] Punitive damages are available on some of their state law claims, while such damages are not recoverable under a 10(b)-5 claim. [Citations.]" (Schneider v. Vennard, supra, 183 Cal.App.3d at p. 1348, 228 Cal.Rptr. 800.) However, these [12 Cal.App.4th 952] state and federal causes of action are not interchangeable. The mere availability of the fraud-on-the-market theory in Rule 10b-5 actions does not make the theory applicable to the state law causes of action alleged in the complaint.