Starting in 1976, Combustion Engineering, Inc. (Combustion) had discussions with directors of Basic Inc (Basic) (defendants) about a possible merger between the corporations. Over the next two years, Basic made three public statements denying that it was engaged in any merger negotiations. Allegedly in reliance on those statements, Levinson and other former Basic investors (plaintiffs) sold their stock in Basic at artificially low prices. The plaintiffs then brought a class-action suit against Basic and its directors, alleging that the false public statements violated SEC Rule 10b-5. The district court certified the class but granted summary judgment to the defendants, finding that statements about preliminary merger negotiations are not material statements of fact. The United States Court of Appeals for the Sixth Circuit affirmed the class certification based on the fraud-on-the-market theory of reliance, but reversed the district court's grant of summary judgment. The United States Supreme Court granted certiorari on the two issues.