Document Type


Publication Date



This Article argues that the materiality doctrine, which lies at the heart of securities fraud, has the potential to operate as a self-fulfilling prophecy. This Article labels this phenomenon "legal circularity." In order to place the potential legal circularity of materiality in context among the various other legal doctrines that share this potential, this Article proposes a two part Theory of Legal Circularity. First, this Article proposes the following Legal Circularity Test to identify potentially circular doctrines: A legal doctrine is potentially circular if: (1) the legal doctrine incorporates the behavior or attitude of a population or person, either hypothetical or real; and (2) the subject population or person either would (if hypothetical) or does (if real) consider prior precedent interpreting the legal doctrine when choosing said behavior or when adopting said attitude. Materiality, among other legal doctrines, arguably satisfies this test because: (1) the materiality standard focuses on whether there is a substantial likelihood that a hypothetical "reasonable investor" would consider information important when making an investment decision, and (2) a reasonable investor would arguably consider prior materiality precedent when assessing whether information is important to his or her investment decision. Second, this Article proposes a Framework to Assess Legal Circularity, with the goal of providing guidance about whether to embrace a doctrine's potential legal circularity. Under this framework, which draws from the rich scholarship on the related but distinct concepts of stare decisis, substantive law heuristics, and precedential herding, courts and scholars should weigh (1) the risk of a "wrong" rule; (2) the effects of greater predictability; and (3) the import of reconceiving the courts' role. Finally, this Article applies this framework to materiality, concluding that courts and scholars should explicitly embrace the legal circularity of materiality, coupled with increased investor education about materiality and absent any clarifying guidance from the Securities and Exchange Commission about the scope of the doctrine.