On June 11, 2012, the United States Supreme Court granted certiorari to resolve an issue that may impact whether companies can defeat securities fraud class actions early in the litigation. The Court will consider whether plaintiffs must prove the element of materiality at the class certification stage. There is currently a split among the Circuits on this issue.
In Connecticut Retirement Plans and Trust Funds v. Amgen Inc., plaintiff alleged that Amgen, Inc. ("Amgen") and several of its officers misrepresented the safety of two of the Company's products used to treat anemia, downplayed potential safety concerns, and otherwise failed to disclose details alleged to be material to the safety of the products, including a concern that one of the products exacerbated tumor growth in a small number of patients. Plaintiff further contended that these misrepresentations and omissions inflated Amgen's stock price.
The district court granted plaintiff's motion for class certification on August 12, 2009.1 The court held that plaintiff had shown Amgen's stock traded in an efficient market and that the alleged misstatements were made publicly and, therefore, had successfully invoked the "fraud-on-the-market" presumption, whereby the price of a stock is presumed to reflect all publicly available information about the company and its business. The court declined to require plaintiff to establish that the alleged misstatements were material. Further, the court refused to allow Amgen to rebut the fraud-on-the-market presumption by demonstrating the market had already absorbed the truth regarding the products by the time the alleged misstatements were made and, therefore, that its stock price was not artificially inflated. The court held that, at the class certification stage, plaintiff need only allege - not prove - purported falsehoods were material.
On November 8, 2011, the Court of Appeals for the Ninth Circuit affirmed, reasoning that materiality is an element that bears only on the merits of a securities fraud claim and not on whether the case may proceed as a class action.2 The court held that whether or not the alleged misstatements are material, plaintiffs' claims "stand or fall together."
In so holding, the Ninth Circuit joined the Seventh Circuit, which had previously held in Schleider v. Wendt, 618 F.3d 679, 685 (7th Cir. 2010), that "[i]t is possible to certify a class under Rule 23(b)(3) even though all statements turn out to have only trivial effects on stock prices." The Second and Fifth Circuits, in contrast, adopted the opposite viewpoint, holding that plaintiffs must demonstrate materiality (and that defendants may rebut the fraud-on-the-market presumption) at the class certification stage.3 The Third Circuit did not require plaintiffs to show materiality to establish the fraud-on-the-market presumption, but held that the presumption may be rebutted at the class certification stage by, among other things, evidence that the alleged misrepresentations did not affect the market price.4
In its petition for certiorari, Amgen argued, among other things, that the Ninth Circuit's decision contradicts the Supreme Court's decision in Erica P. John Fund v. Halliburton, 131 S. Ct. 2179 (2011), in which it held that "an investor presumptively relies on a misrepresentation so long as it was reflected in the market price at the time of the transaction." Id. at 2186. Without proof of materiality, according to Amgen, that fundamental premise is absent.
Regardless of the Court's decision, it will likely have a significant impact on the likelihood of early disposition of securities class action cases. We will provide a further update after the Court renders its decision.
Footnotes
1. 2009 U.S. Dist. LEXIS 71653 (C.D. Cal. Aug. 12, 2009).
2. 660 F.3d 1170 (9th Cir. 2011).
3. The Second Circuit held that the plaintiff must make an evidentiary showing sufficient to support a "definitive assessment" that there is a substantial likelihood that the alleged misrepresentations "would have been viewed by the reasonable investor as having significantly altered the total mix of information." In re: Salomon Analyst Metromedia Litigation, 544 F.3d 474, 484-85 (2d Cir. 2008). The Fifth Circuit held that "proof of a material misstatement" is required at the class certification stage in order to trigger the fraud-on-the-market presumption. Oscar Private Equity Invs. v. Allegiance Telecom, Inc., 487 F.3d 261, 265 (5th Cir. 2007).
4. In re: DVI, Inc. Securities Litigation, 639 F.3d 623, 631, 638 (3d Cir. 2011).
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