By Anthony D. Phillips, Esq.
Berman DeValerio
On Nov. 5, 2012, the United States Supreme Court heard oral arguments in its latest case to address issues of class certification, this time in the context of a securities fraud claim invoking the “fraud on the market” doctrine.
The case, Amgen v. Connecticut Retirement Plans, No. 11-1085, raises the issue of whether securities fraud plaintiffs must prove the materiality of alleged false statements at the class certification stage of litigation – as a predicate to claiming the fraud on the market presumption – or whether the materiality question is properly reserved for the merits stage. The Amgen decision will have important implications for securities fraud plaintiffs and for class action plaintiffs generally, as the law concerning what factual showing is required for class certification continues to evolve.
The Amgen plaintiffs alleged material misrepresentations and omissions by the company regarding the safety of two of its anemia drugs. Amgen has maintained that the relevant safety information was known to the market during the relevant time period.
Having defeated a motion to dismiss, the plaintiffs moved for certification of a class comprising Amgen investors who purchased the company’s stock during the period when its value was inflated by the alleged false statements. The district court granted the motion, finding that questions common to the class would predominate over questions affecting individual class members.
The Ninth Circuit Court of Appeals affirmed the class certification decision. In particular, it affirmed that the fraud on the market presumption enabled plaintiffs to meet their class certification burden of showing that individual questions of reliance would not predominate.
Both the District Court and the Ninth Circuit rejected Amgen’s argument that plaintiffs should have to prove the materiality of the alleged misstatements as a predicate to invoking the fraud on the market presumption of reliance.
The fraud on the market doctrine was accepted by the Supreme Court in its 1988 opinion in Basic v. Levinson. Fraud on the market allows plaintiffs seeking class certification in securities fraud cases to invoke a rebuttable presumption that, in an efficient market the shareholders relied on the alleged mistatements because “the price of a company’s stock is determined by the available material information regarding the company and its business.”Without the presumption, class certification in securities fraud cases would be extremely difficult, as each individual investor would have to demonstrate their direct reliance on the alleged false statement.
The Amgen defendants did not dispute either the efficient market or public dissemination showings advanced by plaintiffs. Rather, defendants asserted that without materiality, the fraud on the market showings become meaningless. By definition, the stock price in an efficient market will move only in response to material public information. Conversely, a stock’s price will not move in response to the market learning immaterial information. The Amgen defendants relied on this premise to argue before the Supreme Court that plaintiffs must prove materiality at the class certification stage, as a predicate to invoking the fraud on the market presumption of reliance.
In the securities fraud context, materiality means whether disclosure of the truth behind a false statement would have been viewed by a reasonable investor as significantly altering the total mix of information available.
During oral argument, certain Justices questioned the propriety of resolving a case dispositive question at the class certification stage. Unlike preliminary inquiries into market efficiency and public dissemination, finding immateriality at class certification would undoubtedly prove fatal for any claims of securities fraud. Justices Kagan and Ginsburg focused on the standard recently articulated in Dukes v. Wal-Mart: that the determining factor for class certification is cohesion – whether the class wins or loses together. Under that standard, a common answer to the question of materiality would apply to all class members, making it appropriate for resolution at the merits stage and not the earlier class certification stage.
Justice Scalia, by contrast, seemed more amenable to resolving materiality at class certification, as a threshold question posed before plaintiffs can invoke fraud on the market. Justice Scalia referred to the “enormous pressure to settle” securities cases once a class is certified as one reason to decide materiality upstream of the merits. Respondents countered these public policy arguments by reference to the Private Securities Litigation Reform Act of 1995 (PSLRA) and Securities Litigation Uniform Standards Act of 1998 (SLUSA). In passing both of these statutes, Congress enacted higher pleading standards to curb perceived abuses in securities fraud lawsuits. But in neither case did Congress alter the market efficiency or materiality rules of the fraud on the market doctrine, despite having a clear opportunity to do so.
A Supreme Court ruling in favor of Amgen would have a considerable impact on plaintiffs in securities fraud class actions. The burden of meeting class certification would grow heavier, with additional factual inquiries and expert testimony required to show materiality. The Supreme Court’s decision is expected by June 2013.
– November 7, 2012
*In August 2017, our firm name changed to Berman Tabacco. Case references and content published before that date may refer to the firm under our prior name, Berman DeValerio.