Securities Fraud Plaintiffs Do Not Need to Prove Materiality to Obtain Class Certification
On February 27, 2013, the United States Supreme Court issued its opinion in Amgen, Inc. v. Connecticut Retirement Plans & Trust Funds, 568 U.S. ___ (2013), in which it held that plaintiffs in a putative securities fraud class action based on the “fraud-on-the-market” theory are not required to prove the materiality of alleged misrepresentations and/or omissions in order to obtain class certification under Federal Rule of Civil Procedure 23. The Supreme Court’s holding in Amgen resolved a growing circuit split on the issue of whether plaintiffs must prove, or only plausibly allege, materiality in order to obtain class certification in actions arising under Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5.
In Amgen, the plaintiffs alleged that Amgen made certain misrepresentations and omissions about the safety, efficacy, and marketing of two of its drugs, resulting in the artificial inflation of Amgen’s stock price. See Conn. Ret. Plans & Trust Funds v. Amgen, Inc., 660 F.3d 1170, 1172(9th Cir. 2011). Plaintiffs alleged that they experienced losses once the truth was revealed and the stock price declined. See id.
In asserting their claims and seeking class certification, the plaintiffs relied on the fraud-on-the-market presumption of reliance. Under this presumption, which was first approved by the Supreme Court in Basic v. Levinson, 485 U.S. 224 (1988), the reliance of individual plaintiffs on the integrity of the market price may be presumed, i.e., plaintiffs do not need to prove the reliance of each individual class member. Underlying the presumption is the premise that publicly traded securities trade in an efficient market in which all publicly available information is incorporated into market price. Because only material information can affect market price, the fraud-on-the-market presumption cannot apply absent a material misrepresentation or omission.
The district court granted class certification, holding that plaintiffs relying on the fraud-on-the-market presumption need not prove materiality at the class certification stage in order to satisfy Fed. R. Civ. P. 23(b)(3)’s requirement that “questions of law or fact common to class members predominate over any questions affecting only individual members.” The district court also rejected Amgen’s argument that defendants should be permitted, at the class certification stage, to present information rebutting materiality. The Ninth Circuit affirmed, holding that in seeking class certification for claims that rely on the fraud-on-the-market presumption, plaintiffs “must plausibly allege – but need not prove at this juncture – that the claimed misrepresentations were material.”
In affirming the Ninth Circuit’s decision, the Supreme Court held that Rule 23(b)(3) requires only proof that common questions predominate; it does not require plaintiffs to prove that each element of their claim, including materiality, is susceptible to class-wide proof. Specifically, the Court held that while plaintiffs “certainly must prove materiality to prevail on the merits,” failure to prove materiality “would not result in individual questions predominating. Instead, [it] would end the case, given that materiality is an essential element of the class members’ securities fraud claim.”
The Court also rejected Amgen’s policy-based argument that allowing class certification without first determining materiality may pressure defendants “to settle rather than incur the costs of defending a class action . . . .” Pointing to the enactment of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), which imposed heightened pleading standards for certain securities fraud claims, and the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), which preempts certain state law securities actions, the Court noted that Congress already has taken steps to “curb abusive securities-fraud lawsuits.” Finally, contrary to Amgen’s argument that requiring proof of materiality at the class certification stage would conserve judicial resources, the Court opined that Amgen’s approach would require a “mini-trial” on the issue at the certification stage.
Notably, although the continued validity of the fraud-on-the-market presumption was not challenged in Amgen, the concurring opinion of Justice Alito and the dissenting opinions of Justices Thomas, Kennedy, and Scalia indicate that the Court may be receptive to such a challenge in the future. Indeed, Justice Alito issued a one-paragraph concurring opinion solely for the purpose of noting that the fraud on the market presumption “may rest on a faulty economic premise,” and suggesting that “reconsideration of the Basic presumption may be appropriate.” Likewise, Justice Thomas, who was joined by Justices Kennedy and Scalia in his dissent, concluded that the “Basic decision itself is questionable.” Justice Thomas noted that there is disagreement regarding the efficient-market premise underlying the fraud-on-the-market presumption and reiterated concerns first raised by Justice White in his dissent in Basic that “the Court is not well equipped to embrace novel constructions of a statute based on contemporary microeconomic theory.”
Finally, Justice Scalia, in his dissent, offered perhaps the most strident criticism of the fraud-on-the-market presumption in noting that the presumption “is to be found nowhere in the United States Code or in the common law of fraud or deception; it was invented by the Court in [Basic].” Moreover, Justice Scalia criticized the majority’s holding that plaintiffs do not need to prove materiality at the class certification stage, stating “[t]oday’s holding does not merely accept what some consider the regrettable consequences of the four-Justice opinion in Basic; it expands those consequences from the arguably regrettable to the unquestionably disastrous.”
Although the majority decision in Amgen sometimes will make it easier for plaintiffs relying on the fraud-on-the-market presumption to obtain class certification, the concurring and dissenting opinions indicate that the Court may be willing to reconsider the continued viability of the presumption itself. These concurring and dissenting opinions lend support for renewed attacks by defendants on the presumption and, ultimately, could lead to a significant blow to plaintiffs in putative securities fraud class actions.
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