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
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.
1. 2009 U.S. Dist. LEXIS 71653 (C.D. Cal. Aug. 12,
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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In a recent decision characterizing precedent as a seven decade "aberration," the Supreme Court of California permitted plaintiff loan borrowers to introduce against a defendant banking institution parol evidence directly contradicting the very terms of the parties’ written loan agreement.