The threat of class-wide judgments in private securities class actions often leads defendants to pay significant amounts to settle claims without testing their merits for fear of incurring even greater damages after a trial. Thus, decisions on motions for class certification are critical in determining whether and how much defendants have to pay to dispose of a case. On June 11, 2012, the U.S. Supreme Court granted certiorari in Amgen, Inc. v. Connecticut Retirement Plans & Trust Funds, a recent Ninth Circuit decision that held that a plaintiff is not required to establish that a misrepresentation on which it claims to have relied was "material" to invoke the fraud-on-the-market presumption of reliance in support of its class certification petition.
Most securities class actions are brought under Rule 23(b)(3), which allows a class to be certified only if the court finds that "questions of law or fact common to class members predominate over any questions affecting only individual members . . . ." Fed. R. Civ. P. 23(b)(3). Because reliance on an alleged misrepresentation is an element of a securities fraud claim, a plaintiff seeking class certification must establish that reliance is common to the class.
Under ordinary circumstances, no plaintiff could show reliance by all the individual prospective class members. But in Basic Inc. v. Levinson, 485 U.S. 224 (1988), the Supreme Court approved the fraud-on-the-market doctrine — a rebuttable presumption of reliance on statements once they become public. According to this doctrine, when a security is traded in an efficient market, all public information is reflected in the market price of the security and it can then be assumed that an investor who buys or sells stock at the market price relies upon all public statements. Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 159 (2008) (citing Basic, 485 U.S. at 247).
In Amgen, the lead plaintiff alleged that Amgen and several of its officers made misstatements and omissions regarding the safety of Amgen's anemia treatment products. After plaintiff moved for class certification, the district court held that plaintiff's allegation that Amgen's supposed falsehoods were material was sufficient to invoke the fraud-on-the-market presumption and that proof of materiality is not required until summary judgment or trial. The district court also denied Amgen's attempt to rebut materiality by offering evidence showing that the market was already aware of the allegedly concealed information before the alleged misrepresentation was made.
The Ninth Circuit affirmed, holding that to invoke the fraud-on-the market presumption, a plaintiff does not need to prove that the alleged misrepresentation was material, but only needs to plausibly allege materiality. The court also held that attempts to rebut the fraud-on-the-market presumption by offering evidence that the alleged misrepresentation was not material should not be permitted by a district court at the class certification stage. According to the Amgen court, these are questions about the merits and should, therefore, be reserved for trial or summary judgment.
The Amgen court explained that the requirements of the fraud-on-the-market presumption — an efficient securities market and a purported falsehood that was public — are not elements of securities fraud claims, while materiality is. It reasoned that failure to satisfy the requirements of the fraud-on-the-market presumption should be separate from failing to prove necessary elements of the underlying securities claim.
Amgen intensifies the existing circuit split in which the Second and Fifth Circuits require proof of materiality at the class certification stage to invoke the fraud-on-the-market presumption,1 while the Third, Seventh, and now Ninth Circuits do not.2
In their petition for certiorari, the Amgen defendants argued that materiality is just as much a predicate for applying the fraud-on-the-market theory as the efficient-market and public-statement predicates, and that a district court should require proof of materiality before class certification just as it does with those other predicates. If a misstatement is not material, Amgen argued, then there is no basis to find that the fraud had been transmitted through market price, and thus, the fraud-on-the-market presumption is inapplicable.
Amgen's petition also identifies the practical concern with the Ninth Circuit's ruling: the "in terrorem power of class certification to force settlements of even non-meritorious securities fraud complaints." The Supreme Court has issued several defendant-friendly rulings in recent years on issues relating to what kinds of securities claims can proceed,3 but its most recent decision on class certification in securities actions was viewed as more helpful to plaintiffs.4 Amgen should allow the Court to clarify whether materiality must be proved or only pleaded to invoke the fraud-on-the-market presumption. Depending on the answer, plaintiffs may have a more difficult burden in prevailing at the class certification stage and a reduced chance of obtaining a favorable resolution of their claims.
Footnotes
1 In re Salomon Analyst Metromedia Litig., 544 F.3d 474, 481 (2d Cir. 2008); Oscar Private Equity Invs. v. Allegiance Telecom, Inc., 487 F.3d 261, 264 (5th Cir. 2007).
2 In re DVI, Inc. Sec. Litig., 639 F.3d 623, 631 (3d Cir. 2011); Schleicher v. Wendt, 618 F.3d 679, 685 (7th Cir. 2010). The Third Circuit has adopted an intermediate approach under which a plaintiff does not need to demonstrate materiality to obtain class certification, but, as in the Second and Fifth Circuits, a defendant is given an opportunity to rebut the presumption of the fraud-on-the-market theory by offering evidence disproving the materiality of the alleged misrepresentation.
3 See, e.g., Janus Capital Group, Inc. v. First Derivative Traders, ___ U.S. ___, 131 S. Ct. 2296, 2302 (2011) (holding that in Rule 10b-5 action, the person who makes a statement must have "ultimate authority over the statement, including its content and whether and how to communicate it" and that "[o]ne who prepares or publishes a statement on behalf of another is not its maker"); Tellabs, Inc. v. Makor Issues & Rights, 551 U.S. 308 (2007) (holding that to satisfy scienter requirement of Private Securities Litigation Reform Act of 1995, plaintiff must plead facts giving rise to an inference of scienter that is at least as compelling as any opposing inference of nonfraudulent intent).
4 See, e.g., Erica P. John Fund v. Halliburton, ___ U.S. ___, 131 S. Ct. 2179, 2185 (2011) (plaintiffs need not prove loss causation to obtain class certification).
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