On February 27, 2013, the Supreme Court ruled in Amgen, Inc.
v. Connecticut Retirement Plans and Trust Funds, No. 11-1085,
that plaintiffs in a federal securities fraud action need not prove
the materiality of an alleged misrepresentation to certify a class
under the fraud-on-the-market theory. The significance of the
Court's holding is probably not the watershed event that some
have predicted, as the argument that alleged misrepresentations
were not material has not often been a particularly effective tool
for defeating class certification. Nonetheless, the Court's
decision comes less than two years after Erica P. John Fund,
Inc. v. Halliburton Co., 131 S. Ct. 2179 (2011), in which the
Court held that securities plaintiffs need not prove loss causation
to certify a class. Together, Halliburton and
Amgen diminish the tools defendants have available to them
to defeat the certification of weak claims. These decisions
underscore the need for defendants to be as aggressive as possible
at the pleading stage of securities fraud class actions.
The contrast between Amgen and the Eleventh Circuit's
decision two days prior in Meyer v. Greene, ---F.3d ----,
No. 12-11488 (11th Cir. Feb. 25, 2013), illustrates this dynamic.
In both cases, the defendants appeared to have a strong argument
that the information claimed to be withheld from the market was in
fact public. In Amgen, the plaintiff alleged that an Amgen
executive misleadingly downplayed the significance of a Food and
Drug Administration Advisory Committee meeting by incorrectly
saying that the meeting would not focus on one of Amgen's
leading drugs. See Amgen, Slip Op., at 24.
Defendants tried to introduce the committee's publicly
available meeting agenda, which showed that the drug would
be discussed, as rebuttal evidence that the alleged
misrepresentations were immaterial. The Supreme Court agreed with
the district court that this evidence could not be admitted, and
the class was certified.
In Meyer, on the other hand, the plaintiff alleged that
the St. Joe Company, a real estate developer, failed to write down
assets from failing projects even though it knew that the real
estate market in Florida, where it had important projects, was
crumbling. See Meyer, Slip Op., at 3-4. Plaintiff
alleged that the truth came to light when investor David Einhorn
made a presentation at a conference arguing that St. Joe's
assets were significantly overvalued; St. Joe's stock dropped
20 percent in the next two days. Id. at 5. The Eleventh
Circuit concluded that the plaintiff had not pled loss causation
because the Einhorn presentation was based entirely on public
information, and thus could not constitute the corrective
disclosure necessary for a securities fraud claim. Significantly,
although plaintiffs had not included the Einhorn presentation in
the complaint, the Court considered the content of the 139-slide
Einhorn presentation in its analysis, including the disclaimer on
the second slide that the information was gleaned only
from publicly available sources. Id. at 5 n.5, 16 &
n.9. The Court rejected plaintiff's attempt to create a factual
issue about whether certain information was public.
Despite having issued a series of rulings on securities fraud
issues in recent years that are often viewed as
"pro-plaintiff" (Amgen, Halliburton,
and Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct.
1309 (2011)), the Roberts Court has actually provided defendants
with important tools for weeding out weak securities cases in their
early stages. The decisions in Ashcroft v. Iqbal, 556 U.S.
662 (2009), and Bell Atlantic Corp. v. Twombly, 550 U.S.
544 (2007), require plaintiffs to show that their interpretations
of particular facts are plausible, not just possible. For example,
Twombly requires a plaintiff to plead facts that
"plausibly suggest[ ]" the supposed misconduct, not that
are "merely consistent with" it. Defendants can argue
that Iqbal and Twombly require a plaintiff to
plead facts (such as quotations from analyst reports) suggesting
that the stock price moved for the reasons plaintiffs claim it did.
This argument may be particularly effective where plaintiff's
theory of loss causation, although theoretically possible, seems
inconsistent with basic assumptions about market efficiency because
of an unexplained lag time between the disclosure of negative
information and a drop in the stock price.
Even with diminished chances of defeating class certification on
materiality or loss causation grounds, these issues may be ripe for
carefully targeted motions for partial summary judgment early in
the case. In certain circumstances, a motion for partial summary
judgment might be filed at the same time as the opposition to class
certification. In general, such early motions for summary judgment
may target issues where little, if any, discovery is necessary to
resolve the claim. Both loss causation and whether certain
information was public are strong candidates for early resolution
because neither should require any electronic discovery of internal
documents from the defendant company to resolve. Defendants should
consider requesting that discovery and scheduling orders be entered
so as to allow the Court to reach such issues as early in the case
as possible.
The Roberts Court may revisit the fraud-on-the-market presumption
in the coming years, which could radically alter the rules for
certifying securities class actions. In Amgen, Justice
Alito, although siding with the majority, separately wrote that
that he would like the Court to revisit Basic Inc. v.
Levinson; it may fairly be assumed that Amgen's
three dissenters would like to do so as well. However, unless and
until the Supreme Court reconsiders Basic, defendants in
putative securities class actions should remain vigilant in trying
to defeat weak claims as early in the case as possible.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.