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From Securities Regulation Daily, February 27, 2013

Securities Fraud Class Action May Be Certified Without Proof of Materiality

By Anne Sherry, J.D.

The United States Supreme Court held today that proof of materiality is not a prerequisite to certification of a securities fraud class action seeking money damages for alleged violations of Exchange Act Section 10(b) and Rule 10b-5. The 6-3 decision resolves a split among the circuits (Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, February 27, 2013, Ginsburg, R.).

Background. Connecticut Retirement Plans and Trust Funds filed a class-action complaint in district court alleging that Amgen, Inc. made misrepresentations and omissions regarding the safety, efficacy, and marketing of two drugs. The complaint invoked the fraud-on-the-market reliance theory that in efficient markets, the share price reflects all publicly available information; Amgen conceded that the market for its securities was efficient. The district court certified the class; on interlocutory appeal, the Ninth Circuit Court of Appeals affirmed. The Supreme Court granted certiorari to resolve a circuit split as to whether district courts must require plaintiffs to prove materiality and allow defendants to present rebuttal evidence prior to certifying a Section 10(b) and Rule 10b-5 class action.

Decision. Amgen contended that to satisfy Federal Rule of Civil Procedure 23(b)(3) — that common questions of law or fact predominate over questions affecting individual class members — Connecticut Retirement must prove, rather than merely plead, materiality before the class can be certified. The majority opinion, authored by Justice Ginsburg and joined by Justices Roberts, Breyer, Alito, Sotomayor, and Kagan, held that proof of materiality is not a prerequisite to class certification as"Rule 23(b)(3) requires a showing that questions common to the class predominate, not that those questions will be answered, on the merits, in favor of the class" (emphasis in original)."Because materiality is judged according to an objective standard," Justice Ginsburg continued,"…the alleged misrepresentations and omissions, whether material or immaterial, would be so equally for all investors composing the class."

The Court held that proof of materiality is not needed to ensure that common questions of law or fact will"predominate over any questions affecting only individual members" for two reasons. First, materiality is a common question because it can be proved through evidence common to the class. Second, because materiality is an essential element of a Rule 10b-5 claim,"there is no risk whatever that a failure of proof on the common question of materiality will result in individual questions predominating"; the failure of proof would end the case for all class members, leaving"no claim … in which individual reliance issues could potentially predominate." For this reason, the Court rejected Amgen's argument that, because other fraud-on-the-market predicates must be proven before class certification under the Court's Halliburton decision, so must materiality. The Court distinguished materiality from issues of market efficiency and publicity because a failure of proof on materiality ends the case and thus does not leave any possibility of individual questions overwhelming common ones.

Similarly, the court did not err in refusing to consider Amgen's rebuttal evidence because the evidence attempted to show that the statements were immaterial, but immateriality is not a barrier to finding that common questions predominate for class certification purposes."[J]ust as a plaintiff class's inability to prove materiality creates no risk that individual questions will predominate, so even a definitive rebuttal on the issue of materiality would not undermine the predominance of questions common to the class."

Amgen also argued that policy considerations merited requiring proof of materiality prior to certification: because certification puts pressure on the defendant to settle, the issue of materiality may never be decided. The Court rejected this argument, noting that in that respect, materiality is no different from other elements of a Rule 10b-5 claim that need not be adjudicated before certification, such as falsity and loss causation. The Court also noted that Congress has addressed settlement pressures through other means, notably through the PSLRA, during the enactment of which it rejected calls to do away with the fraud-on-the-market reliance presumption.

Concurrence and dissent. Justice Alito joined in the majority opinion but wrote a one-paragraph concurring opinion to note that, while the petitioners did not ask the Court to revisit the fraud-on-the-market presumption, the presumption may rest on a faulty economic premise, and it may be appropriate to reconsider it.

Justice Thomas filed a dissenting opinion, in which Justice Kennedy joined and Justice Scalia joined in part, arguing that materiality must be proved prior to class certification. Materiality is a necessary element of the fraud-on-the-market presumption which, in turn, is a necessary predicate to class certification because, without the reliance presumption, individual reliance issues predominate over common ones."The failure to establish materiality [on the merits] retrospectively confirms that fraud on the market was never established, that questions regarding the element of reliance were not common under Rule 23(b)(3), and, by extension, that certification was never proper," the dissent stated. Justice Scalia filed a separate dissenting opinion arguing that the Basic decision"envisions a demonstration of materiality not just for substantive recovery but for certification."

The case is No. 11-1085.

Attorneys: Seth P. Waxman (Wilmer Cutler Pickering Hale and Dorr, LLP) for Amgen, Inc. David C. Frederick (Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C.) for Connecticut Retirement Plans and Trust Funds.

Companies: Amgen, Inc.

Top Story: FraudManipulation

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