Pleading Materiality and Scienter after Siracusano

The Ninth Circuit's discussion of scienter in Siracusano raises questions regarding the effect of product liability claims on plaintiffs' ability to plead defendants' "knowledge" of the alleged facts underlying those lawsuits. Practitioners will want to consider this case in determining whether they are required to disclose, and in what detail to report, pending litigation.

Ms Berens writes: In Siracusano v. Matrixx Initiatives, Inc., 585 F.3d 1167 (9th Cir. 2009), the Ninth Circuit (JJ. Schroeder, Tashima and Bea) reversed the District of Arizona's grant of a motion to dismiss plaintiffs' complaint alleging violations of Section 10(b) of the Securities Exchange Act of 1934, holding that the plaintiffs had adequately pled materiality and scienter. With regard to materiality, the Ninth Circuit held that the statistical significance of patient complaints regarding a product was not the proper measure for determining materiality. Rather, according to the Siracusano decision, courts are required to consider whether the undisclosed information available to the defendants would be significant to a reasonable investor, even if the there is no statistically significant evidence that the product is unsafe.

The portion of the opinion dealing with the scienter element also raises troubling questions regarding the effect of product liability claims on plaintiffs' ability to plead defendants' "knowledge" of the alleged facts underlying those lawsuits. In other cases, courts have held that disclosure of patient claims or lawsuits against a company was not required where the defendants did not believe the claims had merit or were likely to succeed. In Siracusano, the Ninth Circuit held that the existence of the patient complaints and lawsuits, when considered along with several other facts, weighed into its holding that an inference of scienter was at least as likely as any plausible opposing inference.

Although it may be argued that Siracusano should be limited to its facts (including the fact that the level of patient complaints and lawsuits was substantial, eventually involving nineteen lawsuits and 284 patients), the Ninth Circuit's ruling could lead to unintended consequences in other cases involving far smaller numbers of patient complaints and/or claims. The Court's decision also raises serious questions concerning interpretation of FAS 5, dealing with disclosure of "loss contingencies."

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