WASHINGTON, D.C. - (Mealey's) The U.S. Supreme Court heard oral argument Monday, Jan. 10, in a securities class action brought by shareholders
of a drug maker that allegedly failed to properly disclose that one of its
products caused adverse effects in violation of the federal securities laws (Matrixx
Initiatives, Inc., et al. v. James Siracusano, et al., No. 09-1156, U.S.
Sup.; See November 2010, Page 23).
The Supreme Court justices questioned Jonathan Hacker of O'Melveny
& Myers in Newport Beach, Calif., who represents drug maker Matrixx Initiatives
Inc., as to whether Matrixx, which knew that a limited number of adverse event
reports had been issued regarding its product Zicam Cold Remedy, should have
disclosed the reports and issued information disputing the statements of a
physician who said that Zicam had caused anosmia, which is the loss of the
sense of smell, in users.
"[F]irst of all, we
have to be very careful . . . about a rule that requires a company to disclose
false facts. I would say . . . that a reasonable investor doesn't want
false information; a reasonable investor wants
accurate information," Hacker said, responding to questioning from Justice
Antonin Scalia as to why Matrixx did not dispute the information released by
the physician on a national morning television news show.
Hacker argued that
Matrixx was not required to disclose the results of the adverse event reports
under the statistical significance standard because only a small number of
adverse event reports were issued regarding the Zicam side effects.
"I'm sorry, I don't
mean to take a position yet. But, look, Albert Einstein had the theory of
relativity without any empirical evidence, okay? So we could get the
greatest doctor in the world and he has dozens of theories, and the theories
are very sound and all that fits in here is an allegation he now has learned and it's
the free zinc ion that counts. And that could be devastating to a drug
even though there isn't one person yet who had been hurt. So I can't see
how we can say this statistical evidence always works,"
Justice Stephen G. Breyer said,
adding that the allegations made in the instant action rise above the "usual
background noise" that drug makers hear regarding their drugs on a normal
basis.
Arguing for lead plaintiffs National Electrical
Contractors Association-International Brotherhood of Electrical Workers
(NECA-IBEW) Pension Fund and James Siracusano, David C. Frederick of
Kellogg, Huber, Hansen, Todd, Evans & Figel in Washington averred that
Matrixx has made two sets of arguments, both of which should be rejected.
Disagreeing with
Matrixx's claim that the statistical significance standard applies, Frederick
said that under Supreme Court precedent in TSC Industries, Inc. v. Northway,
Inc. (426 U.S. 438 [1976]) [enhanced version available to lexis.com subscribers / unenhanced version available from lexisONE Free Case Law]and Basic Inc. v. Levinson (485 U.S. 224
[1988]) [enhanced version / unenhanced version], "this Court reaffirms the longstanding rule that
materiality is judged based on the total mix of information available to
investors."
The lead plaintiffs
filed their class action complaint on behalf of Matrixx shareholders in the
U.S. District Court for the District of Arizona. They alleged that
Matrixx violated Section 10(b) of the Securities Exchange Act of 1934 by
failing to disclose that Zicam allegedly causes anosmia.
Judge Mary H.
Murguia granted Matrixx's motion to dismiss the class, holding that the
allegations of user complaints regarding Zicam's side effects were not material
because they were not statistically significant. She also held that the
plaintiffs failed to plead scienter.
On appeal, the Ninth
Circuit U.S. Court of Appeals reversed and remanded, and Matrixx appealed to
the Supreme Court, which granted Matrixx's petition on June 14.
[Editor's Note: Full coverage will be in the
January issue. In the meantime, the oral argument transcript is available
at www.mealeysonline.com or
by calling the Customer Support Department at 1-800-833-9844. Document
#57-110111-060T. For all of your legal news needs, please visit www.lexisnexis.com/mealeys.]
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