WASHINGTON, D.C. - (Mealey's) The U.S.
Supreme Court on March 22 unanimously affirmed that shareholders of a drug
maker properly showed that the drug maker violated federal securities law by
failing to disclose that one of its products caused adverse effects (Matrixx
Initiatives, Inc., et al. v. James Siracusano, et al., No. 09-1156, U.S.
Sup.; See January 2011, Page 9)
(lexis.com
subscribers may access Supreme Court briefs for this case).
The court held that the lead plaintiffs properly pleaded
materiality against drug maker Matrixx Initiatives Inc. because under its
ruling in Basic Inc. v. Levinson, 485 U.S. 224 (1988) [enhanced version available to lexis.com subscribers / unenhanced version available from lexisONE Free Case Law],
Section 10(b) of the Securities Exchange Act of 1934's "materiality requirement
is satisfied when there is 'a substantial likelihood that the disclosure of the
omitted fact would have been viewed by the reasonable investor as having significantly
altered the "total mix" of information made available.'"
"Here, Matrixx's bright-line rule - that adverse event
reports regarding a pharmaceutical company's products are not material absent a
sufficient number of such reports to establish a statistically significant risk
that the product is causing the events - would 'artificially exclud[e]'
information that 'would otherwise be considered significant to [a reasonable
investor's] trading decision,'" Justice Sonia Sotomayor wrote for the court, adding
that "Matrixx's premise that statistical significance is the only reliable
indication of causation is flawed."
The court also found that, applying the "total mix"
standard of Basic, the lead plaintiffs have properly pleaded materiality
because "[t]he complaint's allegations suffice to 'raise a reasonable
expectation that discovery will reveal evidence' satisfying the materiality
requirement, and to 'allo[w] the court to draw the reasonable inference that
the defendant is liable.'"
Moreover, the court rejected Matrixx's "proposed
bright-line rule requiring an allegation of statistical significance to
establish a strong inference of scienter" and ruled that "[t]he complaint's
allegations, 'taken collectively,' give rise to a 'cogent and compelling' inference
that Matrixx elected not to disclose adverse event reports not because it
believed they were meaningless but because it understood their likely effect on he market."
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, or loss of smell.
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.
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. The Supreme Court heard oral argument on Jan. 10.
[Editor's Note: Full coverage will be in the April
issue. In the meantime, the opinion is available at www.mealeysonline.com or by
calling the Customer Support Department at 1-800-833-9844. Document
#57-110411-009Z. For all of your legal news needs, please visit www.lexisnexis.com/mealeys.]
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Read commentary by Kevin Lacroix: Supreme
Court Rejects "Statistical Significance" Requirement for Securities
Suit Materiality