U.S Supreme Court Addresses Materiality in Securities Fraud Case

U.S Supreme Court Addresses Materiality in Securities Fraud Case

In Matrixx Initiatives, the U.S. Supreme Court reaffirmed the case-by-case analysis for materiality that it espoused in Basic Inc. v. Levinson, but it may also have signaled that the pleading of materiality is subject to the standards found in Rule 8(a) of the Federal Rules of Civil Procedure and not the heightened standards of the Private Securities Litigation Reform Act of 1995.

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Introduction:

In Matrixx Initiatives, Inc. v. Siracusano, No. 09-1156, 2011 U.S. LEXIS 2416 (U.S. Mar. 22, 2011) [enhanced version available to lexis.com subscribers / unenhanced version available from lexisONE Free Case Law], the U.S. Supreme Court unanimously held that a plaintiff can establish the materiality (for purposes of claims under Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5) of adverse events experienced by users of pharmaceutical products without showing that the incidence of harm from those adverse events was statistically significant. The Court reaffirmed the case-by-case analysis for materiality that it espoused in Basic Inc. v. Levinson, 485 U.S. 224 (1988) [enhanced version / unenhanced version], but it may also have signaled that the pleading of materiality is subject to the standards found in Rule 8(a) of the Federal Rules of Civil Procedure and not the heightened standards of the Private Securities Litigation Reform Act of 1995 (the "PSLRA").

Background

Matrixx manufactures Zicam, a product used to treat symptoms of the common cold. Beginning in 1999, Matrixx learned of a small number of incidents in which persons treated with Zicam nasal spray or gel lost their sense of smell (a condition called "anosmia").

Matrixx conducted no trials to address any alleged causal connection between Zicam and anosmia, and it stated publicly that Zicam was "poised for growth" and had "very strong momentum." Matrixx rejected allegations of a tie between Zicam and anosmia as "completely unfounded and misleading," but its stock price tumbled when Good Morning America reported that more than a dozen persons experienced anosmia after using Zicam and that four product liability lawsuits had been filed asserting a link between Zicam and anosmia. Federal class action securities fraud lawsuits followed against Matrixx and three of its executives based on their failure to disclose the adverse events linking Zicam to anosmia.

The district court dismissed the securities fraud actions, relying on rulings by the U.S. Court of Appeals for the Second Circuit in In re Carter-Wallace, Inc. Securities Litig., 150 F.3d 153 (2d Cir. 1998) [enhanced version], and 220 F.3d 36 (2d Cir. 2000) [enhanced version], that had embraced the "statistically significant" analysis. On appeal, the Ninth Circuit reversed, holding that the plaintiffs had sufficiently pled facts showing materiality and scienter and that there was no need to plead statistically significant ties between the use of Zicam and the onset of anosmia. Siracusano v. Matrixx Initiatives, Inc., 585 F.3d 1167 (9th Cir. 2009) [enhanced version / unenhanced version]. The Supreme Court affirmed the Ninth Circuit's decision.

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Joseph (Joe) E. Bringman is of counsel in Perkins Coie's Commercial Litigation practice, and has nearly 25 years of experience in both state and federal courts. In his early years with the firm, Joe was an integral part of the Perkins Coie team that assisted the Federal Savings and Loan Insurance Corporation and its successors to recover tens of millions of dollars from persons deemed responsible for the failure of several savings and loan associations in the Northwest and Alaska. While his practice continues to include director and officer liability issues, it currently emphasizes securities litigation defense, corporate governance litigation, insurance coverage litigation, foreclosure and other real property litigation (including receiverships), defense of qui tam litigation under the federal False Claims Act, professional liability litigation, and a variety of appellate work.

Michael Clyde is a partner in the Perkins Coie's litigation practice, and has more than 30 years of experience in securities, corporate governance, professional liability, antitrust and other complex litigation. He has represented securities issuers, directors, officers and professionals in a wide variety of litigation involving securities, corporate governance and financial disclosure and accounting issues.

In December 2009 Michael was lead trial counsel for craigslist, Inc. eBay v. Craig Newmark where the Delaware Chancery Court affirmed craigslist's approval of indemnification agreements for officers and directors and implementation of a staggered board. He also has represented witnesses and targets for insider trading and securities fraud investigations in front of the United States Securities and Exchange Commission and other federal and state agencies.