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High Court: Investors Properly Pleaded Materiality In Securities Class Action Suit

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.). 

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]), 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 the 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 of Mealey's Emerging Securities Litigation.  In the meantime, the opinion is available at 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] 

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