Supreme Court Rules Materiality Not A Prerequisite To Certification In Securities Class Action Lawsuit

WASHINGTON, D.C. - (Mealey's) Materiality is not a prerequisite to class certification in a securities class action lawsuit where the plaintiffs are seeking monetary damages for alleged violations of Sections 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, a divided U.S. Supreme Court ruled on Feb. 27 (Amgen Inc., Kevin W. Sharer, Richard D. Nanula, Roger M. Perlmutter and George J. Morrow v. Connecticut Retirement Plans and Trust Funds, No. 11-1085, U.S. Sup.).

(Opinion available. Document #57-130311-005Z.)

Writing for the majority, Justice Ruth Bader Ginsburg held that proof of materiality is not needed "to ensure that the questions of law or fact common to the class will 'predominate over any questions affecting only individual members' as the litigation progresses" for two reasons.

In particular, the majority found that "[f]irst, because materiality is judged accord­ing to an objective standard, it can be proved through evidence com­mon to the class. Thus, it is a common question for [Federal Rule of Civil Procedure] Rule 23(b)(3) purposes. Second, a failure of proof on the common question of materiality would not result in individual questions predominating. Instead, it would end the case, for materiality is an essential element of a secu­rities-fraud claim."

Fraud-On-The-Market Predicates

The majority also rejected petitioners Amgen Inc. and Amgen officers Kevin W. Sharer, Richard D. Nanula, Roger M. Perlmutter and George J. Morrow's (collectively, Amgen) reference to the Supreme Court's ruling in Erica P. John Fund, Inc. v. Halliburton Co. (No. 09-1403, U.S. Sup.; 2011 U.S. LEXIS 4181 [enhanced version of this opinion is available to subscribers]) in making their argument that, if certain "fraud-on-the-market predicates must be proved before class certification[, then] materiality - another fraud-on-the-market predicate - should be treated no differently."

"The requirement that a putative class representative establish that it executed trades 'between the time the misrepresentations were made and the time the truth was re­vealed' relates primarily to the Rule 23(a)(3) and (a)(4) inquiries into typicality and adequacy of representation, not to the Rule 23(b)(3)predominance inquiry. And unlike materiality, market efficiency and the public nature of the alleged misrepresentations are not indispen­sable elements of a Rule 10-5 claim. While the failure of common, class wide proof of market efficiency or publicity leaves open the pro­spect of individualized proof of reliance, the failure of common proof on the issue of materiality ends the case for all class members," the court said.

Moreover, the majority disagreed with Amgen's assertion that "policy considerations" militate in favor of requiring precertification proof of materiality, finding that "materiality does not differ from other essential elements of a Rule 10b-5 claim, notably, the requirements that the statements or omissions on which the plaintiff's claims are based were false or misleading and that the alleged statements or omissions caused the plaintiff to suffer economic loss."

Proof Of Materiality

"Significantly, while addressing the settlement pressures as­sociated with securities-fraud class actions, Congress has rejected calls to undo the fraud-on-the-market theory. And contrary to Amgen's argument that requiring proof of materiality before class certification would conserve judicial resources, Amgen's position would necessitate time and resource intensive mini-trials on materi­ality at the class-certification stage," the court stated.

The court further ruled that "[a]lso unavailing is Amgen's claim that the District Court erred by refusing to consider the rebuttal evidence Amgen proffered in op­posing [shareholder] Connecticut Retirement's [Connecticut Retirement Plans and Trust Funds (CRPTF)] class-certification motion."

"The Ninth Circuit [U.S. Court of Appeals] concluded, and Amgen does not contest, that Amgen's rebuttal evidence aimed to prove that the misrepresentations and omissions alleged in Connecticut Retirement's complaint were imma­terial. The potential immateriality of Amgen's alleged misrepresen­tations and omissions, however, is no barrier to finding that common questions predominate. Just as a plaintiff class's inability to prove materiality creates no risk that individual questions will predomi­nate, a definitive rebuttal on the issue of materiality would not un­dermine the predominance of questions common to the class," the court explained.

Chief Justice John G. Roberts and Justices Stephen G. Breyer, Samuel A. Alito Jr., Sonia Sotomayor and Elena Kagan joined in the majority opinion.

Concurring, Dissenting Opinions

Justice Alito also filed a concurring opinion, stating that "I join the opinion of the Court with the understanding that the petitioners did not ask us to revisit Basic's [Basic Inc. v. Levinson (485 U. S. 224 [1988])] [enhanced version] fraud-­on-the-market presumption."

"As the dissent observes, more recent evidence suggests that the presumption may rest on a faulty economic premise. In light of this development, reconsideration of the Basic presumption may be appropriate," Justice Alito explained.

Justice Clarence Thomas filed a dissenting opinion holding that "[t]he Court today allows plaintiffs to obtain certification of securities-fraud class actions without proof that com­mon questions predominate over individualized questions of reliance, in contravention of Federal Rule of Civil Pro­cedure 23(b)(3)."

Class Certification

"The Court does so by all but eliminating materiality as one of the predicates of the fraud-on-the-market theory, which serves as an alternative mode of es­tablishing reliance. Without demonstrating materiality at certification, plaintiffs cannot establish Basic's fraud­-on-the-market presumption. Without proof of fraud-on-the-market, plaintiffs cannot show that otherwise individual­ized questions of reliance will predominate, as required by Rule 23(b)(3). And without satisfying Rule 23(b)(3), class certification is improper. Fraud on the market is thus a condition precedent to class certification, without which individualized questions of reliance will defeat certification," Justice Thomas said.

"The Court's opinion depends on the following assump­tion: Plaintiffs will either (1) establish materiality at the merits stage, in which case class certification was proper because reliance turned out to be a common question, or (2) fail to establish materiality, in which case the claim would fail on the merits, notwithstanding the fact that the class should not have been certified in the first place, because reliance was never a common question. The failure to establish materiality retrospectively confirms that fraud on the market was never established, that questions regarding the element of reliance were not common under Rule 23(b)(3), and, by extension, that certification was never proper. Plaintiffs cannot be ex­cused of their Rule 23 burden to show at certification that questions of reliance are common merely because they might lose later on the merits element of materiality. Because a securities-fraud plaintiff invoking Basic's fraud­-on-the-market presumption to satisfy Rule 23(b)(3) should be required to prove each of the predicates of that theory at certification in order to demonstrate that questions of reliance are common to the class, I respectfully dissent."

Justice Anthony Kennedy joined in Justice Thomas' dissenting opinion, and Justice Antonin Scalia joined in the dissent, except for Part I-B. He wrote his own dissent in which he stated that "[c]ertification of the class is often, if not usually, the prelude to a substantial settlement by the defendant because the costs and risks of litigating further are so high. It does an injustice to the Basic Court to presume without clear evidence - and indeed in the face of language to the contrary - that it was establishing a regime in which not only those market class-action suits that have earned the presumption of reliance pass beyond the cru­cial certification stage, but all market-purchase and market-sale class-action suits do so, no matter what the al­leged misrepresentation. The opinion need not be read this way, and it should not."

"The fraud-on-the-market theory approved by Basic en­visions a demonstration of materiality not just for sub­stantive recovery but for certification. Today's holding does not merely accept what some consider the regrettable consequences of the four-Justice opinion in Basic; it ex­pands those consequences from the arguably regrettable to the unquestionably disastrous," Justice Scalia said.

Exchange Act

CRPTF sued Amgen in the U.S. District Court for the Central District of California under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5. CRPTF alleged that Amgen made misrepresentations regarding the safety of two of its products, Aranesp and Epogen, causing artificial inflation of the market price for Amgen stock. CRPTF moved to certify a class of people who bought Amgen stock from April 22, 2004, through May 10, 2007. The start of the period corresponds to a public statement by Amgen regarding a May 2004 Food and Drug Administration advisory committee meeting. CRPTF alleges that Amgen misrepresented that the meeting would not focus on the safety of Aranesp. The end of the class period corresponds with a later meeting of the same FDA committee. CRPTF alleged that the meeting constituted a corrective disclosure.

Amgen opposed class certification principally on the ground that CRPTF did not, and could not, establish that the alleged misrepresentations were material. The District Court rejected Amgen's arguments and granted CRPTF's motion for class certification, holding that CRPTF could invoke the presumption of reliance arising from the fraud-on-the-market theory because to trigger the presumption, CRPTF "need only establish that an efficient market exists." Amgen appealed to the Ninth Circuit U.S. Court of Appeals, which affirmed. The Ninth Circuit rejected Amgen's contention that CRPTF must provide proof of materiality at the class certification stage.

On March 1, Amgen and the individual defendants filed a petition for writ of certiorari with the U.S. Supreme Court.

Questions Presented

The petition presented two questions: "Whether, in a misrepresentation case under SEC Rule 10b-5, the district court must require proof of materiality before certifying a plaintiff class based on the fraud-on-the-market theory" and "Whether, in such a case, the district court must allow the defendant to present evidence rebutting the applicability of the fraud-on-the-market theory before certifying a plaintiff class based on that theory."

The Supreme Court granted the petition on June 11. On Aug. 18, the petitioners filed a petitioners' brief, and on Sept. 20, CRPTF filed a respondent's brief.

Former SEC commissioners and officials and law and finance professors filed an amicus curiae brief in support of the petitioners on Aug. 14.

Amici Curiae

On Sept. 27, the following entities each filed amicus curiae briefs in support of CRPTF: the United States; the National Association of Shareholder and Consumer Attorneys; Public Justice P.C., civil procedure and securities law professors; AARP, New York City pension funds and the Colorado Public Employees' Retirement Association of the City of New York; Public Citizen Inc.; and financial economists.

Oral arguments were heard Nov. 5.


The petitioners are represented by Noah A. Levine of Wilmer Cutler in New York, Seth P. Waxman, Louis R. Cohen, Andrew N. Vollmer, Daniel S. Volchok and Weili J. Shaw of Wilmer Cutler in Washington and Steven O. Kramer, John P. Stigi III, John M. Landry and Jonathan D. Moss of Shephard, Mullin, Richter & Hampton in Los Angeles. CRPTF is represented by Frederick, Derek T. Ho and Emily T.P. Rosen of Kellogg, Huber, Hansen, Todd, Evans & Figel in Washington and Edward Labaton, Jonathan M. Plasse and Christopher J. McDonald of Labaton Sucharow in New York.

The former SEC commissioners and officials and law and finance professors are represented by Timothy S. Bishop, Joshua D. Yount and Frank M. Dickerson of Mayer Brown in Chicago. The United States is represented by Mark D. Cahn, Michael A. Conley, Jacob H. Stillman, John W. Wavery, Benjamin L. Schiffrin and Jeffrey A. Berger of the Securities and Exchange Commission in Washington and Donald B. Verrilli Jr., Malcolm L. Stewart and Nicole A. Saharsky of the Department of Justice in Washington. The National Association of Shareholder and Consumer Attorneys is represented by William C. Fredericks and Ann M. Lipton of Bernstein Litowitz Berger & Grossman in New York.

Public Justice P.C. is represented by Arthur Bryant of Public Justice P.C. in Oakland, Calif., and Earl Landers Vickery of Austin, Texas. The civil procedure and securities law professors are represented by David Marcus of the University of Arizona Rogers College of Law in Tucson, Ariz., and Darren J. Robbins and Eric Alan Isaacson of Robbins Geller Rudman & Dowd in San Diego. AARP is represented by Jay Sushelsky of AARP Foundation Litigation and Michael Shuster of AARP, both in Washington.

The Colorado Public Employees' Retirement Association and the New York City pension funds are represented by Gregory W. Smith of the Colorado Public Employees' Retirement Association in Denver; City of New York Corporate Counsel Michael A. Cardozo in New York; Stephen R. McAllister of Thompson Ramsdell & Qualseth in Lawrence, Kan.; Lumen N. Mulligan of Lawrence; and Darren J. Check of Kessler Topaz Meltzer Check in Radnor, Pa. Public Citizen Inc. is represented by Scott L. Nelson and Allison M. Zieve of the Public Citizen Litigation Group in Washington. The financial economists are represented by Ernest A. Young in Durham, N.C., and William C. Fredericks and Ann M. Lipton of Bernstein Litowitz Berger & Grossman in New York.

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