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The Commission filed its amicus curiae brief in Matrixx
Initiatives, Inc. v. Siracusano, No. 09-1156 (S.Ct.), one of two securities
cases the Supreme Court will hear this term. Matrixx centers on the
proper test of materiality at the pleading stage. The other case is Janus
Capital Group v. First Derivative Traders, No. 09-525 (S.Ct) which concerns
the question of primary liability. Both cases are discussed here.
Matrixx is a class action
that claimed the company made false and misleading statements concerning one of
its key products, an over-the-counter cold remedy called Zicam. The company
issued statements regarding the success of the product in 2003. At one point,
Matrixx revised its earning guidance upward based on the performance of the
The company had, however, received information that Zicam
could cause a loss of smell. It came from several medical researchers as well
as individuals. Several product liability suits were filed. Matrixx continued
to maintain that Zicam was safe and that none of the clinical trials supported
a claim that the nasal spray caused a loss of smell. The company denied press
reports to the contrary.
The district court dismissed the complaint concluding
that adverse information relating to the safety of the product was not material
unless the reports contain reliable statistical information that the drug is
unsafe. The Ninth Circuit reversed, concluding that the materiality standard
adopted by the court was contrary to the Supreme Court's decision in Basic
Inc. v. Levinson, 485 U.S. 224 (1988).
The Solicitor General and the SEC filed a brief in
support of Respondents. There, the Commission argues that the rule sought by
Petitioners based on statistically significant association is contrary to Basic.
In that case, the Court rejected a bright line test for materiality in favor of
a nuanced approach which assesses the inferences a reasonable shareholder would
draw from a given set of facts. This is, of necessity, a contextual inquiry.
Viewed in this context, it is clear that a reasonable investor may be concerned
about information which raises questions regarding the safety of a company's
products. This is true even where it does not establish a statistically
significant association. While the test advanced by Petitioners provides some
indication about the validity of a correlation between a product and a harm, it
does not refute an inference of causation, the Commission noted.
Citing Basic, the SEC told the High Court that the
materiality requirement in a securities fraud action filters out essentially
useless information. Data that a company's products cause harm may be important
to an investor "even if it does not establish that the causal link more likely
than not exists." This is because a reasonable investor is concerned with the
impact the information can have on the share price. Reports such as those
involved here might cause consumers not to purchase the product or draw
regulatory attention which can impact the drug's commercial success and
Finally, Basic provides the correct test of
materiality, particularly at the pleading stage. The test avoids a bright line
in favor of an approach which takes into consideration various factors that a
reasonable investor might consider. This contrasts sharply with the statistical
test advanced by Petitioners. Applying this approach to the allegations in the
complaint here demonstrates that it adequately pleads materiality.
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.