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The Supreme Court granted certiorari on Monday in a
securities fraud class action, agreeing to hear a question regarding pleading
standards. The question presented is: "Whether a plaintiff can state a claim under
Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5 based on a
pharmaceutical company's nondisclosure of adverse event reports even though the
reports are not alleged to be statistically significant?" Matrixx
Initiatives v. Siracusano, No. 09-1158 (S.Ct. Cert. granted June 14, 2010).
The case is based on a decision by of the Ninth Circuit
Court of Appeals in Siracusano v. Matrixx Initiatives, Inc., 585 F.3d
1167 (9th Cir. 2009), discussed here. The complaint claimed that Matrixx made
false statements about its key product Zicam, a nasal spray. In 2003, the
company issued statements regarding the success of the product and at one point
revised guidance upward due to its success. The company had, however, received
some information from researches and individuals that the nasal spray caused a
loss of smell. Products liability suits had also been filed against the company
asserting this claim.
Matrixx, however, maintained in press releases that none of
the clinical trials supported any claim that the drug caused a loss of smell.
The company denied press reports discussing complaints about a loss of smell. A
report that the FDA was investigating this claim was followed by a drop in the
share price despite statements by the company that it was not aware of any such
A shareholder suit alleging securities fraud based on claims
that the denials of the company were false and misleading was dismissed by the
district court. In its ruling, the court held that adverse product reports
regarding a loss of smell need not be disclosed because they were not material.
Specifically, the court held that a pharmaceutical company need not disclose
every adverse report that it receives. Rather, those reports need only be
disclosed when they are statistically significant. This conclusion was based on
In re Carter-Wallace, Inc. Sec. Litig. , 220 F.3d 36 (2nd Cir. 2000).
The First and Third Circuits follow a similar rule.
The Ninth Circuit reversed. Citing Basic v. Levinson,
485 U.S. 224 (1988) the court rejected the statistically significant test
employed by the district court and the Second Circuit. Materiality, the court
held, is a question generally reserved for the fact finder. Here, the question
is whether the allegations are properly pleaded under the PSLRA and state a
plausible cause of action under Bell Atlantic Corp. v. Twombly, 550 U.S.
554 (2007). After reviewing the claims in the complaint regarding the adverse
product reports about Zicam, the circuit court concluded that the complaint met
the pleading requirements. Accordingly, the decision of the district court was
reversed. The Supreme Court will hear this case next term.
For more cutting edge commentary on developing securities
issues, visit SEC Actions, a blog by Thomas