Disclosure of "Material" Information To Shareholders: Matrixx v. Siracusano

Disclosure of "Material" Information To Shareholders: Matrixx v. Siracusano

Plaintiff attorney James M. Wilson, Jr. discusses the Supreme Court unanimous rejection of a pharmaceutical company's attempt to inject a bright line test to determine what "material" information is required to be disclosed to shareholders to avoid liability in federal securities litigation in Matrixx Initiatives, Inc. v. Siracusano, reaffirming its 1988 holding in Basic Inc. v. Levinson that what information is material is fact specific.


Introduction: On March 22, 2011, the Supreme Court unanimously rejected a pharmaceutical company's attempt to inject a bright line test to determine what "material" information is required to be disclosed to shareholders to avoid liability in federal securities litigation. In doing so, the Supreme Court reaffirmed its holding in Basic Inc. v. Levinson, 485 U.S. 224 (1988) [an enhanced version of this opinion is available to lexis.com subscribers / unenhanced version available from lexisONE Free Case Law] that the determination of what information is material is an inherently fact specific inquiry. In Matrixx, the defendants argued that the bright line should be "statistical significance," i.e., a duty to disclose adverse events concerning its over-the-counter cold medicine arises only if there were a sufficient number of such events to establish a statistically significant risk that its product was causing those events. Citing to Basic, the Supreme Court rejected this approach because the designation of any such single fact or occurrence as always determinative of an inherently fact-specific finding such as materiality, must necessarily be overinclusive or underinclusive. The determination of "materiality" remains whether a reasonable investor would have viewed the non-disclosed information as having significantly altered the "total mix" of information made available to the public. The Supreme Court emphasized however, that not all "material" information must be disclosed. The duty to disclose "material" information arises only if disclosure is necessary to make statements made, in the light of the circumstances under which they are made, not misleading. Thus, companies can control their duty to disclose by controlling what they say to the markets. The Supreme Court subjected plaintiffs' "materiality" allegations to the Rule 8 notice pleading standard rather than the more stringent pleading standard that applies to fraud claims generally under Rule 9(b), despite invitations from Amici to establish that the Rule 9(b) standard applies to "materiality."


Plaintiffs, investors who bought securities of Matrixx Initiatives, Inc. ("Matrixx" or "the Company"), alleged that defendants (Matrixx and three of its executives) issued false statements to the market between October 22, 2003 and February 6, 2004 touting the virtues and safety of the Company's nasal spray cold medicine called Zicam. In addition, defendants' public statements of strong sales were alleged to be misleading due to undisclosed reports that Matrixx had received about consumers who had lost their sense of smell after using Zicam (a condition called anosmia). Between 1999 and 2003, Matrixx among other things received reports from two doctors regarding 10 such patients and several customers had sued over the issue. When information finally came out in the media about the undisclosed reports of anosmia, the price of Matrixx's stock dropped approximately 26%. Based on these false statements and omissions, plaintiffs filed a class action securities suit alleging that defendants violated Section 10(b) of the Securities Exchange Act of 1934.

Defendants moved to dismiss the complaint, arguing among other things that plaintiffs had failed to plead the elements of a material misstatement or omission. The United States District Court for the District of Arizona held that plaintiffs failed to allege a "statistically significant correlation between the use of Zicam and anosmia so as to make failure to public[ly] disclose complaints ... a material omission" and granted the motion to dismiss. Plaintiffs appealed.

The United States Court of Appeals for the Ninth Circuit reversed applying the objective standard enunciated by the Supreme Court in Basic: "[t]he determination [of materiality] requires delicate assessments of the inferences a 'reasonable shareholder' would draw from a given set of facts and the significance of those inferences to him." The Ninth Circuit held that the district court had erred in requiring an allegation of statistical significance to establish materiality. The Ninth Circuit held that plaintiffs had adequately alleged "information regarding the possible link between Zicam and anosmia" that would have been significant to a reasonable investor. The United States Supreme Court granted certiorari. [footnoted omitted]

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