The Ninth Circuit joined the Third and the Seventh in
concluding that at the class certification stage plaintiffs in a securities
fraud damage action need not prove materiality to utilize the fraud-on-the
market. Three other circuits take a contrary view. The Circuit Court also held
that the district court correctly rejected defendants' efforts to rebut the
fraud-on-the-market presumption with evidence of a "truth-on-the-market"
defense at the certification stage. Connecticut Retirement Plans and Trust Funds
v. Amegen Inc., No. 09-56965 (9th Cir. Filed Nov. 8, 2011). The
ruling is part of a clear split in the circuits on a key issue in securities
fraud damage cases which at some point will have to be resolved by the Supreme
Plaintiff Connecticut Retirement Plans brought an action
against biotechnology company Amgen Inc. and several of its officers. The
complaint alleges that the defendants misstated and failed to disclose safety
information about two Amgen products used to treat anemia. Plaintiffs claim
that four statements are misleading because they downplay the FDA's safety
concerns about the products, conceal details about a clinical trial that was
cancelled because of concerns that a company product exacerbated tumor growth
in some patients, exaggerated the safety of the products on labels and
misrepresent the marketing efforts. The complaint alleges violations of
Exchange Act Section 10(b).
The district court granted the motion for class
certification based on Federal Rule of Civil Procedure 23(b)(3). That Rule
requires that questions of law or fact common to the class members predominate
over those affecting only individual members and that the class vehicle be
superior to other methods for fairly and efficiently adjudicating the
controversy. Under the Rule plaintiffs have the burden of demonstrating that
its requirements have been met. The district court is charged with conducting a
"rigorous analysis" to ensure that the plaintiffs have met their burden under
The district court in this case concluded that common
questions predominated. Those focus on whether false statements were made, if
they were material and connected to a purchase or sale of securities, whether
the statements were intentionally false and if they caused the loss of the
class members. The court also concluded that reliance was common to the class
members based on the fraud-on-the market presumption adopted 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 case concluded that under the efficient market theory available material
information regarding a security is reflected in its price. Those who purchase
in an efficient market are presumed to rely on its integrity, obviating the
need to prove individually the element of reliance. Finally, the court held
that at the class certification stage Connecticut Retirement did not need to
prove materiality. Rather, it could merely allege materiality although that
issue would have to be proven at trial.
The Ninth Circuit affirmed. Under Basic a
plaintiff seeking to rely on the fraud-on-the-market theory to establish reliance
must first demonstrate that the securities were traded in an efficient market
and that the claimed misrepresentations were public. Both of these points have
been admitted here.
The key remaining question centers on the issue of
materiality. Amgen argues that because plaintiffs did not prove that the
claimed false statements were material the certification motion should have
been denied since under those circumstances each individual plaintiff would
have to prove reliance. The difficulty with this contention, the Ninth Circuit
held, is that materiality is an element of the merits of a securities fraud
claim. If the representations are material then the fraud-on-the-market
presumption makes reliance common to the class. In contrast, if the statements
are not material then every plaintiff's claim fails on the merits and there is
no need for a trial on the question of individual reliance. Thus plaintiffs'
claims stand or fall together. What is critical here is not the raising of
common questions but whether the class vehicle can result in common answers
that move toward the resolution of the case.
When invoking the fraud-on-the-market presumption issues
regarding market efficiency and if the misstatements were public are not
elements of the merits. If those elements are not established the presumption
cannot be used. The question of materiality is a merits issue. While it is
appropriate to "take a peek at the merits" and ensure that materiality,
however, has been plausibly pleaded, the district court correctly concluded
that the plaintiffs need not prove it now. This is in accord with decisions of
the Third and Seventh Circuits.
The First, Second and Fifth Circuits, in contrast require
that materiality be established at the class certification stage. This determination
is based on footnote 27 in Basic which states that a plaintiff must
allege and prove materiality in order to invoke the presumption. While clearly
plaintiffs must prove materiality, Basic does not specify that it be
done at the class certification stage, according to the Ninth Circuit. Reading Basic
as requiring that a merits issue be reserved for that stage of the case is
consistent with the Supreme Court's decisions in Erica P John Fund v.
Halliburton, 131 S. Ct. 2179 (2011) [enhanced version / unenhanced version] and Dukes v. Wal-Mart Stores, Inc. [both versions], 603 S. Ct. 2541 (2011).
Finally, the district court correctly rejected Amgen's
efforts to rebut the fraud-on-the-market presumption at the class certification
stage. The company sought to introduce evidence that public pronouncements were
available which contained the truth about the drugs. This would negate any
claim that the alleged misstatements impacted the price of the stock, according
to the company. This truth-on-the-market defense however is "a method of
refuting an alleged misrepresentation's materiality . . . " (emphasis
original) the Court concluded. Thus it is properly reserved for consideration
as a merits issue rather than at the class certification stage.
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.
For more information about LexisNexis
products and solutions connect with us through our corporate site.