Amgen: One Step Closer to Re-Examining the Fraud-On-the-Market Presumption of Reliance

Amgen: One Step Closer to Re-Examining the Fraud-On-the-Market Presumption of Reliance

 by Jonathan Eisenberg

Excerpt:

Plaintiffs in securities fraud cases rely on the fraud-on-the-market presumption of reliance to obtain class certification. As the Supreme Court recently stated in Amgen Inc. v. Connecticut Retirement Plans, No. 11-1085, slip op. at 5-6 (Feb. 27, 2013) (hereinafter, "Amgen"), "Absent the fraud-on-the-market theory, the requirement that Rule 10b-5 plaintiffs establish reliance would ordinarily preclude certification of a class action seeking money damages because individual reliance issues would overwhelm questions common to the class." [an enhanced version of this opinion is available to lexis.com subscribers] See also Basic v. Levinson, 485 U.S. 224, 242 (1988) (hereinafter, Basic) ("Requiring proof of individualized reliance from each member of the proposed plaintiff class effectively would have prevented respondents from proceeding with a class action, since individual issues then would have overwhelmed the common ones.") [enhanced version]

In Amgen, the Supreme Court held that even though materiality is an essential element of the fraud-on-the-market presumption of reliance, plaintiffs need not prove it at the class certification stage and defendants should not be given an opportunity to rebut it at that stage. In reaching this conclusion, however, four members of the Court -- the number necessary to grant certiorari in a future case -- expressed skepticism toward the fraud-on-the-market theory, which could potentially be far more important than the Court's limited holding in Amgen itself. The majority neither embraced nor rejected the theory, but pointed out that Amgen had not challenged the theory either in the courts below or in the Supreme Court, and thus the continuing viability of the theory was not at issue before it.

The Court's Skepticism Toward The Fraud-on-the-Market Presumption of Reliance

The fraud-on-the-market presumption of reliance, though essential to the certification of securities fraud class actions over the last 25 years, rests on a slender thread. Only six Justices participated in the 1988 decision in Basic and only four (Justices Blackmun, Brennan, Marshall and Stevens) accepted it. Moreover, the fraud-on-the-market presumption was based in part on the "efficient market hypothesis" - the hypothesis that "in an open and developed securities market, the price of a company's stock is determined by the available material information regarding the company and its business....Misleading statements will therefore defraud purchasers of stock even if the purchasers do not directly rely on the misstatements." But since 1988, the efficient market hypothesis has come under increasing attack for not reflecting how investors actually act, or the existence of stock market bubbles, or patterns of stock prices preceding the bankruptcy of firms like Lehman Brothers.

In Amgen, the four Justices who concurred or dissented expressed skepticism toward Basic's adoption of the fraud-on-the-market theory for creating a presumption of reliance while the majority highlighted that in the case before it the Court had not been asked to revisit the doctrine. [footnotes omitted]

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Jonathan Eisenberg is the General Editor of and a contributor to Litigating Securities Class Actions, first published by LexisNexis in 2010.