For over 20 years, the “fraud on the market” theory under Basic Inc. v. Levinson, 485 U.S. 224 (1988), has been a key tool for plaintiffs in class action securities fraud litigation. The theory posits that the price of a security trading in an efficient market reflects all publicly-available information about that security, and therefore gives rise to a rebuttable presumption that investors rely on misrepresentations reflected in market prices at the time they transact. Last year, in Erica P. John Fund, Inc. v. Halliburton Co., 131 S. Ct. 2179 (2011), the Supreme Court held that plaintiffs in proposed class actions for securities fraud actions under Section 10(b) of the Exchange Act and SEC Rule 10b-5 need not prove loss causation -- that is, a sufficient causal connection between an alleged material misstatement or omission and actual economic loss -- in order to invoke the “fraud on the market” theory at the class certification stage. However, the Halliburton Court expressly noted that it was not “address[ing] any other question about Basic, its presumption, or how and when it may be rebutted.” Earlier this week, on June 11, 2012, the Court granted a writ of certiorari in Amgen, Inc. v. Connecticut Ret. Plans & Trust Funds, No. 11-1085, to review a Ninth Circuit ruling that raises important questions concerning the “fraud on the market” theory, and class certification in private securities fraud actions, that Halliburton left open. Because the answers to these questions bear directly on the ability of defendants to terminate proposed securities fraud class actions at an early stage, the Supreme Court’s decision in Amgen will almost certainly be a very significant one for public companies and their directors and officers, insurance carriers and outside professionals.
Plaintiff in Amgen, purporting to sue on behalf of itself and a proposed class of purchasers of Amgen Inc. common stock, asserted federal securities fraud claims based on alleged misstatements concerning the safety and marketing of a number of Amgen’s products. Absent any dispute that Amgen common stock traded in an efficient market, and that the misrepresentations plaintiff had alleged were public, the district court found that plaintiff could invoke the “fraud on the market” theory, and certified a plaintiff class under Fed. R. Civ. P. 23(b)(3). On discretionary review of the class certification order, the Ninth Circuit rejected defendants’ argument that, because an immaterial misrepresentation “by definition would not affect Amgen’s stock price in an efficient market, and thus no buyer could claim to have been misled by an artificially inflated stock price,” the district court should have required proof that the alleged misrepresentations were material before permitting plaintiff to invoke the “fraud on the market” presumption. Rather, the Ninth Circuit held that while plaintiffs in federal securities fraud actions must plausibly allege the materiality of purported misstatements or omissions in their complaints sufficient to withstand a motion to dismiss, and prove materiality in order to prevail at trial on the merits, no proof of materiality is necessary at the class certification stage in order to invoke the “fraud on the market” presumption of reliance. The Ninth Circuit also held that defendants may not attempt to rebut that presumption before the certification of a class by offering a “truth on the market” defense -- that is, showing that the alleged misstatements were not material, and could not have influenced the market price of Amgen common stock, because market participants knew the true facts.
The Ninth Circuit in Amgen relied on Schleicher v. Wendt, 618 F.3d 679 (7th Cir. 2010), a Seventh Circuit decision likewise holding that proof of the materiality of the alleged misrepresentation or omission is not a precondition to invoking the “fraud on the market” presumption at the class certification stage, and that defendants may not contest materiality in order to rebut the presumption at that point. The Third Circuit has taken a slightly different approach, holding that plaintiffs need not prove materiality before class certification, but allowing defendants an opportunity at that stage to rebut the “fraud on the market” presumption by showing, for example, that the alleged misrepresentations or omissions were immaterial or had no market price impact. See In re DVI, Inc. Sec. Litig., 639 F.3d 623 (3d Cir. 2011). By contrast, the Second and Fifth Circuits -- and the First and Fourth Circuits in dicta -- require securities class action plaintiffs to prove materiality at the class certification stage. See In re Salomon Analyst Metromedia Litig., 544 F.3d 474 (2d Cir. 2008); Oscar Private Equity Invs. v. Allegiance Telecom, Inc., 487 F.3d 261 (5th Cir. 2007), abrogated on other grounds by Halliburton, 131 S. Ct. at 2185; In re PolyMedica Corp. Sec. Litig., 432 F.3d 1 (1st Cir. 2005); Gariety v. Grant Thornton LLP, 368 F.3d 356 (4th Cir. 2004).
The Supreme Court’s decision in Amgen promises to add clarity to an area of the law in which there has been diversity of views among the Courts of Appeals. Among other things, the Court will likely speak to the operation of the “fraud on the market” presumption under Basic, as well as the extent to which courts may consider, in evaluating class certification in securities cases, matters relevant to both class certification and the merits of the plaintiff’s claim. The Amgen decision is likely to have a substantial impact on the strategies and techniques that parties employ during the early stages of litigation in securities fraud class actions, the relative leverage of the parties in such cases, and the ability of plaintiffs to obtain monetary settlements.