On Monday, June 11, 2012, the Supreme Court granted a Writ of Certiorari in Amgen, Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085 (U.S. Jun. 11, 2012) to decide whether, in a misrepresentation case under SEC Rule l0b-5, the court must require proof of materiality before certifying a plaintiff class based on the fraud-on-the-market theory (and whether the court must allow the defendants to present evidence rebutting the applicability of the fraud-on-the-market theory before certifying the class).
The case was filed in federal court in California on behalf of individuals and entities who purchased shares of Amgen, Inc. between April 22, 2004 and May 10, 2007 (the "Class Period") against Amgen and certain of its directors and officers. Lead Plaintiff Connecticut Retirement Plans and Trust Funds alleged that Defendants made a series of materially false and misleading statements and omissions during the Class Period which artificially inflated the value of Amgen’s stock and later made "partial corrective disclosures," which caused the stock price to decline, damaging the Plaintiff Class.
Plaintiffs' allegations focused on two products: Epogen® (epoetin alfa) ("Epogen") and Aranesp® Epogen for the treatment of anemia associated with chronic renal failure, chemotherapy for cancer, treatment of HIV infections, chronic kidney disease in pre-dialysis patients, and anemic patients scheduled to undergo elective, non-cardiac, non-vascular surgery. Plaintiffs claim that, among other things, defendants:
- made a misleading statement during an April 22, 2004 earnings call when they downplayed the significance of a meeting with the Food and Drug Administration and the safety concerns raised by the FDA regarding Aranesp;
- knowingly concealed material information concerning a clinical trial that tested whether high doses of Aranesp could aid in shrinking tumors of patients with head and neck cancer receiving radiation therapy;
- repeatedly touted the on-label safety of Epogen and Aranesp, despite knowing that there were serious concerns regarding their safety; and
- misrepresented its marketing practices, claiming that it promoted its products solely for onlabel uses when it in fact promoted significant off-label usage.
Plaintiffs claimed that investors did not become fully aware of the safety risks of these drugs until May 10, 2007 when defendants made corrective disclosures. Plaintiffs claim that the misrepresentations violated Sections 10(b) and 20(a) of the Exchange Act of 1934 and Rule 10b-5.
Plaintiffs moved to certify the action as a class action under Fed. R. Civ. P. 23(b)(3) on behalf of all purchasers of Amgen during the Class Period. Judge Philip S. Gutierrez granted that Motion in an August 12, 2009 Order. As part of his ruling, Judge Gutierrez, focusing on the issue of whether the element of reliance was common to the class, held that Plaintiffs successfully invoked the fraud-on-the-market presumption by showing that Amgen’s stock traded in an efficient market and that the alleged misstatements were public. Judge Gutierrez also held that Plaintiffs were not required to prove at that stage whether Amgen’s supposed falsehoods were material in order to invoke the fraud-on-the-market presumption (they could merely allege so and would be required to prove materiality at trial). Furthermore, Judge Gutierrez did not allow Amgen an opportunity to rebut the presumption of reliance at the class certification stage, holding that it an issue for trial.
Defendants requested permission to file an interlocutory appeal, which was granted by the Ninth Circuit Court of Appeals on December 11, 2009.
On November 8, 2011, the Ninth Circuit affirmed the District Court's ruling, stating:
Today we join the Third and Seventh Circuits in holding that the plaintiff must (1) show that the security in question was traded in an efficient market (a fact conceded here), and (2) show that the alleged misrepresentations were public (a fact not contested here). As for the element of materiality, the plaintiff must plausibly allege – but need not prove at this juncture – that the claimed misrepresentations were material. Proof of materiality, like all other elements of a 10b-5 claim, is a merits issue that abides the trial or motion for summary judgment. Likewise, rebuttal of the fraud-on-the-market presumption, at least by showing that the alleged misrepresentations were not material, is a matter for trial or summary judgment, not a matter to be taken up in a class certification motion.
The rulings from the Third and Seventh Circuit which the Ninth Circuit cited were: Schleicher v. Wendt, 618 F.3d 679 (7th Cir. 2010); In re DVI, Inc. Sec. Litig., 639 F.3d 623 (3d Cir. 2011). However, the Court acknowledged that three other circuits courts (the First, Second and Fifth Circuits) require a plaintiff to prove materiality at the class certification stage. In re Salomon Analyst Metromedia Litig., 544 F.3d 474, 481 (2d Cir. 2008); Oscar Private Equity Invs. v. Allegiance Telecom, Inc., 487 F.3d 261, 264 (5th Cir. 2007); In re PolyMedica Corp. Sec. Litig., 432 F.3d 1, 8 n.11 (1st Cir. 2005).
The Courts appear to disagree about the meaning of a footnote from the Supreme Court's ruling in Basic Inc. v. Levinson, 485 U.S. 224, 248 n. 27 (1988), where it said: "[t]he Court of Appeals held that in order to invoke the presumption, a plaintiff must allege and prove … that the misrepresentations were material … ." The First, Second and Fifth Circuits viewed the Supreme Court as having adopted that requirement at the class certification stage. The Seventh and Ninth Circuit disagreed with that interpretation, stating that the Supreme Court merely acknowledged that "the court of appeals deemed materiality essential; the Justices did not adopt it as a precondition to class certification."
Defendants in the Amgen case filed a Petition for a Writ of Certiorari on March 1, 2012. Given the split between the circuits, it comes as little surprise that the Supreme Court elected to hear the case, which it will do next term.
The issues surrounding the fraud-on-the-market theory in class actions continue to come before Supreme Court. A year ago, the Supreme Court unanimously ruled that class action plaintiffs do not need to prove loss causation in order to obtain class certification in Erica P. John Fund, Inc. v. Halliburton, Inc., No. 09-1403, slip op. (Jun. 6, 2011) (as discussed here).