The Supreme Court heard arguments in an important securities case on Monday, Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, Docket No. 11-1085. The question for resolution is whether a securities law plaintiff must demonstrate that the claimed misrepresentations are material at the class certification stage in a fraud-on-the-market case.
The resolution of this question is at the intersection of Rule 23, Federal Rules of Civil Procedure and the Court’s decision in Basic Inc. v. Levinson, 485 U.S. 224 (1988). The Rule governs class certification and in subsection (b)(3), central here, requires that the issues common to the class members predominate to permit the case to move forward as a class action. Basic held that a plaintiff can establish the element of reliance on the misrepresentations by utilizing a rebuttable presumption that purchasers relied on the integrity of the market if it is efficient so that a material misrepresentation would be reflected in the price. In essence, the presumption establishes transaction causation, linking the purchaser and the misrepresentation.
Three themes dominated the arguments. First, the critical point under Rule 23(b)(3) is whether the issues common to the class members predominate. When they do the class can be certified. The text of the Rule makes no reference to the merits of the claim. Second, Basic requires that the securities law plaintiff establish that the market is efficient and that the misrepresentation is material to employ its rebuttable presumption. If the misrepresentation is not material by definition it will not impact the market and there can be no presumption. Third, in earlier cases the High Court has hewed close to the text of Rule 23 when considering the class certification question, concluding that the plaintiff need not turn the certification hearing into a resolution of the merits. The Petitioner-Defendants, Respondent-Plaintiffs and the government as amicus tried to weave these themes into their arguments which were also echoed in the questions by the Justices.
Petitioner sought to define the critical issue at the outset of the argument: “Our case is about whether the claim of liability is in a fundamental sense class wide or individual. The heart of a 10b-5 claim is, I bought or sold in reliance on a misleading statement. The question at the class cert stage is whether each individual will have to prove his own reliance directly . . . A market price will reflect a statement if and only if the statement is material and is made publicly on an efficient market. So, absent materiality, the market price cannot be presumed to reflect the statement in question.”
The Chief Justice immediately turned the argument from Basic and materiality to Rule 23 commonality:
Chief Justice: Why is that – why is that the case? I would suppose if there’s no materiality, that means that the effect on the market price just happens to be zero.
Petitioner: That’s exactly correct. And the point here is —
Chief Justice: Well, why isn’t that common to all parties?
Throughout Petitioner’s position, which would require that the question of materiality be revisited throughout the case – at certification, summary judgment and at trial – was discussed. Justice Kagan asked if the rulings by the court on the question could be different at various points. Petitioners asserted they could because “the judge at the class certification stage is required to weigh competing evidence . . . At the summary judgment stage, a judge is precluded from doing that.” At the same time, Petitioner argued that while certifying the class would force a settlement which may not reflect the merits, denying certification would not be the end of plaintiffs’ claims because each could proceed individually and prove reliance. Justice Ginsburg responded, stating “I am really nonplused by your answer that if the judge says it’s immaterial, that doesn’t end it for everybody.”
Later in the argument Petitioner framed the critical choices for the Court: “The real question in this case is the purpose of Rule 23? If you think that the purpose of Rule 23 is to postpone to the merits everything that can be postponed without a risk of foreclosing valid individual claims, we lose. But that’s not the purpose. The purpose is for a court to determine whether all of the preconditions for forcing everyone into a class action are present before you certify.” While affirming that the point of certification is not to pre-try the case, at the same time Petitioner insisted that Rule 23 be read in tandem with Basic.
Respondents claimed that materiality is a merits question that should not be considered at the certification stage. Almost immediately, they encountered difficulty, seemingly undercutting Basic, at least in part:
Justice Sotomayor: “. . . if Basic set forth a presumption, and are you disputing that at the class certification stage a defendant can prove that the market is inefficient?
Justice Sotomayor: So why shouldn’t we hold Basic to its position that all of its presumptions can be rebutted as well, not just efficiency? Why do we set out efficiency as the one issue that can be rebutted?”
Later, in responding to a similar question from Justice Scalia, Respondents distinguished efficiency: “They all lose [plaintiffs] on the merits if there is no materiality. The question about efficiency . . . and the reason why it is advanced at class certification is because it serves a gate-keeping role in determining whether all the investors can show indirect reliance on the market.” That differs from the question of materiality which is a key element of the merits as Respondents noted in answering questions from Justice Breyer:
Justice Breyer: The publicity of the matter, that is not traditionally a common element of the tort, that is something special to get into this theory.
Justice Breyer: With materiality, it is a common element of the tort always; it is traditionally there; it will be litigated, so there is no special reason to or desirability in or need for litigating at the outset.
Petitioner: That’s correct.
Finally the Solicitor General, arguing in support of Respondents, summed up the case for not requiring proof of materiality at the class certification stage: “And so our issue is not with the predicates for the fraud-on-the-market theory. Our issue is with Petitioners equating the predicate for the fraud-on-the-market theory with the actual prerequisites of Rule 23. And this Court made it very clear in Shady Grove that the only question at the Rule 23 stage is whether the prerequisites have been met. The only one that we’re talking about here is predominance. It’s a comparative inquiry between common issues and individual issues.”
A ruling is expected before the end of the term in June.
Hurricane Sandy: The President suggested that those who want to aid the victims of this devastating storm contribute to the Red Cross. The link is here.
Seminar: The ABA’s premier program on securities fraud, the National Institute on Securities Fraud will be held on November 15 and 16, 2012 in New Orleans (here).