On February 27, 2013, the United States Supreme Court issued its highly anticipated decision in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, which considered the plaintiffs’ obligation in a securities fraud class action to prove the materiality of an issuer’s alleged misrepresentation or omission as a prerequisite to class certification. By a 6–3 majority, the Supreme Court determined that proof of materiality is not a prerequisite to certifying a class.
The case involves an allegation by purchasers of Amgen securities that Amgen artificially inflated its share price by exaggerating the safety of two of its products.
Reliance on an alleged misrepresentation or omission is an essential element of the cause of action for securities fraud under section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. However, as a result of earlier Supreme Court jurisprudence, plaintiffs are not required to prove direct reliance on the alleged misrepresentation or omission, and instead, according to "fraud-on-the-market", they are presumed to have relied on the disclosure. The economic theory behind this presumption is that in an efficient market, all publicly available information is rapidly incorporated into the market price of a security and thus transmitted to investors. Therefore, the theory holds, investors indirectly rely on all publicly available information by relying on the price of a security, and because immaterial information is unlikely to affect the price of a security, investors are presumed not to rely on such information.
One of the prerequisites to class certification in the United States is that questions of law or fact common to the class must predominate over any questions affecting only individual members in the particular case. Amgen argued before the courts that plaintiffs in securities fraud class actions should be required to prove the materiality of the alleged misrepresentation or omission; in so arguing, Amgen relied on economic evidence that called into question the validity of the basis for the fraud-on-the-market theory.
The Supreme Court Decision
Neither the lower courts nor the Supreme Court accepted Amgen’s arguments.
The Supreme Court accepted two issues for review, answering both questions in the negative:
- whether proof of materiality is a prerequisite to class certification; and
- whether a defendant must be given an opportunity at the certification stage to rebut the applicability of the fraud-on-the-market presumption.
The Supreme Court acknowledged that materiality is an underlying premise of the fraud-on-the-market theory. However, the Court found that proof of materiality at the certification stage is unnecessary because (i) the question of materiality is objective and can therefore be proved through evidence common to the class, and (ii) there is no risk that an absence of proof of the common issue of materiality would result in individual issues predominating as a failure to prove this common issue would end the case for the entire class. Consequently, materiality is a trial or summary judgment issue in U.S. securities fraud class actions, and not an issue that need be addressed at the certification stage of the proceeding.
The Supreme Court was invited by Amgen to reconsider the presumption of reliance that is one of the key aspects of the fraud-on-the-market theory. Although several justices commented on the presumption, and whether the Court should revisit the issue, the majority declined Amgen’s invitation to do so.
Implications for Canada
The debate surrounding the applicability of market price economic theories in securities class actions is ongoing in Canada. While the presumption of reliance based on fraud-on-the-market has been explicitly rejected by a number of lower courts, the issue has not yet been directly addressed by an appellate court. However securities legislation in Canada generally makes the question of reliance irrelevant to disclosure cases brought under that legislation because, in connection with both prospectus and secondary market cases, securities legislation permits investors to sue irrespective of whether they relied on an issuer’s disclosure and the alleged misrepresentation.
While reliance may not be an issue in the certification of statutory misrepresentation cases in Canada, the economic basis of the fraud-on-the-market theory – the efficient market, and the impact of information on market prices for an issuer’s securities – may still be relevant in considering the materiality of information in an issuer’s disclosure, although it is not in any way determinative as to whether there was an actionable misrepresentation in respect of that disclosure. Because of the merits-based leave test that plaintiffs must satisfy to commence a secondary market case under provincial securities legislation, and because of the "some evidence" test that must be met by plaintiffs for each component of the test for certification, economic evidence intended to prove or disprove materiality will likely continue to be a component of leave and certification motions in Canadian securities class actions, even if it is no longer a feature of certification motions in U.S. securities fraud class actions.