On March 22, 2011, the U.S. Supreme Court unanimously concluded in the securities fraud class action Matrixx Initiatives, Inc. v. Siracusano1 that the materiality of adverse-event reports cannot be reduced to a bright-line rule. The Court reaffirmed its decision in Basic Inc. v. Levinson2 that the materiality requirement in a private action under Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 adopted thereunder is satisfied when there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available. The Court further determined that evidence of statistical significance is not required to establish either the materiality of a misstatement or omission, or the element of scienter to properly plead a securities fraud claim under Section 10(b) and Rule 10b-5.

The complaint alleged that Matrixx Initiatives, Inc. (Matrixx), maker of Zicam Cold Remedy (Zicam), violated Section 10(b) and Rule 10b-5 by failing to disclose a possible link between the usage of Zicam and the loss of a sense of smell—or anosmia—thereby rendering public statements Matrixx subsequently made regarding Zicam misleading.3 The complaint maintained that Zicam accounted for approximately 70 percent of Matrixx's sales, and that Matrixx had received reports from both medical experts and researchers reporting a possible link between Zicam and anosmia.4 Furthermore, the complaint contended that subsequent to receiving these medical reports suggesting a causal link between Zicam and anosmia—as well as the filing of two products liability lawsuits against Matrixx alleging Zicam damaged the plaintiffs' sense of smell—Matrixx published statements projecting strong growth and a greater-than 50-percent increase in revenues, and later amended that projection to a greater-than 80-percent increase in revenues.

In its Form 10-Q filed in November 2003, Matrixx referred to the potential adverse effect of any products liability claims brought against the company, but did not mention that two suits regarding Zicam had already been filed. Additionally, after a Dow Jones Newswires report that the U.S. Food and Drug Administration (FDA) was looking into complaints that Zicam might be linked to anosmia and the subsequent fall of Matrixx's stock from $13.55 per share to $11.97 per share, Matrixx issued a press release,5 rejecting the notion that Zicam was linked to anosmia and stating that the safety and efficacy of zinc gluconate—the main component of Zicam—was well-established. The day after Matrixx issued this press release, Matrixx's stock rebounded to $13.40 per share.

The Court dismissed Matrixx's efforts to urge a bright-line rule for purposes of determining materiality. In doing so, the Court concluded that a reasonable investor, in light of the specific facts and circumstances, could consider the information made available as significantly altered by the nondisclosed information, and that the complaint alleged facts that pose considerable risk to Matrixx's leading revenue generator. Noting that the mere existence of reports of adverse events does not satisfy the Basic standard and that something more is necessary—but that statistical significance is not required—the Court further explained that medical experts and the FDA often rely on data that are not statistically significant for inferring causation; and therefore, reasonable investors may do so as well.6

The Court also found that statistically significant data are unnecessary to prove the element of scienter, or the intent to deceive, manipulate or defraud,7 but concluded that, taken as a whole, the allegations of the complaint could lead to a reasonable inference that Matrixx chose not to disclose the reports of adverse events or the products liability lawsuits because it was aware of their potentially negative impact on its leading product.8


The Matrixx decision raises questions about when disclosure of reports of adverse events is required and how organizations can take prophylactic measures to prevent similar securities fraud claims.9 As the Supreme Court concluded, the threshold is below statistically significant data; organizations should consider how the information would impact a reasonable investor's view of the "total mix" of information already made public.10

A key takeaway from this decision is that a public company needs to monitor employees and agents who speak on its behalf and to vet public statements before their release to ensure that the statements do not improperly alter the total mix of information and unduly expose the company to securities fraud liability.