On February 27, 2013, the Supreme Court held in a 6-3 decision that plaintiffs in securities fraud class actions under Rule 10b-5 do not need to prove the materiality of any alleged misrepresentation or omission in order to obtain Rule 23(b)(3) class certification. Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085 (Feb. 27, 2013). But the Court made clear that plaintiffs seeking certification under the fraud on the market theory must still prove all other prerequisites of the theory.

To establish a Rule 10b-5 claim, a plaintiff must prove, among other things, that it relied on a material misrepresentation or omission made by the defendant. In order for a securities case to proceed as a class action, however, a plaintiff must establish that common questions prevail over individual ones. In the traditional setting in which a shareholder claimed to have read the allegedly false statement from the company and relied on it, class treatment was unavailable because each class member would have to prove his or her subjective reliance on the alleged misstatement, so individual questions of fact would predominate over common ones. To alleviate that burden, the Supreme Court endorsed a rebuttable “fraud on the market” presumption of reliance in Basic Inc. v. Levinson. 485 U.S. 224 (1988). Under this theory, the price of a security traded in an efficient market will reflect all publicly available material information about a company. Accordingly, if a plaintiff can establish that the alleged misrepresentation was publicly known, that the security was traded in an efficient market, and that the alleged misrepresentation was material, a court may presume that the buyer relied on the alleged misrepresentation through its effect on the market price of the security. The Supreme Court noted in Basic that the presumption is rebuttable, including by any proof that severs the link between the alleged misrepresentation and the market price.

In Amgen, shareholder-plaintiff Connecticut Retirement alleged that Amgen violated §10(b) and Rule 10b–5 through certain misrepresentations and omissions, invoking the fraud on the market theory in seeking class certification under Federal Rule of Civil Procedure 23. Amgen sought to offer proof at the class certification hearing that the alleged misrepresentations were immaterial because the “truth” was already known to the market. According to Amgen, materiality is a prerequisite of the fraud on the market theory of reliance since immaterial information would not move the market, so absent materiality the classwide presumption of reliance under the fraud on the market theory fails. The district court denied Amgen the opportunity to offer proof of immateriality at the class certification stage, holding that materiality need not be proven then in order to invoke the fraud on the market presumption of classwide reliance. The Ninth Circuit affirmed, and the Supreme Court granted certiorari to resolve a circuit split on this issue.

The Supreme Court held that, at the class certification stage, proof of materiality is not needed to ensure that the questions common to the class predominate over any questions affecting individual members. Amgen, No. 11-1085, slip. op. at 12–13. Information is “material” under the securities laws if a reasonable investor would consider it important in light of the overall mix of information in deciding whether to buy or sell. The Court reasoned that while proof of materiality is essential to establish the fraud on the market presumption of classwide reliance, the question of materiality is objective and thus can be proved through evidence common to the class. Id. at 11. Of course, the same is true of market efficiency and publicity?both are also fraud on the market prerequisites, both are subject to common proof, and all courts are in agreement that a plaintiff must establish both of those elements to certify a fraud on the market class. Critically, the Court distinguished materiality from market efficiency and publicity by noting that materiality itself is an “essential element” of a 10b-5 cause of action. Id. If the class cannot prove materiality, no one in the class can recover as the entire class will lose on the merits, and there are no individual questions left which could predominate over common ones. In contrast, the Court observed that if the plaintiff cannot prove market efficiency or publicity, this would mean that a plaintiff could not use the classwide fraud on the market presumption of reliance, but a plaintiff could still attempt to prove its actual, subjective reliance on the alleged misstatement in an individual action. Id. at 17.

The Court was careful to limit its holding to materiality; it held that a plaintiff need not prove materiality at the class certification stage, and since materiality need not be proven then, a defendant did not have the right to rebut materiality at that stage either. The Court did not reach any other questions about the fraud on the market presumption of reliance, including when or how it may be rebutted. Among the questions Amgen does not answer is one the Supreme Court left open in its opinion two years ago in Erica P. John Fund, Inc. v. Halliburton Co.: whether a court may consider proof at the class certification stage that the market price was not distorted by the alleged misstatement. 131 S. Ct. 2179, 2187 (2011).

Perhaps more notable than the majority opinion is the fact that four justices?the three dissenters (Thomas, Kennedy and Scalia) along with one concurring justice (Alito)?all volunteered a willingness to revisit Basic’s fraud on the market presumption of reliance but noted that the Court was not asked to do so in this case. Prevailing on the question of whether materiality must be established at the class certification stage will prove to be a Pyrrhic victory for shareholders if the Court ultimately does away with the Basic fraud on the market presumption of reliance.