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'Materiality' Not Necessary in Fraud-on-the-Market Cases

By Robyn Hagan Cain on March 04, 2013 | Last updated on March 21, 2019

To recover damages in a private securities-fraud action under §10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, a plaintiff must prove, among other things, reliance on a material misrepresentation or omission made by the defendant.

The Supreme Court has endorsed a "fraud-on-the-market" theory, which permits securities-fraud plaintiffs to invoke a rebuttable presumption of reliance on public, material misrepresentations regarding securities traded in an efficient market. The fraud-on-the-market theory facilitates the certification of securities-fraud class actions by permitting reliance to be proved on a classwide basis.

According to the Court's decision last week in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, proof of materiality is not a prerequisite to certification of a securities-fraud class action seeking money damages for alleged violations of the Act.

In the facts leading up to this dispute, Connecticut Retirement alleged that Amgen violated §10(b) and Rule 10b-5 through certain misrepresentations and misleading omissions regarding the safety, efficacy, and marketing of two of its flagship drugs. Connecticut Retirement says that the misrepresentations and omissions artificially inflated the price of Amgen's stock at the time Connecticut Retirement and numerous other securities buyers purchased the stock. When the truth came out, stock price declined, resulting in financial losses to those who purchased the stock at the inflated price.

Amgen conceded that "at all relevant times, the market for [its] securities ... was an efficient market."

The district court granted Connecticut Retirement's motion to certify a class action under Rule 23(b)(3) on behalf of all investors who purchased Amgen stock between the date of the first alleged misrepresentation and the date of the last alleged corrective disclosure. Amgen (obviously) objected to class action certification, and challenged that decision all the way to the Supreme Court.

The issue before the Court concerned the requirement stated in Rule 23(b)(3) that "the questions of law or fact common to class members predominate over any questions affecting only individual members." Amgen argued that Connecticut Retirement had to do more than plausibly plead that Amgen's alleged misrepresentations and misleading omissions materially affected Amgen's stock price. Instead, it claimed that certification must be denied unless Connecticut Retirement proves materiality, reasoning that immaterial misrepresentations or omissions would have no impact on Amgen's stock price in an efficient market.

The Court rejected Amgen's argument for two reasons:

First, because materiality is judged according to an objective standard, it can be proved through evidence common to the class. Second, a failure of proof on the common question of materiality would not result in individual questions predominating. Instead, it would end the case, because materiality is an essential element of a securities-fraud claim.

For in-house counsel, the long-term impact of this case may be an issue that wasn't even decided. SCOTUSblog reports, "Both the majority and dissenting opinions noted that the overarching issue of the continuing viability of the crucial fraud-on-the-market presumption itself was not before the Court." In a concurrence, Justice Samuel Alito suggested that the Court may need to reconsider the presumption.

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