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Univ. of Toledo College of Law

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Monday, June 14, 2010

Supreme Court Accepts Cert to Decide Standard of Pleading Materiality in Securities Fraud Class Action

The Supreme Court today granted certiorari to hear a securities fraud class action, Matrixx Initiatives, Inc. v. Siracusano, next term.  The question presented is:

 Can a plaintiff state a claim under Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5 based on a pharmaceutical company's alleged failure to disclose the possible link between its cold remedy and the anosmia (loss of sense of smell) reported by some consumers even though the reports are not alleged to be statistically significant?

The decision below, Siracusano v. Matrixx Initiatives Inc., comes from the Ninth Circuit and is reported below at 585 F.3d 1167.  Plaintiffs alleged that the defendant violated Rule 10b-5 by failing to disclose material information about its product, Zicam Cold Remedy, specifically that it can cause a loss of smell in its users.  The trial court found that plaintiffs failed adequately to allege materiality because the number of complaints about the product of which defendants were aware was not "statistically significant."  Reversing the trial court's dismissal of the complaint, the appeals court held that the complaint adequately pled materiality and scienter under the PSLRA.  On the issue of materiality, the 9th Circuit held that the trial court erred in relying on the statistical significance standard, because statistical significance is a question of fact that should be decided by the jury.  Rather, applying the fact-specific inquiry mandated by Basic, the appellate court found that the allegations were sufficient to meet the pleading requirements of PSLRA and Twombly.

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